The Bad, the Worse, and the Ugly of Automotive Tariffs

April 2025 has been a tumultuous month for global trade, with the U.S. administration announcing a series of tariffs on imported goods, which rapidly shifted in scope, time frame, and rate over the course of 2 weeks, leaving many manufacturers scrambling to plan and optimize based on the new costs that a globalized supply chain will inevitably incur.

At the time of writing, the new tariff structures facing the automotive industry are summarized below:

• A 25% tariff on imported vehicles from all countries, going into effect April 3
• A 25% tariff on a wide range of imported vehicle components, going into effect May 3
• United States-Mexico-Canada Agreement (USMCA)-compliant vehicles will only be subject to tariffs on the non-U.S. component value of the vehicle
• Certain materials already subject to Section 232 tariffs will not be compounded by these 25% tariff rates

According to the U.S. administration’s own analysis, some 50% of vehicles sold in the United States each year are imported, with only 40% to 50% of the value of each domestically produced vehicle derived from domestically manufactured components. Therefore, from May 3 onward, around 75% of the U.S. automotive market value will be subjected to a 25% increase in supply-side costs. In reality, the impact will be even greater, as those domestic component manufacturers will no longer be subjected to the same foreign competitive pressure to reduce costs. Furthermore, the tendency for a component to cross borders multiple times during construction can see these components, in effect, tariffed on multiple occasions. In addition, the 10% base tariff that has emerged as the settled state for most U.S. trading partners for a period of 90 days from April 9 can be expected to have a generally inflationary effect, also impacting supply chain costs.

Alongside the greater supply side costs, the automotive industry must also anticipate a demand-side shock resulting from the effect of increased tariffs on inflation, interest rates (and therefore, financing), consumer confidence, economic growth, and employment.

For Original Equipment Manufacturers (OEMs), while there will clearly be no outright winners in this context, there will certainly be automakers set to lose less than the competition, potentially setting themselves up for an increased share of an albeit smaller market.

Domestic OEMs: Both Ford and Stellantis have announced the expansion of employee pricing to general consumers on most models, representing thousands of dollars of savings per vehicle. This will help these automakers get ahead of the likely demand disruption caused by the new tariff framework, and also help them gain market share at the expense of competitors that are unable to match these discounts, or that are even being forced to withdraw incentives in the face of new cost pressures. The driving factor enabling these OEMs to offer such discounts is, no doubt, their U.S.-dominated vehicle manufacturing, with 60% of Stellantis vehicles sold in the United States, and 80% of Ford vehicles sold in the United States being manufactured domestically.

Ford also operates a higher level of inventory than the industry average (4 months compared to 3 months), and this push to sell down the higher stock level at lower prices likely reflects fears of a looming demand-side impact later this year.

Foreign OEMs: The response from foreign OEMs has been equally mixed, with some general trends still observable. Audi and Mitsubishi are both holding U.S. imports at port, before the point at which the new tariffs would be applied. Audi manufacturers all of the vehicles sold in the United States either in Europe or Mexico, with the Mexican manufactured Q5 (Audi’s best-selling model in the United States) not featuring enough U.S./Canadian/Mexican content to benefit from USMCA exemptions, subjecting it to the full 25% tariff. Mitsubishi, meanwhile, manufactures every vehicle sold in the United States outside of North America, and has also taken steps to reduce consumer incentives and raise financing rates.

Audi has endured successive quarters of shrinking vehicle sales in the United States, while Mitsubishi has found its profit margin coming under pressure. For foreign automakers already under pressure in the U.S. market, the 25% tariff will push a “wait and see” approach, pausing imports, while the economics of onshoring are considered, or in hopes of a reduction in tariffs. Meanwhile, Mercedes-Benz has committed to maintain 2025 pricing, benefiting from a manufacturing presence in Vance, Alabama, responsible for the production of models such as the GLE, GLS, EQE, and EQS. These models are high margin, allowing Mercedes-Benz to better absorb the impact of the tariffs insofar as it applies to the non-U.S. content of these models.

