New US government administrations are always a time of opportunity and challenge for the auto industry. Shifts in policy and ideology can heavily impact everything from the supply chain to consumer behavior, so as an administration changes from one political side to another, industry experts and executives wait with baited breath for what is to come. In November, the Trump-led Republican Party was elected to take power in both the Executive and Legislative branches of the US government. With this victory has come the looming reality of tariffs and protectionism not only on the US auto industry, but on all US trade and manufacturing. Framed as a way to “protect” US businesses from unfair foreign competition, tariffs have a long and controversial history in both purpose and effect. Experts and C-suite executives both domestically and internationally are growing increasingly concerned about the negative consequences of the US instituting tariffs on global Auto OEMs and consumers. This article will explore the meaning and impacts that tariffs may have on an automotive industry already in flux between internal combustion and electric vehicles.
Tariffs as a concept are inherently designed to be protectionist and isolationist. Originally invented in a time before globalism existed in its modern form, tariffs were first instituted by Western European countries that wished to develop certain domestic industries without fear of being outcompeted by other countries with more developed/stronger manufacturing bases. Prior to the late 19th/early 20th century, tariffs were broadly effective at developing domestic industries in countries such as the UK, propelling it to a position of global dominance economically and politically. However, the era of colonial empires and mercantilist policy has given way to globalism and international cooperation since the end of the World Wars, rendering tariffs questionable for Western nations. They have been effective at preventing unfair competition when other nations subsidized their auto companies so they could export their products and sell at artificially low prices to try to drive domestic manufacturers out of business. Tariffs convinced many of these companies to set up manufacturing plants in the US, Canada, and Mexico. Refocusing on the 21st century, tariffs are still used for protecting some industries and are often a negotiating tool to exert pressure to accomplish a concession and get better trade terms. But, when implemented over time, they tend to restrict global progress, especially when it comes to manufacturing and technology.
The US auto industry relies heavily on the globalization of the supply chain and international manufacturing locations. Sourcing raw materials and parts for vehicles internationally allows it to be more affordable and competitive with other nations’ carmakers, giving Ford, GM, the US portion of Stellantis, Tesla, and Rivian the ability to sell their vehicles for prices better aligned with companies like Toyota, Nissan, and Volkswagen. As vehicles have become more technologically advanced, production costs have increased, especially due to electric powertrains, connected features, and the ever growing need for computer chips. Globalization of supply has facilitated the affordability of parts and production not only for American domestic brands, but also for overseas competitors, collectively bringing down prices for prospective buyers and allowing dealerships to both maintain and move inventory. Agreements like NAFTA, which was signed in 1992, and its replacement, the USMCA which was signed in 2018, have led to a flourishing of production in the US, Canada, and Mexico, propelling the EV segment forward and keeping prices for gas vehicles under control in spite of heavy inflation. Free trade agreements are one of the primary allies of the US auto industry, and the Trump administration’s intent to introduce or expand tariffs may have adverse consequences on American business and consumers alike.
In recent weeks, it has become apparent that the Trump administration plans to levy 25% tariffs on Canada and Mexico (upending the USMCA). Jim Farley, current CEO of Ford Motor Co. said at an investor conference earlier this month: “Let’s be real honest: long term, a 25% tariff across the Mexico and Canada borders would blow a hole in the U.S. industry that we’ve never seen.” He goes on to establish that “frankly, it gives free rein to South Korean, Japanese and European companies that are bringing 1.5 million to 2 million vehicles into the U.S. that wouldn’t be subject to those Mexican and Canadian tariffs. It would be one of the biggest windfalls for those companies ever.” US companies heavily rely on manufacturing in Mexico and Canada to remain competitive with foreign OEMs, and introducing tariffs will likely cause significant constrictive effects on the US auto industry and economy as a whole. Coupled with other concurrent issues including US-Chinese tariffs, lower consumer confidence, and renewed inflation, automakers may be faced with a very difficult economic landscape to navigate. There is some precedence for this move, however. It is worth mentioning that President Lyndon Johnson’s longstanding “chicken tax,” which added a 25% tariff on foreign light trucks in 1964, has created a thriving yet increasingly expensive full-size pickup segment in the US. Moreover, the US already has incredibly steep tariffs on Chinese EVs, which have thus far prevented Chinese OEMs from undercutting domestic EV production. It is yet to be seen if tariffs will have similar positive or negative effects.
While there is much to be wary about in terms of tariffs and the broader economic indicators, US automotive OEMs and suppliers have shown time and again that they are capable of handling challenging situations. Navigating the likes of the 1973 Oil Crisis and the Great Recession, US automakers have done what is necessary to survive and laid the groundwork to thrive when the opportunity to do so reemerged. For the time being, a realignment of priorities seems prudent to protect US business in the face of growing uncertainty. Perhaps EV adoption will temporarily slow down while consumers turn towards cheaper ICE vehicles. It is hard to say exactly what the outcome will be from such a momentous shift in economic policy, but US automakers will likely do anything in their power to remain competitive and deliver the best possible vehicles to the US and global automotive markets. They’ve been doing so for over 100 years.
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