Assessing the Impact of New Auto Tariffs on Your Portfolio
On Wednesday, President Trump signed an Executive Order imposing a 25% tariff on all imported, fully assembled vehicles effective April 3rd, with a similar tariff on select imported auto parts (engines, transmissions, and electrical components) to follow within 30 days[1]. In 2024, the U.S. imported $215 billion in foreign vehicles and an estimated $180-200 billion in auto parts, according to the Bureau of Economic Analysis (“BEA”). The Administration projects these tariffs could generate $100 billion in annual revenue[2].
The tariffs are comprehensive, with few exceptions. Notably, approximately $70 billion in vehicles manufactured in Mexico and Canada under the USMCA may qualify for a tariff reduction based on the value of U.S.-made content, though it is unclear if this applies to auto parts. President Trump has emphasized that no negotiated exceptions will be granted to affected automakers, and the tariffs will remain in place throughout his four-year term. These auto tariffs are distinct from the "reciprocal" tariffs he plans to announce on April 2nd.
Assessing the Fallout
The full impact of these tariffs remains uncertain. During an auto analyst call yesterday, industry experts struggled to quantify the effects on stakeholders. The Trump Administration appears to have relied primarily on a 2019 Commerce Department study, without consulting industry participants prior to the announcement[3]. Ford and GM CEOs rushed to Washington, D.C., seeking clarity, as even major auto OEMs grapple with estimating the earnings impact.
While specifics are elusive, the tariffs are likely to negatively affect auto OEMs, parts suppliers, car dealerships, rental car companies, and ultimately, consumers. Every auto OEM will face significant challenges to gross margins and supply chain reconfiguration, with Tesla potentially being the sole exception due to its 100% U.S.-made vehicles and parts. Even domestic giants like GM and Ford, with substantial production in Mexico and Canada, will feel the strain. Foreign firms such as BMW, Honda, and Hyundai, despite some U.S. production, will also be impacted, as key components like BMW engines are manufactured abroad.
Inflationary Pressures
As production costs rise, auto OEMs will likely pressure parts suppliers to absorb some of the tariff burden while passing the remainder to consumers. The willingness of buyers to accept higher MSRPs will vary by brand and model—Ferrari customers may shrug off a 25% increase, while Ford F-150 or Toyota Corolla buyers may balk. Consequently, some tariff costs will likely flow through to consumers, influencing inflation metrics like Core CPI and Core PCE. New vehicles constitute 5.5% of Core CPI, but the ripple effects extend further[4]. Higher new car prices could boost demand for used vehicles, driving up those prices, while rising parts costs may increase vehicle servicing expenses. Collectively, these factors influence nearly 10% of Core CPI, potentially pushing inflation higher.
Economic Implications
Beyond inflation, the economy faces risks. Elevated vehicle prices may dampen demand for new and used cars, potentially triggering industry-wide layoffs. The auto sector accounts for 3-3.5% of U.S. GDP, per the BEA, while the Alliance for Automotive Innovation estimates the broader automotive ecosystem contributes over $1 trillion annually—closer to 5% of GDP. Secondary effects could spread to industries like car rentals, where higher fleet turnover costs may raise rates and reduce demand, or to consumer spending, as higher car payments squeeze budgets. Even reduced dealership advertising could hit media outlets, from paid search to local TV. The tentacles of these tariffs are long and far-reaching.
Portfolio Implications
At present, the direct impact on your portfolios is minimal, but the situation warrants close monitoring. We view these tariffs—and those expected next week—as a negotiating tactic by President Trump, though his ultimate objectives remain unclear. Tariffs were expected, and we have deliberately avoided sectors most vulnerable to such measures. One notable exception is our recent addition of Tesla (TSLA) to the Global Vigilance Tilt portfolio, our highest-risk strategy. Tesla’s fully U.S.-based production could position it to benefit amid this disruption. Should these tariffs tip the broader economy into recession—a scenario we do not currently anticipate—we would adjust to de-risk the portfolio. For now, we remain vigilant but steady.
We will keep you informed as this evolves. Please reach out with any questions.
Disclosures
LIM is a Registered Investment Advisor based in Dallas, Texas and registered with the Securities and Exchange Commission. Registration does not imply a certain level of skills or training. LIM is a company with purpose, dedicated to creative and unique thinking. We focus on portfolio valuation and research, along with superior client experience. We seek to identify investment opportunities by looking at economic factors, security valuation and human behavior. We start with the fundamentals of portfolio management and valuation. Then we build on these fundamentals with unique thinking and creative intelligence gathering to form a viable investment thesis. We believe this approach leads to dynamic global portfolios with increased return and managed risk. LIM utilizes Charles Schwab & Co. Inc. (“Schwab”), a FINRA-registered broker-dealer, member SIPC, as its custodian of assets. LIM is independently owned and operated and not affiliated with Schwab.
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