With Car Tariffs, Trump Puts His Unorthodox Trade Theory to the Test

 

With Car Tariffs, Trump Puts His Unorthodox Trade Theory to the Test

 

With sweeping auto levies, the president is putting his beliefs about tariffs into practice on the global economy. Economists aren’t optimistic.

 

Ana Swanson

By Ana Swanson

Ana Swanson is based in Washington and has written about international trade for over a decade.

https://www.nytimes.com/2025/03/27/us/politics/trump-car-tariffs-trade-strategy.html

March 27, 2025

 

President Trump and his supporters have clashed with mainstream economists for years about the merits of tariffs. Now, the world will get to see who is right, as the president’s sweeping levies on automobiles and auto parts play out in a real-time experiment on the global economy.

 

In Mr. Trump’s telling, tariffs have a straightforward effect: They encourage companies to move factories to the United States, creating more American jobs and prosperity.

 

But for many economists, the effect of tariffs is anything but simple. The tariffs are likely to encourage domestic car production over the long run, they say. But they will also cause substantial collateral damage that could backfire on the president’s goals for jobs, manufacturing and the economy at large.

 

That’s because tariffs will raise the price of cars for consumers, discouraging car purchases and slowing the economy, economists say. Tariffs could also scramble supply chains and raise costs for carmakers that depend on imported parts, reducing U.S. car production in the short term.

 

They could also lead to retaliation on U.S. car exports, as well as other products American companies send abroad, leading to damaging global trade wars.

 

On Thursday, global stock markets fell, with auto stocks hit hardest, as investors absorbed the scope of Mr. Trump’s plans. Shares in General Motors, which imports many of its best-selling cars and trucks from Mexico, were down roughly 7 percent in midday trading. Stellantis and Ford shares were also lower. European shares closed lower Thursday, with carmakers suffering the worst losses.

 

As automakers and economists scrambled to rework their growth forecasts, America’s allies slammed Mr. Trump for imposing tariffs, saying the levies would destabilize the global economy. Several vowed to retaliate.

 

Brad Setser, an economist at the Council on Foreign Relations, said the tariffs were likely to lead to more domestic auto production in the long run. But getting there would be “really disruptive,” he said, and costly to both American consumers and the U.S. economy.

 

Mr. Setser said foreign automakers would be unlikely to give up on the U.S. market, and that brands like Toyota, Hyundai and Mercedes could end up making more cars in the United States to avoid paying the tariffs. In the shorter run, however, higher prices could convince some American consumers not to buy cars at all. That, along with disruptions in supply chains that run through Canada and Mexico or depend on foreign parts, could actually cause U.S. auto production to fall in the near term, he said.

 

Nearly half of all vehicles sold in the United States and 60 percent of all parts used in auto factories are imported. Daniel Roeska, an analyst at Bernstein, predicted that automakers could see costs rise by $6,700 per vehicle sold.

 

“You could, because of the disruption along the way, have something that looks like a cyclical downturn in the auto sector, with layoffs, with lost jobs, even in places that will attract new investment and grow over time,” Mr. Setser said.

 

“This is a fairly risky move,” he added.

 

Economists also said the approach is likely to have downsides not just for foreign automakers like Toyota and Mercedes, but also for U.S. brands.

 

Jim Reid, a research strategist at Deutsche Bank Research, noted that it was not just overseas auto stocks that had tumbled, but also those for General Motors, which assembles just over half of its cars purely in the United States, he said. “So the pain is happening domestically as well as abroad.”

 

“The more you listen to the current U.S. administration, the more you appreciate that they are prepared to sacrifice near-term market performance and economic growth if it’s required to meet their longer-term objectives,” Mr. Reid said.

 

Economists have also questioned Mr. Trump’s assertions that tariffs will bolster economic growth, investment and hiring, suggesting that they could do the opposite.

 

In a note on Thursday, economists at Barclays Research said they had revised their forecasts and now expected global and U.S. growth to slow considerably from 2024 levels. “But if worst-case outcomes on tariffs are realized, even those forecasts may end up being too optimistic,” they wrote.

 

Marc Giannoni, the chief U.S. economist at Barclays, said that uncertainty over the direction of trade policy would encourage businesses to hold off on making new investments in factories and hiring more workers in the coming months.

 

“We expect businesses to hire less in the next few months,” he said. “Businesses that are pausing the investment decision are likely also to pause the hiring decision. So we see a lot of reduction in demand for labor.”

 

Mr. Trump has denied that the tariffs would have much negative effect, instead pointing to multiple company announcements of new investment in the United States. In addition to introducing additional tariffs on imports from China, Canada and Mexico in the last few months, Mr. Trump is planning to announce more tariffs next week, which he has said will make the global trading system more fair.

