Automotive sector: Possible impacts of the new Trump presidency on the automotive sector

Trump’s ‘America first’ agenda

During his electoral campaign, president-elect Donald Trump alluded to a 60% tariff on all imported Chinese goods and a 10 to 20% tariffs on goods imported from all other countries. This week, he pledged to issue an executive order on his first day in office that would introduce new tariffs of 25% on imports from Canada and Mexico and to increase tariffs on China by 10%. These new potential tariffs appear to breach the trade terms established by the United States-Mexico-Canada Agreement (USMCA). One of Trump’s aims for his second mandate is to reduce America’s trade deficit and to revive its manufacturing sector.  

By promoting an ‘America First’ agenda, Trump is willing to strengthen domestic production and reduce US reliance on foreign imports. As shown on the graph below, besides Mexico, China and Canada, Japan, South Korea, other Asian countries and the EU are also important trade partners for the USA. Hence, Trump may also use tariff threats on them, at least to secure some concessions, including in the automotive sector, which should be one of the most affected by the imposition of tariffs. 
 

Focus on the automotive sector

For both local and foreign companies manufacturing automotives in the USA, no tariffs will be applied on the vehicles themselves. On the contrary, the introduction of tariffs may encourage companies with sufficient production capacity to increase their local production and avoid relocating their operations abroad. For example, Tesla already announced its plans to boost domestic production in Texas after CEO Elon Musk decided to cancel the Tesla gigafactory project in Mexico. Whereas companies that do not have adequate capacity in their US factories will face a choice: either absorb the additional tariffs or pass those costs onto consumers by raising vehicle prices.

However, many of these companies that manufacture automotives in the USA are still dependent on parts imported from abroad, especially from Mexico and Canada, which will potentially be subject to tariffs. This situation may compel US manufacturers to rethink their supply chains. If adjustments to their supply chains are not feasible, they might continue importing parts at higher costs, and ultimately increase their operating expenses. 

Large spillover impact on Mexico …

The potential impact of Trump’s proposed tariffs on the Mexican automotive industry could be significant, especially in the light of the recent shifts in manufacturing dynamics. Indeed, Mexico has now surpassed China to become the largest exporter of vehicles to the USA. Despite the existing free trade agreement with the USA and Canada, Trump threatened to impose tariffs, including a staggering 200% levy on cars imported from Mexico, unless the country takes action to curb illegal migration across its border and drug trafficking. This has created a climate of uncertainty for manufacturers and investors. For example, Honda warned that such tariffs could significantly affect its exports from Mexican plants, potentially impacting around 160,000 vehicles. Major automakers, such as Ford, Volkswagen and Toyota, have substantial manufacturing operations in Mexico, and any tariffs could disrupt their supply chains and production strategies as well. Imposing these tariffs would not only harm Mexican and foreign manufacturers, but also negatively affect US automakers producing in Mexico, particularly General Motors and Stellantis, which rely on trucks produced in Mexico. 

… and beyond

As the USA is the top destination for German car exports, any tariffs could worsen the difficulties this sector is already facing. The German automotive industry is currently under considerable financial strain, dealing with rising costs associated with the development of electric vehicles (EVs) and the influx of competitively priced models from Chinese manufacturers. This competitive pressure has led to shrinking profit margins, recently prompting Volkswagen to shut down plants in its home market for the first time in history, a move that underscores the severity of the situation.

The European automotive industry, particularly in Germany, may be about to face additional challenges from Trump’s proposed tariffs, potentially leading to increased vehicle prices and reduced sales in the US market. This would not only harm manufacturers located in Germany but would also have serious repercussions on Central European countries, such as Poland, Hungary and the Czech Republic, that rely on the German automotive sector as a key trade partner. Countries like Poland and Hungary, where many automotive suppliers and assembly plants are located, might experience job losses and economic struggles, as the impact of these tariffs spreads. Overall, the combination of tariffs and existing market pressures could threaten the stability of the entire European automotive sector, a key industry in the EU.

On 14 May 2024, President Joe Biden announced new tariffs on Chinese EVs, raising them from 25% to 100%, to safeguard American manufacturers against alleged Chinese unfair trade practices. Although only 2% of EVs imported to the USA originate from China, these tariffs have been strategically designed to prevent China from gaining a stronger presence in the US market. While their immediate macroeconomic impacts – such as changes in quantities, prices and exchange rate – should be negligible, these tariffs could still pose challenges for certain Chinese firms and US importers. For the American consumers, the effects should be negligible, translating more into a loss of future opportunities rather than into immediate expenses. Donald Trump could potentially want to further increase these tariffs, which if that were so could be met by retaliatory measures from China. 

Main takeaway points

Donald Trump’s ‘America First’ agenda could significantly impact the automotive sector, but the future remains uncertain. As a businessman, Trump may approach his proposed tariffs strategically, using them as a bargaining chip rather than implementing them all. While his goal is to strengthen the US manufacturing industry and reduce the United States’ reliance on imports, these tariffs could disrupt supply chains and potentially raise costs for both manufacturers and consumers. The automotive industry in the USA, Mexico and Europe could face significant challenges, as companies would have to adapt to changing trade policies. Trump’s recent tariff threats have prompted promises of retaliation from the targeted countries, increasing the likelihood of a global trade war that could exceed the situation of his first term. The implementation or not of these tariffs will be crucial for the automotive market’s future. Stakeholders need to stay alert: the outcomes of these policies could alter the industry for years to come, affecting everything from production methods to vehicle prices. Ultimately, how these protectionist measures will interact with global trade relationships will play a key role in the future of the automotive sector.

Analyst: Laura Pierssens – l.pierssens@credendo.com