President Trump said on Wednesday that he would impose a 25 percent tariff on cars and car parts that were imported into the United States, a move that could encourage U.S. auto production over the longer run but is likely to throw global supply chains into disarray and raise prices for Americans who buy an automobile.
The tariffs will go into effect on April 3 and apply both to finished cars and trucks that are shipped into the United States and to imported parts that are included in cars assembled at American auto plants. Those tariffs will hit foreign brands as well as American ones, like Ford Motor and General Motors, which assemble some automobiles outside the country, including in Canada or Mexico.
Nearly half of all vehicles sold in the United States are imported, as well as nearly 60 percent of the parts in vehicles assembled in the United States. That means the tariffs could push up car prices significantly when inflation has already made cars and trucks more expensive for American consumers.
During remarks at the White House, Mr. Trump said the tariffs would encourage auto companies and their suppliers to set up shop in the United States.
“Anybody who has plants in the United States, it’s going to be good for,” he said.
But the auto industry is global and has been built up around trade agreements that allow factories in different countries to specialize in certain parts or types of cars, with the expectation that they would face little to no tariffs. That has been particularly true for North America, where national auto sectors have been stitched together by trade agreements since the 1960s.
Stock markets fell on news that the auto tariffs would be imposed. Shares of major carmakers tumbled further in after-hours trading, after the White House clarified that the tariffs would also cover imported auto parts. General Motors was down nearly 7 percent and Ford and Stellantis were more than 4 percent lower after the markets closed. Tesla’s stock fell 1 percent in extended trading.
While Mr. Trump argues that the tariffs will increase domestic production, it’s not clear how immediately that goal will be accomplished. Tariffs can encourage companies to use more products from the United States and expand production, but new factories typically take several years and can cost billions of dollars to construct.
Meanwhile, the additional costs that tariffs will introduce could backfire economically, harming the U.S. auto industry by disrupting its supply chains, squeezing its profits and chilling its ability to make new investments.
The measure could also set off more trade clashes with foreign countries, particularly European nations, Japan and South Korea, whose companies send many cars to the United States.
Economists from Capital Economics said the tariffs could boost domestic investment and production. “In the short run, however, it will be inflationary and, assuming that domestic producers respond by substantially increasing their own prices, could make new vehicles something of a luxury item,” they said.
The Canadian Chamber of Commerce said in a statement that the auto tariffs would hurt the United States as well as other countries.
“Throwing away tens of thousands of jobs on both sides of the border will mean giving up North America’s auto leadership role, instead encouraging companies to build and hire anywhere else but here,” they said. “This tax hike puts plants and workers at risk for generations, if not forever.”
Some groups praised the tariffs. In a statement, the president of the United Auto Workers union, Shawn Fain, said the tariffs would “end the free-trade disaster that has devastated working class communities for decades.”
“Ending the race to the bottom in the auto industry starts with fixing our broken trade deals, and the Trump administration has made history with today’s actions,” he said.
The administration said the 25 percent tariff would apply to both cars and car parts made in Canada and Mexico, despite the U.S. trade agreement signed with those nations. It created a small exception to those levies, saying any content or materials that originated in the United States but were incorporated into cars finished in Canada and Mexico would be exempt.
According to an administration official, if a car from Mexico is shipped into the United States with 50 percent American parts and 50 percent foreign parts, the 25 percent tariff will be levied only on the foreign parts, for an effective tariff of 12.5 percent.
While the levies are set to go into effect on April 3, Canada and Mexico will get a short reprieve on auto parts that come into the United States. That’s because of the complexity involved in determining how much of those parts ultimately come from the United States.
Car companies have set up their supply chains to snake across the borders with Canada and Mexico. Those supply chains feed into U.S. auto factories, which could see their production disrupted from a sharp increase in the price or availability of parts.
