The Effect Of Tariffs On The Auto Industry — It’s Not Just EV Manufacturers That Are Hurting – CleanTechnica

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The Trump administration has imposed double-digit tariffs on automobiles and auto parts for virtually all of the world’s largest vehicle manufacturers. And, boy, are global automakers and their supply chains starting to feel the effects of the tariffs, which range from 7.5%–25%.

The tariffs are severely disrupting the automotive industry, a key global economic driver.

Buyers beware. In nearly all cases, the economic burden of tariffs as an incremental tax on imports is passed on when consumers eventually purchase the imported products. Price shifts are already evident in the automotive industry, as the tariffs are dramatically increasing production costs and vehicle prices, reportedly by up to $12,200 per vehicle.

The auto industry’s complex supplier network is now highly vulnerable, and subsidiary companies are feeling compelled to seek adaptive strategies. Some suppliers are diversifying in order to mitigate tariff impact, but doing so extends lead times and shrinks profit margins.

Major supply chain adjustments are infusing inefficiencies across the entire sector.

Cox Automotive calls the constant, on-again-off-again nature of the Trump policies “the most challenging aspect of this tariff cycle.” The tariffs are reshaping the auto market, the digital marketing and analysis companies add, so that “cost pressures and policy pivots are rewriting the playbook for manufacturers, dealers, and consumers alike.”

The automobile sector is heavily influenced by government policies, which shape production, investment strategies, and market dynamics. Suppliers as a general rule aren’t lucrative enough to invest in shifting production to other countries. Thousands of small and midsize parts suppliers create the quiet core of the manufacturing sector, and their profits are generally slender. Volume is all, and future volume numbers have become scarily opaque with the backdrop of tariffs.

Add to that equation the realization that the inevitable shift to electric vehicles is probably going to make many automotive parts for combustion engine vehicles obsolete. As if that isn’t inconstant enough, the Trump administration’s rejection of electric vehicles has added even more uncertainty to the automotive industry.

Electric vehicle sales skyrocketed last quarter as buyers took advantage of the final days of the Biden-era $7,500 federal EV tax credit, which expired on September 30. EVs rose to a record 10% of US deliveries. Yet Ford Motor Company’s CEO, Jim Farley, warned of a bleak outlook for electric vehicles as Trump’s policies prop up internal combustion engine-powered vehicles. Earlier this week Farley commented, “I wouldn’t be surprised if EV sales in the US go down to 5%.” The EV market will be “way smaller than we thought,” he predicted.

The Look from Abroad at the Effect of US Tariffs

The US is the largest purchaser of finished vehicles assembled in Japan, Germany, and South Korea. Data from the New York Times indicate:

• Japan’s auto parts sector employs over 600,000 people across some 20,000 companies, many of which are industrial lifelines in rural areas of the country.
• South Korea’s parts suppliers have about 330,000 employees.
• Germany’s suppliers make up about a third of the more than 700,000 people in the automotive sector.

The precarious nature of these jobs extends to the US, too, where tariffs on steel, aluminum, copper, parts, and battery materials are driving up costs for automakers and auto dealers. Tariffs are inflationary, adding significantly to the cost of producing and selling automobiles.

Below is a deep dive into some newly tenuous US relations with global automotive trading partners.

China: The China-US trade war has disrupted nearly half a century of trade liberalization, impacting the global distribution of production and the configuration of supply chains. As Feng Wang writes from Singapore Management University, while tariffs on automobiles protect the local US automotive market, the increased production costs due to tariffs on components place US-made cars at a competitive disadvantage in the global market, negatively affecting automobile production. The difference in the targets of these effects leads to a structural change in the US so that Chinese companies are adopting strategies like trade relocation and production relocation to mitigate the negative impact of increased tariffs. Contrary to Trump administration intentions, the existence of production relocation makes it difficult for the US to exclude Chinese companies from its supply chain, and, so, has accelerated the globalization of Chinese enterprises.

Canada: The potential imposition of 25% tariffs on Canadian raw materials in 2025 presents a significant challenge back on US soil. The domestic automotive industry relies on specific raw materials and finished products sourced from Canada. Tariffs are disrupting supply chains and increasing costs.

Today Michigan Governor Gretchen Whitmer acknowledged the travesty in Washington, DC, saying that US-Canada relations are “challenging,” and the “tone, insults, and ignorance” from the Trump administration are “unwise, unnecessary, and unjustified.” She further examined the state of the cross-border automotive relationship.

Auto companies in Canada and Michigan are stockpiling parts and laying off workers. Bonus checks for autoworkers are shrinking by thousands. Suppliers are facing higher costs and delaying expansions. The price of a new car could rise by $2,500. Businesses are considering moving operations entirely overseas to pay one tariff on one product.

Japan: Trump applied a 15% tariff on Japanese automobiles and parts this year, and the subsequent consensus in Japan seems to be for less US demand for cars and parts. The value and volume of auto parts shipped from Japan to the US have fallen each month since May, when tariffs first went into effect. Toyota has the profits to absorb the added costs, but smaller companies which comprise the dense networks of auto parts suppliers may be stretched thin. For example, in July, the value of auto parts shipped to the US dropped 17.4% from a year earlier.

South Korea: The Korea Chamber of Commerce and Industry, South Korea’s largest business organization, surveyed its automobile and auto component companies and revealed that 81% of respondents said tariffs would hurt their earnings. South Korea has set aside around $11 billion to support manufacturers.

Kyoung You Kim from the Korea Institute for Industrial Economics and Trade anticipates that rising production costs are likely to erode profitability and lead to higher retail prices. The US auto market “is expected to undergo significant changes as demand declines due to higher vehicle prices,” Kim continues. “The market is slowly exhibiting a growing preference for smaller vehicles, and demand for aftermarket parts is growing as used car sales rise amid longer vehicle lifespans.”

European Union: The automotive sector is crucial to the EU’s economy, directly supporting around 6% of total employment. Despite this, sales of European-made vehicles have not recovered to prepandemic levels. At the same time, the industry is undergoing a profound transformation, shifting from internal combustion engines to electric vehicles. The US lowered tariffs on auto imports from the EU to 15% retroactive to August 1. Relief for automobiles and parts, as reported by Bloomberg, was contingent on the EU introducing legislation to lower tariffs on US industrial goods and some non-sensitive agricultural products.

Germany: Tariffs have already cost the German auto industry billions of dollars, said Hildegard Müller, the president of the German Association of the Automotive Industry. “Overall, the increasing geopolitical tensions and the increasing protectionism and activism mean that companies have to serve the markets more and more locally,” Müller surmised. “This will not be without repercussions for jobs in the countries involved.”