Stocks took another header Monday as trade uncertainty continues to unnerve investors, and President Trump threatened China with an additional 50% tariff on top of the 54% already promised. One certainty is that his tariffs will inflict sweeping and hard to predict costs on businesses and consumers. The auto industry is a case in point.
Autos are nominally exempt from Mr. Trump’s latest tariffs because they are covered by his 25% tariff on cars and trucks. But shares in auto makers have still crashed as investors assess the spillover impact of his tariff barrage. Stellantis’s stock has fallen 17% in the last week, and Tesla (-11%), General Motors (-8%) and Ford Motor (-8%) have also sold off.
The car makers could become collateral damage in an escalating trade war with China, and they will be hit with higher costs on everything from plastic for cup-holders to seat upholstery. Such costs will be layered on top of the President’s 25% steel and aluminum tariffs and 25% duties on auto parts and non-U.S. content of vehicle imports.
The Anderson Economic Group (AEG) estimated last week that the auto tariffs alone could increase the cost for smaller cars like the Honda Civic and VW Jetta by $2,500 to $4,500. Costs for larger vehicles that are more heavily affected by the tariffs like the Chevrolet Suburban, GMC Yukon and Cadillac Escalade could rise by $10,000 to $12,000.
Used car prices will also climb, AEG predicts, as demand increases among consumers who don’t want to pay higher prices for new cars. If tariffs also cause car makers to reduce their U.S. inventory, car prices will rise even more. Volkswagen said last week it would stop rail shipments to the U.S. from Mexico.
The auto tariffs will cause Americans to pay $30 billion more for cars in the first year while “investors and employees of manufacturers, suppliers, and dealers in the automotive industry will absorb at least another $30 billion in tariff costs,” AEG predicts. Over time, manufacturers will pass more of their tariff costs onto consumers, including the higher costs of reworking supply chains to produce more cars and parts in the U.S. So much for the claim that foreigners will pick up all tariff costs.
Mr. Trump’s first-term 25% steel and 10% aluminum tariffs are illustrative. Steel prices in the U.S. rose 20% in 2018 as domestic manufacturers took advantage of the tariffs to raise prices. Former Ford CEO James Hackett estimated that the tariffs reduced its annual profit by $1 billion. Ultimately, consumers and auto dealers ate the costs.
A University of Kentucky study last year examined how auto makers responded to the steel and aluminum tariffs. While they increased car invoice prices charged to dealers, their affiliated lending arms also raised interest rates on loans, which especially hurt lower-income consumers who tend to finance a large share of their purchase cost.
Dealers absorbed some of the tariff costs as they didn’t pass along all of the higher invoice prices to buyers. Tariffs can “spill over to bundled and complementary goods,” the study notes. “This provides firms with the option to spread tariff costs across multiple price dimensions.”
In other words, companies will try to mitigate their higher costs by various means, including by raising prices on products and services not subject to tariffs. The impact of Mr. Trump’s tariffs will ripple through the economy, especially if they cause consumers to pull back their spending.
This may be why shares in U.S. steel and aluminum makers have also plunged. Even the purported beneficiaries of tariffs inevitably become victims as an ebbing tide maroons all ships.