Overall, the automakers, both foreign and domestic, that are best positioned to weather the storm are those with significant U.S. manufacturing presence, with U.S. production capacity devoted to the manufacture of high margin models such as Sport Utility Vehicles (SUVs) and luxury sedans. Holding a renewed competitive advantage, these automakers may even double down and pursue increased incentives to increase their market share before the demand-side impact starts to bite.

Meanwhile, OEMs without any USMCA-based manufacturing, or that feature too high a proportion of non-U.S. content in their vehicles for exemptions in their USMCA-based manufacturing, are most heavily exposed, particularly with respect to narrow margin models.

Scenario 1: Uncertainty Plagues the New Sales Market (Bad): U.S. policy on tariffs has fluctuated considerably since April 2. What was first announced as a series of reciprocal trade tariff rates apparently calculated in accordance with the U.S. balance of trade deficit for each country has given to way to a blanket 10% tariff on all trading partners, with the exception of China, with goods currently subject to a tariff of 145%. While the policy on automotive tariffs has remained consistent, the recent decision to exempt certain devices and components such as smartphones, semiconductors, and other components for a period of 90 days has given rise to speculation that a more general return to the pre-April status quo, or something like it could be in the cards. However, it is important to be realistic about the prospect of such a shift. In the first case, the rhetoric of the U.S. administration tends toward re-imposition of protectionist measures against smartphones and their components after the pause. More generally, automotive protectionism is long standing, with the recent 25% levies an expansion of an existing practice, rather than a novelty.

However, even if the scope and rate of automotive and automotive component tariffs were to be reduced, this would only serve to amplify the confusion and uncertainty with which automakers are grappling. Onshoring is a complex process, with the timeline for the planning, construction, and optimization of new manufacturing processes measured in years, meaning automakers are reluctant to commit to such a strategically important decision in the context of a policy environment that is changing by the day.

Scenario 2: The Tariffs Remain and Other Major Markets DO NOT Retaliate (Worse): Some of the United States’ trading partners have pursued a cautious policy in their response to increased U.S. tariffs, preferring a measured approach that maximizes the probability of a compromised trade deal as close as possible to the status quo. In this context, the biggest shake-up will be in the composition of the new vehicle sales market, with domestic brands or brands with a healthy U.S.-based manufacturing base gaining market share at the expense of OEMs skewed or entirely dependent on non-U.S. manufacturing, even while all of the U.S. market deals with the demand impact of higher prices. If the automotive tariff framework is generally accepted by the market to remain consistent for the long term, then a protracted period of onshoring, combined with a preference for U.S.-based components will prove the least worst way to optimize in this context.

At the same time, it will make sense for vehicles manufactured within the United States for export to have their production shifted outside of the United States in order to avoid the tariffs placed on the import of non-U.S. components and construction materials more generally. Of the 4.9 million vehicles manufactured in the United States by international OEMs, 0.76 million were exported, with European OEMs, in particular, exporting over half of the vehicles manufactured in the United States.

Scenario 3: The Tariffs Remain and Other Major Markets DO Retaliate (Ugly): While the United States does import many of the vehicles that American consumers buy, it also exports many vehicles for sale in other countries. According to the European Automobile Manufacturers’ Association (ACEA), in 2022, the United States exported 3.9 million vehicles, with 13% of these vehicles sold within the European Union (EU). While increasing protectionism in the United States can make U.S. OEMs more competitive in their home market, retaliatory measures can make them uncompetitive everywhere else. China has adopted a more “tit-for-tat” policy in response to U.S. tariffs, with the impact on the automotive market already visible in the fact that Tesla is no longer accepting orders for U.S.-manufactured Model S and X vehicles in China. At the high water market in 2017, U.S. manufacturers exported 4 million vehicles into China alone, in comparison to the roughly 6 million vehicles that the United States will typically import. Having ceded leadership in Autonomous Vehicles (AVs), Software-Defined Vehicles (SDVs), and Electric Vehicles (EVs) to Chinese OEMs, U.S. automakers were already struggling with being competitive in China on capability, halving their share of new car sales in China reach just over 2 million in 2023. Retaliatory tariffs will likely to lead to American vehicles being uncompetitive on cost and capability in the world’s largest automotive market.

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