Trump’s tariffs to raise car prices and disrupt industry supply chains

Move aimed at 'turbocharging domestic car manufacturing' is almost certain to backfire, expert warns

About half of all cars sold in America last year were imported. Reuters

US President Donald Trump’s decision to impose 25 per cent tariffs on all imported vehicles and parts is expected to drive up car prices for American consumers, while disrupting supply chains for the industry across North America.

Starting April 3, new tariffs will be levied on complete vehicles and parts entering the US. The move will not only affect foreign car makers but also American companies that use imported components, including Ford Motor and General Motors, which carry out some manufacturing in Canada and Mexico.

About half of all cars sold in America last year were imported, according to research firm GlobalData.

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“It's hard not to interpret this as anything but a cue for higher prices and lower growth, with a soft landing becoming more complicated. Countries most exposed to the new auto tariffs are Slovakia, Mexico, South Korea and Japan,” said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities in Singapore.

Shares of General Motors slumped 6.2 per cent in after-hours trading, while Ford was down nearly 5 per cent. The US-listed shares of Chrysler-parent Stellantis dropped by 4 per cent. Shares of Tesla, which makes all cars sold in the US locally, were down 1.3 per cent.

In Asia, Toyota Motor's stock fell by 2.6 per cent, Honda Motor's by 2.8 per cent and Hyundai Motor's by more than 4 per cent.

The US car market recorded continued growth in new-car sales throughout last year, recovering from pandemic-era lows. That was driven by increased vehicle availability, more attractive financial incentives and a significant rise in consumer interest in hybrid models.

New vehicle sales reached 15.9 million last year, up 2.2 per cent from 2023, and the highest since 2019, according to data from Wards Intelligence.

Car makers initially expected strong sales to continue this year, but the latest tariffs and the removal of tax credits for electric vehicles have increased uncertainty.

“The move, aimed at turbocharging domestic car manufacturing, will almost certainly backfire,” said Nigel Green, chief executive of global financial advisory company deVere Group. “It will dent consumer confidence and slow US growth – and it will impact the global economy, compromising America’s credibility as a trading partner."

The news has sent shock waves across global markets. Japan's Topix was down 0.50 per cent and Australia's S&P/ASX 200 was 0.38 per cent lower, but Hong Kong's Hang Seng and India’s BSE Sensex Index were up nearly 1 per cent each at 10.08am UAE time on Thursday.

The S&P 500, which tracks the performance of 500 large-cap US companies, closed 1.2 per cent lower on Wednesday. Equity-index futures for the S&P 500 were up 0.1 per cent, while contracts for Nasdaq 100 were slightly lower.

Supply chain challenges

Unlike previous tariff announcements, which were mostly temporary negotiation tactics, this one is likely to be sustained for a longer period, although there could be exemptions for US car makers, said Chuck Carlson, chief executive of Horizon Investment Services.

"I could see the US auto makers getting some exemptions based on their supply chains. But I think [Mr Trump] may want to see how this works out as opposed to stopping it in two or three days ... this particular tariff might have legs in terms of its longevity," he added.

The tightly connected car industry of the US, Canada and Mexico – shaped by decades of trade deals, such as the North American Free Trade Agreement and the United States-Mexico-Canada Agreement – relies on complex supply chains, where parts and vehicles cross borders several times. This makes production across North America highly vulnerable to disruptions.

The average percentage of American and Canadian parts in cars sold in the US dropped from 38 per cent in 2007 to 18 per cent in 2023, according to an allamerican.org report last year.

The report, which analysed manufacturer data, found a consistent trend of low American and Canadian content in vehicles sold in the US. Among major car makers, Tesla led with 65 per cent, followed by Honda at 60 per cent.

In contrast, traditional American manufacturers ranked lower, with General Motors at 41 per cent, Ford at 30 per cent and Chrysler at 23 per cent. They were behind foreign brands including Volkswagen, Subaru and Nissan.

In a statement released on Wednesday, American Automakers, an industry body consisting of Ford, GM and Stellantis, said tariffs should be introduced in a way that avoids raising prices for consumers and "preserves the competitiveness" of the integrated North American car manufacturing sector.

Tesla impact

Mr Trump has said the tariffs could benefit Tesla, but affirmed that Elon Musk, the company's chief executive and a close political ally, had no input on the tariff decisions.

However, Mr Musk has said tariffs will affect the electric vehicle maker, which is the largest car manufacturer in the world in terms of market value.

"Important to note that Tesla is not unscathed here. The tariff impact on Tesla is still significant," Mr Musk said in a post on X.

"This will affect the price of parts in Tesla cars that come from other countries," he wrote in a separate post. "The cost impact is not trivial."

Tesla's shares have dropped by more than 28 per cent since the start of the year, as demand for its electric cars weakens amid backlash over Mr Musk's far-right political remarks and the emergence of cheaper options.