HOW CARMAKERS ARE BECOMING THE BIGGEST LOSERS IN TRUMP´S TRADE WAR / THE FINANCIAL TIMES BIG READ

How carmakers are becoming the biggest losers in Trump’s trade war

The so-called Big Three of Ford, GM and Stellantis say the new tariff regime will cost them a combined $7bn this year

Kana Inagaki in London

American carmakers and their suppliers are lobbying the Trump administration for relief while facing the prospect of raising prices or cutting jobs © FT montage/Getty/Bloomberg

Mike Musheinesh has been distributing low-cost car parts in the US since he began working at his father’s company at the age of 14.

But since April, Donald Trump’s trading policies have raised tariffs on the Chinese-made parts that they bring into the US via Mexico to 72.5 per cent.

The 45-year-old chief executive of Detroit Axle could not immediately find cheap American alternatives. 

With his family business at risk of going under, he is suing the Trump administration to lift the tariffs. 

“Our tier of [tariff] exposure went from $700,000 a month that we used to pay to over $7mn a month. 

This was on a drop of a dime,” Musheinesh says as he waits for his lawsuit to move forward. 

“It’s just an incredible shock.”

The ordeal at Detroit Axle, which has hundreds of millions of dollars in annual sales, is a tiny window into the far-reaching impact on American companies of the president’s global trade war, which flared back into life this week as Trump sealed fresh deals with some countries but hit others with swingeing tariffs.

Mike Musheinesh, CEO of Detroit Axle, in a warehouse of the company in Ferndale, Michigan. On the tariff increase, he says: ‘It’s just an incredible shock’ © Nick Hagen/New York Times/Redux/Eyevine

The overall level of tariffs in the new regime is not as high as announced during Trump’s April 2 “liberation day” speech but still well above anything the global economy has seen in recent decades.

The objective was always to revive US manufacturers and make them stronger than foreign rivals, while shutting out competition from China.

The auto industry, the flagship sector of US manufacturing, was to be a major beneficiary. 

Unveiling 25 per cent tariffs on all imports of foreign-made vehicles in April, Trump promised “a golden age” for America. 

“Jobs and factories will come roaring back into our country,” the president declared to auto workers who gathered at the White House to hear him speak.

Yet in the time since, the global car industry has emerged as one of the biggest victims of Trump’s trade war — with American companies among the worst hit.

The so-called Big Three have forecast in recent weeks a combined $7bn earnings hit from tariffs in 2025 — of which $1.5bn is Stellantis, $2bn is Ford and $3.5bn is General Motors.

This week Ford, which makes about 80 per cent of the vehicles it sells in the US locally, reported a net loss for the April to June quarter after an $800mn headwind wiped out its profits. 

In the words of its chief executive Jim Farley, Ford was now “the most American company with a $2bn liability”.

Even Tesla’s Elon Musk has warned of “tough quarters ahead” as it came under pressure from Trump’s anti-EV policies and a $300mn bill in tariff costs in the second quarter.

US car lobby groups say that under current trading conditions, they could end up losing more than their Asian and European rivals such as Toyota, Hyundai and Volkswagen.

Ahead of Trump’s self-imposed August 1 deadline to slap even higher tariffs on trading partners, the US has signed a flurry of trade deals with the EU, Japan and South Korea that have brought down the tariff rate on cars to 15 per cent. 

Yet as of Friday, Mexico and Canada, which have highly integrated automotive supply chains with the US through a 2020 USMCA trade agreement, have not reached new deals with Trump. 

That means cars produced in those two countries would have a higher overall tariff of 27.5 per cent than those built in Japan, the EU or South Korea.

Antonio Filosa, the new CEO of Stellantis, which owns the Fiat, Jeep and Opel brands, pointed out to investors that 4mn of the 16mn vehicles sold in the US each year were built at plants in Mexico and Canada using many components from US suppliers. 

Meanwhile, he added that another 4mn units that come from Europe and Asia had “virtually zero US content”. 

Ford CEO Jim Farley stands between the Ford Mustang RTX and the Ford Mustang GTD at a Ford ‘Detroit Proud’ event earlier this year. He said the company was now ‘the most American company with a $2bn liability’ © Bill Pugliano/Getty Images

“We would like to request [the Trump administration] to properly recognise the high American content in some vehicles,” Filosa said after the group reported a €2.3bn net loss for the first half of the year.

The chaos and disruption of Trump’s trade offensive comes at a time when the global car industry had already been reeling from collapsing market share in China and the rising costs of shifting away from the internal combustion engine as well as overall tepid growth in new vehicle sales in the US and Europe.

American carmakers and their suppliers are now desperately lobbying the White House for relief while facing the prospect of raising prices or cutting jobs.

“We’re having very constructive conversations with them to ensure a more level playing field,” says Ford’s financial officer Sherry House. 

“So we are optimistic at this point, but we do have real work to do.” 

It is hard to say which carmakers are most disadvantaged by the tariffs — or which might benefit.

