Trump is driving the American people crazy (myself included!) with his trade war, pun intended. Last week, Trump announced that he is imposing 25 percent tariffs on automobile and automobile parts imports, which took into effect yesterday. Per the White House's fact sheet announcing the tariffs, Trump believes these tariffs are a national security issue since "excessive imports [are] threatening America's domestic industrial base and supply chains." In his fantasy world, Trump believes that the tariffs will simply encourage manufacturers to bring production back to the United States. Give me a break! There will not be a revival of the manufacturing that the United States experienced in the 1950s because as I explained during Trump's first term, those days are long behind us.
In addition to believing the tariffs will boost manufacturing, Trump also believes that tariffs will make America great again, a claim that has been refuted multiple times here at Libertarian Jew. Whether it is under the guise of national security, fighting the War on Drugs, helping out small businesses, or fighting trade deficits, I have been shaking my head wondering what gives with Trump's trade war. So what makes Trump's latest tariffs especially harmful to the auto industry?
Let's say that it is not a coincidence that General Motors' stock fell six percent after Trump's announcement about the automobile tariffs. And if tariffs are so good for automakers, why is Auto Drivers America, the largest trade association for U.S. automakers, denouncing the tariffs? Trump is not going to boost manufacturing or improve domestic supply chains because Trump does not grasp how supply chains work for the auto industry. As this table from the Cato Institute below shows, automobiles are not strictly manufactured in the United States. More than half of the content of what many would consider "an American car" consists of foreign parts.
Some brands will be harmed more than others with these tariffs, but the harm in the auto industry will be widespread. And it is not as if these manufacturers could shift manufacturing to the United States on a dime even if they wanted to. That is not how capital-intensive industries such as this one work. Given how integrated the global market for automobiles is, it should not come as a surprise that these tariffs will increase automotive prices for U.S. consumers. Fragmenting the global supply chain will lead to more inefficiencies, which will contribute to the higher costs. Speaking of which.....
In its 2024 report, the International Trade Commission calculated that a 25 percent tariff on automobiles would decrease imports by 70 percent while increasing average vehicle prices by 5 percent. The chief economist at Cox Automotive, which is the world's largest automotive services and technology provider, had told the New York Times that these tariffs would make the average vehicle $3,000 more expensive, whereas the National Taxpayers Union estimates that these tariffs will increase the average vehicle price by over $6,500. Depending on the model of the car, Anderson Economic Group puts the estimates in a range from $4,000 to $12,000 per vehicle.
This also means cutting back on automobile choice. To compensate for higher costs, automakers could cut back on various features or even stop selling affordable models. Cox Automotive also projects that there will be 700,000 few automobiles than initially estimated because of Trump's trade volatility and the trade war he initiated. That does not exactly sound like helping out the 7.3 million Americans working in U.S. auto manufacturing, now does it?
What Trump does not understand is that it was freer trade vis-à-vis the North American Free Trade Agreement (NAFTA) that made the automobile industry great, not protectionism. After all, the import quotas that the Reagan administration put on Japanese automobiles in the 1980s had the same unfortunate result, whereas automobile production took off after NAFTA (see chart below).
Since Mexico is a major participant in the manufacturing of U.S. automobiles, these tariffs (along with Trump's trade war generally) could also push Mexico over into recession territory. Trump cannot coax the automotive industry into bringing its manufacturing back to the United States. What Trump's latest stunt will do is cause supply chain delays in the auto industry, limit automobile choice, undermine his own trade agreement, USMCA, from his first term (which will erode trade relations with other countries because it shows that he can go back on his word), and make cars more expensive. This goes to show that Trump's tariff does not make America great again, but rather really screws over the American consumer.