Auto Industry Braces for Impact: 25% Tariffs on Imported Vehicles Set to Disrupt Market

The Cox Automotive Economic and Industry Insights team reported on the U.S. auto market performance during the Q1 Industry Insights and Sales Forecast Call on Wednesday, March 26. As the call was taking place, everyone was keenly aware that the auto industry was one week from the “unthinkable,” as Chief Economist Jonathan Smoke called it: 25% tariffs on some imported automobiles.

Just hours later, President Trump signed an executive order as a precursor to officially implementing those tariffs on April 3. That executive order made clear that significant new tariffs, on top of existing tariffs, would be placed on all new vehicles entering the United States. This directive effectively ends more than 30 years of free trade across North America and further imposes significant tariffs on other key trading partners, including Germany, Japan, South Korea and Sweden, to name a few. Additionally, the order from the White House also called for tariffs to be placed on auto parts beginning in May.

How this will ultimately unfold at the U.S. borders is yet to be fully understood, but the directives from the new administration are beginning to come into focus. As our team has noted in the past, increasing domestic production is an admirable goal, but the current state of the global automotive market has been more than six decades in the making. Change won’t happen overnight, nor will it happen in just a few years. The evolution will be slow and difficult, and in the near term, after an initial, short surge in buying, we expect vehicle sales to fall, new and used prices to increase, and some models to be eliminated if tariffs persist.

Jonathan Smoke, Chief Economist

“We had expected the postponed 25% tariffs on Canada and Mexico and some reciprocal tariffs to go into effect on April 3, the day after what the president has called Liberation Day. That expectation was reflected in our downwardly revised sales forecast for the year. The announcement that all imported vehicles will see 25% tariffs will have a broader impact on the auto market. However, since the tariffs do not at least immediately apply to parts, it may not be as disruptive to U.S. vehicle production as we had feared.

“President Trump indicated that the new tariff will be permanent, and as such, this move resembles the executive order by President Lyndon B. Johnson in 1964 on light trucks, which has remained in place for more than 60 years. This is no negotiation gambit – it is an attempt to restructure the U.S. auto market favoring domestic production. Like in 1964, this favors manufacturers with extensive production in the U.S. It will also favor the domestic labor and suppliers that serve the U.S. production.

“It is not immediately clear when the tariff will be imposed on vehicles and inflating the cost of vehicles in inventory, but consumers likely have a narrow window to buy new or used vehicles before prices increase by 10% or more.

“After a near-term surge in buying, we expect sales to fall, new and used prices to increase, and some models to be eliminated. The tighter supply and higher prices we expect will be reminiscent of 2021. If the White House then pursues expanding the scope and applying the 25% duty to parts, we will see a negative impact on U.S. production as well. Moreover, with 25% increases in the cost of parts, inflation would surge in maintenance and repair and insurance, which vehicle owners are already struggling to handle.”

Erin Keating, Executive Analyst

“This is difficult news for an industry already staring down an affordability problem. Affordable new vehicles are already few and far between – there are only 27 vehicles available with prices starting below $30,000, four of which have already been discontinued: the Chevy Malibu and Nissan Versa ending production this year and the Nissan Altima on the chopping block. Many are sourced from Mexico, Japan and South Korea. Tariffs of 25% or more at the border change the dynamics drastically – pushing prices higher on average by $5,300. Last year, these models made up 13% of all vehicles sold in the U.S.

“We have seen this movie before. During COVID, supply became constrained, costs skyrocketed. While the increase in prices this time may be for completely different reasons, it still stands to reason that the market will not bear another significant increase, at least not for those in need of affordable transportation, especially those households earning less than $100,000. We saw 10% of these buyers exit the new-vehicle market over the same period.”

Charlie Chesbrough, Senior Economist

“Trump’s comments yesterday have sent shockwaves across the marketplace. Tariffs have been threatened and delayed multiple times over recent months, but it now seems nearly certain that a 25% tariff on 50% of the market is happening next week. Prices are set to rise thousands of dollars on almost all vehicles as a result. So, it seems likely that our March seasonally adjusted annual rate (SAAR) forecast of 15.9 million will now be too slow a pace. Many folks who were thinking of buying a vehicle are now rushing to buy before the end of the month. There are also many potential buyers who have been leaving the market over fears of a worsening economy, but yesterday’s comments will likely overpower those with many more pull-ahead buyers in the next few days.

“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 Q2. Dealers and OEMs will be pulling back on incentives immediately as the rush to sell existing inventory declines. The value of an unsold vehicle on a dealer’s lot is now worth X% more since its replacement cost will be much higher. And, future supply availability may be vulnerable, so motivation to sell may be changing as well, and it is moving away from the buyer’s favor.”

Jeremy Robb, Senior Director of Economic and Industry Insights

“Tariffs are likely to be fairly inflationary for used vehicles. Our initial estimates on wholesale values could rise 2.2% this year (using a blend of our scenario outcomes) but may not rise quite as fast in 2026. However, there’s likely more inflationary pressure this year as consumers trade down, so it’s possible that values end up rising 2.8% year over year by the end of December (all else being equal).

“Longer term, there will be a trade-off. Several years of this tariff impact will cause more consumers to trade down from new to used. If tariffs cause the average price of a new unit to rise above $50,000 (which is likely given prices today), then even more consumers cannot or will not pay up for a new vehicle. As a result, some consumers will get priced out of new vehicles and must trade down to used vehicles, which puts more upward pressure on the value of used vehicles. Additionally, if we see higher used values, that will raise the value equation (higher Cox Automotive Lease Equity or CALE) of off-lease units – which are already in short supply – and even less of them could come back to the used-vehicle supply chain. All of those factors put upward pressure on demand for used vehicles and, therefore, on price.”

Stephanie Valdez Streaty, Director of Industry Insights

“While we remain optimistic about electric vehicle (EV) sales in 2025, President Trump’s policies and tariffs will significantly impact the EV industry. Like gas-powered vehicles, many EVs are imported, and even those made in the U.S. often have imported parts, particularly batteries. The reliance on imported battery components from countries like China, South Korea and Japan means that these tariffs will escalate production costs and disrupt established supply chains. The proposed 920% antidumping duty on Chinese graphite, a critical material for lithium-ion batteries, could lead to a staggering 125% increase in battery prices. Additionally, the 25% tariff on steel and aluminum disproportionately affects EVs, which rely more heavily on aluminum to reduce weight and enhance efficiency than gas-powered vehicles. These compounded costs will inevitably be passed on to consumers, potentially hampering EV adoption. While the Inflation Reduction Act has spurred U.S. manufacturing investments, the transition to domestic production is still ongoing and will take years to complete. Moving production and retooling plants takes time, posing additional challenges for companies aiming to adapt quickly to the new trade environment.”

ADDITIONAL RESOURCES

Listen to the Q1 Industry Insights and Sales Forecast Call for additional commentary.

Since the first announcements of coming auto tariffs were made, Cox Automotive’s Economic and Industry Insights team has been closely monitoring this evolving story and published related content:

“Unthinkable” Comes True: 25% Tariffs on Canada and Mexico Put Auto Market on Uncharted Road (published March 4, 2025)

Auto Industry Faces Uncertainty as Tariff Decisions Remain Unclear (published Feb. 18, 2025)

Tariffs Across North America Will Upend the Auto Industry (published Feb. 4, 2025)

The Cox Automotive Economic and Industry Insights team will continue monitoring tariff developments and provide updates as necessary.