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Portfolio > ETFs > Broad Market

Get Ready for Higher Car Prices Due to Trade Tariffs

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How many Americans do you know who’d be willing to spend $2,000 more on a regular car? Not many, chances are. They’re the ones who’ll be helping to pay for President Donald Trump’s trade war.

Automakers are starting to get their heads around the dollar cost of tariffs. Toyota Motor Corp., becoming more vocal about the impact, said this week that it would cost an extra $1,800 per vehicle to produce its American-made Camry — the country’s best-selling car — under the 25 percent duty on automotive imports that the Trump administration is reportedly considering. The Tokyo-based carmaker has a 15 percent market share in the U.S.

The numbers are stark: The retail price of a Camry made at Toyota’s factory in Georgetown, Kentucky, is around $24,000. Assume about 30 percent of the car’s parts are made outside the U.S. and subject to the tariff, and that gives the $1,800 cost markup. Between 20,000 and 40,000 Camrys are sold every month in the U.S. The model accounted for more than 300,000 of the 2.4 million cars Toyota sold in the country last year.

(Related: Trade War Odds Rise as Tensions Escalate: Economists)

The Japanese carmaker’s estimate underscores the global nature of the auto supply chain: Tariffs aimed at imports won’t spare U.S.-manufactured vehicles because they inevitably contain components sourced from overseas.

The price of an average U.S.-produced car will rise by at least $1,262 under the Trump tariffs, according to the National Taxpayers Union Foundation. Imported car prices will increase by an average of $4,205 per vehicle, the federation says.

That’s a significant hit to consumers’ pockets. Already, almost 50 percent of Americans spend more than they make every month, studies have found. Average disposable incomes are around $3,000 to $4,000, according to Bureau of Labor Statistics data for 2016. Americans spend an average of around $10,000 a year on cars — more than they do on healthcare costs, or about a fifth of monthly budgets.

In other words, buyers have little ability to bear price hikes of this magnitude. Many will be forced to settle for more basic models, or take on more debt to fund purchases.

They’ve been here before. In the 1980s, quotas on auto exports from Japan to the U.S. caused a welfare loss of $10 billion to $15 billion between 1982 and 1985 to consumers, according to the American Action Forum, a Washington-based group that opposes protectionist trade policies. Those punitive actions didn’t prevent Japanese automakers from taking a dominant share of the U.S. auto market.

Automakers could choose to absorb the extra cost themselves. But they have already been ramping up incentive spending to sustain sales, eroding profitability. Carmakers in the U.S. spend an average of about $4,000 per car on incentives. Toyota, which has kept such expenses lower than peers, may have more leeway. The company boosted inducements by 6 percent in the first three months of this year, compared with a 10 percent jump for General Motors Co.

Automakers are already contending with higher material costs stemming from the aluminum and steel tariffs that Washington has already imposed. Higher tariffs in an increasingly unfriendly U.S. market may dull the appeal of investing further and burnish the allure of China, the world’s largest car market, where the likes of Nissan Motor Co. are bolstering their presence.

The punitive measures will also force carmakers further into defensive mode, shaping an industry that can only afford to cut costs and undermining its ability to invest for the future.

That’s the dollar cost. Greater pain will come from the people cost: Almost 200,000 auto industry jobs will go, the Peterson Institute for International Economics estimates. If other countries hit back, employment would drop by 5 percent in the autos and parts industry — more than 600,000 jobs in the U.S.

Like real wars, trade wars have casualties. This one doesn’t look like it will have any real winner, whatever the president says.

— Check out Goldman, Citi Hunker Down as Trade War Hits Emerging Markets on ThinkAdvisor.


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