Car Tariffs Then Lenient Reciprocal Tariffs?
The 25% tariffs on cars underlines that tariffs are not just about getting better trade deals, but in Trump’s view raising (tax) revenue and trying to shift production back to the U.S. Combined with other tariffs being implemented, plus policy uncertainty, we see a moderate overall hit from tariffs on U.S. GDP and a boost to inflation.
President Donald Trump 25% car tariff shows that he is interested in raising tax revenue from tariffs and shifting production back to the U.S., with better trade deals not featuring in the list of objectives. Trump noted that his is against exemptions, which will disappoint Japan that thought it had a chance due to its good relationship with the U.S. Japan, EU and S Korea GDP will be hurt by the move by a small amount, as it will likely led to less sales into the U.S. Car parts are also covered from May.
The 25% tariffs on cars from April 3 does have a caveat for Mexico and Canada if covered under the USMCA, with the tariff then only applying to non U.S. content – see White House factsheet (here). This caveat still means a hit to Mexican and Canada cars and undermines the competitiveness of exporting some cars to the U.S.
Most of this will likely be passed onto the U.S. consumer in the form of higher prices, which will likely led to lower car sales rather than all consumers switching to U.S. produced cars initially. Consumer preferences, plus inertia, are thus likely to hurt U.S. GDP by a small amount. However, the cumulative tariffs, plus policy uncertainty caused by the on-off tariff announcements, will have a moderate adverse effect on GDP and boost inflation as we outlined in our U.S. Outlook (here).
Next up is the reciprocal tariff announcement on April 2, which Trump yesterday said would be lenient and in some cases would not match the tariffs imposed on the U.S. by other countries. This suggests that the Trump administration is backing away from the idea of penal reciprocal tariffs that includes the full scope of non-tariffs e.g. VAT Rates. However, the president outlined his view that reciprocal tariffs will likely be applied on all countries without exemptions, which differs from reports earlier in the week that only a dirty 15 would be hit. Trump also promised to announce lumber tariffs on April 2, but delay semiconductor and pharma tariffs. Finally, the threat of across the board secondary tariffs on any buyers of Venezuelan oil from April 2 has already prompted Indian companies to suspend purchases, as 25% across the board is penal. Trump tariff crusade remains in place for now, which is likely to do economic damage, but we also feel can extend the correction in the S&P500 to 5200 (here).