Will Tariffs Increase Car Prices?

Tariffs have become increasingly common in recent years as more politicians have begun to advocate for their use. But what is a tariff, and will tariffs increase new automobile prices for Bloomington drivers? Tariffs play a significant role in shaping the prices of automobiles, influencing both manufacturers and consumers. When a country imposes tariffs on imported vehicles or automotive parts, it can result in higher production costs, reduced competition, and higher prices for consumers.

Tariffs come in various forms, and each affects the industry differently. However, it’s essential to note that tariffs are paid by the company importing them into the country, and then those prices are passed on to purchasers to cover the additional cost. Below, we’ll cover what a tariff is, and why they can influence the automotive industry so heavily.

What is a Tariff?

In short, tariffs are taxes or duties that are imposed by governments on goods imported from a particular country. Let’s use an example of t-shirts. If a Chinese company sells shirts to a U.S.-based company for $10, and a 10% tariff is applied to shirts imported from China, then a $1 tax is incurred. As a result, the U.S.-based company pays $11. That company then has to turn around and charge an extra $1 per shirt it sells to cover the tax.

Tariffs can be imposed on individual products or even on the raw materials originating from a country. The United States has often imposed tariffs on finished automobiles to protect domestic manufacturers by increasing the prices of foreign models. But if they are usually used on finished vehicles, how will tariffs increase car prices? Below, we’ll talk about the global impact of tariffs.

Modern Cars Are a Global Effort

Modern vehicles are the result of a highly complex, multinational supply chain. Few cars are produced entirely in one country, as automakers source materials and components from around the world to optimize costs, quality, and efficiency. Some key aspects of this globalized production include:

1. Component Sourcing – Automakers rely on suppliers from multiple countries. For example, a single car might have an engine from Germany, electronic components from Japan, with semiconductors from Hong Kong, steel from South Korea, and tires from the United States.
2. Global Manufacturing Plants – Many car companies operate assembly plants in different regions to reduce costs and avoid tariffs. For instance, Japanese manufacturers such as Toyota and Honda build cars in the U.S. to circumvent import tariffs on fully finished vehicles.
3. Research and Development (R&D) – The design and innovation of vehicles often take place across various countries. A German automaker might conduct R&D in Germany, but collaborate with U.S. tech companies for advanced driver assistance systems and manufacture components in China.
4. Shipping and Logistics – After assembly, vehicles are transported globally to reach their final markets. Trade policies, tariffs, and import/export restrictions can significantly impact the efficiency and cost of this distribution network before they arrive at a dealership near Champaign.

How Tariffs Can Affect Automobile Prices

For consumers and automakers alike, tariffs can have a major impact on the price of everything. For example, a tariff on Canada and Mexico hits automotive manufacturers at multiple points in the process. For example, one vital component of an engine, such as the piston rods, may cross the borders several times.

• The piston rod starts as raw steel in Tennessee in a quarry
• The steel is then transported to Michigan, where it is turned into steel to be sold to other companies
• A Canadian-based company buys that steel, importing it into their factory, then turns it into hardened steel
• A U.S.-based company has a factory in Mexico that purchases the hardened steel for their factory from the Canadian-based company, and turns it into piston rods for automotive engines, paying a tariff on the Canadian product
• Then, a U.S.-based automotive company purchases the piston rods for use in their engine, paying a tariff on the product coming out of Mexico

If there is a 25% tariff on products coming out of Canada and Mexico, then just one piston rod is taxed twice in this example. And this is just one of many possible components of a car that can be impacted by tariffs, and the combined price increase is passed on to consumers.

Real-World Impact of Tariffs

How much can vehicle prices be expected to rise? The answer is complex, as it depends on the number, severity, and duration of the tariffs. Economists estimate that a 25% tariff on Mexico and Canada—two key U.S. allies—could drive up new car prices by $3,000 to $6,000 in 2025 for Peoria drivers to absorb. According to MotorTrend, 3.6 million vehicles were imported from Canada and Mexico last year alone, representing approximately 25% of all new vehicles sold in the U.S. that year, with $100 billion in car components imported from manufacturers in those two countries.

On the other hand, higher vehicle prices can work in your favor, as the value of used cars often rises. This makes it an ideal time to trade in your old vehicle and maximize your return, using our Value Your Trade tool.

Let Sam Leman Automotive Group Take Care of Your Shopping Worries

If you still have questions about what a tariff is, we’re here to help answer them. While supply chains and tariffs can be complex, buying a car should be simple. The finance team at Sam Leman Automotive Group is dedicated to helping you get the best deal possible, regardless of the current geopolitical climate. With a wide range of new and used vehicle specials, along with flexible lease options, we make it easy to find the perfect car at a price that fits your budget. Visit our dealership in Central IL and experience a hassle-free car buying process today.