Automotive Tariffs: The Latest Impact Analysis

What are tariffs?

Tariffs are duties and taxes imposed by governments on imported goods and services, paid by the company importing the good into the country. Tariffs are not paid by governments or directly by consumers. Tariffs can be used to encourage increased foreign direct investment or to discourage companies from participating in a market.

Currently, the US is taking an aggressive stance and using tariffs to adjust the US relationships with essentially all trading partners. The US Administration is using tariffs directly for several industries, including autos, pharmaceuticals, steel and aluminum, and agriculture, as well as imposing wider tariffs on general goods imported.

The situation has been dynamic since President Trump took office in January, with tariffs announced and, in several cases, changed within days. The US is looking to use these as an entre for wider trade negotiations.

Specific to the auto industry, how might auto tariffs impact vehicle prices?

Auto tariffs for importing complete vehicles will lead to increased costs for manufacturers who import vehicles. Auto tariffs on vehicle parts, which have also been implemented, affect the cost to manufacture in the US as well.

The new tariffs are at a rate likely difficult to impossible for automakers and suppliers to absorb, so the increased costs will be passed on to consumers at some level. What increase in the price consumers will pay will vary by automaker and vehicle.

What is the purpose of implementing tariffs?

The primary purposes of all tariffs include:

• Protecting domestic industries;
• Generating government revenue;
• Affecting overall trade balances between countries; and
• Influencing trade negotiations by applying economic or political pressure.

A key reason for imposing tariffs is to encourage local manufacturing and foreign investment, thereby reducing reliance on foreign imports.

How do auto parts tariffs affect the automotive supply chain?

Auto tariffs increase the costs to import components. The cost of manufacturing the component may not change.

• Auto Manufacturers: Manufacturers rely on global supply chains and import both fully assembled vehicles and parts for domestic production. The costs to import parts and vehicles is increased by the imposition of a tariff, above any typical manufacturing or shipping costs. To address the increased cost, automakers may choose to change sourcing strategies, shift production locations, or alter supplier relationships. Making any of those changes typically requires further investment by the automaker and the parts supplier and disrupts a currently efficient manufacturing supply chain.
• Consumers: Because tariffs increase the cost to import a foreign vehicle (and the parts to produce a vehicle in the US), the prices consumers will pay increases. To the extent automakers choose to adjust their import, export and local production strategies, consumer choice may also be limited.
• Governments: Governments use tariffs to influence trade balances, drive negotiations protect local industries. However, these actions can also complicate international trade relations, creating trade disputes and retaliation from other countries. Retaliation typically is in the form of increasing tariffs on goods the US exports to that country.

Are there different types of tariffs?

There are two main types of tariffs, including:

• Specific Tariffs (a fixed fee per unit)
• Ad Valorem tariffs (a percentage of the value of the imported goods).

The rates vary between countries and can change based on trade agreements and negotiations.