If It's Real, Low End Cars Will Go Up In Price
This is how tariffs work. China’s (and the world’s) biggest auto manufacturer, Xpeng, makes a very affordable electric car and they have priced it at just under $17,000. However Biden slapped a 100% or more tariff on it— instead of the normal 27.5% tariff— which means an American buyer would have to pay over $34,000, not really a good deal. His decision was part of a broader strategy to protect American industries from what the administration described as China's unfair trade practices, including technology transfer, intellectual property concerns, and market-distorting subsidies.
The problem, of course, is that while making Chinese-made cars less competitive in the U.S. in order to protect domestic EV manufacturers like Tesla, the tariffs also limit the availability of lower-cost EV options for American consumers, slowing the adoption of electric vehicles here. American TVs are expensive, too expensive for most people; Chinese EVs are cheap. By putting these high tariffs up, it prevents budget-conscious consumers from getting rid of gas-powered cars and allows U.S. EV manufacturers to keep prices high.
And apparently, Trump's plans make affordable cars even more expensive for American consumers. According to a report in the Wall Street Journal by Sean McLain, Trump is targeting inexpensive cars manufactured in Mexico. “Today, nearly one-third of all vehicles priced below $30,000 and sold in the U.S. are built in Mexico, including the Nissan Sentra, Ford Maverick and other popular nameplates… The border country has long been a go-to for automakers looking to defray the hefty expense of manufacturing a car, particularly on smaller models that sell for lower price points and have slimmer profit margins than larger trucks and SUVs… Trump has threatened to upend this strategy, pledging in November to impose 25% tariffs for Mexico and Canada, a move that could mean undoing the free-trade agreement he negotiated in his first term. Any new tariff-related costs are likely to be passed along to the consumer— at least in the near-term— and would hit the most affordable cars and SUVs the hardest, analysts and dealers say.”
Some lower-price models, such as the Honda Civic sedan, are made in Canada, and car parts built in the two neighboring countries would additionally be subject to new trade duties, further pushing up costs for manufacturers and consumers.
Trump’s tariff proposal could add about $3,000 to the average cost of every car sold in the U.S., according to a Wolfe Research estimate.
“Everyone’s got a pretty big case of anxiety here,” said Steven Center, head of Kia’s U.S. operations. “In two words: Please don’t. Punch me in the arm. Smack me in the head. But please don’t put a tariff on.”
Kia, which is among more than a dozen automakers building cars in Mexico, makes its Forte and K4 compact sedans in the country for U.S. export. Together, those two vehicles accounted for about 18% of Kia’s U.S. sales.
Adding new trade barriers in North America would end up being more destructive than helpful to the U.S. auto industry, Center said.
The tariff threat comes as many U.S. car buyers are already paying near-record sums to drive off the dealership lot in a new vehicle.
Selling prices for new cars soared during the pandemic, mostly because of parts and inventory shortages. Rising interest rates in recent years have pushed car-ownership costs higher for drivers.
The average monthly payment on a new-car loan today is about $700, up from $500 in 2016, when Trump first took office, industry data shows.
“That’s just the average,” said Ivan Drury, director of insights at car-shopping website Edmunds. “One in five is over $1,000.”
The sharp increase is prompting more car shoppers to downsize into smaller, less-expensive vehicles, giving a lift in sales to many models now made in Mexico.
Rob Matthews, president of Matthews Auto Group, a dealership chain with stores in New York, Pennsylvania and Massachusetts, said he is seeing more customers give priority to affordability over space and size, a shift that has accelerated within the past year because of inflation.
“Obviously, it’s a delicate situation, where you’re not looking for more shocks to pricing,” he added.
Today, more than 20 auto assembly factories in Mexico are churning out nearly four million vehicles a year. About 70% of them are shipped to the U.S. for sale, according to the Mexican Association of the Automotive Industry.
Car companies piled into Mexico after the signing of the North American Free Trade Agreement in 1994, hoping to take advantage of the country’s lower labor rates and abundance of undeveloped land to build new auto plants.
The country has become a hub for production of small cars and SUVs, in part because its reduced manufacturing costs have helped improve the profitability of models that have historically been money losers when built in the U.S.
In Mexico, wages at auto-assembly plants typically start at between $3.50 and $4.30 an hour, said Ernesto Bravo, who heads the western division of Tecma Group, a U.S. firm that helps foreign companies set up operations in Mexico.
In the U.S., auto-assembly jobs pay on average about $33 an hour, according to data from the Bureau of Labor Statistics.
During his first term, Trump sought to reverse the outward flow of U.S. manufacturing work, particularly to China, Mexico and other lower-cost countries. As part of those efforts, he renegotiated NAFTA, replacing it with a new pact, called the U.S.-Mexico-Canada Agreement, or USMCA.
The agreement largely maintained duty-free trade between the three countries but put in new requirements aimed at protecting union workers in the U.S. and Canada. Among the new mandates, manufacturers must source a higher percentage of their parts in North America to avoid tariffs. The deal also requires 40% to 45% of the materials that go into a car be handled by workers earning at least $16 an hour.