President Trump is considering a modification to automotive tariffs that would provide relief to manufacturers that complete final assembly in the United States. The relief is an extension of a previously announced adjustment offset to address tariffs from imported automobile parts, equal to 3.75% of the suggested retail price for eligible U.S. assembled vehicles through April 2026 and 2.5% for the following year, sunsetting after that. According to Reuters, Trump is now considering keeping the offset at 3.75% and extending the length of the credit to five years, and expanding the offset to U.S. engine production. Companies such as Ford, Toyota, Honda, Tesla, and General Motors, which lead in domestic content production, would benefit the most from the extension. The tariff relief would also give other automakers more incentive to move car production to the United States, creating more U.S. jobs, which is President Trump’s goal.
Background
In April, President Trump imposed 25% auto tariffs on more than $460 billion worth of imports of vehicles and auto parts annually. He later reduced those tariffs for countries that have made trade deals — Japan, South Korea, the United Kingdom, and the European Union. As reported by Bloomberg, the U.S.-Japan trade deal, for example, lowered tariffs on Japanese auto imports from 27.5% to 15%, providing companies, such as Toyota Motor Corp., a thousands of dollars per vehicle cost advantage over competing models made in the United States, particularly when factoring in the Asian nation’s lower labor and currency costs.
Via Reuters, in August, the Commerce Department hiked steel and aluminum tariffs on more than 400 products, including numerous auto parts totaling $240 billion in annual imports. The parts include automotive exhaust systems and electrical steel needed for electric vehicles, as well as components for buses. The metals are essential for vehicle production, used in chassis, engine components, body panels, and structural reinforcements. U.S. producers have limited immediate availability to produce automotive-grade steel and aluminum, making it difficult to fully offset foreign sources with domestic ones. It is unclear, however, whether automakers will be able to apply the tariff relief to the impact of aluminum and steel tariffs.
According to the Wall Street Journal, earlier this year, GM, the country’s largest automaker, indicated the company faces $4 billion to $5 billion in tariff-related costs in 2025, which it hopes to partially offset by pulling back on spending and increasing production at its U.S. factories. The tariffs will potentially cut GM’s net profit by a quarter. Via Kiplinger, Ford expects to take a $3 billion hit from tariffs in 2025, even though it builds most of its line domestically because of the global nature of car manufacturing. Ford slashed its full-year profit forecast to $6.5 to $7.5 billion, down from an earlier range of $7 to $8.5 billion, largely due to the unexpected tariff costs.
Analysis
Sweeping tariffs have had especially adverse effects on the automobile industry because of the extent that domestic automakers purchase materials and parts from abroad. Like all tariffs, restrictions on auto-part imports may benefit some domestic manufacturers in the short run, but at the expense of consumers and the economy as a whole. As Economist Milton Friedman admonished in Capitalism and Freedom, “Our tariffs hurt us as well as other countries.”
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