Trump's trade deals could push the average new car price well above $50,000

Yahoo

2 days ago

Markets have cheered President Trump's trade deals with Japan and the European Union. New 15% tariffs on most imported products from those countries are lower than many analysts expected, and they finally bring some predictability to Trump's chaotic on-and-off-and-on-again tariff policy.
But import taxes are still going up, and past experience tells us that American consumers will ultimately bear most of the cost. Some of the most important imports from Europe and Japan are cars and car parts, and the higher taxes are sure to make all facets of owning a car costlier, just as drivers were hoping for a break from soaring prices. Trump is still working on trade deals with Canada, Mexico, and South Korea, other major sources of auto imports, and those outcomes will likely hike prices further.
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The average new car costs nearly $49,000, according to Kelley Blue Book. Trump's tariffs could raise costs by $3,000 or more once fully priced in, with costs rising less for cheaper models and more for luxury makes. It could take several months for those import taxes to work through supply chains, but unless there's a recession that ravages demand, car prices seem certain to hit new record highs during Trump's second presidential term.
Read more: The latest news and updates on Trump's tariffs
Ten years ago, the average car price was just $30,000. Several factors have pushed prices higher. Americans increasingly buy big pickups and SUVs, which cost more. Manufacturers struggle to make money on small economy cars and have been pulling them from their lineups. An explosion of digital gizmos adds to the cost, as does new automaker investments in electrification, which still isn't profitable industrywide.
The COVID pandemic turbocharged auto inflation due to supply chain disruptions, parts shortages, stronger demand for non-urban transportation, and other factors. Costlier new cars increased demand for used cars, fueling inflation there, as well. More expensive parts and higher repair costs caused a surge in insurance premiums, which have doubled during the last 10 years. The charts below show the trends.
Auto inflation has stabilized — but prices aren't coming down. They're basically stuck at new, higher levels. The only real break for drivers has been gasoline prices, down about 10% during the last year, to a national average of about $3.15 per gallon.Automakers have been first-line victims of Trump's tariffs. That means their customers will feel the pain too. General Motors (GM) and Jeep-parent Stellantis (STLA) both said tariffs harmed profitability in the second quarter. Ford (F) will probably echo that theme when it reports earnings on July 30. Automakers aren't just suffering from tariffs on imported parts, but also from Trump's new 50% tariff on most imported steel and aluminum, which are major components in cars.
Most car prices haven't risen yet. The all-in cost of buying a car has actually dropped from peak levels of 2022, when the average cost of a new car equated to 42 weeks of work for the typical buyer, according to the Cox Automotive/Moody's Analytics affordability index, which accounts for prices, incomes, and interest rates. That's now down to about 37 weeks of work.
But overall costs are still about 10% higher in real terms than they were from 2012 through 2021. And it's only a matter of time before automakers start passing higher tariff costs onto buyers.
Some of the most popular cars in the US market are imports. The Subaru Impreza, Toyota (TM) Prius, and Mazda (7261.T) Miata come from Japan, as a few examples. Many Audis, BMWs (BMW.DE), and Mercedes (MBG.DE) come from Europe, along with the Volkswagen (VWAGY) Golf. Those imports will all come with the new 15% tax.
Korean imports include the Hyundai (005380.KS) Elantra, Kia Soul, and many other models from the two Korean manufacturers. They seem likely to face the same 15% import tax, since that is becoming the standard for Trump's trade deals.
Read more: What Trump's tariffs mean for the economy and your wallet
Mexico is the biggest source of automotive imports, supplying about 40% of all imported components, plus finished vehicles such as the Ford Maverick, Chevy Blazer, Mazda 3, and Nissan (NSANY) Sentra. Canada is another major source of vehicles such as the Chrysler Pacifica, Lexus RX 350, and many Honda (HMC) Civics. New Trump trade deals with Mexico and Canada seem further off, but in the meantime, he imposed a 25% tax on imported products from those countries that don't satisfy complex domestic-content requirements.
All told, about 46% of the 16 million cars sold in the United States each year are imports, and almost all of the cheapest economy cars on the market are imports because carmakers generally can't afford to make them in America.
Virtually all of those products will cost more because of the Trump tariffs. Earlier this year, when Trump was threatening 25% taxes on all imported cars, the Yale Budget Lab estimated such an across-the-board tariff would raise the cost of an average car by $6,400. That applied to all cars, whether imported or domestic, because price hikes in one major sector allow competitors to raise their prices too.
If the across-the-board tariff is 15% instead of 25%, price hikes would obviously be less. Manufacturers might make adjustments and 'eat' some of the cost by accepting lower profits. But they can't eat all of the additional cost. Shareholders won't accept it, and with costs rising throughout the industry, all automakers will have pricing power, allowing them to charge more.
Even if prices rise by less than under some other scenario, car buyers still have reason to expect lower prices from Trump, not higher ones. Trump ran for president last year, vowing to 'bring prices way down,' after three years of excessive inflation. Voters who went for Trump in 2024 said that was one of the main reasons they picked him. Yet earlier this year, Trump said he 'couldn't care less' if automakers raised prices to offset the cost of his tariffs.
They're going to. Maybe it won't be by as much as analysts thought before, but that won't comfort buyers facing sticker shock anew at the dealership, service center, auto parts store, and insurance agency. Those Trump trade deals won't look so rosy once people start to pay for them.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
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