President-elect Donald Trump has made a bold vow to protect American-made cars through steep tariffs on imports. However, the reality is far more complex than it may seem at first glance. Under current trade law, there is no such thing as a truly all-American car, as even the most "domestically" produced vehicles contain parts from around the world. Trump's Tariff Promise and Its Consequences for the Auto Industry
The Promise of Tariffs
Trump has promised that tariffs will be a key part of his economic plan in his second term. On Monday, he announced plans to impose a 25% tariff on all goods coming from Mexico or Canada on his first day in office. This move has the potential to upend the North American car industry, which has operated for decades as if the continent is one giant country thanks to free trade agreements.However, despite his claim that tariffs are paid by the foreign country, they are in fact paid by whoever is buying the imported good. In the case of cars, US businesses almost always pass most - or all - of that cost onto consumers.Upending the Auto Industry
The auto industry supply chain depends on parts and materials from around the globe. From relatively inexpensive nuts and bolts to expensive computer chips and other electronic components, no single country can produce everything needed to build a car.If Trump goes ahead with his plans to impose steep tariffs on the parts that go into "American" vehicles, auto prices could rise sharply. This would have a significant impact on consumers, who are already spending nearly $50,000 on each new vehicle purchased here.Domestic Parts Challenges
Finding domestic supplies for many of the imported car parts would be difficult. Even if some are made here, there is not enough excess capacity to replace production of the parts now being imported. And for some of the less expensive goods, it's not economical to make them at US factories.Even if an American parts supply could be found, it would likely be more expensive. The low price of imports is the reason automakers turned to those supplies in the first place.Impact on Different Vehicles
Almost all of the vehicles that have 50% or more of their content from US or Canadian suppliers are either built by Tesla or brands that assemble cars here. For example, the Ford F-150, the most popular vehicle in the US for more than 40 years, has only 45% of its parts coming from US or Canadian factories.Even if Trump pulls back on tariff plans and only imposes tariffs on fully-assembled cars imported into the US, it will raise the price of cars built here. And if tariffs do raise the price of Mexican-assembled vehicles, automakers might decide to stop offering them altogether rather than build them at US factories.Supply and Demand Effects
Tariffs on imported vehicles would likely lead to higher prices on cars that are assembled here, as it would limit the supply of vehicles in the US market. When supply is limited and demand remains strong, rapid price increases are often the result.This could have a ripple effect throughout the market, including on the used car market. There are all these potential car buyers who have held out because of high prices, and if these tariffs are put in place, it could tank the industry.In conclusion, Trump's tariff plans have the potential to have a huge impact on the auto industry and car buyers. The exact impact will depend on the final details of his plans, but it is clear that the situation is complex and will require careful consideration.
