President-elect Donald Trump is vowing to protect American-made cars through steep tariffs on imports. The problem is, there is no such thing as an all-American car.
Trump has promised that tariffs, which are a tax on goods that are imported from another country, 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.
The US government tracks what percentage of each car’s parts is made “domestically.” But under current trade law, both Canadian-made parts and US-made parts are counted as the same domestic content. Even with the broader definition of “American made,” none exceed 75%.
That’s why auto prices could rise sharply if Trump goes ahead with plans to impose steep tariffs on the parts that go into the “American” vehicles found in showrooms nationwide. The auto industry supply chain depends on parts and materials from around the globe – from relatively inexpensive nuts and bolts that are cheaper to buy from foreign producers, to expensive computer chips and other electronic components that aren’t made in sufficient quantities in US factories to meet demand.
But despite his claim that tariffs are paid by the foreign country, they are in fact paid by whoever is buying the imported good, and US businesses almost always pass most – or all – of that cost onto consumers.
Upending the way of US cars are built
The North American car industry has operated for decades as if the continent is one giant country, thanks to free trade agreements signed by presidents from Bill Clinton to Trump himself. Parts and whole vehicles have flowed freely across borders, sometimes multiple times, before they end up in an American dealership.
But Trump is promising to change that. Because of the threat of tariffs on both Canadian and Mexican exports to the United States, shares of most automakers’ stocks fell Tuesday, with GM closing down 9%, Ford down 3%, Stellantis, the maker of cars under the Jeep, Ram, Dodge and Chrysler brands, off 6%. In addition Toyota closed off 2% in US trading, and Honda fell 3%.
Trump’s plans would upend the US-Mexico-Canada Agreement, or USMCA, the three-country trade deal he negotiated. Mexico and Canada are two of America’s largest trading partners, and are currently exempt from most tariffs under the USMCA, but that that could change.
And it’s not just tariffs on goods from Mexico and Canada that are raising concern. Trump’s promise to increase tariffs are China an additional 10% beyond existing measures have the potential to make plenty of cars more expensive, too. While China ships relatively few cars to the United States, it is a major source of low-priced auto parts.
Trump argues that the move would bring jobs back to the United States by forcing manufacturers to close plants in other countries and open or expand US plants. But the amount of parts that go into cars assembled here would be difficult for American suppliers to replace, which would make building a car at US auto plants much more expensive.
There are only two vehicles hit that are considered to be 75% American-made by the US government – the Tesla Model 3, and the Honda Ridgeline, a pickup assembled at a Honda plant in Lincoln, Alabama. And once again, that 75% includes any content that currently comes from Canada, and could be subject to new tariffs.
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 are ostensibly “foreign,” but actually assemble cars here – Honda, Hyundai, Kia, Nissan, Mazda, Subaru and Toyota.
The Ford F-150, the most popular vehicle in the United States for more than 40 years, has the most domestic content of any vehicle made by one of the traditional “Big Three” automakers. While the all the parts are assembled into a pickup truck in either Michigan or Missouri, only 45% of those parts come from US or Canadian factories. Many of the larger versions of its engines come from Mexico.
“Yes, it’s America’s truck, assembled in America, but not with American parts,” Ivan Drury, director of insights for Edmunds, told CNN.
Domestic parts could be tough to find
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, paying US wages. It would be more economical to pay the tariffs, and pass along the cost to car buyers.
Even if an American parts supply could be found, in most cases it would be more expensive. The low price of imports is the reason automakers turned to those supplies in the first place.
And spending the time and money to build new plants, assuming suppliers are willing and able to do so, would pose its own challenges. Take the multitudes of computer chips that go into modern cars, for example, which control everything from fuel economy to windshield wipers to lumbar support and seat warmers. The 2022 CHIPS Act approved $30 billion to support building 16 semiconductor factories in the United States. But even with all of that money, it can take three to five years to build new plants.
Even modernizing and expanding existing US chip plants, which would need to take place in order to meet increased domestic demand if imported chips become more expensive due to tariffs, could take a year or more. One New York plant that’s being expanded is expected to take 10 years to fully realize its additional production levels.
The tariffs would raise the cost of assembling vehicles at US plants. And those increased costs would definitely hit car buyers who are already spending nearly $50,000 on each new vehicle purchased here.
“Those costs … are not going to be absorbed by the automakers or suppliers,” Jeff Schuster, global vice president of automotive research at consultant GlobalData, told CNN.
Automakers had no comment when asked about their plans and the impact on prices due to new tariffs when contacted by CNN.
Imported car tariffs likely would raise all prices
Even if Trump pulls back on tariff plans and only imposes tariffs on fully-assembled cars imported into the United States, it will raise the price of cars built here, let alone on those imports.
During the campaign he vowed 100% to 200% tariffs on vehicles built in Mexico, saying it was vital to protect American auto jobs, although he made no reference to those plans in Monday’s announcement. That would double or triple the cost of those cars, likely killing all demand for them. He predicted there would be a “bloodbath” in the US auto industry and auto jobs if his tariff plans weren’t imposed.
If tariffs do in fact raise the price of Mexican-assembled vehicles, like the Chevrolet Blazer or Honda HR-V, and subsequently price them out of the the market, automakers might decide to stop offering them altogether rather than build them at US factories. Cars built in Mexico are most often lower priced, lower profit models, that are only able to maintain their profitability by being built with cheaper Mexican labor.
But it’s not just smaller, entry-level models that are built in Mexico that could see price hikes. The tariffs could impact many models car buyers don’t realize are imports, such as the heavy duty versions of Ram pickup trucks, which are built in a Stellantis plant in Saltillo, Mexico. Some versions of the Chevrolet Silverado are also built in Mexico. Even if the automakers shift production of those more profitable vehicles back from Mexico to US factories, it would take years to accomplish the switch.
Fewer imported cars would raise all prices
Tariffs on imported vehicles likely would also lead to higher prices on cars that are assembled here, since 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, which is what happened in 2021 and early 2022 when a shortage of computer chips and other parts severely restricted production across the industry. Almost all car buyers were suddenly paying above sticker price for the first time, and average prices soared.
And the higher prices on imports would mean less competition for manufacturers making cars and trucks at US plants, giving them the chance to charge more in order to increase profits - not necessarily hire more workers. US automakers have used strong profits in recent years to repurchase billions of dollars worth of their shares to support their stock price, even as they were laying off workers and slowing or trimming production in some cases.
“It will have a ripple effect throughout the market, and fallout on all vehicles,” said Drury. “You’re going to disrupt the used car market as well.”
The exact impact will be difficult to determine until final details of Trump’s tariff plans are spelled out. During his first term there were numerous threats of tariffs that never came to pass. Drury said that some of the tariff talk from the campaign trail might not happen this time either. If they do, it will have a huge impact on car buyers.
“There are all these potential car buyers who have held out because of high prices,” said Drury. “If these tariffs are put in place, it could tank the industry. I hope for the car buying public, nothing is as aggressive as advertised.”
