President Trump’s 25% tariff on all cars imported into the U.S. began at midnight. Yet, the price of many cars today is far from clear.
A combination of uncertainty about the tariffs themselves and the complex structure of car sales in America means prices will more likely be a constantly moving target than a steadily increasing one for the next few months.
Experts have begun making predictions, and you will likely see estimates quoted widely in the media in the coming weeks. Car shoppers should take them more as guidelines than rules.
Uncertainty in the Government’s Explanations
The first reason for caution? White House announcements about the tariffs themselves are unclear on what will happen. Many rules remain unwritten.
At midnight, the Commerce Department enacted a 25% tariff on many imported cars. The tariff applies immediately to vehicles built in Europe and Asia.
Different Rules for Canada, Mexico
It exempts some (but not all) cars built in Canada and Mexico under the U.S.-Canada-Mexico Agreement (USMCA), a trade pact Trump negotiated during his first term in office. Some cars built in Canada and Mexico use too many parts imported from Europe or Asia to be covered by the USMCA.
Those will fall under a later tariff. The same presidential proclamation that announced the tariff on finished cars enacts a similar 25% tariff on parts imported into the country.
No One Has Written the Rules for Parts Tariffs
That could affect all cars. No car is built entirely in the U.S. with only American parts. Even the “most American” car — the Tesla Model 3, according to a recent study — uses interior parts from China and some other parts from outside the U.S.
The president’s order explains that cars built under the USMCA should be tariffed only on their “non-U.S. content.”
However, the president’s order gave the Commerce Department until May 3 to write rules explaining how the parts tariff would work. Until those rules are published, the parts tariff doesn’t apply.
There may be a further complication in the document, as well. Another clause of the proclamation says that parts tariffs “shall not apply to automobile parts that qualify for preferential treatment under the USMCA until such time that the Secretary [of Commerce], in consultation with CBP [the U.S. Customs and Border Protection Agency], establishes a process to apply the tariff exclusively to the value of the non-U.S. content of such automobile parts.”
That clause appears to have no deadline. So automakers may have no way of knowing the final tariff on any car built in the U.S., Canada, or Mexico indefinitely.
Bloomberg reports that automakers are currently “lobbying the administration to exclude certain low-cost car components from the planned tariffs.”
Complexity in How Cars Get Their Prices
Even when the rules behind the tariffs are clear, the automotive industry’s complex finances mean price changes won’t be as simple as a 25% increase.
Industry publication Automotive News explains, “The industry relies on sometimes labyrinthine systems to calculate the vehicle’s cost. The price of the vehicle is determined using a cocktail of market research, bills of materials, financial agreements, intuition, and other elements.”
Several Layers Between Builder and Buyer
Automakers will pay the tariffs themselves when they import a car. They may then pass that cost on to dealers, almost always separate businesses not owned by the automaker. In some cases, a foreign automaker technically transfers the car to a domestic subsidiary, which then sells it to a dealer.
Those dealers often pay for cars through a complex arrangement called a “floorplan loan.” Floorplan loans involve a dealership borrowing money from a bank to pay for the cars on its lot. Who owns that bank? Usually, the automaker they buy them from.
Dealers then sell the cars to consumers, who often borrow money themselves — sometimes also from the automaker’s bank.
Automakers Could Raise One Price to Protect Another
Automakers could also choose to adjust prices on one model rather than another. Many analysts believe the tariffs could hit the least expensive cars hardest, even causing automakers to stop selling some of their cheapest cars. However, a large automaker could raise prices on its most expensive models to try to raise enough money to pay tariffs on its least expensive.
Further complicating matters, automakers build a handful of popular models in several countries. Your local Nissan dealership may have two Rogue SUVs parked next to one another on the lot, one built in the U.S. and the other imported from Japan. The two would face very different tariffs.
With a financial arrangement that complex, the various players have many levers and knobs with which to enact to try to mitigate the tariffs’ final effects on pricing.
Some Early Predictions
Despite the complexity, some analysts have begun predicting price changes.
Anderson Economic Group (AEG), a consultancy of economists focused on the automotive industry, is known for its caution and conservative estimates. Yesterday, AEG estimated that tariffs will “cost additional $2,500 to $5,000 for the lowest-cost American cars, and up to $20,000 for some imported models.”
Morgan Stanley, meanwhile, has predicted that the average vehicle’s price will increase by 11% to 12%.
Watch the Fair Purchase Price
Finally, each dealership faces a separate pricing decision in each negotiation over an individual car. Today, their lots are filled with cars they bought at pre-tariff prices. But they must negotiate knowing that, for each vehicle they sell, they’ll need to buy a more expensive one to take its place.
Each dealer has its own supply of cars to sell. Some will last much longer than others.
Cox Automotive Senior Economist Charlie Chesbrough explains, “I expect we’ll see relatively strong sales activity for a month or two, but prices will rise, and sales will slow noticeably before the end of” the second quarter. Dealers and automakers, he says, “will be pulling back on incentives immediately as the rush to sell existing inventory declines.”
Cox Automotive owns Kelley Blue Book.
One tool that can help car shoppers track changes is the Kelley Blue Book Fair Purchase Price. It tracks actual sale prices consumers have paid recently in your area. We update the calculations weekly, which should help shoppers time their own decisions.