Car Industry

How will Trump's foreign car tariff affect the US auto industry?

Could a 25 percent tariff cause the collapse of the American car market?

If you've been paying attention to the news lately, then you'll no doubt have seen a ton of coverage on President Trump's plans to impose a 25 percent tariff on imported vehicles. But what, exactly, will that mean for the auto industry? Spoiler alert: It's probably not good news.

If The Donald does manage to get his 25 percent tariff imposed, foreign automakers have a few options. First, they could swallow the cost and continue selling vehicles at similar prices to what we have now. Naturally, this would totally hose their bottom lines and could have residual effects like the slower development of technology, etc., due to reduced budgets. Not ideal.

President Trump's proposal for a 25 percent tariff on imported cars could spell bad news for the American auto market.

Anthony Wallace/AFP/Getty Images

Next, these companies could pass the extra costs to the customers. That means that if you go to your friendly local Mercedes-Benz dealer and want to buy the E-Class wagon that you've been saving your pennies for, you'd have to shell out something like $78,000 for the base model, compared to $63,000 without the added tariff. Big bummer.

But it's still more complicated than that. If foreign-built cars were all of a sudden 25 percent more expensive to consumers, what would that mean for the industry in terms of lost sales? According to research firm LMC Automotive, it could cause a 10 percent reduction in total vehicle deliveries, which works out to around 2,000,000 sales.

The third -- and least likely -- option is that foreign marques without any US production facilities might pull out of the US market altogether. This is especially concerning for smaller or less established brands like Alfa Romeo (which only just came back to the US after a decades-long absence), Smart (whose parent company Mercedes-Benz builds cars in the US) and Jaguar Land Rover.

Less established brands that produce their vehicles outside the US, such as Alfa Romeo, would likely be the hardest-hit by a 25 percent tariff.

Nick Miotke/Roadshow

The fourth solution to Trump's tariff is pretty well codified in history; this kind of tariff structure isn't new to the automotive industry. Manufacturers have been working around the so-called "Chicken Tax" since 1964. The "Chicken Tax" is a 25 percent tariff that was placed on light trucks (and concurrently SUV's and vans) as a response to French and West German taxes on American chickens. OEMs got around this tariff in a number of ways, but most notably by building these types of vehicles in US-based facilities.

Will Trump's plan, if enacted, cause a collapse of the American car market? Maybe. Will they strain already tricky relationships with countries like Germany? Almost certainly. But will it be the end of the world? Probably not.