Liberation Eve Musings on US Auto Tariffs

Driving America into a New Golden Age!

Automotive manufacturing world-wide generated over $3 Tn in sales of cars and their parts in 2024. Its value has been growing at 3.1% since 2022 as it pulled out of a Covid slump. Global car sales in 2024 were 78 Mn after 75.3 Mn in 2023 and, until very recently, were forecast to rise to 80 Mn or more in 2025.

Automotive manufacturing is ranked first out of all global manufacturing industries. It makes use of one of the most globally integrated supply chains on the planet. China and the US are the leading manufacturers in both volume and value. The biggest exporters in 2023 were Germany ($178 Bn, 19% global share); Japan ($111 Bn, 12% share); China ($78 Bn, 8%); South Korea ($68 Bn, 7%); the US ($63 Bn, 6% share); Mexico ($57 Bn, 6%); Belgium (43 Bn, 5%); Canada (38 Bn, 4%) and the UK ($37 Bn, 4%).

Four trends are apparent in the industry: connectivity (cars being part of the internet of things); electrification (battery and hybrid powertrains); autonomy (self-driving cars); and sharing, with one in ten cars sold by 2030 likely to be multi-user.  All of these trends were slowed by the Covid pandemic but have since returned. Now there is a fifth trend: deglobalisation, spurred by US President Trump’s belief that trade tariffs will restore the US economy to a golden age.

Donald Trump says he hopes tariffs will drive consumers to buy more American cars. But they will be more expensive until car manufacturers can unravel their cross-border supply chains which will add $3,000 to $6,000 to the cost of a car, according to Cox Automotive, a consultancy. Similar figures are widely reported from multiple sources. To keep prices as low as possible, manufacturers will remove features and cut research and development budgets. In effect, the US will become the automobile world’s remainders bin. US buyers will face a choice of less sophisticated versions of vehicles with fewer innovations. They can console themselves with the recent wisdom of Scott Bessent: “Access to cheap goods is not the essence of the American Dream." 

Cox Automotive forecasts as many as 1.5 Mn per year fewer new car sales in the US, with the most affordable models being the first to be cut, as they have the slimmest profit margins. Second-hand vehicle prices will rise globally as new cars become less affordable once tariffs apply to all major car makers. Car parts demand will rise as older cars are kept running for longer.

Companies that sell cars with mostly US sourced parts will have an advantage unless or until their competitors begin to build factories in the US not just for cars but for their sub-assemblies too. President Trump has praised a Hyundai plan to invest $21 Bn in the US which includes a localised supply chain including for batteries and for steel via a new $5.8 Bn steel plant in Louisiana to make steel for Hyundai’s EV factories in Georgia and Alabama.  Mr Trump says that “This investment is a clear demonstration that tariffs very strongly work. Hyundai will be producing steel in America and making its cars in America and as a result they will not have to pay any tariffs. You know there are no tariffs if you make your product in America.” After recent announcements from Taiwan Semiconductor and Apple, Mr Trump can point to his tariff policies having the desired effect. 

Globally, car production is likely to stall or fall in 2025. That will reduce demand for the steel and other metals, engines, ceramics, cables, glass, batteries, plastics, and synthetic rubber that are used in car manufacture. It will reduce demand for electricity as auto factories reduce output. Demand will fall for the raw materials used to make cars and for the energy that runs the factories that build cars and their subassemblies. There will be an effect on shipping, in particular for vehicle carriers, but also for container shipping, for which auto parts are a top 10 demand item, for dry bulk and general cargo shipping and possibly for petrochemicals shipping. Contrarily, if the EV market in the US faces price headwinds due to the Trump administration's disdain for low-carbon energy, US demand for gasoline and gasoil may face a reprieve even as it falls in other markets with deeper EV penetration such as China, where Sinopec has recently forecast peak oil demand will be reached in 2026.

Longer term, policy uncertainty is likely to cause more caution among investors and industrials. Should they play the MAGA long game and assume Mr Trump, or Mr Vance, or both, will be in charge of the US for the next eight to 12 years, maybe in a Putin-Medvedev style job swap? Should they assume Mr Trump’s policies will outlive him? Should they hold off on investing in the US and await the outcome of the mid-terms or the next presidential election?

In the short-term, the fall of the US dollar against its main currency partners and the correction in the US stock market indicate that investors are walking away from the US, fearful of the effects of sanctions and tariffs. The latest full year data from the IMF, for 2023, show that the US was by far and away the biggest recipient of foreign direct investment, benefiting from $5.4 Tn, ahead of the Netherlands with $3.7 Tn and China with $3.65 Tn. We won't see the 2024 data for months yet, but if it falls, then predictions for the 2025 data will be on the downside.

In the even shorter term, who knows whether whatever Mr Trump announces on 2 April will still be policy on 2 May? The flip-flopping is enough to make our heads spin. This is a government making up policy on the hoof. At this point, prediction becomes impossible and many non-US businesses will switch to risk management, which means reducing exposure to the risk, be that US policy, US trade or even the USD itself. As Mr Trump tries to drive radical restructuring of the global economy to the US's favour, he runs the risk of puncturing America's tyres. For now, there is no sign of him taking his foot off the accelerator.