Auto Tariffs to Drive Up Prices

The short term effect of tariffs are inescapable. The long term is even worse.

The price of that car you had your eye on this Spring is going up. When and by how much is still an open question, but it’s clear that the imposition of a 25% tariff on cars, trucks, components and parts will significantly impact car and truck values in the U.S. The price increases could be substantial, with most estimates coming in at USD $2,500 to $10,000 -- or more. The final impact is unknown at the moment as specifics on exactly how the tariff will be applied to models with differing national content and the pace of the phase-in of the full tariff remain cloudy.

Cars made in the U.S. will not be exempted. Even with the temporary exemption for parts compliant with USMCA, the parts content of U.S. made cars originating outside of North America is subject to the tariff. And while not part of the initial round of tariffs, the Trump administration has indicated USMCA parts will be subject to tariffs as well—once they figure out how to do it (supply chain traceability in econ-speak), which will likely be an administrative nightmare.

There’s also the issue of tariffs on imported steel and aluminum, which are already in place. Even with a slow ramp-up of vehicle tariffs, these two materials play substantial roles in the construction of cars and trucks and will drive up the cost of production of many models made in the U.S.

Tariff Effect on Used Cars

OK, but what does all this mean for used car prices? Rising new car prices will undoubtedly create demand for used cars and trucks, especially late model vehicles. This will increase transaction levels at both the wholesale and retail level. We’ll also likely see many dealers taking advantage of the situation with so-called “Tariff Fees” or “Market Adjustments”, an arbitrary markup that may have little justification other than to increase their profits. It’s just one example of many unintended consequences of tariffs.

Not in the Market for a car at all? Doesn’t matter, your auto expenses will rise, too. A couple obvious examples:

Maintenance
Most automotive parts come from other countries. They tend to be low margin products that rely on cheap labor. We don’t have that here, and it’s unlikely we could become competitive with those countries on a cost basis so reality says we’ll just have to pay more for our parts because production for these low margin products will not move here.

Insurance
Auto insurance premiums will rise, too. As anyone whose had to deal with getting a vehicle repaired after an accident, insurance companies love to replace your OEM parts with cheap parts from overseas. If it costs more for an insurance company to fix a vehicle, you can bet that cost will be recovered through higher premiums to you and me.

Silver Lining
Well, not really. There are, however, mitigating factors that may cushion the blow. Manufacturers, exporters, importers, and retailers may all absorb a portion of the cost increase by accepting lower margins, at least temporarily. Additionally, gas prices will likely fall due to falling demand for oil in a slowing economy.

Hopefully, cooler, thoughtful heads will prevail. Until then, buckle up.