About one million Americans are employed by auto and parts manufacturers, according to the Bureau of Labor Statistics, and two million more are employed at dealers that sell cars and parts. Both groups could be hit hard by lower auto production and higher prices that lead to fewer sales. And cars are often the single biggest purchase for American families, meaning that additional costs from tariffs could weigh heavily on consumers.
Mr. Trump’s decision to impose car tariffs escalates his aggressive trade approach. Since coming into office, he has put an additional 20 percent tariff on all U.S. imports from China. He also imposed a 25 percent tariff on almost all goods from Canada and Mexico, before exempting roughly half of those imports, which trade under the rules of the North American trade agreement.
Mr. Trump plans to introduce more levies next Wednesday, when, he has said, he will announce “reciprocal tariffs” that match the high tariffs and other trade barriers that other countries impose on American exports. Mr. Trump said on Wednesday that the tariffs would be “very fair” and “very nice.”
“We’re going to make it very lenient,” he said. “I think people are going to be very surprised.”
Mr. Trump’s car tariffs will be imposed under an old trade case, which used a national security-related legal authority known as Section 232. During his first term, his administration carried out an investigation into car imports and concluded that they threatened U.S. national security.
The White House sought to deliver an early rebuttal to concerns that the president’s new auto tariffs could result in a major uptick in car prices. The official pointed to Mr. Trump’s push to secure a new tax deduction for interest payments on auto loans, which would be limited to American cars. They also said Mr. Trump was working to try to lower gasoline prices.
Before the details of the tariffs were announced, Jonathan Smoke, chief economist at Cox Automotive, a market research firm, estimated that a 25 percent tariff on goods from Mexico and Canada would add $3,000 even to the cost of a car built in the United States.
Tariffs would add $6,000 on average to the prices of cars made in Mexico or Canada, a category that includes vehicles like the Toyota Tacoma pickup, gasoline and electric versions of the Chevrolet Equinox, and several models of Ram pickups, according to Cox estimates. Ram is owned by Stellantis, which also produces Dodge, Chrysler and Fiat vehicles.
Higher prices will deter buyers and force automakers to curtail production, Mr. Smoke said. He estimated that U.S. factories would produce 20,000 fewer cars per week, or about 30 percent less than usual.
“By mid-April we expect disruption to virtually all North American vehicle production,” Mr. Smoke said Wednesday on a conference call with clients and reporters. “Bottom line: lower production, tighter supply and higher prices are around the corner.”
There could be a temporary benefit for companies, including Ford, Hyundai and Stellantis, that have large numbers of unsold vehicles on dealer lots. Vehicle shortages caused by tariffs will allow them to clear inventory without cutting prices. But the benefit would be short-lived.
Carmakers may be able to blunt some of the impact from tariffs because they have designed factories to produce different models on the same assembly line.
“Changes in production are always an option,” said Jörg Burzer, a member of the management board at Mercedes-Benz who oversees production at the German automaker.
But it will not be possible for Mercedes to completely avoid the impact of tariffs, which will add substantially to the prices for new cars. Tariffs “would definitely add to the cost, that’s clear,” Mr. Burzer said in an interview in Berlin last week.
In an effort to appease the Trump administration, some foreign carmakers have pledged to expand their manufacturing operations in the United States.
Hyundai Motor said during an event with Mr. Trump at the White House on Monday that it would invest $21 billion in the United States over the next four years. The South Korean company, which already has large factories in Georgia and Alabama, said the new investments would include a factory in Louisiana to produce steel for Hyundai, Kia and Genesis cars.
Mercedes, which produces S.U.V.s in Alabama, plans to expand its U.S. operations, Ola Källenius, its chief executive, said in an interview in Rome this month. “We are 100 percent committed to the United States and will continue to be so and are poised to do more,” he said, without giving specifics.
Mr. Källenius acknowledged that there was an imbalance between the tariffs that Europe and the United States imposed on auto imports. The United States charges a 2.5 percent tariff on cars from Germany and other European Union countries, while the European Union charges a 10 percent tariff on American cars.
“Why not go zero-zero?” Mr. Källenius asked.
