Introduction
When President Trump announced his new auto tariffs in April 2025, he said they were necessary to protect national security.
Foreign-made cars and car parts, he insisted, were a threat, not just to American jobs but also the economic and military security of America. Now that’s some high stakes!
To fight against this threat, he imposed a 25% tariff on imported passenger vehicles and auto parts. This immediately shook global automotive markets.
Then came the flip-flops.
Almost as soon as the policy landed, US automakers panicked. General Motors, Ford, and others rushed to Washington, urgently reminding the administration of a critical aspect of reality the administration has overlooked.
US cars aren’t made in America; they are made in North America. Vehicles and their parts shuttle back and forth across borders multiple times before hitting the showroom. Disrupting this intricate dance with blunt-force tariffs would not boost the cost competitiveness of the US auto industry. Blunt tariffs would harm the very industry he was seeking to protect.
Clearly, reality had missed its invite to the White House’s tariff strategy session.
The tariff chaos continued
But the surprises didn’t stop there. Just weeks after setting the auto tariff at 25% for every nation – with exceptions only for Canada and Mexico – he lowered the 25% to 10% for imports from Britain. This wasn’t a huge deviation as UK-made cars made up less than 2% of the market.
Yesterday, the exception was massively widened when POTUS lowered the national-security tariffs on Japanese cars to 15% from its current 25%. FWIW, I think that was a good thing since I don’t think tariffs will fix the auto sector’s ailments. But leave that aside. Let’s judge the President’s trade policy by his own metrics.
The Japan exception matters much more since Japan imports already account for about 10% of US sales. Moreover, yesterday’s deal does not limit the number of cars that can benefit from the lower rate, so Japan may end up increasing its exports to the US at the expense of nations that still pay the 25%.
Today’s Factful Friday unpacks how the President’s scattershot approach to auto-sector tariffs could unintentionally undermine American automotive competitiveness. Why, in other words, Donald Trump’s trade policies could undermine the goals of Donald Trump’s trade policy.
Tariff chaos and market shares
Let’s start with a look at the tangled web Trump’s tariffs have woven. Before Trump II, US tariffs were zero on auto and auto part imports from Canada and Mexico, and 2.5% for the rest of the world (25% on pickup truck etc).
In March, POTUS put on an extra 25% tariff on all auto and auto part imports – regardless of where they were made. See the table for the market shares by country of assembly.
The table shows that US-made cars take up about half the market, with cars assembled in Canada and Mexico making up another 24%. Plainly, US auto sales are dominated by cars made in North America (three quarters) with Canada and Mexico accounting for a third of that. In short, imported cars are a really big deal in the US market.
Looking overseas, Japan and the EU are the next most important sources, with 10% and 6% respectively. Korea has 5%. The whole rest of the world makes up about 10% of total US sales. Interestingly, China’s share is tiny and set to stay that way as POTUS has applied prohibitive tariffs to their most competitive models (electric vehicles in particular).
If US-made autos were 100% made in America, this 25% National Security tariff would surely have boosted the prices of US-made cars and hence production of US-made cars. After all, a tariff has an economic effect that is exactly equal (in a competitive market) to a federal sales tax equal to the tariff, and a domestic production subsidy equal to the tariff. Thus the 25% would, via a federal sales tax, raise the revenue necessary to subsidise US production. That would almost certainly lead US car companies to recapture some of the 50% market share that is now going to foreign-made cars.
If foreign car companies could count on the high 25% staying there for decades, they would sure start shifting more production to inside the US to get on the right side of the protection.
Alas, US-made autos are not 100% made in America and that muddles the analysis. This reality hit Trump’s car tariffs just hours after they were announced.
Just to keep US-based factories running, POTUS had to drop the tariff on auto parts and modify the tariff on autos imported from Canada and Mexico. What tariff do they face now? Well, its complicated. The effective tariff paid varies company by company since the 25% tariff applies, but only the "non-US content."
