With the clock quickly running out on a one-month reprieve on tariffs on goods imported from Canada and Mexico to the U.S. the auto industry is on “pins and needles” according to one economist, since Pres. Donald Trump has hinted he may exclude autos and parts from the levies.
But should Trump go ahead with the threatened tariffs, the cost to consumers, suppliers and automakers would be extensive, according to experts at Cox Automotive.
“It looks like we are headed for the highest effective tariff rate since World War II for the auto market,” predicted Cox Automotive chief economist Jonathan Smoke during a webcast on market conditions, Wednesday. “That is especially problematic as such, tariffs would be highly disruptive to North American vehicle production, resulting in tighter supply, higher prices and lower production and sales.”
For one, the tariffs on would cause a $3,000 price hike on U.S.- made vehicle and $6,000 or more on a typical vehicle assembled in Canada or Mexico,” said Smoke.
“If the tariffs go through this time, by mid-April, we expect disruption to virtually all North American vehicle production, amounting to 20,000 fewer vehicles produced per day, which is about a 30% hit to production over the longer term,” estimated Smoke. “We expect sales to fall, new and used prices to increase, and some models to be eliminated if those tariffs persist.”
Indeed, Smoke said he’s fairly confident Trump will impose the tariffs come April 2.
The prospect of tariffs is already affecting the market, according to a report released Wednesday by J.D. Power, predicting nervous shoppers swarmed to dealer lots this month to avoid higher prices, resulting in an expected 13% increase in sales over March, 2024.
“In addition to the boost in March sales, anticipated increases in manufacturer and dealer discounts have not materialized, even as inventory on dealer lots rises,” said Thomas King, president of the data and analytics division at J.D. Power. “Although the magnitude of these effects is currently modest, they do present a preview of potential disruption as manufacturers, dealers and consumers prepare for uncertainty in the coming weeks and months.”
Uncertainty over whether or not the 25% tariffs on vehicles that do not meet the standards under the U.S. Mexico Canada Agreement, or USMCA, will be imposed is basically killing momentum in what has so far shaped up to be a strong start to 2025.
“If the market were left alone with no massive tariff impact on automotive, we’d expect sales to see a one to 2% gain over last year, and finish near 16.3 million. That was our view just a few weeks ago,” said Cox Automotive senior economist Charlie Chesbrough, during Wednesday’s presentation. “However, what seems most likely now is some tariffs for some countries for some period of time. So we’ve revised our baseline forecast of 15.6 million down one to 2% from last year.”
Further eroding prospects is Smoke’s conjecture compliance with USMC won’t immunize imports if the tariffs are triggered on April 2.
“It would appear about 8% of vehicles are not compliant, because 92% are duty free, and that would imply that most of them meeting the rules,” Smoke pointed out. “So we think what is really changing next Wednesday will be, effectively, even vehicles that are in compliance are now subject to the 25% tariff.”
As alluded to by Thomas King at J.D. Power, automakers are reining in incentives as consumers rush to beat any price increases before the tariffs would take hold.
It’s all adding up to what Cox Automotive’s Chesbrough termed a “perfect storm for a return to inflation” created by higher values for existing inventories, incentives in decline and potential supply disruptions, noting “it may already be happening.”
For electric vehicles, the outlook is becoming murkier given the segment is not only threatened by tariffs, but by Trump’s stated intentions to kill tax credits for EV purchases and funding for a national charging network.
Cox is estimating EV sales for the first quarter will increase 12% over the first three months of 2024, despite an expected 18% falloff from the torrid sales at the end of last year fueled by discounts and incentives, but the twin uncertainties are creating a more “complicated” scenario, according to Stephanie Valdez Streaty, director of industry insights at Cox.
While EV sales in general are increasing, market leader Tesla has been steadily losing ground.
“The rapid pace of technological advancements and the emergence of new competitors are outpacing Tesla’s ability to maintain its early lead,” said Streaty.
The company’s share of the EV market peaked in 2020 at 79% and has been declining since then to about 55% last year, according to Streaty. She also cited opposition to Tesla CEO Elon Musk politically and personally as an additional factor for the brand’s sales ebb.
That’s reflected in a sharp decline in customer consideration of the brand. Citing Kelly Blue Book data, Streaty noted consideration of Tesla among luxury EV buyers fell from 16% in 2021 to 9% in 2024.
It’s all a lot to think about as the countdown clock ticks towards next Wednesday as the auto industry, its suppliers, dealers and consumers await the word from the White House.
Cox Automotive’s Smoke is not optimistic.
“We’re not there yet, but we’re a week away from moves that make the dark side more likely,” he mused. “In the meantime, we’ve seen uncertainty grow dramatically over the last two months, and uncertainty can be like a deep fog that simply ruins the warning commute.”
