Analyses
How do Automotive Tariffs Impact the Auto Corporate Sector? History in the Making
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Insight Article
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avril 01, 2025
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How do Automotive Tariffs Impact the Auto Corporate Sector? History in the Making
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avril 01, 2025
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How do Automotive Tariffs Impact the Auto Corporate Sector? History in the Making
How do Automotive Tariffs Impact the Auto Corporate Sector? History in the Making |
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The Trump Administration has imposed a 25% additional tariff on automotive imports effective April 3, claiming it will fuel domestic manufacturing. But critics fear it may put the brakes on automakers that depend on global supply chains. United States-Mexico-Canada Agreement (USMCA) compliant imports will be exempt until the government establishes a process to certify the percentage of their content originating in the U.S. for partial exemption. The U.S. imports roughly $135 billion of automobiles and $65 billion of auto parts, for a total of $200 billion in the last twelve months.1
Here is a look at how the added tariff will create stress and potential benefits for participants across the marketplace.
Impact on Consumers
Production in the U.S. cannot ramp up quickly enough to absorb the units produced abroad and imported to the U.S. The labor market remains tight and additional shifts will be expensive to fill. Building new plants and bringing them up to speed takes several years. In the long run, we believe the creation of additional plants and running at higher capacity is beneficial to employment, and inflationary to the consumer. U.S. consumers will likely face price increases in both new and used vehicles. We expect all-in demand for new vehicles to decline and insurance premiums to rise due to the increase in repair costs driven by tariffs on auto parts.
Impact on Auto Manufacturers
Car manufacturers have historically weak pricing power, with complex manufacturing footprints and supply chains that have been developed over several decades. While they can pass through some costs, the sector will have to deal with production shutdowns potentially leading to plant closures, lower workforce, and lower demand from consumers in an uncertain economic environment. The car manufacturers will need to determine how to pass along the costs to consumers, with a disproportionate share going to higher-end vehicles, where demand is less price sensitive.
There is also no process in place to collect the tariffs yet, imposing potential bottlenecks on the supply chain. The original equipment manufacturers (OEM)s will likely be forced to support critical suppliers that may struggle with the tariff impact, as they did during the post-COVID-19 shutdown supply chain shocks.
Impact on Automotive Part Suppliers
Nearly all suppliers say they plan pass through 100% of the tariff impact to the manufacturers. Tier 1 suppliers are likely to achieve something close to this, but Tier 2 and Tier 3 suppliers will struggle and will need to share some of the pain.2
Suppliers are volume-based businesses with generally high fixed cost bases. Any production decline as well as production disruption without advanced notice will negatively impact suppliers as we saw during the pandemic. Similarly to Auto Manufacturers, Suppliers will likely need to invest in relocating production facilities to the US if their OEM customers do, as many larger auto parts are too expensive to ship and Supplier plants are co-located with OEM customer plants.
Impact on Used Car Providers
Used car prices will likely rise in reaction to increased demand given higher new car prices. Consumers will be more likely to hang on to used cars longer, benefitting aftermarket service providers.
Tire manufacturers also stand to benefit, as they typically generate much of their revenue and profit from aftermarket tire sales. Tire retailers have demonstrated in the past that they are able to pass the price increase to consumers. Consumer incentive to keep existing cars longer may also bolster tire aftermarket volume.
Impact on Car Rental Companies
The outlook is mixed for rental car companies. While higher used car residual values will provide a near-term benefit, escalating new car prices pass the burden to consumers. Combined with higher insurance costs, this may lead to a reduction in demand. Additionally, demand for car rentals will be dampened by a negative impact on economic growth due to lower vacation and business travel, but it may also pick up as people choose to forgo buying a new or used car and renting when they absolutely need a vehicle.
Impact on Credit Spreads
Spreads on the corporate auto sector may have hit a ceiling for now. Future outperformance or underperformance should be driven by the duration of tariffs and potential off-ramps and loopholes, as well as individual trade agreements. But auto spreads have meaningfully underperformed year to date. Absent any material new news, spreads could trade rangebound for the time being and remain at elevated levels.
Bottom Line: The longer-term impact will be fueled by the duration of the tariffs and potential exemptions and loopholes that may develop over time. Overall, the Trump administration’s announcement extends the life of traditional internal combustion engine (ICE) vehicles given the potential increase in costs for electric vehicles (EVs) and imports, while benefitting the used car markets. Ultimately, we would expect off-ramps and certain loopholes as individual trade agreements are reached with different countries, and significant dispersion among manufacturer namess.
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Head of IG Credit Research
Broad Markets Fixed Income Team
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Managing Director
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Jackie Desir
Executive Director
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Lenny Senkovsky
Executive Director
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Hadley Carlton
High Yield Bonds
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Ben Lee
Executive Director
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