Auto tariffs take effect: What this means for the United States and its auto finance sector

Introduction

On March 26, 2025, the President of the United States Donald Trump signed a proclamation invoking Section 232 of the Trade Expansion Act of 1962, implementing a tariff on automobile imports and certain automotive parts with an objective to safeguard and bolster the US automotive industry.

A 25% tariff will be levied on imported passenger vehicles (regardless of their country of origin), including sedans, SUVs, crossovers, minivans, cargo vans and light trucks, alongside essential automobile parts such as engines, transmissions, powertrain components and electrical parts. There are also provisions to extend the tariffs to additional parts if needed. The tariff on completely built-up vehicles went into effect on April 3, 2025, while the tariff on auto parts is set to take effect on May 3, 2025.

With this 25% tariff imposed on imported vehicles and a 10% tariff on auto parts, President Trump’s 2025 auto tariffs are likely to have far-reaching effects not only on car manufacturers and consumers, but also on the auto finance sector. The US auto finance market, which is responsible for financing hundreds of billions of dollars in vehicle loans and leases each year, could face significant challenges, as higher vehicle prices and supply chain disruptions reshape the way Americans buy and finance vehicles.

Perspectives in favor of the tariffs implemented by the Trump Administration as per the official White House website:

• The Atlantic Council, an American think tank in the field of international affairs, stated that tariffs would encourage US consumers to purchase domestically made products.
• Similarly, a 2023 report by the US International Trade Commission, which examined the impact of Section 232 and 301 tariffs on over $300 billion worth of US imports, found that the tariffs led to a decrease in imports from China and successfully boosted US production of the taxed goods, with only minimal effects on prices.
• The Economic Policy Institute stated that the tariffs imposed by President Trump during his first term “demonstrated no clear connection to inflation” and had only a short-term impact on overall price levels.
• A 2024 study on the impact of President Trump's tariffs during his first term found that they “bolstered the US economy” and “resulted in substantial reshoring” in sectors such as manufacturing and steel production.

Immediate impact on vehicle prices and consumer affordability

Essentially, there are profound implications for the automotive industry as a whole. While the official website of the White House states: ‘President Trump is taking action to protect America’s automobile industry, which is vital to national security and has been undermined by excessive imports threatening America’s domestic industrial base and supply chains’, these tariffs are seen as controversial by many.

Many critics argue that they will significantly raise the cost of vehicles, which could negatively affect consumers in the United States, while also disrupting global supply chains. American automakers rely on imported components and will subsequently face higher production costs, which are likely to be passed on to consumers.

While some of the domestic manufacturing processes may remain unaffected, the auto industry operates within a complex global supply chain (even within the Canada-USA-Mexico region there are many interdependencies and movements of vehicle parts, components and resultant manufacturing). Foreign parts, ranging from microchips to specialized materials, are crucial to the production of vehicles. With parts becoming more expensive due to the 10% tariff, automakers will likely have to adjust prices accordingly. In addition, foreign automakers that sell vehicles in the US will see their production costs rise as they absorb the tariffs or attempt to pass them on to US consumers.

To put it into perspective, an imported car valued at $40,000 would incur a $10,000 tax. This is a cost that someone in the supply chain will ultimately have to absorb. The immediate result of higher vehicle prices is that many Americans may find themselves priced out of the new car market. Consumers who would otherwise purchase a new car may shift to buying used vehicles, which could, in turn, inflate the prices of used cars. For those who still choose to purchase new vehicles, the higher costs will likely translate into larger monthly payments, which could place additional strain on household budgets.

Although luxury brands like Bentley or Ferrari claim they’ll pass on costs, mainstream automakers, who typically operate with margins of just 6% to 8%, have far less flexibility.

The affordability of cars for middle-income Americans will become an even more pressing concern, as wages have not kept pace with inflation and rising vehicle costs. For consumers in lower-income brackets or with subprime credit scores, the situation may be even more difficult, as these groups are already more likely to face challenges in securing financing for vehicles.

Broader economic impact and consumer behavior

The ripple effects of the 2025 auto tariffs are likely to extend beyond just the auto industry. As car prices rise, consumers may cut back on spending in other areas, particularly discretionary purchases like home goods, entertainment and travel. This could have a dampening effect on the broader economy, especially in industries that rely on consumer spending.

Additionally, higher car prices could slow down overall vehicle sales. When vehicles become more expensive, consumers may choose to keep their current cars for longer, delaying new vehicle purchases. This ‘wait-and-see' mentality could lead to a reduction in car sales and slow the turnover of inventory, further exacerbating the challenges for auto dealerships.

Following the announcement and subsequent implementation of the auto tariffs, S&P Global Mobility reported one of the most significant forecast adjustments in their history. Only the adjustments made in response to the 2020 COVID-related global manufacturing shutdown and the 2008–09 global financial crisis surpassed the scale of the changes to their April 2025 sales and production forecasts.

