There is no such thing as a purely American car. Here’s why tariffs could raise all car prices | News

New York (CNN) — President-elect Donald Trump is promising to protect American-made cars with high import tariffs. The problem is that there is no such thing as an all-American car.

Trump has promised that tariffs, a tax on goods imported from another country, will be a central part of his economic plan in his second term. On Monday, he announced plans to impose a 25% tariff on all goods from Mexico or Canada on his first day in office.

The U.S. government monitors what percentage of each car’s parts are made “domestically.” However, under applicable trade law, parts manufactured in both Canada and the United States are considered to have the same domestic content. Even on the broader definition of “American made,” none are above 75%.

That’s why car prices could rise sharply if Trump continues his plans to impose high tariffs on the parts that go into the “American” vehicles found in showrooms across the country. The automotive industry’s supply chain relies on parts and materials from around the world – from relatively inexpensive nuts and bolts that can be purchased cheaper from foreign manufacturers to expensive computer chips and other electronic components that are not produced in sufficient quantities in U.S. factories be produced to cover needs.

But despite his claim that tariffs are paid by foreign countries, they are actually paid by whoever buys the imported goods, and U.S. companies almost always pass on most — or all — of those costs to consumers.

The way US cars are built is changing

Thanks to free trade agreements signed by presidents from Bill Clinton to Trump himself, the North American auto industry has functioned for decades as if the continent were one giant country. Parts and entire vehicles were sometimes transported across borders several times before ending up at an American dealer.

But Trump promises to change that. Amid looming tariffs on Canadian and Mexican exports to the United States, shares of most automakers fell on Tuesday, with GM closing 9% down, Ford down 3%, Stellantis, the maker of Jeep, Ram, Dodge and Chrysler, 6% discount. Additionally, Toyota ended down 2% and Honda fell 3% in U.S. trading.

Trump’s plans would upend the US-Mexico-Canada Agreement (USMCA), the three-country trade deal he negotiated. Mexico and Canada are two of America’s largest trading partners and are currently exempt from most tariffs under the USMCA, but that could change.

And it’s not just the tariffs on goods from Mexico and Canada that are a concern. Trump’s promise to increase tariffs on China by another 10% above existing measures also has the potential to make many cars more expensive. While China supplies relatively few cars to the United States, it is a major source of inexpensive auto parts.

Trump argues that the move would bring jobs back to the U.S. by forcing manufacturers to close plants in other countries and open or expand U.S. plants. But the amount of parts that go into cars assembled here would be difficult for American suppliers to replace, making it significantly more expensive to build a car in U.S. auto plants.

Only two vehicles that the U.S. government believes are 75% made in the U.S. are affected – the Tesla Model 3 and the Honda Ridgeline, a pickup truck built at a Honda factory in Lincoln, Alabama. And again, this 75% includes all content that currently originates from Canada and could be subject to new tariffs.

Almost all vehicles with 50% or more of their content coming from U.S. or Canadian suppliers are built either by Tesla or by brands that claim to be “foreign” but actually assemble cars here – Honda, Hyundai, Kia, Nissan , Mazda, Subaru and Toyota.

The Ford F-150, the most popular vehicle in the United States for more than 40 years, has the largest domestic share of any vehicle manufactured by any of the traditional Big Three automakers. While all parts are assembled into a pickup truck in either Michigan or Missouri, only 45% of those parts come from U.S. or Canadian factories. Many of the larger versions of its engines come from Mexico.

“Yes, it’s America’s truck, assembled in America, but not with American parts,” Ivan Drury, director of insights at Edmunds, told CNN.

Domestic replacement parts may be difficult to find

For many of the imported auto parts, it would be difficult to find domestic supplies. Even if some are made here, there is not enough excess capacity to replace production of the parts now imported. And for some of the less expensive goods, it is not economical to produce them in U.S. factories at U.S. wages. It would be more economical to pay the tariffs and pass the costs on to car buyers.

Even if an American spare parts supply were possible, it would be more expensive in most cases. The low import price is the reason car manufacturers resorted to these deliveries in the first place.

And the time and money required to build new facilities, assuming suppliers are willing and able, would bring its own challenges. Take, for example, the multitude of computer chips built into modern cars that control everything from fuel economy to windshield wipers to lumbar supports and heated seats. The 2022 CHIPS Act appropriated $30 billion to support the construction of 16 semiconductor factories in the United States. But even with all that money, building new facilities can take three to five years.

Even the modernization and expansion of existing U.S. chip factories, needed to meet increased domestic demand as imported chips become more expensive due to tariffs, could take a year or longer. It is expected that it will take ten years for a New York plant that is being expanded to fully utilize its additional production levels.

The tariffs would increase the cost of assembling vehicles at U.S. plants. And those higher costs would definitely hit car buyers who already spend nearly $50,000 on each new vehicle purchased here.

“These costs … are not borne by the automakers or suppliers,” Jeff Schuster, global vice president of automotive research at consulting firm GlobalData, told CNN.

When contacted by CNN, the automakers did not comment on their plans or the impact of the new tariffs on prices.

Tariffs on imported cars would likely raise all prices

Even if Trump withdraws his tariff plans and imposes tariffs only on fully assembled cars imported into the United States, this will increase the price of cars built here, not to mention the prices of those imports.

During the campaign, he promised tariffs of 100% to 200% on Mexican-built vehicles and said it was critical to protect American jobs in the auto industry, although he did not mention those plans in Monday’s announcement. That would double or triple the cost of these cars and likely destroy all demand for them. He predicted that there would be a “bloodbath” in the U.S. auto industry and automotive jobs if his tariff plans were not enforced.

If the tariffs actually raise the price of Mexican-made vehicles like the Chevrolet Blazer or Honda HR-V and subsequently drive them out of the market, automakers could decide to discontinue them altogether rather than build them in U.S. factories. The cars built in Mexico are mostly cheaper, lower-profit models that can only maintain profitability if they are built with cheaper Mexican labor.

But it’s not just smaller entry-level models built in Mexico that could see price increases. The tariffs could impact many car models that buyers don’t realize are imports, such as the heavy-duty versions of Ram pickups built at a Stellantis plant in Saltillo, Mexico. Some versions of the Chevrolet Silverado are also built in Mexico. Even if automakers shifted production of these more profitable vehicles from Mexico to factories in the U.S., it would take years to make the transition.

Fewer imported cars would drive up all prices

Tariffs on imported vehicles would also likely result in higher prices for cars assembled here as they would limit the supply of vehicles in the U.S. market.

When supply is limited and demand remains strong, rapid price increases often result, as was the case in 2021 and early 2022, when a shortage of computer chips and other parts severely limited production across the industry. Almost all car buyers were suddenly paying more than sticker price for the first time, and average prices skyrocketed.

And the higher prices for imports would mean less competition for manufacturers that make cars and trucks in U.S. factories, giving them the opportunity to charge higher prices to boost profits — and not necessarily hire more workers. U.S. automakers have used big profits to buy back billions of dollars’ worth of stock in recent years to support their stock prices even as they laid off workers and, in some cases, slowed or cut production.

“It will have a profound impact on the entire market and impact on all vehicles,” Drury said. “They will also revolutionize the used car market.”

The exact impact will be difficult to determine until final details of Trump’s tariff plans are known. There were numerous threats of tariffs during his first term, but they never materialized. Drury said some of the bargaining talks from the campaign may not happen this time either. If this is the case, it will have a huge impact on car buyers.

“There are all these potential car buyers who have held off because of the high prices,” Drury said. “If these tariffs are imposed it could disrupt the industry. I hope for car buyers that nothing is as aggressive as advertised.”