Liberation Day has come and gone. Many agree with President Trump that we should make more manufacturing goods in the United States, but simply imposing tariffs on foreign goods could have unintended consequences. A proclamation and an executive order on April 29 to lighten the auto and auto parts tariff impacts under Section 232 of the Trade Expansion Act of 1962 and minimize cumulative tariffs under various existing executive orders and proclamations are welcome moves. However, these modifications are not sufficient to incentivize domestic investments for the industry. In fact, current tariff conditions continue to punish the auto manufacturers and cause U.S. job losses in three ways.
First, both domestic and international auto manufacturers who made additional investments under the United States–Mexico–Canada Agreement (USMCA) will be impacted. Second, international auto companies that invested and made the United States one of their global export hubs will be devastated. Lastly, it punishes the dealers who invested in their facilities to sell and service vehicles, and their jobs will be jeopardized.
The USMCA
Tariffs on auto imports from Canada and Mexico will punish and cause job loss for both domestic and international auto manufacturers who made additional investments under the USMCA. Current tariffs imposed on Canada and Mexico under the International Economic Emergency Powers Act (IEEPA) do not apply to USMCA-compliant products, but the same rules do not apply to Section 232 auto tariffs.
The April 29 proclamation offers to refund some of the duties for automobile parts used in U.S.-assembled vehicles. The refund will be equal to 3.75 percent of the manufacturer’s suggested retail price for the next year (April 3, 2025–April 30, 2026), and 2.5 percent of U.S. production the year after (May 1, 2026–April 30, 2027). The refund amount will be equivalent to the tariffs paid when the USMCA regional value content (RVC) is 85 percent for that vehicle. In other words, if the final assembly of vehicles is done in the United States and has 85 percent RVC, additional cumulative tariffs are reduced after the refund. The local content rate of 85 percent needed to reduce the impact of tariffs is higher than the existing USMCA required RVC of 70 percent. Companies operating under the USMCA’s current rules may not immediately qualify, and the refund process will create unnecessary administrative work.
On April 29, an executive order was also released to address the cumulative effect of 25 percent Canadian and Mexican IEEPA tariffs, 10 percent Canadian energy and every source IEEPA tariffs, as well as 25 percent Section 232 steel and aluminum tariffs for the auto industry. The latest order says the auto and auto parts are not subject to those tariffs. Again, this is a welcome first step, but it does not eliminate the original 25 percent auto tariffs, and the carve-outs only apply to the listed policies and will be cumulative for the other tariffs, such as the Section 301 China tariffs.
The USMCA auto rules of origin are the most stringent of any existing free trade agreement. The USMCA rules not only require a very high North American RVC but also include additional criteria such as the labor value content (LVC) requirement to ensure more parts are made in the United States. The LVC requires manufacturers to meet a specific minimum percentage of the content in vehicles to be sourced from North American manufacturing facilities that pay workers at least $16 per hour on average.
The required LVC percentage is 30 percent for passenger cars and 45 percent for pickup trucks. This means that 30 percent of the cost of passenger cars must come from facilities that pay workers at least $16 per hour on average. The requirement automatically eliminated significant content from Mexico while ensuring more content would come from the United States or Canada. As a result, many manufacturers who do the final assembly in Mexico have to source a significant portion of their parts, especially engines and transmissions, from the United States or Canada to meet the USMCA requirement.
Section 232 auto tariffs do allow auto manufacturers to exclude the value of U.S.-made components from the entire vehicle value when calculating tariffs. While the exclusion could help mitigate the impact, this will create unnecessary administrative burdens on manufacturers and suppliers. Some small suppliers have a very lean operation. They do not have the capacity or manpower to collect and provide additional information. The extra work is not constructive and will take them away from doing something more productive.
In addition, the supply chain for USMCA-compliant companies is deeply integrated within North America. Closure of a Mexican plant could have a ripple effect on the U.S. side. CNBC reported on April 3 that Stellantis was halting production at its Canadian and Mexican plants to navigate the new tariffs. This is causing temporary layoffs of around 900 workers in the United States at supporting plants.
USMCA-compliant vehicles already contain significant U.S. content; why not exclude them from tariffs? Without such exclusions, tariffs unfairly penalize USMCA-compliant companies that made additional investments in the United States and will bring unintended consequences, such as job cuts at their U.S. facilities.
International Automakers
Second, the new tariffs can cause job losses for international companies that invested billions in the United States. According to Autos Drive America, international automakers invested $109 billion in the United States in the last 60 years. They have increased U.S. production by more than 85 percent over the past 25 years. There are 31 foreign manufacturing facilities in the United States, and six more are coming. They produced 4.9 million vehicles in the United States in 2023, and 15 percent of those were exported. In fact, international auto companies exported 72 different U.S.-made models worldwide to more than 130 countries, making the United States one of their global export hubs.
