-Analysis-
PARIS — Donald Trump has chosen the worst-case scenario. From Tokyo to Munich, the global automotive industry woke up in shock on Thursday morning. The U.S. president announced late Wednesday night a 25% tariff on car imports, regardless of their origin. This hardline approach includes vehicles from countries with which the U.S. has signed free trade agreements. Under the new administration, Washington’s past commitments no longer seem to hold weight.
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This is a major upheaval for the sector, as the United States is the world’s third-largest automotive market, after China and the European Union. U.S. automobile imports total $270 billion, nearly a quarter of the country’s trade deficit. Only vehicles imported from Mexico and Canada that contain at least 75% U.S.-made parts will be exempt from the new tariffs.
The United States’ closest allies will be the hardest hit by the tariff shock. If the 25% border tax remains in place over time, the automotive industries of its northern and southern neighbors would be devastated. According to simulations by CEPII, a French research center specializing in international economics, Canadian and Mexican car production would drop by 71% and 57%, respectively.
The estimated severity of the shock is due to the high level of industrial integration among the three countries within the free trade zone. The first agreement allowing free movement of cars and auto parts dates back to the 1960s.
Europe will not be spared either, though the impact will be less severe. The continent exports around 640,000 cars to the U.S., valued at approximately $57 billion. CEPII estimates that the most affected European countries would be Sweden, Italy and Slovakia.
“Tariffs could lead to revenue losses of up to $9.8 billion for automakers, triggered by a 10% drop in export volumes. This would logically have a ripple effect on the entire European automotive ecosystem,” says Sébastien Amichi, an automotive analyst at the Kearney consulting firm in Paris.
1. Which automakers will suffer the most?
The biggest victims are expected to be Volkswagen and Stellantis. Both companies have heavily relocated parts of their production to Mexico and Canada for the U.S. market. Yet analysts at UBS believe Stellantis’ vehicles may qualify for an exemption, thanks to an American content share exceeding 75%.
Among European manufacturers, German premium brands are particularly vulnerable. While their export volumes may seem modest, they consist of high-margin models. Once again, Volkswagen will be the most impacted due to its luxury and premium brands like Audi and Porsche. The Wolfsburg-based group ships at least 160,000 vehicles assembled in Europe to the U.S., including 25,000 Porsche Macans and more than 10,000 Audi Q8s. Analysts at Bloomberg Intelligence estimate that tariffs could wipe out nearly a quarter of profits made by Porsche and Mercedes. The latter exports more than 110,000 cars to the U.S.
Teslas are the most American-made cars.
Stellantis will also be affected, as it exports nearly 50,000 vehicles to the U.S. from its European factories, including Jeep’s Renegade and Compass models.
Across the Pacific, Japanese and Korean automakers face an economic tsunami. Already struggling, Nissan is expected to be hit the hardest, with its operating profit projected to plummet by 56%, according to Goldman Sachs. Toyota, the world’s largest automaker, imports half of the vehicles it sells in the U.S. and could see its operating profit shrink by 6% by 2026.
For Korean manufacturers, Hyundai and Kia, both major players in the American market, could face up to billion in tariff costs, equivalent to 40% of their operating profits.
2. Will anyone benefit from these measures?
Starting at midnight on April 3, the automakers that have offshored the least to Mexico or Canada will gain a competitive edge. In this regard, Tesla is in the best position, as it manufactures all the vehicles it sells in the U.S. domestically. “Teslas are the most American-made cars,” the company boasted on social media platform X this week.
Could this raise concerns about a major conflict of interest, given that Tesla CEO Elon Musk is among Trump’s closest allies? The U.S. president sought to dispel such concerns when announcing the tariff hike on Wednesday night. He added that Musk had never asked him “for a favor in business whatsoever.” Yet just two weeks ago, Trump made a high-profile purchase of a Tesla, seemingly to support the company’s stock price.
Ford could also benefit from the new tariffs. The automaker produces 80% of its models in the U.S., including its flagship F-150 pickup truck. “If no tariffs are imposed on auto parts, this model will become more competitive than its rivals,” says USB analyst Joseph Spak.
3. What impact will this have on American consumers?
“There will be very few winners,” Sam Fiorani of AutoForecast Solutions told Bloomberg. “Consumers will lose out because they will see fewer model choices and higher prices.”
Automakers are expected to scale back production in Canada and Mexico, which will likely lead to fewer discounts for dealerships, according to UBS analysts.
“If the tariffs remain in place, car prices will have to rise to offset the increased costs,” they add. If 100% of the additional cost is passed on to consumers, new car prices could increase by ,000 to ,000. “This will have an impact on demand” and ultimately lead to a decline in car sales, UBS analysts conclude.
4. What are the consequences for the automotive industry?
Trump’s decision is also a disaster for auto parts suppliers. They will first have to absorb the direct impact of the new tariffs on their production. “We will pass on 100% of this additional cost because we have no other choice,” warned Valeo CEO Christophe Perillat. Yet most supplier contracts do not account for such scenarios, setting the stage for tough negotiations with automakers.
Car manufacturers will likely try to shift some of the added costs onto their subcontractors as well. “This is a common practice in the automotive industry,” explains Kearney analyst Amichi. This poses a significant risk to suppliers whose profit margins have already been shrinking in recent years.
Some early signs suggest the policy is having an impact.
There is also an indirect but equally damaging effect: The rise in car prices will reduce the number of vehicles produced in Europe and exported to the U.S., cutting into the production volumes that suppliers rely on to amortize their fixed costs.
In a report published three days ago, Amichi estimated that this revenue loss for affected suppliers could range from .9 billion to .3 billion, leading to a decline in profitability of 3% to 13%, and putting between 6,000 and 23,000 European jobs at risk.
5. Will automakers invest in the United States?
One of Trump’s stated goals is to use tariffs to reindustrialize the United States. But for this to happen, the tariffs must remain in place long-term and survive beyond his four-year presidential term. Investing in a new factory, or even modifying an existing assembly line, takes time.
“We now have an answer to the question of ‘what tariff level,’ but the next question is ‘how long will they last?’” Morgan Stanley analysts say. Automakers will only invest in the U.S. if they believe these new trade barriers are here to stay.
Some early signs suggest the policy is having an impact. South Korean automaker Hyundai recently announced a massive billion investment in the U.S. at a White House event. “In the long run, we expect General Motors and Ford to relocate production from Canada and Mexico to the United States,” predict UBS analysts.
Trump has insisted that his tariffs are “100% permanent.” Yet past attempts to impose similar taxes on imports from Canada and Mexico have not lasted more than three days.
