Is Trump's Tariff on Cars Pushing Entry-Level Vehicles Out of Reach?
Rising tariffs may deplete affordable vehicle stock, is the worrying forecast from industry experts.
It looks like President Trump's tariffs on the auto industry might put a strain on your wallet if you're in the market for an affordable car.
Car experts are sounding the alarm about these tariffs, warning that they could make entry-level vehicles out of reach for many buyers. Around 90% of budget-friendly vehicles - cars priced below $30,000, as defined by Cars Commerce - are manufactured outside the U.S. This puts them squarely in the sights of potential price hikes or production cuts, according to Cars.com editor-in-chief Jennifer Newman.
With these vehicles already in short supply, Trump's tariffs could push manufacturers to further reduce production.
The current situation isn't looking rosy either - cars priced under $30,000 account for just 14% of new-vehicle inventory, a drastic drop from 38% during the 2019-2021 period, according to Cars Commerce data.
Trump raised havoc when he imposed a 25% tariff on all imported passenger vehicles back in April. This includes everything from sedans to SUVs, crossovers, minivans, cargo vans, and light trucks. The tariff also impacts key automobile parts such as engines, transmissions, powertrain parts, and electrical components[2][3].
The administration is also leaning towards imposing a separate 25% tariff on auto parts starting May 3. Initially, components that adhere to the United States-Mexico-Canada Agreement (USMCA) will be exempt. However, the Commerce Department plans to develop a plan to impose tariffs on non-U.S. components. By late June, the agency expects to establish a process for imposing tariffs on other auto parts[6].
Automakers typically don't reap as much profit on budget vehicles, so if prices rise, they might start to scale back on those models in favor of more expensive ones that yield bigger margins[3].
“What we saw during the pandemic is that when automakers had to make tough decisions about which vehicles they were going to prioritize, they went with the vehicles that were higher priced because they made a little more money on them. With tariffs, we could see automakers re-evaluate their full lineup and cut their lower-cost vehicles instead of shouldering the cost,” Newman explained[3].
As automakers start to prioritize certain vehicles, demand for those models will skyrocket. Dealers will likely capitalize on this scarcity by increasing prices, knowing that buyers will pay out of necessity[3]. The average price of a new car now hovers around $49,000, according to Kelley Blue Book data. This figure has remained relatively steady for the past 18 months but is still about 30% higher than the first quarter of 2019, according to Cars Commerce data[3].
"We're looking at it as a bit of a perfect storm, honestly, for our shoppers. The trouble is the unpredictability of what the future holds," Newman added[3].
The ripples of this potential squeeze on new cars will extend to the used car market as well, as it closely mirrors the new car market[5].
"A lot of shoppers see them as two different things. They're not. They're connected. And, so, because of that, when there's tightness on the new cars side, people shift to used cars," Newman explained[5].
However, the supply in the used car market is also limited, particularly for vehicles less than 6 years old[5]. As a result, budget-conscious shoppers may have to consider older, higher-mileage cars, which could require more frequent repairs, potentially becoming even costlier as tariffs drive up prices and make parts more difficult to source[5].
In essence, Trump's tariffs could trigger a perfect storm for budget-conscious car buyers, with rising prices and limited options making affordable vehicles increasingly out of reach[3].
*SOURCES:
- Bloomberg
- Washington Post
- Cars Commerce
- CNN Business
- CBC News
- Reuters
- Trump's tariffs on the auto industry, particularly on entry-level vehicles, could make them out of reach for many buyers due to potential price hikes or production cuts.
- Change in consumer behavior might occur as automakers prioritize more expensive vehicles with bigger profit margins to compensate for potential losses, leading to increased demand and pricing for those models.
- The demand for affordable cars could drive up the average price of a new car, which has already been steadily increasing since the first quarter of 2019.
- The unpredictability of the future, with its impact on tariffs and the economy, is causing concerns among budget-conscious car buyers due to the limited options for affordable vehicles and the potential to make them increasingly out of reach.
- The limited supply in the used car market, especially for vehicles less than 6 years old, could force budget-conscious shoppers to consider older, higher-mileage cars, potentially making these options even costlier as tariffs drive up prices and make parts more difficult to source.
- The ripple effects of this potential squeeze on new cars will extend to the used car market, merging the two markets, and creating a perfect storm for budget-conscious car buyers.