For Canadian-made autos, estimates of the average non-US content land at around the 50% mark, which means they effectively face about a 12.5% tariff (25% on half the value). For Mexico, estimates of the average non-US content runs a bit higher, around 60–70%, so the resulting tariffs averaging closer to 16%.
Complicated, right? But we are not done. These average tariffs mask important differences across companies. Each company has to document the US-content they use in the cars they assemble in Canada and Mexico. So the tariff paid by each company varies.
While North American brands like GM, Ford, and Chrysler generally maintain high US content levels, German and Japanese automakers assembling vehicles in Mexico typically use fewer American-made parts. This significantly increases their non-US content, pushing their effective tariff rates much closer to the original 25%.
Complicating matters further, Trump’s metal tariffs raise costs for US-based auto and auto part production, but not for production located in Canada and Mexico. The 50% he put on steel and aluminium have been estimated to undermine the competitiveness of the US auto industry to the tune of 2000ドル per car. By increasing the domestic cost base, these metal tariffs make American auto production less competitive, thus undermining the national security of America – if the President’s justification is to be taken literally and seriously.
Then came the special deal for Japan. Their auto national-security auto tariffs dropped from 25% to 15%. See the table for a summary.
This complexity on auto tariffs is amplified by the matching complexity of the 25% on auto parts which is amplified by the complexity of the supply chains. These vary by company and even by model.
Trump’s patchwork of special deals and complicated tariff formulas distorts incentives. Indeed, a tariff regime that was supposed to protect American manufacturing may end up doing exactly the opposite. Unpacking the effects is the job of the next section.
Unintended consequences of tariff chaos
What are the economic effects engendered by the chaotic and seemingly unreflective tariff landscape that Trump has created. I see three key, unintended consequences.
The first is rather obvious.
- Cutting tariffs on imports from a formidable competitor like Japan directly undermines the goal of boosting US auto assembly.
The original logic behind the 25% "national security" tariffs was to make foreign-made cars more expensive, thereby encouraging consumers to choose American-made vehicles instead. But Trump's abrupt reduction of tariffs on Japan means Toyota and Honda vehicles assembled in Japan will now face a significantly lower entry barrier into the US market.
That's great news if you're one of the millions of Americans who buy cars, but bad news if you're one of the hundreds of thousands of American autoworkers. Put plainly, Trump’s trade deal with Japan undermined Trump’s trade policy on autos.
The second is more subtle. This is a less obvious consequence.
- Japan’s preferential tariff indirectly harms US auto parts producers by shifting production away from Mexico and Canada.
Here is the key point. If you squint at the table above, you’ll see that the average tariff paid on cars made in Mexico is higher now than the tariff paid on imports from Japan.
Now keep in mind that the current location of assembly is not a random outcome. Japanese car companies assemble some inside the US, some in Japan and some inside Mexico because that is optimal – taking account of factors ranging from tariffs and production cost to supply chain resiliency. Whatever allocation was optimal with a 25% tariff on imports from Japan will not be optimal with a 15% tariff on imports from Japan.
What’s your guess? I’m thinking they will shift at least some production from Mexico to Japan given the new tariff rates. The same is surely true but less so for Japanese vehicle assembled in Canada.
What does this have to do with US auto manufacturing? Japanese automakers that currently produce vehicles in Mexico source a significant share of their auto parts from US factories. Think parts made in Michigan, Ohio, and Texas being incorporated into Japanese cars assembled in Mexico. Some of this US-centric source is necessary to qualify under the free trade area called USMCA. That agreement has been gutted by Trump unilaterally, but the current configuration of many assembly operations in North America are shaped by it.
Japan's new preferential tariff encourages Toyota, Nissan, and Mazda to reconsider their production strategies. Why continue assembling in Mexico, using expensive US parts and facing tariff uncertainty and complicated content rules, when they could simply shift more production back to Japan?
If Japanese automakers move their assembly lines from Mexico to Japan, they will not buy as many parts from the USA. The upshot is that if Japanese companies supply more cars to the US market from Japan and fewer from Mexico, the demand for US auto parts will fall.
In short, reducing the demand for US-made auto parts is the second way that the tariff preferences will undermine the national security goals of Trump’s tariffs.