In their April 2025 forecast, they revised US sales downward by approximately 700,000 units for 2025, 1.2 million units for 2026 and 930,000 units for 2027, compared to the projections made in the March 2025 forecast round. Pertaining to vehicle production, North American output is now projected to drop by roughly 1.28 million units in 2025, bringing the total to between 13.9 million and 14.3 million units. According to trade experts, the 25% tariff could cut vehicle imports by as much as 75%.

The American Property Casualty Insurance Association, which represents home, auto and business insurers, reports that roughly 6 out of every 10 auto replacement parts used in US repair shops are imported from Mexico, Canada and China.

“You can’t walk into a dealership today and not see a United Nations of parts,” said Skyler Chadwick, Director of Product Consulting at Cox Automotive.

With tariffs on steel and aluminum i.e. materials from which auto parts are made, the cost of vehicle repairs and replacements could surge. More expensive auto parts would drive up repair expenses for insurers, with the American Property Casualty Insurance Association (APCIA) projecting an annual increase in claims costs between $30 and $60 billion. Auto insurance rates are therefore also a growing concern for consumers, driven by a combination of factors including supply chain disruptions and inflation.

Impact on auto manufacturers and supply chains

The United States automotive industry is heavily reliant on a global supply chain, with many components, such as electronics, metal parts and interior materials, sourced from abroad. Even though domestic manufacturers like General Motors, Ford and Stellantis (formerly Fiat Chrysler) assemble vehicles in the US, they are still heavily dependent on imported parts.

With the imposition of a 10% tariff on auto parts, domestic manufacturers will face increased costs for critical components that they either produce overseas or import for assembly. This will likely force manufacturers to increase prices on new vehicles to cover the added costs, resulting in higher prices for consumers, as previously mentioned. The cost burden could particularly affect manufacturers that are already operating on thin margins.

In response to these higher costs, American automakers may attempt to offset the price hikes by shifting more production to the US in a bid to avoid tariffs on imported vehicles. This may result in some jobs being brought back to the US, potentially benefiting domestic workers. However, the transition may not be easy or quick. American factories would need to adapt to the production needs of specific foreign car models and new investment in manufacturing infrastructure may be required. Furthermore, rising labor costs and other domestic production challenges, such as worker shortages, may limit the long-term benefits of this shift.

International automakers may also face difficulties in adjusting to the tariffs. Brands like Toyota, Honda and BMW who already operate in the US market and build a significant portion of their vehicles in US plants may find it challenging to maintain competitive pricing while managing production costs. These automakers may decide to pass on some or all of the costs to consumers, or in some cases, they may reduce production or scale back investments in their US plants.

In 2024, Americans purchased around 16 million cars, SUVs and light trucks, with 50% of them (8 million) being imports. For the remaining 8 million vehicles assembled in the United States, the average domestic content is estimated to be about 50% - though it is likely closer to 40%. As a result, only about 25% of the content in the 16 million vehicles bought by Americans can be considered ‘Made in America’.

Reactions from global automakers

Jaguar Land Rover, headquartered in the UK, announced it would temporarily halt exports of its luxury cars to the United States. Meanwhile, Stellantis paused production at its factories in Canada and Mexico that manufacture Chrysler and Jeep vehicles, and laid off nearly 1000 workers who provided engines and other parts to those plants.

Audi, Volkswagen's luxury division, also suspended car exports to the United States from Europe, instructing dealers to sell off any remaining stock on their lots.

Although the initial impact of the tariffs has been disruptive, in at least one instance, President Trump’s tariffs have achieved their goal of boosting production in the US. General Motors announced it would ramp up light truck production at a factory near Fort Wayne, Indiana.

Mercedes-Benz will absorb the tariff costs on 2025 models for an undisclosed period, meaning the company does not intend to raise prices on vehicles impacted by the import tariff in the short-term.

BMW confirmed it will cover tariff costs for cars built in Mexico, but only through May 1. Those tariffs apply to the 3-series sedan, 2-series coupe and M2 models, which are built at BMW's factory in San Luis Potosí, Mexico.

Honda is reportedly considering relocating some of its manufacturing plants from Canada and Mexico to the United States. This shift could result in a boost in vehicle production by as much as 30% over the next two to three years.

Meanwhile, Toyota, one of the largest automakers globally, has not made an official statement regarding its plans to address the tariffs. However, reports suggest that Toyota’s North American division has informed major parts suppliers that it will assist in covering the costs associated with the tariffs, which will apply to parts starting May 3.

The long-term effects of the 25% tariffs remain uncertain. Many automakers are still working to find ways to avoid raising prices to a level that would make new cars unaffordable for consumers. Investors are wary, with shares of Ford, GM and Tesla all dropping in recent trading days.

“Let’s be real honest; long-term, a 25% tariff across the Mexico and Canada borders would blow a hole in the US industry that we’ve never seen,” said Ford CEO Jim Farley. He suggested that such tariffs could lead to significant cost increases, chaos, and ultimately, a decline in the industry.

