President Donald Trump, in his first two days in office, ramped up threats to impose a 25% tariff on all imports from Canada and Mexico. “I think we will do it February 1,” Trump told reporters.
If Trump enacts the tariffs, car shoppers should expect dramatic, immediate changes.
Related: What Trump’s Executive Orders Mean for Car Shoppers (So Far)
Tariffs Would Affect Nearly Every Car
Most cars sold in the United States include parts made in Mexico or Canada. Some are assembled there, but even those built in the U.S. contain many Canadian and Mexican parts.
Automakers ship more than a billion dollars worth of cars and parts across America’s northern and southern borders each day, The New York Times reports. “Vehicles sometimes go back and forth between the United States and Canada several times in the course of manufacturing.”
Even parts can pass back and forth, notes Marketplace, as smaller parts are assembled into larger and larger parts. Cox Automotive Chief Economist Jonathan Smoke asks, “Does that mean 25% gets applied every time it crosses?”
Cox Automotive owns Kelley Blue Book.
Even the U.S. government doesn’t differentiate between American and Canadian parts – by law, the window sticker on each car sold in the U.S. lists the percentage of American and Canadian parts, as if the two countries were one.
Tariff threats have already impacted automakers on several continents. Stock prices of most global automakers fell Tuesday, Reuters reports, with Volkswagen, Honda, Mazda, Hyundai, Kia, and Stellantis (parent company of Dodge, Jeep, Ram, and other brands) hit particularly hard.
Increased Prices for All New Cars
Raising the cost of each part and each vehicle by 25% would raise prices.
Every automaker we have spoken to declines to comment on what tariffs might do to their business. However, a consensus has emerged among analysts who study the industry: The price of the average car would rise by about $3,000.
Recent analyses from both Wolfe Research and TD Economics arrived at the same average, according to industry publication Automotive News.
Some vehicles — particularly full-size pickup trucks — would see their prices rise by more than the average.
That would keep many potential buyers home.
Increased Competition, Prices for Used Cars
“Tariffs will inflate car prices that many potential buyers already think are too high,” Erik Gordon, a business professor at the University of Michigan, told the Times.
That could send many would-be new car shoppers to used car lots looking for something they can afford.
Such offerings won’t be easy to find. Used car prices are already rising, with the average sale price last month reaching $25,565.
The nationwide supply of used cars has remained low since the early days of the COVID-19 pandemic. Automakers built about 8 million fewer cars during the height of the pandemic, due to factory closures and supply chain problems. That will mean fewer cars entering the used car market for years to come.
With supply already short and more buyers arriving, used car prices would rise quickly once tariffs begin.
Good for Repair Shops
One part of the automotive industry could benefit from the tariffs — repair shops.
Gordon, the University of Michigan business professor, tells the Times, “People will keep their old cars longer. That will be good for repair shops — where dealers often make more money than they do selling a new car — and put a lid on sales and production of new vehicles.”
Repair costs, however, will rise because — you guessed it — many spare parts come across the northern and southern borders.
The cost of the average car repair has risen in recent years, particularly for newer cars often laden with expensive sensors.
Shifting Production to America Would Be Slow, Costly
Automakers could respond by shifting production to the U.S. But that could take years and cost billions of dollars.
A report from TD Economics estimates that moving all non-U.S. production to America “would require a 75% boost in U.S. auto assembly and cost automakers more than $50 billion.”
Many automakers have already invested in new U.S. factories building electric vehicles (EVs) in recent years. The law that created a $7,500 tax rebate for EV buyers requires automakers to move more production to the U.S. each year for their cars to qualify.
President Trump has suggested, however, that he will end that program.