 

Speaking at the White House on Thursday, the president said that “business is coming back to the United States so that they don’t have to pay tariffs.”

 

“A lot of companies are going to be in great shape because they’ve already built their plant, but their plants are underutilized, so they’ll be able to expand them inexpensively and quickly,” he said of the automakers. He added that, “others will come into our country and build, and they’re already looking for sites.”

 

Mark DiPlacido, a policy adviser at American Compass who served in the Office of the United States Trade Representative in Mr. Trump’s first term, said he believed the tariffs would incentivize “a lot more investment in the American auto industry.”

 

“As the White House indicated, we’re at a point where 75 percent of the content of American vehicles are made abroad and imported here,” he said. “Reshoring more of that industry and investing in industry and workers is a welcome step.”

 

He acknowledged that there could be “disruptions and potentially short-term price increases” in the interim, but said that similar protections in the past had helped revive the auto industry.

 

But others say that carmakers could wait on making investments to see whether the tariffs will last. Though Mr. Trump said Thursday that they would be permanent and the White House said that no exclusions would be granted, both foreign countries and companies appeared to be hoping that the president would relent.

 

“Although he’s been pretty clear he intends to, we know from previous experience we shouldn’t assume these things are a done deal until they really are,” said Jennifer McKeown, the chief global economist at Capital Economics.

 

Anticipation of the tariffs is already rippling through the auto industry. Kit Johnson, a customs broker with John S. James Co. in Savannah, Ga., who helps car manufacturers with their importing, said he had been on the phone with customers all morning on Thursday, and there was “a big scramble right now to figure out what to do.”

 

The tariff pronouncements in the last few weeks had made it difficult for his clients to plan. “Every announcement that comes out, there’s planning sessions, they’re running different models to figure out what the financial impact will be,” he said. “It’s been one thing after another.”

 

Mr. Johnson said he believed the tariffs were “counterproductive.” He said that many companies wanted to invest to manufacture more in the United States, but that tariffs would “put a financial strain on them” as they tried to do so. “It’s kind of a Catch-22.”

 

Valerie Benton Smith, a senior sales associate at Bill Black Chevrolet Cadillac in Greensboro, N.C., said that she was bracing for the tariffs, and that higher prices and shortages of car models at dealerships “could hurt tremendously.”

 

She said the tariffs had been introduced suddenly, and that businesses were not set up to meet customer demand using all-American cars and parts. “I really think better planning needs to be done,” she said. “There’s just a lot of domino effects to this.”

 

The other main question is whether tariffs will spiral into bigger trade wars. Mr. Trump said on social media early Thursday that he would punish the European Union and Canada if they tried to work together to fight back against his tariffs.

 

“If the European Union works with Canada in order to do economic harm to the USA, large scale Tariffs, far larger than currently planned, will be placed on them both in order to protect the best friend that each of those two countries has ever had!” Mr. Trump wrote.

 

Foreign leaders responded angrily to the tariffs, though none immediately imposed tariffs in response.

 

Canada’s prime minister, Mark Carney, said his country would introduce additional retaliatory tariffs on the United States but they will not be finalized until Wednesday, when Mr. Trump plans to introduce his so-called reciprocal levies.

 

“We will respond forcefully,” Mr. Carney said. “Nothing is off the table to protect our workers and our country.”

 

President Emmanuel Macron of France said Thursday that he had told Mr. Trump during a discussion the day before that tariffs were “not a good idea,” and said that Europeans would respond by reciprocating in hopes of getting the U.S. president to reconsider.

 

Mexico’s president, Claudia Sheinbaum, told reporters, “We are always going to protect Mexico.” The Mexican government would issue “an integral response” to all U.S. tariffs — which so far also include levies on steel and aluminum — hitting the country on April 3, she said.

 

Economists predicted that the tariffs could be particularly devastating for Canada and Mexico, which have been integrated into the North American auto supply chain for decades.

 

Flavio Volpe, the president of the Auto Parts Manufacturers’ Association of Canada, called tariffs “a really blunt instrument.”

 

“One million cars in Canada a year are made by American manufacturers with 50 percent American parts and 55 percent of American raw materials and he’s ready to push them off a cliff to make a point no one understands,” Mr. Volpe said of Mr. Trump.

 

Reporting was contributed by Danielle Kaye, Ian Austen, Liz Alderman and Emiliano Rodríguez Mega.

 

Ana Swanson covers trade and international economics for The Times and is based in Washington. She has been a journalist for more than a decade. More about Ana Swanson