If the EU secures a similar 15% preferential tariff automakers like BMW and Volkswagen might also reconsider their Mexican operations. Imagine VW shifting production from Puebla back to Wolfsburg, or BMW relocating from San Luis Potosí to Bavaria. Every shift of assembly away from North America spells lost demand for American-made auto parts. Whether that improves things for Americans is one issue, but it certainly does not advance the cause of boosting the US car industry in the name of national security.
The final point concerns investment.
- Erratic tariff policies discourage long-term investment in US auto assembly plants.
Trump’s tariff unpredictability is seriously eroding investor confidence. Imagine you're Hyundai, and you're actively exploring building a new 2ドル billion auto assembly plant in Georgia or Alabama. Factories like this typically operate for decades, amortizing initial costs gradually. To justify such a massive commitment, you need assurance that the high US auto tariffs will stay high for the long-term.
But Trump's abrupt policy shifts send precisely the opposite signal.
To the trade guys I know, it seems like Trump has been in office for six years rather than for six months since US tariffs have fluctuated more in the last six months than they have in the previous six decades.
The US tariffs seem to move like a yo-yo with no string of logic attached.
This tariff roller coaster undermines precisely the kind of stable, predictable business environment that large-scale manufacturing investments require. Why risk billions of dollars on a new US plant if tomorrow's tariffs could flip yet again, making your investment obsolete?
By constantly changing tariff levels and applying them unevenly across trading partners, Trump's administration inadvertently undermines US-based auto assembly, hurts American auto parts producers, and scares off exactly the type of long-term manufacturing investments America needs.
Summary and closing remarks
Trump’s auto-sector tariffs claim to promote US auto production by raising the cost of imports. Yet the way they have been implemented and altered repeatedly has created a chaotic system of winners and losers that disrupts rather than stabilizes the North American automotive production and supply chains. It puts off potential investors in US-based production.
One has to ask: Is Trump’s tariff policy undermining the announced goals of his tariff policy? And the answer is almost surely "Yes."
We have yet to see what the tariffs will be on Korean and EU cars. If they match Japan’s 15%, the pro-US production impact of the original 25% tariffs will be seriously eroded. That would be a good thing for US car buyers. It is certainly something that would cheer up most members of the President’s political base as it would hold down the rising cost of living. And it might force the US to adopt a more carefully considered, more strategic plan for reindustrialising the sectors it actually needs for its national security.
By the way, I’ve focused exclusively on what the 15% for Japan means for the US industry. But as my Factful Friday from 7 June 2025 points out, this hodgepodge of tariff rates can have tricky consequences for foreign companies as well. See the reasoning here.
Why countries don’t usually do this
Decades ago, the entire global trade system moved to non-discriminatory tariffs as the default option. Countries charged the same rate for all, regardless of flag. This was not because it was fashionable, but because it was functional.
Uniformity brought predictability. Predictability brought investment. Investment brought growth.
The alternative? Chaos, uncertainty, political shenanigans, and unintended consequences. The very sort of mess we’re watching unfold now in the US . In an imperious manner, the US President hands out tariff breaks to Japan, hits Canada and Mexico with partial penalties, and threatens the EU and Korea with who-knows-what. The problem is that when tariffs become a game of favourites, companies play musical chairs with factories.
As I put it in a paper I wrote with Frederic Robert-Nicoud a long time ago, "Entry and Asymmetric Lobbying: Why Governments Pick Losers.":
"Governments that try to pick winners and losers usually choose the latter ... not that government policy picks losers, it is that losers pick government policy." - Baldwin and Robert-Nicoud, 2007.
Trump’s tariff chaos isn’t a strategy for making American industry great again. Roulette-based tariffs do not a strategy make. If national security truly is the goal, then stability and predictability, not a hunt for happy headlines, should be the guiding principle. And it’s exactly why the rest of the world embraces rules over imperious tariff setting.
That’s it for today’s Factful Friday! Except I can’t end without doing an advert for my May 2025 eBook:
