Al Root

President Donald Trump's tariff announcement was arguably worse than Wall Street's worst-case scenario.

Investors should brace for volatility while they consider the impact on production and profit margins and what countries might do to retaliate.

On Wednesday evening, President Trump announced 25% import tariffs on all cars imported to the U.S. Key car parts are included, too. Trump's prior plan contemplated import tariffs on Canada and Mexico. Those countries are still included, but European and Asian nations have been caught in Trump's tariff net.

At the margin, the U.S. domestic industry came out better than auto makers importing cars from Japan, South Korea, or Europe. There is a carve-out for U.S. content on vehicles imported from Canada and Mexico. That doesn't change much, but it recognizes that cars imported from, say, Ontario have U.S.-sourced parts in them. So, instead of putting a 25% tariff on 100% of the car, the tariff might only apply to 90% of the value.

That is a very small silver lining for the domestic auto industry. UBS analyst Joseph Spak wrote recently that 25% tariffs on cars and car parts from Canada and Mexico could completely wipe out profits at Ford Motor and General Motors.

Ford, GM, Stellantis, and Tesla didn't immediately respond to a request for comment.

Bernstein analyst Daniel Roeska called the tariffs a "blow" to the industry in a Wednesday report. Wedbush analyst Dan Ives said they represented a "hurricane-like headwind."

The United Auto Workers union is happy with the decision. "We applaud the Trump administration for stepping up to end the free trade disaster that has devastated working-class communities for decades," said UAW president Shawn Fain in an emailed statement. "These tariffs are a major step in the right direction for autoworkers and blue-collar communities across the country."

Still, it will be tough for the industry to deal with wage gaps between the U.S. and Mexico. A Mexican production worker makes close to $3 an hour. A U.S. production worker makes more like $30 an hour.

What car companies will do now is a combination of cutting costs and raising prices. The impact that will have on demand is tough to say at this point. President Trump added on Wednesday that car loan interest on U.S.-made vehicles would be tax deductible. That's a potential offset to any price increases -- if it happens.

Tesla is in a relatively good position. It makes all the cars it sells in the U.S. in America. It does source parts from other countries. Those would be subject to tariffs.

After Tesla, Ford makes about 80% of the cars it sells in the U.S. The number for Honda is about 65%. GM and Stellantis make about 55% of the cars sold in the U.S. in America. The number for Toyota Motor is about 50%. The number for BMW and Mercedes-Benz is about 50% and 40%, respectively. Hyundai and Kia import about 65% of sales. Volkswagen imports about 80%.

Ford stock was down 2.6% in premarket trading. GM and Stellantis shares were off 6.5% and 1.9%, respectively. Tesla stock was down 0.5%, while S&P 500 and Dow Jones Industrial Average futures are little changed.

Foreign carmakers were getting hit similarly hard. Honda's American depositary receipts fell 1.8% and Toyota was down 2%. Over in Frankfurt, German car makers were reeling. Volkswagen dipped 2.7%, BMW dropped 3.6%, and Mercedes retreated 4.5%.

These are initial moves. There will be more volatility to come.

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

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 27, 2025 05:25 ET (09:25 GMT)

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