Implications for the US auto finance industry

A significant impact of the 2025 auto tariffs will be felt in the auto finance sector. With vehicle prices expected to rise, a growing number of consumers will require financing to afford their cars. For the auto finance sector, this creates both opportunities and challenges.

Increased loan demand and lending dynamics

As vehicle prices rise, more Americans will turn to financing options to make car purchases. This will lead to higher demand for auto loans and leases, which could translate into more business for banks, credit unions and other lenders. However, this higher demand could place additional pressure on the lending market, especially as the risk of defaults increases. In April 2025, automotive site Edmunds.com listed the average car loan interest rate for March 2025 as 7.2% APR for new car loans and 11.5% APR for used car loans.

A report from Edmunds shows that an increasing number of new car shoppers opted for longer-term loans in Q1 2025 – a trend expected to accelerate with the introduction of auto tariffs. Nearly 20% of new vehicle buyers chose 84-month financing, prioritizing lower monthly payments over long-term financial flexibility. The share of 84-month loans reached a record high, accounting for 19.8% of new-vehicle financing in Q1 2025, up from 15.8% in Q1 2024 and 13.4% in Q1 2019.

Impact on residual values

Trump’s auto tariffs, particularly those targeting imported steel and aluminum had noticeable effects on the residual values of vehicles, specifically imports and models with high foreign content. Residual value refers to the projected worth of a vehicle at the end of a lease term or after a certain period of ownership and it’s a key factor in lease pricing and resale strategies. Tariffs imposed lead to increased production costs for automakers, which are often passed down to consumers in the form of higher vehicle prices. This leads to a more uncertain pricing environment, which in turn affects residual value forecasts.

For imported vehicles and even US-assembled vehicles that rely heavily on foreign parts, residual values may soften. Lenders and leasing companies will grow cautious, reducing the projected residual values to hedge against increased costs and shifting demand. On the other hand, some domestic vehicles, particularly those less impacted by tariffs, can see a relative strengthening in their competitive position, which could support their residual values. The uncertainty can make it difficult for the auto finance and leasing sectors to maintain stability in their pricing models.

The used car market

The auto tariffs have significantly impacted the US used car market. With new car prices rising due to these tariffs, many consumers have turned to used vehicles as more affordable alternatives. This surge in demand for used cars, coupled with a limited supply, exacerbated by fewer leased vehicles returning to the market (as a consequence of the previous crisis driven by the pandemic), has driven up used car prices. Industry experts anticipate that used car values could increase by 2.8% year-over-year by the end of 2025.

Additionally, the tariffs have led to higher costs for auto parts, affecting both new and used vehicle prices. For instance, brake pads and other components sourced from countries like China and Mexico have become more expensive, impacting repair and maintenance costs for used vehicles. This price inflation, combined with increased demand, has created a challenging environment for consumers seeking affordable transportation options.

Tightening credit markets

With the likelihood of higher loan amounts and larger monthly payments, lenders may become more cautious in approving loans, especially for subprime borrowers. As both expected and actual auto loan delinquencies rise in response to higher prices and monthly payments, financial institutions may increase interest rates to cover their increased risks. This could further limit the accessibility of auto loans for consumers with lower credit scores.

Evolution of financing products

In response to rising vehicle costs, the auto finance industry may see the emergence of new types of financial products. Lenders are offering longer loan terms to help reduce monthly payments, although this can increase the total interest paid over the life of the loan. Alternatively, automakers and lenders could introduce more lease options, which allow consumers to avoid the high upfront costs of purchasing new vehicles.

Most recent developments

On April 14, 2025, President Trump indicated that he might temporarily exempt the auto industry from the tariffs he has imposed, allowing automakers time to restructure their intricate supply chains. That being said, the President did not clarify the duration or specifics of the potential pause, but the auto industry is waiting to see how regulations might shift regarding the tariffs. As the Administration weighs a pause on auto tariffs, exemptions for parts may be crucial for the US industry.

Experts have noted that brief pauses would likely not provide automakers enough time to adapt their extensive global supply chains, although parts exemptions could certainly support the industry amid the ongoing disruptions.

On April 29, 2025, a senior White House official stated that President Donald Trump plans to reduce the burden of his tariffs on US car manufacturers. The president is expected to announce measures pertaining to a reduction in certain import duties on foreign-made parts used in domestic vehicle production. Additionally, although vehicles manufactured outside the US will remain subject to the automotive tariffs, they will be exempt from additional levies such as those imposed on steel and aluminum.

Conclusion

President Trump’s newly announced auto tariffs are set to significantly alter the landscape of the US automotive industry. From rising vehicle prices to disruptions in global supply chains and potential shifts in consumer behavior, these tariffs will have widespread consequences.

While the tariffs may provide some short-term benefits, such as increased domestic production and potential job creation, the long-term impact on consumers and the economy at large remains uncertain.

As vehicle prices rise and financing becomes more expensive, the relationship between consumers, automakers and financial institutions will become increasingly complex, and the auto finance sector must be prepared to navigate these changes carefully.