Trump doesn’t seem to understand how car prices work
The Trump administration announced last week that it will impose a 25% tariff Thursday morning on all cars imported from foreign countries, including Canada and Mexico. Eventually, tariffs will be placed on imported auto parts, too.
Although the parts tariffs are aimed at foreign-made components, those levies could raise the cost to produce cars at US factories, because a significant percentage of the parts used to manufacture the 10.2 million cars built at American plants each year are imported from other countries, according to federal government data.
Industry experts estimate that the parts tariffs alone could increase production costs by $3,000 to more than $12,000 per vehicle for cars assembled at US plants.
But it’s not just the cost of tariffs could drive up prices. It’s the law of supply and demand.
Trump said he expects tariffs to eventually lower American car prices as manufacturers shift production to the United States. That could take years to accomplish with uncertain outcomes. In the meantime, basic economics will weigh on virtually all US car purchases - foreign and domestic, new and even used. Expect car prices that are already near record levels to go even higher once tariffs dramatically upend the car market.
Cox Automotive estimates that tariffs will cut North American car production by 10% to 20%. That’s roughly 1.5 million to 3 million fewer cars a year rolling off assembly lines in Canada, Mexico and the United States, most of which are slated to go to US dealerships and showrooms.
Also likely to disappear from the US market: perhaps millions of the 3.7 million vehicles being imported annually from Asia and European auto factories that current make up a quarter of the US new car market, according to data from S&P Global Mobility.
And the long-ago established economic law of supply and demand means that taking millions of cars out of the supply will drive up prices.
“Those directly imported will face a higher cost, and that will cause a shortage,” said Jeff Schuster, global vice president of automotive research at GlobalData. “When there’s a shortage, it drives those prices up.”
“Yes, cost is a factor. But at the end of day, the price agreed upon is basic economics, supply and demand,” said Ivan Drury, director of insights at Edmunds.com
That supply shortage, coupled with the higher production costs due to tariffs, are likely to raise prices quickly on American built cars models, even if there are no immediate tariffs on parts and the cost of producing a car a US factory doesn’t immediately increase. The reduced competition from fewer imports is likely to put upward pressure for all cars prices.
“The nature of a supply shock will lead to increased prices,” said one auto executive who spoke to CNN on background last week.
Prices surged in past supply shortages
In this case, history can be a guide. When the United States put tariffs on imported light trucks back in the 1960s, the price of American-made light trucks that were not subject to tariffs, such as pickups and vans, climbed much faster than other car prices, according to Jonathan Smoke, chief economist with Cox Automotive.
“In the absence of that competition, the price of light trucks accelerated,” he said.
Automakers don’t set or necessarily even benefit from higher car prices. Car dealerships, which are independent businesses, buy the cars wholesale from automakers and then negotiate prices with car buyers directly. And a sharp increase in costs of imports, and fewer cars available at dealerships, will quickly equal higher prices.
You don’t even have to go back more than 50 years for proof. The United States experienced this same supply and demand dynamic play out only a few years ago.
In 2021, as automakers tried to ramp up production that had been curtailed in the first year of the pandemic, a shortage of parts, most notably computer chips, cut into car production and drove prices up sharply. Soon afterward, almost all car buyers where paying more than sticker price.
The average price jumped 17% for new vehicles between January and December of 2021, according to Edmunds’ data. The shortage of new vehicles, coupled with higher prices, sent many typical new car buyers into the used car market. So the price of used cars rose even faster, rising 32% during the same period even though none were affected by the chip shortage.
That means the price of used cars are expected by many experts to shoot higher along with new car prices, even if they aren’t directly affected by tariffs. It could happen once again, with used car prices rising even faster than new car prices, Smoke said.
Concerns about higher car prices
The increase in prices for both new and used cars was a major driver of the spike in inflation in 2021 that helped lead to many Democrats’ defeat in the 2024 elections.
But recent polls are showing a majority of voters don’t think that Trump is doing enough to bring down prices, and they are concerned about the impact of tariffs. Potential car buyers were rushing to buy cars over the last week ahead of the tariffs taking effect.
Last week the Wall Street Journal reported that Trump had warned automakers that his administration would not look favorably on them raising car prices as a result of the forthcoming auto tariffs. According to the report, the remark rattled automakers. The companies are worried they will face punishment if car prices rise.
Trump pushed back on the report over the weekend, telling NBC he’d be pleased with price increases on imported cars, because he believes it would prompt US car buyers to shift to “American cars.”
“No, I never said that,” Trump replied when NBC’s Kristen Welker asked him about the report of telling automakers to not raise prices. “I couldn’t care less. I hope they raise their prices, because if they do, people are gonna buy American-made cars. We have plenty.”
After the interview a White House aide told NBC that Trump was specifically referring to the price of foreign cars, not cars assembled at US plants.
Automakers have not commented publicly about their plans for prices, or on the Wall Street Journal report about Trump warning them not to raise prices. But the industry’s main trade group, the Alliance for Automotive Innovation, did issue a statement warning that tariffs will raise the costs for consumers.
“Additional tariffs will increase costs on American consumers (and) lower the total number of vehicles sold inside the US … all before any new manufacturing or jobs are created in this country,” said John Bozzella, CEO of the group.
Privately, the automakers say the same thing.
“There is a healthy debate to be had over how that cost might be shared between the suppliers, the (automakers), dealers and the final consumers,” one auto executive told CNN. The consumer, the executive added, “will see a fair chunk of it.”
https://www.cnn.com/2025/04/01/business/car-prices-tariffs-supply-demand/index.html
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