When Trump declares 25% tariffs, auto stocks plummet

Although Donald Trump's most recent tariffs will affect cars and auto parts entering the US and abroad, American businesses and consumers will also be impacted

More tariff announcements from US President Donald Trump, this time targeting the auto industry, have alarmed markets.

On Wednesday, March 26, Trump issued a presidential proclamation announcing a 25 percent tax on incoming automobiles and auto parts. The measures will go into effect on Thursday, April 3.

The top auto importers into the US are Mexico, South Korea, Japan, Canada, and Germany. Because their production lines are cross-border, US automakers will also be impacted by the tariffs.

Trump cited a 2019 Commerce Department investigation that concluded "excessive" auto imports posed a national security risk to the United States in order to defend the tariffs.

According to the Trump administration, technological advancements in the automotive industry benefit the defense industry. Nonetheless, detractors will note that the Trump administration has turned this into a calculated move.

Under Section 232 of the Trade Expansion Act of 1962, Trump can impose tariffs without going through Congress by claiming national security concerns.

In the past, Trump has justified tariffs, including on nations like Canada, by pointing to illegal immigration and fentanyl trafficking.

The fact is that very little fentanyl actually crosses the Canadian-American border. CNN cites government statistics that indicate the Canadian border accounted for only 0.2 percent of all fentanyl seizures last year.

The news has caused auto stocks to drop. Toyota, the Japanese automaker, ended Thursday's trading session 2 points lower, while Hyundai, the South Korean automaker, lost 4 points.

When markets opened this morning, the effects were also felt by European auto stocks. According to Morningstar, "Mercedes Benz experienced the largest decline among German automotive stocks, with shares falling by over 4% in early trading before rising to trade down 3% around midday."

"With BMW down 1 point and Porsche down 3 points, Volkswagen's stock fell 1 point and a third. While Frances Renault, which has little exposure to the US market, defied the trend and saw a slight increase in price, Stellantis saw a 30.8 percent decline.

Today, U.S. automakers have also opened lower.

Will American consumers and businesses suffer from auto tariffs?

Despite Trump's claims that tariffs will boost US growth and attract foreign investment and jobs, the truth is very different. The American automakers are truly quite concerned.

Parts may cross the northern and southern borders multiple times during the assembly process, and the majority of US automakers have plants in Mexico and Canada.

Wide-ranging exemptions were later granted under the US-Mexico-Canada trade agreement (USMCA), providing automakers with a reprieve after Trump threatened Mexico and Canada with universal tariffs earlier this month. This doesn't seem to be the case right now.

Up until now, Trump has only stated that importers can provide the commerce secretary with papers detailing how much US content is included in each model that is brought into the country.

A tariff exemption may be granted for parts that are "wholly obtained, produced entirely, or substantially transformed" in the United States; however, the remaining product (any "non-US content") will be subject to the 25% tariff.

For the US auto industry, this is bad news. Tariffs on China and Mexico could increase the cost of new cars by around £4,000 to £10,000, according to research done earlier this year by the consulting firm Anderson Economic Group.

Think about General Motors. It has four plants in Mexico and four more in Canada. Examining a few of the company's business segments helps illustrate the magnitude of the tariff disruption.

Caleb Miller of Car and Drivers, for instance, claims that General Motors' shift to electric vehicles is largely dependent on its Ramos Arizpe plant in Mexico.

In the meantime, General Motors owns Chevrolet, and the company's best-selling model is produced at a number of facilities, including in Canada (Oshawa) and Mexico (Silao).

Both Ford and Stellantis have a portion of their manufacturing facilities in Canada, Mexico, or both. These corporations will be impacted not only by Trump's tariffs but also by any retaliatory tariffs imposed by the targeted nations.

Of course, the long-term goal of the Trump administration is to get businesses to relocate their manufacturing to the United States, but this is a slow and expensive process.

Lindsay James, an investment strategist at wealth management company Quilter, stated that a company could only contemplate this due to the high upfront expenses if it was evident that the policy would be permanent, rather than just lasting the president's term.

Although there have been proposals for tax incentives, Congress has not yet approved any of them. Whether or not businesses share that belief will depend on their own assessments, but in the short run, there isn't much defense against a move that could cause significant collateral damage.