New Auto Tariffs Set to Upend Industry, Drive Up Costs for American Car Buyers
The automotive industry is bracing for a significant shake-up as new tariffs on auto parts come into effect on Saturday. The 25% import tax on most auto part imports is expected to have far-reaching consequences for the industry, with costs potentially running into tens of billions of dollars.
According to a report by CNN, the previous auto tariffs left US-made cars untouched, but the new tariffs on parts will have a significant impact on the industry. Not a single of the 10 million cars turned out by US plants last year was built without at least some imported parts. The tariffs on parts could now mean tens of billions of dollars in new cost to the industry – and eventually to American car buyers and owners.
As reported by CNN, Jonathan Smoke, chief economist at Cox Automotive, said that "frankly, from my perspective, (the parts tariffs) looks worse for the broader economy than the tariffs on imported vehicles." This sentiment is echoed by many in the industry, who are concerned about the potential impact on the economy.
The tariffs will not apply equally to all imports, however. Parts from Canadian or Mexican suppliers who pay their workers $16 or more an hour are deemed "compliant" with the US-Mexico-Canada Agreement, a trade deal negotiated during the first Trump administration. This means that most Canadian parts are exempt from tariffs, but relatively few Mexican parts.
In an effort to mitigate the impact of the tariffs, the White House announced that automakers assembling cars in the United States will be able to offset part of the parts tariff, at least temporarily. The refund will be up to 3.75% of the price of the vehicle against their parts tariffs bill in the first year, sliding to 2.5% in the second year before being phased out in the third year, as reported by CNN.
However, even with this refund, the added cost of tariffs could still come to an average of about $4,000 per vehicle, according to estimates derived from a CNN analysis of government trade data. This cost is likely to be passed on to consumers, with General Motors CEO Mary Barra telling CNN on Thursday that the tariffs will cost her company between $4 billion and $5 billion this year.
The impact of the tariffs will not be limited to new car buyers, however. Everyday Americans will still see higher prices elsewhere, such as the repair shop. "The tariffs on parts that will lead to higher inflation in repair and maintenance and insurance which impact every American and not just the people thinking about buying a new imported vehicle," Smoke said, as quoted by CNN.
The recent change in the parts tariff rules means that any car assembled in the United States with 85% "USMCA compliant" parts would essentially be tariff-free. However, according to analysis by Frank DuBois, a retired professor at American University’s Kogod School of Business, virtually no vehicle meets that 85% threshold.
The problem is that automakers have been operating for decades as if North America is a single market, moving parts repeatedly across the US borders with Canada and Mexico with few if any tariffs. As a result, judging which content is actually domestic could be tough, with DuBois noting that it could come down to minor points such as where the oil and antifreeze come from.
In 2022, the US imported $19.2 billion in Canadian components, but most other imported parts will not be exempt. Mexico, for example, sent $82.5 billion in parts to the United States last year, but few of those are considered "USMCA compliant," so most will have the tariff attached.
If current tariffs for auto parts (and additional levies for Chinese goods in general) had been in effect last year, the total price tag would have been about $60 billion. Even with the refund rules announced this past week, that bill would only have been reduced to $40 billion, according to CNN.
The parts refund, Smoke said, is just about "taking a bad situation and making it slightly less worse." The industry is likely to face significant challenges in the coming months as it adapts to the new tariffs, and American car buyers may ultimately bear the brunt of the costs.
The new auto tariffs are set to have far-reaching consequences for the industry, and it remains to be seen how the situation will unfold. One thing is certain, however: the impact will be felt across the industry, and American car buyers will likely face higher costs as a result.
Sources:
https://www.cnn.com/2025/05/03/business/auto-parts-tariffs
