By Elisabeth Buchwald, Chris Isidore and Vanessa Yurkevich, CNN
US President Donald Trump speaks to the press after signing an executive order in the Oval Office of the White House in Washington, DC on January 31, 2025. Photo: MANDEL NGAN / AFP
US President Donald Trump has announced a 25 percent tariff set to take effect on 2 April on all cars shipped to the United States, a significant escalation in a global trade war.
"We start off with a 2.5 percent base, which is what we were at, and we go to 25 percent," Trump told reporters on Wednesday before signing an executive proclamation in the Oval Office.
The tariff will be applied not just to foreign-made cars but also to car parts, including engines and transmissions.
Parts coming from Canada and Mexico that comply with the United States-Mexico-Canada Agreement (USMCA) will be exempt from the tariffs until US Customs and Border Protections has a system in place to apply tariffs to non-US tariffs, a White House spokesperson said in a post on X.
Trump said on Wednesday he's been in touch with the Big Three automakers, Stellantis, Ford and General Motors.
"If they have factories here, they're thrilled. If you don't have factories here, they're going to have to get going and build them."
This comes after the Big Three automakers successfully lobbied for exemptions to 25 percent tariffs on all goods coming to the US from Canada and Mexico that were set to go into effect earlier this month.
The exemption Trump announced allowed for autos to come in duty-free if they were compliant with the terms of the United States-Mexico-Canada Agreement (USMCA) free trade agreement.
Trump later applied that to all goods coming from the two countries. However, that's set to expire on 2 April, when Trump could announce higher tariff rates for the two countries and many others as part of his "Liberation Day."
"I gave the American car companies a break because it would have been unfair if I didn't," Trump said last week.
The move didn't come as a huge surprise to automakers. An executive at one of the automakers, who spoke on background to CNN on Wednesday, said they had already been working with the assumption that auto tariffs would take effect next week.
"We were all kind of expecting 2 April to be our day," said the auto executive. "But if the Trump administration has shown us anything, I mean, things are unexpected."
Countries hold off on announcing retaliatory measures
Following Trump's announcement, European Commission President Ursula von der Leyen released a statement condemning the tariffs.
However, she said the European Union will wait to announce any retaliatory actions.
"We will now assess this announcement, together with other measures the US is envisaging in the next days," she said.
Ontario Premier Doug Ford said Canada should retaliate. "I've spoken with Prime Minister Carney. We agree Canada needs to stand firm, strong and united," Ford said in a post on X. "I fully support the federal government preparing retaliatory tariffs to show that we'll never back down."
Car prices likely to rise quickly
Given the auto tariffs include parts, they could quickly raise the prices of new cars by thousands of dollars, according to industry experts.
There is no such thing as an all-American car, since all depend on parts from Mexico and Canada for a significant part of their content. Parts from the two countries could soon be subjected to the tariffs Trump unveiled Wednesday.
According to analysis by Michigan-based think tank Anderson Economic Group, the cost of producing vehicles built at US plants will rise by between US$3500 (NZ$6120) to $12,000 each.
The US government tracks what percentage of each car's parts is made "domestically".
But under current trade law, Canadian-made parts and US-made parts are all counted as the same domestic content. Even with the broader definition of "American made," none exceed 75 percent.
The North American car industry has operated for decades as if the continent is one giant country, thanks to free trade agreements signed by US presidents from Bill Clinton to Trump himself. Parts and whole vehicles have flowed freely across borders, sometimes multiple times, before they end up in an American dealership.
Even if tariffs only apply to fully assembled vehicles and not auto parts, it is likely to raise average car prices by eliminating some lower-cost options for car buyers.
Some Mexican-assembled vehicles, like the Chevrolet Blazer or Honda HR-V could be priced out of the market, and automakers might decide to stop offering them altogether rather than build them at US factories.
Cars built in Mexico are most often lower-priced, lower-profit models that are only able to maintain their profitability by being built with cheaper Mexican labour.
"One of the losses from tariffs tends to be a loss of product variety," said another auto industry executive who spoke to CNN on Wednesday.
It's not only the smaller, entry-level models built in Mexico that could see price hikes. Trump's auto tariffs could impact many models that car buyers don't realise are imports, such as the heavy duty versions of Ram pickup trucks, which are built in a Stellantis plant in Saltillo, Mexico.
Some versions of the Chevrolet Silverado are also built in Mexico. Even if the automakers shift production of those more profitable vehicles back from Mexico to US factories, it would take years to accomplish the switch.
There were a total of 4 million vehicles built in Mexico in 2024, according to data from S&P Global Mobility, of which 2.5 million, or 61 percent, were shipped to the United States.
Most of the nation's largest automakers have assembly plants in Mexico, including General Motors, Ford, and Stellantis, which makes cars under the Ram, Dodge, Jeep and Chrysler brands; as well as Asian automakers Toyota, Honda, Hyundai, Nissan, Mazda, Mitsubishi and German automakers Mercedes-Benz and Volkswagen.
Canadian auto plants built 1.3 million vehicles last year, of which 1.1m, or 86 percent, were exported to US dealerships. But it won't just be Canadian and Mexican workers hurt by the tariffs.
If the 3.6m cars coming from those two countries become unaffordable, it could hit US auto parts plants that supply those countries' assembly plants.
The US exported $35.8 billion worth of parts to Mexico last year, according to federal trade data, and another $28.4 billion of parts to Canada.
Parts suppliers, who employ about 550,000 workers or nearly twice as many as work in auto assembly plants, could be forced to cut back their production and staffing if Canadian and Mexican plants shut down, even temporarily.
In addition, United States car exports to Canada and Mexico were significant, with $14.9 billion going to Canada and $4.6 billion to Mexico. If those countries retaliate with their own tariffs on US-assembled vehicles, it could force some US assembly plants to scale back their own production.
Cox Automotive estimates that about 30 percent of North American auto production, or roughly 20,000 vehicles a day, could be halted due to tariffs, although that assumes there would be tariffs both on auto parts and assembled vehicles.
- CNN
