Car tariff wacky races will still produce some winners
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Like a handful of nails tossed into a busy road, here come President Trump’s punitive car tariffs. A 25 per cent levy on vehicles imported into the US from everywhere else in the world — with partial exceptions for Mexico and Canada — will force companies such as General Motors, Ford, Stellantis, Volkswagen and BMW to bunny hop, swerve and reverse.
While a flat tariff is a simple thing to announce, auto supply chains are complex. Almost half of US vehicles are imported, reckon Bernstein analysts. Even those assembled domestically get more than 50 per cent of their components from outside the US, and those parts will be subject to tariffs under current plans.
The outcome: $440bn of taxable value, and a potential tariff take of $110bn, a veritable crater for a sector with operating margins of 5-10 per cent. Nonetheless, some carmakers are better placed than others to navigate the disruption. Three types of company could prove relative winners.
First, those that actually produce their vehicles in the US. Elon Musk’s Tesla laps rivals here. As well as being American-assembled, its cars also — largely — rely on domestically-produced parts. That’s not an easy lever for others to pull. While European and Asian carmakers will no doubt seek to move as much of their production as possible to the US, there is limited slack in the system. Building new capacity takes time and money.
Then there are carmakers that sell few or no cars in the US, and will therefore be mostly unharmed. That includes Chinese manufacturers and Europe’s Renault.
Finally, those whose cars are madly expensive already. Ferrari, for example, has already said that it will raise prices by up to 10 per cent and does not expect much of a profit dent this year. After all, when customers already fork out hundreds of thousands of dollars on a car — and are proud to do so — a mark-up is unlikely to curb their enthusiasm. Ferrari might even prove to be a Veblen good: one that gets more coveted as it gets more expensive.
At the other end of the spectrum, of course, carmakers that sell imported bargain basement basic motors are likely to find they have to eat up more of the cost. Otherwise, customers who simply want something that gets them from A to B might forgo new purchases altogether.
Seen from space, the purpose of these tariffs is threefold: raise some revenue, encourage more domestic manufacturing and advantage local carmakers over foreign ones. That is unlikely to work as planned. US carmakers may make more of their cars locally than Europeans do, but are also more exposed to the chaos. Trump has reordered the car trade’s winners and losers — albeit maybe not how he intended.
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