Trump's latest trade deal will hurt car buyers

Get ready for a Trump bump in car prices.

As U.S. negotiators close in on a new trade deal with Mexico and Canada, they appear committed to new rules on car production that will require costlier components, which in turn would raise prices. Further provisions would allow for new tariffs on some imported cars that could boost sticker prices by thousands of dollars.

The new rules would require more American-made content in cars imported from Canada and Mexico, in exchange for allowing those products to enter the U.S. duty-free. Another measure would raise the portion of a car that must be built by workers earning relatively high wages. Cars coming from Mexico and Canada that don’t meet those requirements will be subject to a 2.5% tariff, while cars imported from other countries could face tariffs as high as 25%.

The protectionist measures are meant to safeguard U.S. manufacturing jobs. But they come at a cost to consumers. “At the least, the new rules will raise the price of autos for U.S. consumers,” writes Chad Bown of the Petersen Institute for International Economics. “The North American auto sector could suffer an even worse blow if the Trump administration imposes new tariffs or quantitative limits on autos and parts not covered by the new deal.”

Of the 17.3 million cars sold in the United States last year, about 8.6 million were produced in the U.S. That leaves 8.7 million imports. Of the imports, Canada and Mexico each account for about 1.9 million. Popular models made in Mexico include the Ford Fusion, GMC Terrain, Jeep Compass, Honda HR-V and Volkswagen Jetta. Canada produces the Chrysler Pacifica, Ford Edge, Chevy Equinox, Cadillac XTS and Lexus RX450h, among others.

The new version of the Toyota RAV4, made in Canada, could cost more on account of President Trump.
The new version of the Toyota RAV4, made in Canada, could cost more on account of President Trump.

The new rules would raise the required amount of North American content in a tariff-free car from 62.5% to 75%. Another rule would require at least 70% of the steel, glass and aluminum in a car to come from North American sources. And a wage provision would raise the automaker’s portion of assembly-line workers earning at least $16 per hour from 30% now to 40% for cars, and 45% for SUVs.

It’s not yet clear how much the new rules would add to the cost of imported cars, because we don’t know how automakers would react to the changes. If complying with the new rules would add more than 2.5% to the cost, then it would make sense to simply pay the 2.5% tariff rather than spending more than that to eliminate the tariff. If manufacturers passed all of that onto consumers in the form of higher prices, the starting sticker price of a Toyota RAV4, for example, would jump from $24,660 to $25,277.

Price hikes could be considerably steeper on some models. In addition to the new trade deal with Canada and Mexico, Trump is considering tariffs of 25% on all other imported cars. That amounts to roughly 3.8 million vehicles including many Audi, BMW and Mercedes models built in Europe, Toyota Priuses built in Japan, Hyundais built in Korea, Buicks built in China, and others. With a 25% tariff, the starting price of an Audi A4 would soar from $36,975 to $46,219.

Trump’s 25% tariff on select imports would cause major disruption in the industry. The Center for Automotive Research estimates that a 25% tariff on auto imports, excluding Canada and Mexico, would raise the cost of all imported vehicles by an average of $3,980 and the price of all vehicles, including those built in the United States, by $2,450. The reason all prices would rise is that forcing up the price of some imports allows competitors to raise prices as well, even if they don’t have to pay the tariff.

The Audi A4, made in Germany, could end up subject to a new 25% tariff.
The Audi A4, made in Germany, could end up subject to a new 25% tariff.

Higher prices normally dent sales, and the Center for Automotive Research predicts that a 25% tariff on non-North American imports would reduce sales of all new cars by about 1.2 million units per year. That would kill 197,000 American jobs, which is obviously the opposite of what Trump says he is trying to accomplish.

Protectionist tariffs don’t necessarily protect jobs because government bureaucrats imposing new rules can’t predict how companies will react. “Some companies may rework their supply chains to meet the new rules,” says Bown. “But perversely, a second possibility is that Trump’s new regulations will be so costly that companies decide to source even less content from North America. To keep car prices at levels consumers are willing to pay, some automakers may buy parts from Asia or Europe, where they are cheaper.”

Automakers also have to keep the cost of U.S. production under control if they want to export those vehicles to other countries, where they have to compete with other exports not subject to Trump-style government-imposed price hikes. Carmakers build about 2.4 million vehicles in the United States for export each year, and those vehicles need to be price-competitive in foreign markets. BMW, for instance, exports SUVs from its factory in South Carolina to China, and if the cost of producing in the U.S. gets too high, they could relocate that production elsewhere.

The new trade provisions with Canada and Mexico still aren’t final. Once the three countries fully agree, Congress has to approve any changes, and that isn’t likely until late this year, at the earliest. If Democrats gain control of the House of Representatives in the November midterm elections, as seems possible, Congress may never approve of the controversial Trump trade maneuver. For consumers, the breakdown lane may not be a bad place to be.

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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman