The modern auto industry is deeply interconnected, relying on supply chains that stretch across borders. Vehicles and their components are often assembled in multiple countries, driven by decades of free trade agreements that have allowed the North American auto sector, in particular, to develop around seamless cross-border trade. Roughly half of all vehicles sold in the US are imported, while around 60 per cent of parts used in American-assembled cars are sourced internationally.

The new tariffs would affect all brands, both foreign and American, with domestic companies such as General Motors and Ford Motor Company among those impacted. Both manufacturers assemble cars in neighbouring countries like Canada and Mexico. The tariffs could inflate the cost of new cars and disrupt supply chains that have been honed for efficiency.

Market reaction and economic impact

News of the tariff announcement sent stock markets tumbling, with shares of major automakers falling in after-hours trading. General Motors saw its stock drop nearly 7 per cent, while Ford and Stellantis both fell by more than 4 per cent. Tesla, which relies less on imported parts, experienced a more modest 1 per cent decline.

Although Trump argues that the tariffs will encourage companies to relocate production to the US, economists and industry experts are cautious about the short-term impact. Building new production facilities in the US takes years and billions of dollars, meaning any substantial shift in domestic manufacturing is unlikely to occur immediately.

The tariffs will likely exacerbate inflationary pressures on the US automotive market, where prices have already risen sharply. Analysts estimate that the cost of new vehicles could increase by as much as $3,000 for American-made cars and up to $6,000 for models manufactured in Mexico and Canada.

In response, some carmakers may raise prices across the board, making new vehicles a luxury item for many consumers.

International implications

The new tariffs are expected to inflame tensions with key US trading partners, particularly in Europe and Asia. Automakers in Germany, Japan, and South Korea — all of which send large volumes of vehicles to the US — will be hit hard. European leaders, who have long complained about imbalances in US-EU auto tariffs, may seek to retaliate or negotiate new terms with the Trump administration.

Ola Källenius, CEO of Mercedes-Benz, said the company would continue to invest in its US operations but acknowledged that the tariffs could severely disrupt its business. “Tariffs would definitely add to the cost,” Källenius said.

At the same time, foreign automakers have been taking steps to increase their US presence. Hyundai Motor recently announced a $21 billion investment in its US operations, including a new steel plant in Louisiana, aimed at reducing the company’s reliance on imported materials. Mercedes-Benz and other foreign carmakers have also signalled potential expansion of their US manufacturing footprint.

What are the challenges to the tariffs?

While the tariffs are scheduled to take effect on April 3, the administration has acknowledged that some aspects of their implementation will be complex. For example, determining how much of a car or part is American-made versus foreign-sourced will require detailed analysis. Canada and Mexico will receive a temporary reprieve from tariffs on parts, reflecting the challenges of untangling the supply chains that bind the three countries together.

(With inputs from NYT, AP, Reuters)