After weeks of speculation, the Donald Trump administration implemented tariffs on imported goods from Canada, Mexico, and China. As of March 4, a 25% tariff was placed on Mexican and Canadian imports, while a 20% tariff was levied on Chinese goods. These tariffs directly impact the automotive industry, raising costs for new and used vehicles.
What is a Tariff and How Does It Work?
A tariff is a tax imposed by a government on imported goods. Historically, tariffs have been used to generate revenue and protect domestic industries by making foreign products more expensive. There are two main types of tariffs:
- Specific Tariff: A fixed fee per unit of an item, such as a $1,000 tariff on an imported vehicle.
- Ad Valorem Tariff: A percentage of the item’s value, such as a 10% tax on a car’s price.
Tariffs can disrupt supply chains, increase costs for consumers, and even spark trade wars when affected countries retaliate with their own tariffs.
When Are Tariffs Starting and How Will They Impact Car Prices?
The new tariffs officially took effect on March 4, causing immediate concern in the auto industry. Since one-third of all light-duty vehicle production in North America—about 20,000 units per day—occurs in Mexico and Canada, these tariffs could lead to supply disruptions and price hikes.
Major automakers have remained tight-lipped about specific price adjustments, but industry experts predict that some vehicles could see price increases of up to 25%. This cost is expected to be passed directly to consumers, impacting both new and used car prices.
Some experts say that the price of new cars will increase from $3,000 to $4,000 at least.
How Will Tariffs Impact Used Car Prices?
New Cars Will Become More Expensive
If a car is manufactured in Canada or Mexico, it will now be subject to a 25% tariff. This additional cost will be absorbed by automakers and likely passed on to consumers. Additionally, even cars made in the U.S. could see price hikes due to rising costs of imported components.
Used Cars Will Also Get More Expensive
Consumers may turn to the used car market to avoid the inflated prices of new cars. However, increased demand for used vehicles combined with low supply from past years of slowed production (particularly during the pandemic) will likely drive prices up.
Limited New Car Supply Will Increase Prices
Automakers rely on a steady supply of imported components. If suppliers face difficulties absorbing a 25% cost increase, production lines could slow down or shut down altogether. This could reduce the availability of new vehicles, forcing more buyers into the used car market.
What Do Economic Studies Say About Tariffs?
The Macroeconomic Consequences of Tariffs study by Furceri, Hannan, Ostry, and Rose examined the long-term effects of tariffs in 151 countries. The findings suggest that tariffs often lead to:
- Declines in domestic output and productivity.
- Higher unemployment and income inequality.
- Minimal improvements in trade balances, contrary to their intended purpose.
In short, tariffs may not provide the economic boost policymakers expect and could instead slow down economic growth while increasing prices.
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Why can tariffs trigger inflation?
When tariffs are applied to imported goods, the direct consequence is that they become more expensive.
If businesses do not find alternative suppliers that are sufficiently cheap or close (nearshoring) or decide that reshoring is not viable in the short term, the cost falls on the final customer. And inflation, a problem that directly affects purchasing power, can erode the popularity of the administration implementing such measures.
Which products will increase in price due to tariffs?
One of the most searched questions on Google after the measure was confirmed is: “Which products will be affected by the tariffs?”
Since this is a general 25% levy, all goods exported from Mexico to the United States—including those from the automotive, agri-food, textile, and electronics industries—will face increased costs if the tariff is strictly enforced. Some of the most visible examples include:
- Tomatoes and avocados: The U.S. imports massive volumes of these fruits and vegetables from Mexico. A 25% tariff could significantly increase supermarket and restaurant prices.
- Auto parts: With a highly integrated automotive exchange, a large portion of vehicle components sold in the U.S. are manufactured or assembled in Mexico.
- Home appliances and electronics: Mexico is a major exporter of computers, televisions, and refrigerators to the U.S. Higher costs will be reflected in final prices.
- Beer and tequila: Two of the most consumed and iconic Mexican products, which will undoubtedly also face a significant price hike.
For Canada, goods such as auto parts, steel products, and even energy (though with a 10% tariff) will be affected. This could lead to a potential cost escalation across the entire North American production chain.
