Automotive Tariffs: Reshaping Vehicle Sales, Pricing, and Production

The primary purposes of all tariffs include:

• Protecting domestic industries;
• Generating government revenue;
• Affecting overall trade balances between countries; and
• Influencing trade negotiations by applying economic or political pressure.

A key reason for imposing tariffs is to encourage local manufacturing and foreign investment, thereby reducing reliance on foreign imports.

Auto tariffs increase the costs to import components. The cost of manufacturing the component may not change.

• Auto Manufacturers: Manufacturers rely on global supply chains and import both fully assembled vehicles and parts for domestic production. The costs to import parts and vehicles is increased by the imposition of a tariff, above any typical manufacturing or shipping costs. To address the increased cost, automakers may choose to change sourcing strategies, shift production locations, or alter supplier relationships. Making any of those changes typically requires further investment by the automaker and the parts supplier and disrupts a currently efficient manufacturing supply chain.
• Consumers: Because tariffs increase the cost to import a foreign vehicle (and the parts to produce a vehicle in the US), the prices consumers will pay increases. To the extent automakers choose to adjust their import, export and local production strategies, consumer choice may also be limited.
• Governments: Governments use tariffs to influence trade balances, drive negotiations protect local industries. However, these actions can also complicate international trade relations, creating trade disputes and retaliation from other countries. Retaliation typically is in the form of increasing tariffs on goods the US exports to that country.

There are two main types of tariffs, including:

• Specific Tariffs (a fixed fee per unit)
• Ad Valorem tariffs (a percentage of the value of the imported goods).

The rates vary between countries and can change based on trade agreements and negotiations.