Al Root

President Donald Trump upended the U.S. car business by imposing " draconian" 25% tariffs on all cars imported to America and up to 25% tariffs on key auto parts.

New-car prices are going up, profit margins are coming down, and it might make the most sense to consider buying a used car in 2025.

President Trump announced the tariffs on Wednesday. They will go into effect on April 2. The outcome was worse than Wall Street expected. The original plan was 25% tariffs on Canadian and Mexican imports, partly as punishment for fentanyl imports in both countries.

UBS analyst Joseph Spak estimates that 25% tariffs on cars and car parts could completely wipe out 2025 profits for Ford Motor and General Motors. J.P. Morgan analyst Ryan Brinkman wrote Thursday that both GM and Ford face "material earnings risk as draconian tariffs seem likelier than ever." He estimates $82 billion in increased costs. That works out to roughly $5,000 per new car sold.

GM imports about 45% of the cars it sells in the U.S. from outside the country, mainly from Canada and Mexico. Ford imports about 20%. Overall, America imported more than 7 million cars in 2024, mostly from Mexico, Japan, South Korea, and Canada.

Car makers aren't the only ones impacted. Higher costs usually mean higher prices, depressing demand for dealers.

"The implementation of 25% tariffs on all imported automobiles, in addition to imported parts over time, is unequivocally negative for the auto retail ecosystem in the near and medium-term," wrote J.P. Morgan analyst Rajat Gupta in a Thursday report.

Retailers face headwinds, too. Cost pass-through could increase average prices by some $5,000 per car. The average new-car price in the U.S. is about $48,000. The average used-car price, however, is closer to $26,000.

Used cars don't face the same import tariffs. The spread between new and used vehicles could expand. There might be better deals to find on the used-car lot. Eventually, things adjust. "We expect the inflationary impact on new cars to immediately trickle down to used cars by a similar amount," added Gupta.

It's hard to say exactly how things will turn out. New-car buyers could rush to purchase current inventory, depleting inventories and tightening the market in months ahead. Auto makers could eliminate purchase incentives and raise prices immediately, slowing that rush to buy. Then, there is the overall health of the consumer and interest rates, which always impact auto demand. Investors will have to watch to see how things play out.

President Trump also floated the idea of making interest on car loans tax deductible -- if the car was manufactured in America. That's a complicated offset that offers some relief but doesn't fully offset tariff impacts, writes Gupta.

Gupta notes that used-car dealers are in the best position right now. That's relatively good news for CarMax, Carvana, and AutoNation.

Of those three, he likes Carvana best, rating shares at Buy with a $325 price target. He rates AutoNation stock at Hold with a $175 price target. He rates CarMax stock at Sell and has a $65 price target. All three price targets came down after the tariff announcement.

CarMax stock was down 0.3% at $74.87 in early trading, while the S&P 500 was down 0.5% and the Dow Jones Industrial Average was off 0.4%.

AutoNation stock was down 3% at $165.16. Carvana stock was down 2.8% just below $200 a share.

The used-car stocks aren't moving higher yet. If they're set for a Trump bump or merely bumps down the road is difficult to say.

Write to Al Root at allen.root@dowjones.com

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March 27, 2025 10:06 ET (14:06 GMT)

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