Thanks to Tariffs, Car Prices in the U.S. Are Going Higher

If imposed, tariffs are going to move U.S. car prices higher

car prices - Thanks to Tariffs, Car Prices in the U.S. Are Going Higher

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The tariffs recently implemented by the Trump Administration already are having some effects. But one that hasn’t shown up yet — but possibly will — is an increase in car prices for U.S. consumers.

President Trump already has used the Twitter Inc (NYSE:TWTR) platform to call for a 20% tariff on imported cars. Whether those tariffs are permitted as a response to a “national security threat” remains to be seen, with the administration currently investigating that matter. Already instituted steel and aluminum levies will have a more modest impact as well.

And so it’s worth considering what those tariffs might mean for car buyers — and investors. Right now, the news seems relatively negative, at least if the industry itself is to be believed.

The Effect of Tariffs on Car Prices

The problem with imposing tariffs on automobiles — and automobile parts — is that the industry’s supply chain is truly global. Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) assemble and produce cars in Mexico and source parts from markets all over Asia and Europe. Meanwhile, many foreign automakers have plants in the United States, notably Toyota Motor Corp (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC).

Hence, the idea that tariffs will only hit foreign companies is probably too simplistic. Indeed, the industry’s trade group — which includes Ford and GM — already has come out against the tariffs. Toyota has said that its Camry, which is manufactured in Kentucky, would see a price increase of $1,800. Other estimates have suggested average car prices could climb by over $5,000 per unit.

Estimating the precise impact is difficult at the moment because, admittedly, the situation remains in flux. As I’ve pointed out elsewhere, negotiations could wind up averting a trade war. It’s likely — but not certain — that other countries would retaliate if US tariffs were imposed. GOP Senators are trying to create the power to essentially veto any tariffs that come from the White House.

But even steel and aluminum tariffs alone should have an impact. One estimate suggested a more modest, but still notable, effect of about $300 per car.

Of course, this shouldn’t necessarily be news. Tariff-sourcing from lower-labor-cost overseas markets generally benefits U.S. consumers — and hits U.S. manufacturers. The reversal of that policy should lead to a reversal of the outcome. The concern at the moment, however, is that, because the supply chain is so global, U.S. consumers will feel the pain — and U.S. manufacturers won’t see the benefit.

Will Automobile Tariffs Help Automotive Stocks?

Of course, it’s far from guaranteed that will be the case. GM and Ford are against tariffs at the moment, but they could adapt over time to the new regime, and even wind up gaining market share in the U.S.

At the moment, it doesn’t look like investors believe that will be the case. GM stock and Ford stock both have fallen rather steadily, as trade-war rhetoric has heated up. It’s not just higher prices, either. More challenged supply chains could delay the rollout of autonomous vehicles. Of course, that could be a good thing for GM and Ford if it keeps competition from Tesla Inc (NASDAQ:TSLA) and Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG) at bay.

But at the moment, it seems wisest to trust the automobile manufacturers themselves. And, quite clearly, they see tariffs as driving car prices higher — but not in a way that necessarily will boost sales and profits.

With Ford and GM already facing “peak auto” concerns, more risk isn’t welcome — even with both stocks at seemingly cheap valuations. And if investors continue to price in that risk, shares of both companies — and their foreign counterparts — could have further to fall.

As of this writing, Vince Martin has no positions in any securities mentioned.


Article printed from InvestorPlace Media, https://investorplace.com/2018/06/car-prices-us-going-higher/.

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