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What is Trump's new 25% tariff on US auto imports?

Donald Trump, who has been threatening new tariffs for weeks on imported vehicles, followed through with his threats on Wednesday. He said that a 25% tax would be imposed on cars not made in the U.S. next week.

Trump will add a 25% tariff to previous duties on imported finished vehicles, starting April 3 at 12:01 am EDT (0401 GMT). The U.S. base tariff rate on automotive imports is 2.5 percent.

The plan to disrupt the auto supply chain and trade sparked uncertainty among investors and customers, and retaliation threats were made. Global auto stocks fell from Asia to America.

What is known?

From the least to most HIT

GlobalData, a research firm, estimates that half of the vehicles sold in the U.S. were imported last year. General Motors imports almost half of its sales and Ford, a much lower 21%.

Ford and GM both source a large number of parts outside the U.S. A significant portion comes from Mexico. They may face pressure until April 2, when more clarity is revealed about finished vehicles and auto components.

Tesla would be less affected, as all of its production and assembling is done in the United States. Automakers may increase efforts to localize their production in order to offset tariff costs. This would benefit domestic suppliers on the long-term.

As companies restructure their sourcing strategies and manufacturing activities, they may disrupt global supply chains.

Canada, Mexico, and South Korea, all countries with free-trade agreements, will face the duties. The European Union, Japan, and German and Italian automakers, along with Britain, will also be hit hard.

DUTIES ARE DELAYED BY 25%

Trump's announcement also states that the 25% tariffs would apply to imports of major auto parts. These include "engines and parts for engines, transmissions and parts for powertrains, and electrical components." The Federal Register will announce a date for the start of parts duties, which could be up to one month later. But no later than May 3,

The notice will also include the specific tariff codes of components that are subject to duties. These codes were not disclosed in Trump's announcement.

USMCA EXEMPTION PARTIAL

The plan offers a partial exemption of tariffs on vehicles and parts that meet the USMCA rules of origin. However, this is only applicable to the value of the U.S. produced content. A truck made in Mexico that contains 45% U.S. material would still be subject to a 25% tax on the value of 55%.

Auto parts compliant with USMCA rules would be taxed on the non-U.S. component.

It will be difficult to determine these levels of content. USMCA compliant auto parts are duty-free until the Commerce Department and U.S. Customs and Border Protection agency decide on a method to apply tariffs for their non-U.S. contents. The process was not given a deadline.

What about auto retailers and suppliers?

Imported vehicles and parts are becoming more expensive, which will increase the costs for auto retailers. This could result in higher sticker prices, a weaker demand and slowed sales.

It may be difficult for suppliers who rely on international markets to absorb tariffs, or pass costs onto automakers. This could squeeze profit margins.

J.P. Morgan analysts noted that franchise dealer's parts and services businesses could benefit from higher prices, as customers may hold onto their cars longer and increase demand for repair and maintenance.

LEGAL RATIONALE

Trump's new tariffs were based on a national security investigation conducted in 2019 into auto imports during his first term as president under Section 232 of Trade Expansion Act of 1964. Trump used the Cold War trade law in 2018 to impose 25% tariffs for steel and aluminum imports.

The Commerce Department concluded that the increasing market share of imported vehicles was negatively impacting U.S. National Security by eroding U.S. Industrial Base and the ability for domestic automakers develop advanced technologies to be used in military applications.

Trump chose to not impose tariffs at that time, instead opting for trade negotiations with trading partners in order to resolve these concerns.

He concluded on Wednesday that the talks had failed and that the USMCA, KORUS, and the revisions made to them had not improved U.S. trade in the automotive sector. Reporting by David Lawder and Andrea Shalal; Editing by Lincoln Feast, Sriraj Kalluvila and Nathan Gomes

(source: Reuters)