Trump’s auto tariffs will put more pick-up trucks and SUVs on American roads

The manicured lawns of US President Donald Trump’s Mar-a-Lago resort were crammed earlier this month with beautiful vehicles from European luxury brands like Lamborghini, Ferrari and Bugatti. The annual Palm Event was an opportunity for the super-rich to schmooze and show off, but it was also a celebration of automotive excellence, international specialization and consumer choice.

I was reminded of it on Wednesday evening when Trump—who’s owned many European luxury cars over the years—announced a blanket 25% tariff on all new vehicle imports, as well as key components.

The president cited national security grounds, but his aim is clear—to force manufacturers to re-shore production and thereby create US manufacturing jobs.

Also Read: Imitation game: Can Big Auto emulate Xiaomi’s EV strategy?

Unfortunately, his tariffs will also raise vehicle prices in the US, impair competition and further limit the pool of affordable vehicles for American consumers—all while massively denting auto industry profitability.

The Biden administration had already shut out affordable Chinese electric vehicles (EVs) with a 100% tariff, thereby denying Americans access to world-beating innovation. Now, Trump is going after the rest: Almost half of the vehicles sold annually in the US are imported.

Although it’s often hard to tell Trump’s policies apart from posturing, he’s long been obsessed by auto imports and I think he’s serious this time.

Porsche’s management confessed recently to having “sleepless nights” about tariffs—North America accounts for more than one-quarter of its sales—but it’s unlikely that the sportscar maker and European luxury peers like Ferrari will rush to build cars in the US. Part of their core appeal is their most desirable vehicles are made by German and Italian engineers.

It’s true that previous tariff arrangements in some cases put US auto manufacturers at a disadvantage—Europe imposes a 10% levy on car imports compared with a 2.5% by the US. But I’ve long thought Germany’s former vice chancellor, Sigmar Gabriel, had a point when he said in 2017 that the way to correct auto trade imbalances was for the US to “build better cars.”

Further, a blanket 25% tariff will stoke inequality because Porsche and its ilk are better able to pass on tariffs via higher prices, and Trump and his wealthy acolytes can afford to pay them (plus their existing car collections should get a value boost from new ones costing more).

It all feels very ‘foreign cars for me, but not for thee.’

Also Read: Nitin Pai: Trump’s tariffs serve political ends even if they lack economic logic

Trump may try to offset vehicle price increases with a tax break for auto loan interest, but those benefits would accrue mostly to the wealthy, too.

In contrast, many of the few remaining affordable models in the US are imports. For poorer customers, a higher sticker price can make the difference between a new car and going without.

Teslas built in California and Texas are largely insulated from tariffs. But I’m not sure how big an advantage that is: After the world’s richest person began making odd hand gestures and firing government workers, Tesla’s US sales are forecast to decline in the first quarter.

History suggests that once such tariffs are imposed, the consequences can be profound. Consider the ‘chicken tax,’ a 25% tariff on light truck imports enacted by the US in the 1960s in protest of European levies on US poultry. The tax is still around today (oddly Trump doesn’t talk about it much), and it has played a big role in reshaping the auto market to favour larger trucks.

By choking off foreign competition, pick-up trucks turned into a cash cow for US manufacturers, and combined with weaker fuel-economy standards, the market gradually shifted away from small cars to capacious trucks and SUVs.

The two top-selling vehicles in the US last year were both pick-ups: the Ford F150 and Chevrolet Silverado.

A 25% import tariff could further reinforce the shift toward big, expensive vehicles, because large SUV and truck manufacturers are better able to pass on price increases without losing sales volumes—their customers are more able to pay up.

Also Read: Mint Quick Edit | BYD versus Tesla: Let merit decide pole position

In contrast, compact SUVs and small cars will “get hammered,” notes Bernstein Research analyst Daniel Roeska, because these highly competitive segments combine a high import share and low margins. Some of these car buyers will be forced into the used market instead.

Due to tariffs and technology regulations, the global auto market is bifurcating, with Western manufacturers increasingly unable to compete in China, while the US insists that cars sold in the US must be built there too. This is grim news for European automakers who find themselves stuck in the middle.

But even if Trump is successful in bringing back US manufacturing jobs, the future for American consumers looks similarly depressing: More expensive trucks and SUVs on the roads, and fewer affordable imports. ©Bloomberg

The author is a Bloomberg columnist.