For quite some time, President Trump and his supporters have been at odds with many mainstream economists regarding the value of tariffs. Now, with broad tariffs on automobiles and auto parts, we have the opportunity to observe first-hand the real-time impacts of these policy decisions on the global economy.
According to Trump, the rationale is straightforward: tariffs are designed to motivate companies to relocate their factories to the United States, thereby boosting American jobs and economic prosperity.
However, the narrative is more complex for economists. They acknowledge that, over time, tariffs could promote domestic car production. Yet, they warn of significant unintended consequences that might conflict with Trump’s broader objectives for employment and economic growth.
The concern among economists is that these tariffs will drive up consumer car prices, potentially discouraging purchases and stunting economic activity. Furthermore, by disrupting supply chains and increasing costs for American carmakers reliant on imported components, tariffs may actually hamper U.S. auto production in the near term.
There is also the threat of foreign retaliation against U.S. car exports, as well as other American goods, which could instigate harmful global trade conflicts.
As these plans became clearer, Thursday saw a decline in global stock markets, with auto stocks taking the biggest hit. Shares of General Motors, heavily dependent on imports from Mexico, fell around 7% during midday trading, while Stellantis and Ford also experienced losses. European markets closed with carmakers facing the brunt of the downturn.
As automakers and economists revised their growth forecasts, allies of the United States openly criticized Trump’s tariff strategy, expressing concern that these measures would destabilize the global economy and even pledged to retaliate.
Brad Setser, an economist with the Council on Foreign Relations, speculates that although domestic auto production may increase in the long run, the journey there would be disruptive and challenging for American consumers and the economy overall.
Setser predicts that international carmakers such as Toyota, Hyundai, and Mercedes might scale up their U.S. production to sidestep tariffs. Nonetheless, in the short run, higher consumer prices may deter car purchases altogether, while supply chain disruptions could further hinder U.S. auto production.
Interestingly, nearly half of the vehicles sold in the U.S., along with 60% of parts used by auto factories, are imported. According to Bernstein analyst Daniel Roeska, carmakers could see costs increase by as much as $6,700 per vehicle.
Setser also notes the potential for a cyclical downturn within the auto sector due to such disruptions, resulting in layoffs and lost jobs, despite anticipated long-term investments.
The impact of tariffs may affect not only foreign auto brands like Toyota and Mercedes but also domestic manufacturers. Jim Reid, a research strategist at Deutsche Bank Research, highlighted that both U.S. and international stocks have been adversely affected, including General Motors, which builds a significant portion of its vehicles domestically.
Reid asserts that the current U.S. administration appears willing to sacrifice short-term market performance for long-term strategic objectives.
Economists question Trump’s claims that tariffs would stimulate economic growth, suggesting they might achieve the opposite.
Barclays Research economists have revised their forecasts, expecting a considerable slowdown in global and U.S. growth from 2024, with even more pessimistic outcomes if the worst-case tariff scenarios unfold.
Marc Giannoni, the chief U.S. economist at Barclays, explains that uncertainties in trade policy might dissuade businesses from making new investments or hiring, potentially slowing down the labor market.
President Trump remains confident that the tariffs won’t have a negative impact, citing recent company announcements of U.S. investments. Yet in recent months, he has expanded tariffs on imports from China, Canada, and Mexico and plans to disclose more next week, aiming to establish a fairer global trading system.
Speaking from the White House, the President noted that businesses are returning to the U.S. to avoid tariffs, suggesting that some companies are expanding existing plants or scouting new locations for additional facilities.
Mark DiPlacido, a policy adviser with American Compass, supports the tariffs, emphasizing the benefits of increased American auto industry investment, despite acknowledging potential short-term disruptions.
However, some believe automakers may delay investments until the situation clarifies, even though Mr. Trump and the White House indicate these tariffs as permanent.
Jennifer McKeown from Capital Economics advises caution, based on past experiences that things may change.
The auto industry is already feeling the ripple effects of impending tariffs. Customs broker Kit Johnson reports his clients are in a frenzy, handling financial and planning chaos.
Johnson considers the tariffs counterproductive, as companies aiming to build more in the U.S. face financial strains, creating a challenging situation.
Valerie Benton Smith, from a car dealership in Greensboro, N.C., is preparing for potential repercussions, wincing at higher prices and potential shortages in American-made models.
Businesses feel unprepared for the sudden tariff shifts, arguing for better planning to mitigate the cascade of effects.
The looming question is whether tariffs will escalate into broader trade wars. Via social media, Trump threatened further action if the EU and Canada collaborate against his measures.
While foreign leaders retaliated with rhetoric but no immediate action, they voiced strong opposition.
Canada’s Prime Minister Mark Carney plans suitable retaliatory tariffs, pending details of Trump’s levies. France’s President Macron has also warned of a reciprocal approach to encourage the U.S. to rethink.
Mexico plans a comprehensive response to include existing tariffs on steel and aluminum.
Economists fear for Canada and Mexico, deeply entwined in the North American auto supply chain.
Flavio Volpe of Canada’s Auto Parts Manufacturers’ Association criticizes tariffs for their bluntness, warning of severe impacts on the industry.
Reporting contributions by Danielle Kaye, Ian Austen, Liz Alderman, and Emiliano Rodríguez Mega.
