New Auto Tariffs Could Reshape Industry Dynamics

A new round of auto tariffs targeting imported parts went into effect on May 3, 2025, imposing a 25% import tax on most components entering the U.S. Unlike previous levies focused on finished vehicles, these tariffs directly affect the supply chains of U.S. automakers, who rely heavily on foreign-sourced parts. The change could disrupt decades-long industry practices and escalate costs for manufacturers and consumers.

The shift marks a departure from earlier policies, as no U.S.-made vehicle assembled in 2024 used parts that were entirely domestically sourced. Analysts estimate the tariffs could add $4,000 to the average vehicle’s production cost, with the potential to ripple through repair services and insurance markets.

Automakers are bracing for significant financial strain. General Motors CEO Mary Barra told CNN that auto tariffs could cost her company $4 billion – $5 billion this year alone. Ford CEO Jim Farley announced an extension of “employee pricing” incentives to offset immediate price hikes. However, long-term consumer prices may rise as manufacturers absorb auto tariffs.

Jonathan Smoke, chief economist at Cox Automotive, warned that the new auto tariffs could have broader economic repercussions than previous vehicle-specific levies. “From my perspective, this looks worse for the economy than earlier import vehicle tariffs,” he said during a recent industry webinar.

The auto tariffs exempt components from Canada and Mexico only if they meet U.S.-Mexico-Canada Agreement (USMCA) criteria, such as worker wage thresholds ($16/hour or higher). While Canadian parts essentially qualify, Mexican components—accounting for $82.5 billion in imports last year—face stricter scrutiny.

Determining compliance is complex. Analysts note that decades of integrated North American supply chains have blurred the line between domestic and foreign parts. Frank DuBois, a retired American University professor, highlighted the difficulty of tracing inputs like oil and antifreeze to their origins.

The White House introduced a temporary refund system for automakers to ease the burden. In the first year, manufacturers can reclaim up to 3.75% of a vehicle’s price to offset auto tariffs, scaling down to 2.5% in Year 2 before phasing out entirely. However, Smoke characterised the relief as merely “taking a bad situation and making it slightly less worse.”

According to CNN’s trade data analysis, if similar tariffs had been imposed in 2024, the total cost would have reached $60 billion. With the refund program, the projected bill drops to $40 billion, which is still a substantial financial hit.

The auto tariffs may force automakers to reevaluate their supply chain strategies. In the long term, companies could prioritise localising production or sourcing compliant parts from Canada and Mexico. Consumers, meanwhile, may see delayed price increases as manufacturers absorb initial costs but could face higher expenses for repairs and maintenance.

As the industry navigates these changes, experts caution that the “all-American car” era may be over. With global supply chains deeply intertwined, achieving 85% USMCA-compliant parts, the threshold for tariff exemptions, remains an elusive goal for most vehicles.