President Donald Trump made a dynamic advance today. He’s announced he’ll impose 25% tariffs on cars and car parts on April 2nd. As Washington and New York risk shoving untested new impositions on the economy, the stakes couldn’t be higher. It deepens the trend toward changes that have been made during his administration’s second term. It would be the largest step yet in Trump’s trade policy. As of now, they’ve raised the cumulative rate of tariffs imposed on China by an astounding 20 percentage points. Today, Mexico provides almost 50 percent of all car imports into the U.S. As such, it is most likely to be hit the hardest by these new tariffs.
The economic impact of these actions are far-reaching. The effective average tariff rate on all U.S. imports could surpass 13% if the newly proposed tariffs on China, Canada, Mexico, cars and car parts, and steel and aluminum are fully enacted. Such an increase would strain the U.S. GDP by about 0.5%. Notably, domestic value added to United States-Mexico-Canada Agreement (USMCA) compliant car and car part imports would be exempt from the tariffs. For USMCA compliance, this means that a product must have at least 75 percent of its value coming from North America.
Unlike previous tariffs, the tariffs are species-blind, targeting all imports, and build upon existing trade measures on shrimp. The biggest gains are expected through the elimination of exemptions that had long been accorded to Mexican and Canadian imports. These tariffs will have a real impact on $428 billion worth of new goods. Consequently, they will increase the trade-weighted average tariff rate on all U.S. imports by an estimated 5.5 to 6.0 percentage points due to Trump’s tariff alterations. The new tariff levels have already soared to highs not seen since the post-World-War-II era.
The USMCA-compliant goods will now enjoy the delay in the tariff increase until sometime next week. This provides impacted stakeholders with long overdue regulatory respite. To date, only about half and 60% of Mexican and Canadian imports have been affected by the tariffs, respectively. Certain exports are seeing short-term reprieve. Yet, these new export controls are nevertheless a significant continuation of President Trump’s administration’s trade policy to the U.S., though.
The administration states that they are imposing these tariffs to protect domestic industries. This shift comes with severe political implications for possible economic fallout at home as well as abroad. The impacts to the automotive industry would be significant, with increasing costs. This will likely raise prices for consumers and lead to friction with our most important trading partners, Mexico and Canada.