Key Takeaways
President Trump is adjusting his auto part tariffs for domestically produced cars as he seeks to onshore more auto manufacturing after decades of offshoring by companies.
His 25% tariff on auto parts will be tempered by an import adjustment offset that allows a refund to domestically built car prices of 3.75% in the first year and 2.5% in the second year. After that, the offset sunsets, allowing time for car manufacturers to adjust to the tariffs on imported parts.
Vehicle prices are still expected to rise by an average of $4,000 as more manufacturers build capacity to produce parts domestically.
The United States ran a trade deficit of $93.5 billion in car parts last year.
Vehicles built domestically that contain a combined 85% of parts adhering to the U.S.-Mexico-Canada Agreement (USMCA) would not be subject to the tariff, which benefits Canada more than Mexico.
Some manufacturers are already increasing prices on items such as tires, and consumers should expect higher repair prices.
In addition to the 25% tariff on imported cars that is still currently in place, President Trump placed a new 25% tariff on auto parts that went into effect on May 3, which applies to passenger vehicles, light trucks, and key components such as engines, transmissions, and electrical systems. However, he has made some concessions, such as reimbursements for domestic car producers importing car parts, called the “import adjustment offset”. The maximum reimbursement is 3.75% of the value of domestically produced cars, which will decrease to 2.5% for the second year and be phased out entirely thereafter. The offset roughly corresponds to imported parts making up 15 percent of a vehicle’s value in year one, and 10 percent in year two. The average value of the offset is expected to be around $1,500 per vehicle. According to CNN, even with that refund, the added cost of tariffs could still average about $4,000 per vehicle. Trump’s concessions allow auto companies more time to re-shore their manufacturing capabilities, giving them a temporary break.
The Trump executive order also shields auto manufacturers from facing multiple auto-related tariffs. Auto manufacturers will only be subject to the highest tariff associated on whatever they are importing. For example, an auto manufacturer could end up paying a 25% tariff on a car part, but not an additional 25% tariff on the steel and aluminum used in the part.
Also, cars containing a combined 85% of parts that comply with the United States-Mexico-Canada Agreement (UMCA) and are produced domestically would not face any tariffs. However, virtually no vehicle meets the 85% threshold because automakers have been treating North America as a single market. As a result, not one of the 10 million cars turned out by U.S. plants last year was built without at least some imported parts. The tariffs on parts could now mean tens of billions of dollars in new costs to the auto industry, which could be passed down to consumers. More than 50% of the content of cars assembled in American auto plants is imported, according to U.S. government estimates. In 2024, the nation ran a $93.5 billion trade deficit in auto parts.
With Trump’s concessions, the tariffs will not apply equally to all imported parts. Parts from Canadian or Mexican suppliers who pay their workers $16 or more an hour comply with the US-Mexico-Canada Agreement. That means most Canadian parts are exempt from tariffs, but relatively few Mexican parts are exempt. Last year, the U.S. imported $19.2 billion in Canadian components and $82.5 billion in parts from Mexico. The price of tariffs on imports from Mexico would have been $60 billion if current tariffs for auto parts (and additional levies for Chinese goods in general) had been in effect last year. The refund rules would only take that bill down to $40 billion, according to CNN.
General Motors CEO, Mary Barra, indicated that tariffs will cost her company between $4 billion and $5 billion this year, but she does not expect car prices to change in the near term, although Americans will likely see higher prices in the repair shop. Because Ford makes most of its vehicles in the United States, it is less affected by Trump’s 25% tariffs on auto parts than other carmakers. The company expects the tariffs to cost $1.5 billion this year. CEO Jim Farley indicated that Ford would extend its “employee pricing” offer through July 4. The company is scrapping its sales forecast, citing uncertainty over tariffs, as are other carmakers, including Mercedes-Benz and Stellantis. Some expect that the most severe impacts on production and sales will likely appear in 2026.
One market where the impact is expected to be felt is the tire market where the tariffs could lead to higher prices and supply disruptions since imports make up a significant portion of the U.S. supply. Some manufacturers, including Goodyear and Yokohama, have already announced price increases.
Conclusion
President Trump has a 25% tariff on imported cars and another 25% tariff on imported auto parts, with some concessions, as his goal is to encourage the reshoring of auto supply chains while maintaining competitiveness. He has introduced an import adjustment offset that allows a refund to domestically built car prices of 3.75% in the first year and 2.5% in the second year, after which the offset sunsets, which is to allow time for car manufacturers to adjust to the tariffs on imported parts. The concessions also include shielding auto manufacturers from facing multiple auto-related tariffs by subjecting them to only the highest associated tariff, and excluding cars that contain a combined 85% of parts that comply with the UMCA and are produced domestically from the tariffs. Nevertheless, despite the concessions, the tariffs are expected to increase the cost of a domestically produced car by $4,000.
