With tariffs, even more consumers cannot or will not pay up for a new vehicle. As a result, some consumers will get priced out of new vehicles and must trade down to used vehicles, which puts more upward pressure on the value of used vehicles, one Cox expert says.
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How tariffs will ultimately unfold at the U.S. borders is yet to be fully understood, but the directives from the new administration are beginning to come into focus, according to insights this week from economists and analysts at Cox Automotive.
President Donald Trump’s executive order on March 26 clarified that high new tariffs, on top of existing tariffs, would be placed on all new vehicles entering the United States. This directive effectively ends more than 30 years of free trade across North America and further imposes significant tariffs on other key trading partners, including Germany, Japan, South Korea, and Sweden, to name a few. The order from the White House also called for tariffs to be placed on auto parts beginning in May.
As the Cox team has noted, increasing domestic production is an admirable goal, but the global automotive market’s state has been in the making for more than six decades. Change won’t happen overnight, nor will it happen in just a few years. The evolution will be slow and difficult. In the near term, after an initial, short surge in buying, Cox experts expect vehicle sales to fall, new and used prices to increase, and some models to be eliminated if tariffs persist.
Among key insights from Cox contributors:
- Jonathan Smoke, chief economist: “We had expected the postponed 25% tariffs on Canada and Mexico and some reciprocal tariffs to go into effect on April 3, the day after what the president has called Liberation Day. That expectation was reflected in our downwardly revised sales forecast for the year. The announcement that all imported vehicles will see 25% tariffs will have a broader impact on the auto market. However, since the tariffs do not at least immediately apply to parts, it may not be as disruptive to U.S. vehicle production as we had feared. President Trump indicated that the new tariff will be permanent, and as such, this move resembles the executive order by President Lyndon B. Johnson in 1964 on light trucks, which has remained in place for more than 60 years. This is no negotiation gambit – it is an attempt to restructure the U.S. auto market, favoring domestic production. Like in 1964, this favors manufacturers with extensive production in the U.S. It will also favor the domestic labor and suppliers that serve the U.S. production. It is not immediately clear when the tariff will be imposed on vehicles and when the cost of vehicles in inventory will be inflated. Still, consumers likely have a narrow window to buy new or used vehicles before prices increase by 10% or more. After a near-term surge in buying, we expect sales to fall, new and used prices to increase, and some models to be eliminated. The tighter supply and higher prices we expect will be reminiscent of 2021. If the White House then pursues expanding the scope and applying the 25% duty to parts, we will also see damage to U.S. production. Moreover, with 25% increases in the cost of parts, inflation would surge in maintenance, repair, and insurance, which vehicle owners are already struggling to handle.”
- Erin Keating, executive analyst: “This is difficult news for an industry already staring down an affordability problem. Affordable new vehicles are already few and far between – there are only 27 vehicles available with prices starting below $30,000, four of which have already been discontinued: the Chevy Malibu and Nissan Versa ending production this year, and the Nissan Altima on the chopping block. Many are sourced from Mexico, Japan, and South Korea. Tariffs of 25% or more at the border change the dynamics drastically – pushing prices higher on average by $5,300. Last year, these models comprised 13% of all vehicles sold in the U.S. We have seen this movie before. During COVID, supply became constrained, costs skyrocketed. While the increase in prices this time may be for completely different reasons, it still stands to reason that the market will not bear another significant increase, at least not for those in need of affordable transportation, especially those households earning less than $100,000. We saw 10% of these buyers exit the new-vehicle market over the same period.”
- Charlie Chesbrough, senior economist: “Trump’s comments have sent shockwaves across the marketplace. Tariffs have been threatened and delayed multiple times over recent months, but it now seems nearly certain that a 25% tariff on 50% of the market is happening next week. As a result, prices are set to rise thousands of dollars on almost all vehicles. So, it seems likely that our March seasonally adjusted annual rate (SAAR) forecast of 15.9 million will now be too slow a pace. Many folks considering buying a vehicle are now rushing to buy before the end of the month. Many potential buyers have been leaving the market over fears of a worsening economy. Still, yesterday’s comments will likely overpower those with more pull-ahead buyers in the next few days. I expect we’ll see relatively strong sales activity for a month or two, but prices will rise, and sales will slow noticeably before the end of Q2. Dealers and OEMs will pull back on incentives immediately as the rush to sell existing inventory declines. The value of an unsold vehicle on a dealer’s lot is now worth X% more since its replacement cost will be much higher. And, future supply availability may be vulnerable, so the motivation to sell may also change, and it is moving away from the buyer’s favor.”
- Jeremy Robb, senior director of economic and industry insights: “Tariffs are likely to be fairly inflationary for used vehicles. Our initial estimates on wholesale values could rise 2.2% this year (using a blend of our scenario outcomes) but may not rise quite as fast in 2026. However, there’s likely more inflationary pressure this year as consumers trade down, so values may rise 2.8% yearly by the end of December (all else being equal). Longer term, there will be a trade-off. Several years of this tariff impact will cause more consumers to trade down from new to used. If tariffs cause the average price of a new unit to rise above $50,000 (which is likely given prices today), then even more consumers cannot or will not pay up for a new vehicle. As a result, some consumers will get priced out of new vehicles and must trade down to used vehicles, which puts more upward pressure on the value of used vehicles. Additionally, if we see higher used values, that will raise the value equation (higher Cox Automotive Lease Equity or CALE) of off-lease units – which are already in short supply – and even less of them could come back to the used-vehicle supply chain. All those factors put upward pressure on demand for used vehicles and, therefore, on price.”
- Stephanie Valdez Streaty, director of industry insights: “While we remain optimistic about electric vehicle (EV) sales in 2025, President Trump’s policies and tariffs will significantly impact the EV industry. Like gas-powered vehicles, many EVs are imported, and even those made in the U.S. often have imported parts, particularly batteries. The reliance on imported battery components from countries like China, South Korea and Japan means that these tariffs will escalate production costs and disrupt established supply chains. The proposed 920% antidumping duty on Chinese graphite, a critical material for lithium-ion batteries, could lead to a staggering 125% increase in battery prices. Additionally, the 25% tariff on steel and aluminum disproportionately affects EVs, which rely more heavily on aluminum to reduce weight and enhance efficiency than gas-powered vehicles. These compounded costs will inevitably be passed on to consumers, potentially hampering EV adoption. While the Inflation Reduction Act has spurred U.S. manufacturing investments, the transition to domestic production is still ongoing and will take years to complete. Moving production and retooling plants takes time, posing additional challenges for companies aiming to adapt quickly to the new trade environment.”
Originally posted on Automotive Fleet