The Impact of Tariffs on Car Prices: What You Need to Know
As the global economy continues to evolve, the automotive industry is bracing itself for potential changes that could affect car prices. With President-elect Donald Trump’s proposed tariffs on imported goods, experts warn that car prices could increase significantly.
The Complexity of Tariffs
Tariffs, or taxes on imported goods, are paid by U.S. companies that import those goods. In the automotive industry, tariffs have the potential to disproportionately affect car prices because materials used to assemble a vehicle come from different parts of the world. Components may cross U.S. borders multiple times before reaching the factory, making it difficult to determine the true cost of a vehicle.
The Estimated Cost of Tariffs
According to estimates, component tariffs could add $600 to $2,500 per vehicle on parts from Mexico, Canada, and China. Prices on vehicles assembled in Mexico and Canada, which account for about 23% of vehicles sold in the U.S., could rise $1,750 to $10,000.
Who Will Bear the Cost?
If tariffs are enacted, the sticker price drivers pay at the dealership will eventually go up. However, carmakers and sellers may also have to bear some of the costs. “The cost will spread across all stakeholders: automakers, dealers, and consumers,” said Erin Keating, executive analyst at Cox Automotive.
The Unique Supply Chain of the Automotive Industry
The automotive sector’s supply chain is unique because some pieces move back and forth across international borders while the part is built and assembled. Take a steering wheel, for example. Electronic sensors or other parts that go into the steering wheel come to the United States for assembly from countries like Germany, only to be sent to Mexico for stitching, and then back to the U.S. to be installed in the vehicle.
The Silver Lining
Despite the potential increase in car prices, there is a silver lining. Many cars that will be on the lots in early 2025 have already been assembled or are currently being made, adding to next year’s available supply. Car shoppers in 2025 are unlikely to see prices that factor in new tariffs, and dealers are likely to offer more incentives to pull in buyers next year.
The Current State of the Auto Market
The average transaction price for new cars is expected to hover between $47,000 and $48,000. As of November, the average price was $48,724, 1.5% higher from a year before. While the average price is higher than pre-pandemic levels, it’s relatively stable. Average auto loan rates for new cars are at 9.01%, while borrowing costs for used vehicles are at 13.76%. Experts expect consumers to see even lower rates by spring, creating a favorable buying environment.
The Outlook for 2025
Despite the uncertainty surrounding tariffs, experts are optimistic for the auto market next year. With inventory and deal opportunities growing, “tariffs or no tariffs, there will be more incentives,” said Ivan Drury, director of insights at Edmunds.
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