Donald Trump has promised to impose sweeping tariffs on imported goods on April 2nd, dubbing it “Liberation Day”. The car industry got a preview of what is in store a week earlier, when on March 26th America’s president said he would charge hefty levies on imported cars and parts. The aim is to restore carmaking to America. But it will come at a high cost. Raised prices will hit sales and reduce choice for American consumers. Carmakers, meanwhile, will be “liberated” from large chunks of their profits.

Tariffs on cars from Mexico and Canada had already been threatened and postponed in February, then again in March, so the news was no surprise. The speed of the tariffs’ implementation, and their size, however, are the “worst-case scenario”, according to Jefferies, a bank. Mr Trump had apparently held off only to give his administration more time to organise duties on imports from the rest of the world, too. He says the levies will be in place for the duration of his presidency.

The 25% tariff will not hit all of the 7.6m vehicles imported to America each year equally. It is calibrated to put the greatest burden on carmakers with the smallest tyreprint in America. Around 3.6m cars are imported each year from Mexico and Canada under the United States-Mexico-Canada Agreement (USMCA), a free-trade deal. Cars complying with USMCA’s rule that 75% of their manufacturing should be done in the region will attract tariffs only in proportion to their non-American content.

A levy of 25% will also be applied to car parts from May 3rd, though those that are USMCA-compliant will be exempt until a system to apply duties to their non-American content is worked out. As half the parts in American-made cars are manufactured abroad, no carmaker will emerge unscathed. Even Tesla, which makes all its cars for the home market in America, relies on some imported components.

Mr Trump is prepared to inflict even more pain on Detroit’s “big three” car firms. Ford, General Motors and Stellantis (whose largest shareholder, Exor, part-owns The Economist’s parent company) will have a tougher time. All bring in cars and parts from Canada and Mexico. GM also imported 460,000 cars from its factories in South Korea last year. Even if Ford and GM pass on some of their increased costs to customers, their operating profits in 2025 could be 30% lower than last year, estimates Bernstein, a broker. Stellantis, whose Mexican-made cars include plenty of parts made in America, will suffer less.

For other firms the picture is complicated. Some, such as Toyota and Volkswagen, make cars in America as well as importing them from Mexico and other countries (see chart). Though many of their vehicles will be exempt from Mr Trump’s tariffs, the 530,000 cars that Toyota ships from Japan to America each year, for instance, will not. Most of the Audi-branded cars that Volkswagen sells in America are made in Europe. BMW and Mercedes-Benz, which make cars in both America and Mexico, will suffer because they use engines and transmissions from Europe. Firms such as Porsche and Jaguar Land Rover, which make all their cars in Europe, will feel the full force of duties.

Carmakers face a difficult decision on how to react. Most have imported a stockpile of cars and parts, but the effects of the levies will be felt in a few weeks as these run down. As tariffs bite, carmakers will absorb some of the increased costs, but are likely also to raise prices. That could add $10,000 or more to fancier vehicles and $3,000-4,000 to average-priced cars, analysts believe.

The greater dilemma concerns the long term. Should car firms unwind cross-border supply chains built up over 30 years? Even if Mr Trump keeps his promise to maintain tariffs for his full term, the next administration might reverse them as fast as they arrived. And Mr Trump may yet be amenable to deals that include some reshoring of production in return for lower duties.

Some production could be brought home from Mexico or Canada using what little spare capacity firms have in America. But as Erin Keating of Cox Automotive, a car-services firm, points out, retooling factories for different models and employing expensive, unionised staff would raise costs. Restarting dormant factories or building new ones might take two or three years. Carmakers need to make decisions that will affect them for the two-decade lifespan of a new factory, notes Stephanie Brinley of S&P Global Mobility, a data firm.

Establishing supply chains in America would be similarly hard. Labour-intensive parts, such as wiring looms, may still be cheaper to make in Mexico, with or without tariffs. And even if production were shifted it might not lead to a jobs bonanza. Mark Wakefield of AlixPartners, a consultancy, says that workers would be replaced with automated systems where possible in new plants, to keep costs down.

Mr Trump says that he “couldn’t care less” if car prices rise as a result of his tariffs. But pricier imports and the rising cost of making cars in America will undoubtedly hit sales. Americans bought 16m cars last year. This year that figure could tumble by 1m-2.5m, analysts predict, with the models most affected being cheap ones that would be unprofitable to import or manufacture at home. Making fewer, more expensive cars and pricing out poorer buyers is an odd sort of liberation. ■

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