U.S. Tariffs on Imported Vehicles Create Mixed Reactions in Automotive Sector

The automotive industry reacted with surprising resilience following the announcement of a 25% tariff on all imported vehicles by former President Donald Trump. The tariffs were officially put into practice on Thursday, setting off a wave of confusion and concern about how they’ll affect automakers and American drivers. Despite initial concerns, shares of some of the world’s largest automakers demonstrated unexpected stability, largely attributed to exemptions granted to Canada and Mexico.

>Rico Luman, senior sector economist for transport and logistics at Dutch bank ING, was surprised to see such early resilience stick in the automotive sector. He noted that this might be due, in part, to the clear signal given about Trump’s 25% tariff on car imports. Investors cheered the announcement, and for good reason. They were most happy about the exemptions freeing joint-production centers in Canada and Mexico from the new fees. This announcement in particular drove most of the positive market reactions, as most automakers are very dependent on these close by countries to base their production capabilities.

They cautioned that the tepid reaction from auto stocks could be intimately linked to these exemptions. Thomas Besson, head of autos research at European investment group Kepler Cheuvreux, is inclined to agree on the overall market still looking stable. He cautions, investors will inevitably reconsider their exposure to the automotive industry with the sweeping changes on the way. Currently, the White House intends to move forward with a 10% baseline tariff on automobile parts with a start date of May 3rd. This significant step could introduce new headaches for manufacturers.

In addition to the baseline tariff, we’ll launch more targeted rates. Among them, 34% on Chinese imports, 20% on imports from the European Union, and 46% on imported goods from Vietnam. Yet these measures are freighted with enormous implications. Indeed, economists from RBC Capital Markets have recently issued a warning that the tariffs will result in a massive spike in car prices and a dramatic drop off in auto sales over the next several months.

None felt the chill across the Atlantic more than shares of Sweden-based Volvo Cars, whose stock sank over 10% in value after the tariff announcement. Retreating in the broader market context today, the Stoxx Autos index lost 1.8%. At one point, right after the market opened, it was down over 2%. That reflects a gradualist investor stance in the face of uncertainty over future pricing and sales dynamics.

And the still-strong automotive industry has provided remarkable resiliency thus far. Worse than the short-term disruptions, the new tariff regime could have dire long-term effects. The exemption for our neighbors to the north and south provides only temporary respite. Analysts are understandably trying to catch up and understand how these developments will play out in the coming weeks. This would increase the average U.S. tariff rate on imports from Canada from 2.5% to approximately 3.5%. If it goes into effect as planned, this increase will add to the already difficult trade environment for automakers.