It’s been a month since we last looked at the situation with tariffs and how they’re impacting the auto industry, which means quite a few things have changed. In the short term, tariffs have been nothing but bad news for the industry. Many of the tariffs put into place remain, though there have been some notable changes that directly impact the auto industry, which means the current landscape is well worth looking at. I’m not going to get into the origins of the tariff situation or a play-by-play of how things have come to pass since I’ve already gone over all of that before. Instead, let’s focus on what’s new in the past month and what all of this will mean for you…
Auto-Parts Tariffs Went Into Effect
Perhaps the biggest update for the auto industry came on May 3rd when the tariffs on auto parts went into effect; this wasn’t a surprise since it had been announced long before. Essentially, it is a 25% tariff (or import tax) on the vast majority of auto parts coming into the US. This covers all parts no matter what country they’re coming from, making it distinct from a lot of other tariffs going around that are targeted at particular countries. According to government estimates, more than 50% of parts used to assemble vehicles here in the US are imported, so this tariff applies to pretty much every single vehicle made and sold here in America.
Prior to this, there was already an established tariff of 25% on all car imports coming into the US that went into effect on April 3rd. A 25% tariff on steel and aluminum also went into effect on March 12th; since these metals are used a lot in the auto industry, numerous tariffs all impact vehicles that come into or are built here in the US. I said I wasn’t going to go over too much previous stuff, but these numerous tariffs are important to note because they all add up to massive extra costs for car manufacturers. Car companies weren’t about to take this lying down, however, so they put a lot of effort into meeting with the President and his people.
Changes to Tariffs for the Auto Industry
All of those efforts weren’t in vain because there actually has been a result that helps out car companies a bit—not entirely, but it eases things up. On April 29th, the President signed an executive order to help ease up some of the tariffs on the auto industry. For one thing, car companies would no longer suffer the stacking effects of numerous tariffs, as we looked at above. Rather than pay a 25% tariff on steel and aluminum along with a 25% tariff on a vehicle coming into the US, they would only pay one tariff—whichever is highest. This doesn’t eliminate all penalties for car companies, but it eases up some of the intensity of these taxes.
In addition, car companies can deduct tariffs on import parts for their vehicles worth about 3.75% of the sticker price on the vehicle as long as it is produced here in the US. This is meant to help offset the tariff on automotive parts that went into effect on May 3rd; you can see it only applies to vehicles made here, and it’s only a relatively small portion of parts. This amount will go down to 2.5% next year and disappear completely after another year. The idea is to encourage car companies to start manufacturing parts here in the US, giving them two years for that to happen. Is it enough? That’s not for me to decide, but it’s something at least.
The UK Signs a Trade Deal
In one lone bright piece of news, on May 8th, the United Kingdom became the first nation to sign a trade deal with the US, and it specifically addressed the car tariffs. While the UK is hardly a major car manufacturing center, it is home to brands like Mini, Land Rover, Lotus, Bentley, Rolls-Royce, and McLaren. And if you happen to be shopping for a model from one of those brands, it will now only be subject to the flat 10% tariff on all imports rather than the higher 25% tariff on automotive imports. This won’t be much help to the vast majority of car buyers, but it does signal that the President is open to negotiations and there is potential for major car-producing nations like Japan and Germany to sign similar agreements in the future.
What Have Car Sales Looked Like Recently?
When discussing tariffs, everyone talks about how it will increase the costs of cars and how that could impact the auto industry. So far, it seems to be causing a surge in sales as people rush to buy their new vehicles before these added costs from tariffs come into play. High sales must mean prices are going down, right? Nope, it seems the average transaction price (ATP) of new vehicles in April increased to $48,699—a rise of 2.5% over the previous month. This is the highest April increase the auto industry has seen since 2020—I think we all remember what was happening in April 2020.
As you might expect, low-cost and entry-level vehicles are all in high demand. The bad news is that those are the vehicles that car companies have been making the fewest numbers of. Following COVID and the chip shortage afterward, manufacturers have focused their limited resources on making the vehicles that are the most profitable for them. That’s why we see plenty of fully loaded models on dealer lots. Entry-level options are likely to become even harder to find as demand increases.
How Will These Tariffs Continue to Impact You?
All of the above paints a pretty clear picture for folks who just want to buy a car at a reasonable price: get ready to do some hunting. Low-price vehicles are already fairly limited on the market because the margins on them are quite low. Manufacturers make more profit off large, expensive trucks and SUVs, which is why you’ll only find a handful of new models for under $20,000 these days. Even finding something under $25k can be a daunting prospect because car companies shifted so many resources to making their high-end vehicles.
But don’t worry, it gets worse. The low-cost cars that do exist are typically manufactured in Mexico and other low-wage countries because that’s how companies keep their costs down. This means they’re impacted by the tariffs we’ve seen. For instance, the Ford Maverick is the most budget-friendly option out there if you’re looking for a truck. However, Ford announced recently that its price would be going up because—you guessed it—the Maverick is made in Mexico and subject to tariffs. In other words, finding a low-cost, entry-level vehicle will become even more difficult as demand for them goes up, and their prices will increase due to the tariffs targeting those models.
What Does the Future Hold for Auto Tariffs?
The changes we recently saw to tariffs impacting the auto industry are a good sign; as I said, they’re not full relief, but they’re something. That being said, the relief on the auto parts tariff only applies to manufacturers, so any parts you buy at an auto parts store or that your mechanic charges you for when you take your vehicle in for service are still impacted by the 25% tariff if they aren’t made in America. Ultimately, however, it’s just one more example of “tariff whiplash” (I didn’t come up with that, but it expresses this perfectly) that the industry and the rest of us are dealing with.
In order to offset some of that uncertainty in a rapidly changing environment, several car companies have instituted programs to offset tariffs, like Ford’s “From America, For America” program that lets everyone take advantage of employee pricing; but that’s going to end after the July 4th holiday. So expect the second half of the year to become a lot more expensive if you’re shopping for a car, truck, or SUV. More changes are almost certainly coming as the tariffs situation continues to evolve, so stay tuned.