Trump’s tariff system is multi-layered and inchoate, with further trade agreements in the offing. 

The industry’s supply chains, meanwhile, are both complex and global in nature.

On the face of it, the 25 per cent tariff announced in April was a big hit. 

Almost half of vehicles sold in the US are imported, while those assembled in the US on average source nearly 60 per cent of their parts from overseas. 

American consumers are the ones that are paying it in the end

But since then Trump has introduced several concessions for the car industry to soften their tariff burden. 

Car parts from Mexico and Canada, for example, that comply with the rules of the USMCA trade agreement created under the first Trump administration in 2020 are tariff-free, while non-compliant vehicles will face a maximum tariff of 25 per cent.

Complete vehicles compliant with the USMCA will have the 25 per cent tariff applied only to their non-US parts content. 

The administration is also offering those that assemble their vehicles in the US small rebates — up to 3.75 per cent of the retail value of the car for the next year — to offset the cost of the levies.

When all of these factors are applied, the average tariff cost per vehicle for cars imported from the EU, South Korea or Japan would be around $5,600 — higher than the $4,900 for vehicles imported from Canada and Mexico, according to Erin Keating, executive analyst at Cox Automotive, a car services and data group.

“We [also] anticipate that the USMCA will get renegotiated at some point,” Keating says. 

“So to me, it’s a bit of a red herring to say that it’s not fair that Japan, South Korea and Europe got 15 per cent.” 

How the impact of the various tariffs filter through is also very different for each company.

The US trade deal with South Korea, for example, benefits GM since its two carmaking plants in the country produce affordable compact vehicles, principally for the North American market, accounting for nearly 17 per cent of the group’s US vehicle sales.

“Obviously, our tariff impact would be lower if the tariffs with Mexico, Canada and Korea were lower,” GM’s chief executive Mary Barra said before the US-South Korea deal was sealed.

BMW, meanwhile, has said the rebates for US-assembled vehicles would help to offset the tariff costs since the German carmaker builds about half of the vehicles it sells in the US at its plant in Spartanburg, South Carolina.

Still, BMW’s US production is not compliant with the USMCA, meaning that it currently pays a 27.5 per cent tariff, including an existing 2.5 per cent levy, on vehicles and components it imports from Canada or Mexico.

But BMW’s tariff burden on parts was probably quite large because it imports expensive components such as engines and transmissions from Europe, according to Stephanie Brinley, principal automotive analyst at S&P Global Mobility. 

Now with the US-EU deal, the levy will come down to 15 per cent. 

“I think this tariff discussion is way exaggerated and also its effects on the industry,” said BMW’s chief executive Oliver Zipse in a call with journalists. 

“You have to trade in all directions and be locally strongly integrated. 

These are the business models that will always survive.”

In the long term, the US auto industry is making moves to reshore manufacturing where it can.

General Motors, for example, recently unveiled plans to invest $4bn in US assembly plants to add 300,000 units of capacity by moving some production out of Mexico.

But the new tariff regime promises more immediate pain, via the 50 per cent levies Trump has imposed on imported aluminium and steel and now copper. 

Although the auto industry is exempt from direct tariffs on these materials, suppliers have passed on as much as 80 per cent of the higher costs of the levies.

Carmakers will eventually be forced to pass on these mounting costs to US consumers, Brinley says. 

“Automakers have been hesitant to raise prices and very cautious, also waiting to see how the situation will unfold, but that pause will have an end,” she adds.

Donald Trump and Elon Musk speak to the press as they stand next to a Tesla vehicle at the White House in March. The Tesla CEO has warned of ‘tough quarters ahead’ © Mandel Ngan/AFP/Getty Images

Keating says Cox Automotive is forecasting an average price increase of about 4-8 per cent for new vehicles by the end of the year, with price rises expected to come when carmakers launch new models in September.

So far, the average transaction price of new vehicles in the US was up 1.2 per cent in June, which was the largest year-over-year gain this year but still well below the 10-year average increase of 3.9 per cent, according to US valuation company Kelley Blue Book.

Due to the political sensitivity of such moves, some carmakers have made “stealth” price increases by raising financing costs and reducing discounts rather than increasing the headline purchase figure.

The National City Marine Terminal, a major port for vehicle imports and exports, in National City, California. It’s hard to say which carmakers are most disadvantaged by the tariffs or which might benefit © Kevin Carter/Getty Images

Musheinesh at Detroit Axle has also raised prices of car parts sold online to pass on the tariff costs. 

In May, he concluded that the business would not survive unless he either laid off more than 100 employees and closed its warehouse in Detroit, or successfully sued for relief.

However, in an illustration of the unpredictability of the current moment, the situation has since reversed. 

Sales have increased 20 per cent despite the price rises as his weaker rivals went out of business. 

Profits are still down 80 per cent but he has now cancelled plans to reduce his 300-plus workforce.

“The world has changed . . . and short of an economic crisis occurring, I don’t see it going back,” Musheinesh says. 

“American consumers are the ones that are paying for it in the end.”