Trade War Tariff Escalation Spells Bad News for Luxury Auto Industry

If you are in the market for a new luxury car, buy it in the next week or so, because prices are about to go up and production is about to go down.

U.S. President Donald Trump campaigned in 2016 on trade issues, saying that American industries and workers were given the short shrift by previous administrations. While his grasp on trade policy then (and now) is a matter for debate, as the chief executive the president has the authority to regulate international trade. As we’ve reported in the past weeks, the current trade battle with China could send the price of imported cars skyrocketing. While there seemed to be hope on the horizon, this week the Trump administration levied new tariffs on China. These will not just make imported cars more expensive, but domestic auto prices are expected to go up as well. 

Auto market analysts are saying that these new tariffs are more of a punishment to U.S. automakers than Chinese manufacturers. “Tariffs are taxes on consumption. Eventually, costs will be passed down to the consumer. This will drive vehicle costs higher. It also includes a lot of body shop equipment,” Peter Nagle of IHS Markit tells Detroit Free Press. He goes on to say that the impact of these tariffs will be “a big deal” that will be felt by American consumers. He and other analysts unanimously agree that these tariffs will hurt the auto industry, causing a decline in profits.

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What Are the New Tariffs?

The trade dispute between the U.S. and China, as a matter of policy, is great for political media and firing up the populist voting base. But it is bad for business. In levying taxes on materials, like steel and aluminum, the White House argues that it will encourage manufacturers to buy American. Of course, the American steel and aluminum industry can’t handle the demand and thus American consumers will see the price of imported cars go up. To make matters worse, the U.S. is also renegotiating trade deals with its neighbor Mexico, where many U.S. and foreign cars are actually made. These new tariffs are different, because they focus on specific goods, including those that go in cars.

At the end of September, a tariff of ten percent will be instituted on thousands of products imported to the U.S. from China. Among these products are things like brake pads or tires and even major parts like engines. And this is only the first phase. Starting on January 1, 2019, the tariff will increase one and a half times to 25 percent. It’s estimated that these tariffs represent $200 billion. China retaliated by levying tariffs on American imports, including American cars. There is no question sales of U.S. cars in China are going to all but cease entirely. However, these tariffs will have an ever larger impact on the global auto industry.

The New Tariffs Will Hurt the Auto Industry and Consumers

The impact these tariffs have on the auto industry at large isn’t immediately clear, but the unanimous consensus is that prices will have to increase. Auto parts manufactured in China are crucial to the mass-production of cars, including those assembled in the United States. As sales go down, the fallout from that could impact the very manufacturing workers that the White House says they are championing. Analysts expect that the full impact of the 25 percent tariff will be felt by consumers in February of 2019. U.S. automakers haven’t said how they will absorb these new costs, instead saying they are going to evaluate their options. Of course, the industry analysts say their options are limited to one: raise prices and sell fewer cars.

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A study from the National Automotive Dealers Association analyzed the impact of the 25 percent tariff, and it’s not a rosy forecast. Car payments will increase by, at least, $78 per month. The study says that not only will the cost of new vehicles increase, but the cost of used vehicles will increase because of heightened demand. The cost of repairing and maintaining vehicles will also increase. So, even if you are not in the market for a new vehicle, this will affect you. Ultimately, they believe that this will result in two million fewer vehicles sold per year. This will result in a lost of nearly one million jobs in the auto manufacturing and auto sales industries. The U.S. GDP will feel a loss of around $60 billion.

Tariffs will seriously impact the luxury auto industry.

Whether you're currently in the market for a new vehicle or will be in the coming months, expect higher prices. Should the trade war continue, it's likely that this trend will continue.

What do you think? Share your thoughts, feelings, and reactions in the comments below. Remember to share the article on social media if you liked it. 

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