By Stephen Wilmot

Facing intense competition in China and heavy regulation in Europe, overseas automakers were counting on the U.S. to keep their engines humming. Then came President Trump's tariffs threats.

Since taking office, the U.S. president has taken aim at the $918 billion U.S. trade deficit with a raft of tariff proposals, including a 25% tax on shipments from Mexico and Canada, reciprocal tariffs based on other partners' own trade restrictions, and specific tariffs for sectors such as autos and semiconductors.

On Tuesday, Trump said the sector tariffs could be "in the neighborhood of 25%" and might rise even higher over time. A grace period could give companies time to bring production onshore, he added.

In response, automakers from Europe and Asia have been gaming out alternative manufacturing plans to remain competitive in a market that has become increasingly important.

"Things keep changing minute by minute, but our stance is to stay flexible and be able to be agile in reacting to the situation," Honda Executive Vice President Shinji Aoyama said last week.

Trump has long railed against auto imports, particularly from Europe. The European Union's 10% tariff on imported cars, compared with an equivalent 2.5% U.S. tariff, was one example of "lack of reciprocity" cited by the White House when announcing the reciprocal-tariff plan.

Last year, roughly half of the almost 16 million light vehicles sold in the U.S. were imported. Those imports were split roughly equally between assembly plants in Mexico and Canada -- within the USMCA free trade area -- and plants outside of North America.

Detroit manufacturers General Motors, Ford and Stellantis and their suppliers are heavily reliant on shipping goods back and forth across the U.S. land borders and have been lobbying the White House intensively to keep trade barriers within North America to a minimum.

Outside of North America, Japan, South Korea and Germany top the list of countries that run auto-trade surpluses with the U.S.

While the biggest Japanese brands started building local production networks in the 1980s, they still depend on shipping a lot of cars from home. Industry giant Toyota reported North American sales of roughly 2.7 million vehicles last year. Of those, about 2.1 million were assembled on the continent, including 1.4 million in the U.S., according to Wards Intelligence data.

Korea's Hyundai and Kia have grown rapidly in the U.S. in recent years, leaving them more reliant on imports than their Japanese peers, though they are also rapidly expanding production in America.

The Asian producers are highly dependent on American consumers. The U.S. accounted for a quarter of sales at Toyota, 29% at Hyundai and almost two-fifths at Honda in their most recent results.

Germany's carmakers are also increasingly looking to the U.S. as the Chinese market they once dominated becomes hyper-competitive. Volkswagen has been particularly vocal about its ambitions in the U.S. -- the only big market globally where it has much headroom to grow.

Slow growth and heavy regulation at home adds to the appeal of the U.S. for European brands. Sales in Europe last year were almost a fifth lower than in 2019, and manufacturers are having to make expensive investments in electric vehicles to meet stringent emissions regulations.

The fancier the European car brand, the more it typically depends on American consumers and the less on American production. Ferrari and Porsche sold roughly a quarter of their vehicles in the U.S. last year, all of them imported.

While Audi doesn't have a U.S. factory, Mercedes-Benz and BMW in the 1990s set up bases for making sport-utility vehicles in Alabama and South Carolina, respectively, that have grown into linchpins of their production networks.

The factories are useful talking points in Washington, but they don't necessarily reduce the German companies' exposure to tariffs. Given limited production volumes, Mercedes and BMW ship sedans from Europe to the U.S. and SUVs from the U.S. to Europe, rather than making each vehicle type in each region.

Executives are in scenario-planning mode as they await further clarity from Washington. On earnings calls last week, Honda and Nissan discussed the possibility of shifting production.

While increasing U.S. production could help to avoid tariffs, as Trump has emphasized, it isn't an easy decision because of the time and cost required to build plants or retool assembly lines, and the uncertainty about how long new tariffs would last.

U.S. tariffs on Mexico and Canada are on hold until March, and Trump last week tasked federal agencies with delivering reports in early April on how to implement reciprocal tariffs, including a focus on non-tariff barriers. More details on the auto tariffs are expected around the same time.

Trump has hinted at a very broad interpretation of non-tariff barriers. This week he posted on X to say that so-called value-added taxes are "far more punitive" than tariffs and would be included in the U.S. calculation of reciprocal tariffs. VAT is a sales tax typically levied at rates of 20% or more on cars and other products sold in Europe, including those made by local companies.

Volvo Cars Chief Executive Jim Rowan said the Swedish automaker has space to produce more cars in its factory in South Carolina, but would need to weigh new tariffs against U.S. production costs and the knock-on impact on its global production network.

"It really depends on the amount of tariffs first of all," he said.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

(END) Dow Jones Newswires

February 19, 2025 05:44 ET (10:44 GMT)

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