In addition, many international auto manufacturers have made significant research and development (R&D) investments in the United States. There are 76 R&D facilities, and 82 different models have been designed or developed in the United States.
In addition to the investment and employment contribution, foreign manufacturers in the United States have also emphasized workforce training. International auto manufacturers, with their partners, provide 337 workforce development programs across 37 states. As a result, these companies provide high-skilled, well-paid jobs to 2.4 million Americans, contributing $328 billion to the gross domestic product in 2023. They are also a significant source of tax revenue to federal, state, and local governments. In 2023, $47.7 billion was generated in federal tax receipts and other revenue, and $37.9 billion was generated in state and local tax receipts and other revenue by those companies.
If the president is determined to impose tariffs on automobiles, it would make more sense to calibrate them to reflect a company’s level of investment in the United States, which would minimize the impact on U.S. jobs.
Dealership Investment
According to the National Automobile Dealers Association, there are almost 17,000 dealerships in the United States with over $90 billion in payroll. The American International Automobile Dealers Association says over 9,400 of them carry international name brands, with employment of over 560,000, and with $48 billion in payroll. These dealers not only provide job security in every corner of the nation, but they are also integrated into their local economies, contributing to local charities and philanthropies. It is common in many communities to see local Boys and Girls Clubs of America or Little League being supported by local auto dealerships.
Virtually all manufacturers, domestic and international, import some models from outside the United States. These low-volume vehicles are usually produced in one location, and the model is exported globally from that location. This strategy allows dealers to provide a variety of models to consumers at reasonable prices.
In addition, some companies have a production system where each model is produced in only one location and is exported globally from that particular plant. While these producers may have a production facility in the United States as a global export hub for a particular model, they would have to import other models.
Tariffs on auto imports will not only increase business costs to the dealers but will also limit what they can offer to consumers. Some smaller dealers may not be able to survive the cost increase. Bankruptcies by the dealers who are integrated into the local community could be devastating.
Why Can’t Manufacturers Build Everything Here?
It is effectively impossible to produce an entire vehicle in the United States. There are nearly 30,000 parts that go into each internal combustion engine car, and producing all of them in the United States is not practical. According to the American Automotive Labeling Act Report, there is no vehicle with 100 percent U.S. content. For instance, the Ford Ranger, which is built in Wayne, Michigan, has 64 percent North American content. That means at least 36 percent of its components are imported from outside North America.
Because all vehicles contain some foreign components, tariffs will increase the price of all vehicles sold in the United States. According to the latest report, Impact of a 25 Percent Tariff on U.S. Auto Industry by Arthur B. Laffer, a 25 percent tariff could cost each U.S.-built vehicle an additional $4,711. The Center for Automotive Research says that since no vehicles are 100 percent domestic, tariffs will impact 10.2 million U.S.-built vehicles. The Canadian Chamber of Commerce also estimates that a 25 percent tariff means pickup trucks could cost as much as $8,000 more.
Because vehicle parts are not 100 percent sourced within North America, let alone within the United States, it will be physically impossible to build everything here, at least in the short term. Some small suppliers are only able to produce in one location and don’t have a sophisticated sales and marketing department to research the feasibility of relocating production. Even if they can relocate, finding a new site, constructing a new plant, and training the workforce to start producing parts at newly built facilities will not happen overnight, but will take several years. Even with an existing idle plant, retooling will take some time. According to CBS News, Stellantis is retooling its Belvidere plant in Illinois, which had been idled since February 2023, but it will not reopen till 2027.
Finding workers will also be a challenge. Stephanie Ferguson Melhorn, who is senior director for workforce and international labor policy at the U.S. Chamber of Commerce, says the United States has 8.0 million job openings but only 6.8 million unemployed workers. Auto manufacturers usually produce labor-intensive parts, such as wire harnesses, in lower-wage countries to keep car prices reasonable. Producing everything in the United States means these labor-intensive parts must be produced here despite labor shortages and higher costs.
Conclusion
As the United States looks into ways to increase its domestic automobile production, it will be critical to avoid unintended consequences. Relocating production takes years, and companies consider numerous factors when deciding on the location of their next investment.
The Trump tariffs are creating unproductive work and forcing companies to reduce additional investment and spending as they try to navigate the tariffs. If tariffs remain high, they will lead to more layoffs and even some bankruptcies. There are many things the government could do to encourage further investments, but punishing companies that made commitments to investment and provide good-paying jobs in the United States is not one of them.
To read the full analysis as it was published by CSIS, click here.