President Trump and his supporters have been clashing with mainstream economists over the merits of tariffs for many years. Now, with the president's fundamental taxation unfolding in real-time experiments on the world economy, the world will see who is right.
In Trump's narrative, tariffs have a simple effect. They encourage businesses to move factories to the US, creating more American jobs and prosperity.
However, for many economists, the impact of tariffs is not simple. They say tariffs are likely to encourage domestic automobile production in the long term. But they also cause major collateral damages that could support the president's goals for employment, manufacturing and the economy as a whole.
That's because tariffs raise consumers' prices for cars, prevent cars from buying, and slow the economy, economists say. Tariffs can also scramble supply chains, raise costs for automakers relying on imported parts, and reduce US car production in the short term.
They could also lead to retaliation for US car exports and other products American companies send overseas, leading to damages in the World Trade War.
On Thursday, the global stock market, where auto stocks were hit hardest, fell as investors absorbed the scope of Trump's plans. Common Motors stocks, which import many of Mexico's best-selling cars and trucks, fell by about 7% in noon trading. Stellantis and Ford stocks were also low. European stocks closed the bottom on Thursday, causing the carmaker to suffer the worst losses.
As carmakers and economists rushed to redo their growth forecasts, American allies accused Trump of imposing tariffs, saying that taxation would destabilize the global economy. Some vowed to retaliate.
Brad Sesser, an economist with the Council of Foreign Relations, said tariffs are likely to lead to domestic automobile production in the long term. But getting there would be “really destructive,” he said, and it costs both American consumers and the US economy.
Sesser said it's unlikely that foreign automakers will give up on the US market, and that brands like Toyota, Hyundai and Mercedes could end up making more cars in the US to avoid paying customs duties. However, with shorter driving, if prices rise, some American consumers could convince them not to buy a car at all. That could actually drop in US car production in the near future, along with disruptions in the supply chain that drives Canada and Mexico or rely on foreign parts.
Almost half of all vehicles sold in the US and 60% of all parts used in automobile factories are imported. Bernstein analyst Daniel Lawesca predicted that the automaker could increase $6,700 per vehicle.
“Because of the upheavals along the way, you can have what looks like a cyclical recession in the automotive sector. There are even places where you can attract new investments and grow over time, with layoffs, lost jobs,” Sesser said.
“This is a pretty dangerous move,” he added.
The economist also said that the approach is likely to have drawbacks not only for foreign automakers such as Toyota and Mercedes, but also for US brands.
Jim Reid, research strategist at Deutsche Bank Research, pointed out that it is not just foreign cars that assemble more than half of the cars purely in the US that fell, but also General Motors' auto stocks. “So the pain is happening not only domestically but internationally.”
“We listen to the current US administration, and we appreciate that we are ready to sacrifice short-term market performance and economic growth when we need to achieve our long-term goals,” Reed said.
Economists also suggest that they can question Trump's claims that tariffs will strengthen economic growth, investment and employment, and can do the opposite.
In a memo on Thursday, an economist at Barclays Research said he revised his forecast and expected global and US growth to be significantly slower than the 2024 level. “But even those predictions may be too optimistic if the worst outcomes on tariffs come to fruition,” they write.
Barclays American economist Mark Giannoni said the uncertainty about the direction of trade policy encourages businesses to make new investments in more workers and refrain from hiring more workers in the coming months.
“We expect companies to have fewer employment in the coming months,” he said. “Companies that have suspended investment decisions are likely to suspend employment decisions, which is why we believe that demand for labor is significantly reduced.”
Trump has denied that tariffs will have many negative consequences, instead referring to the announcement of multiple companies' new investments in the US. In addition to introducing additional tariffs on imports from China, Canada and Mexico over the past few months, Trump is expected to announce more tariffs next week.
Speaking at the White House on Thursday, the president said “business will return to the US and there will be no need to pay tariffs.”
“As they already build plants, many companies are very shape-wise, but the plants are underutilized, so they can expand cheaply and quickly,” he said of the car manufacturer. He added, “Other people have come to our country and they are already looking for a site.”
Mark Diplacido, a policy adviser at American Compass, who served with the US Trade Representative during Trump's first term, said he believes tariffs will encourage “more investment in the American automotive industry.”
“As the White House has shown, we are at the point where 75% of the content on American vehicles is made overseas and imported here,” he said. “It's a welcome step to reworking the industry and investing in the industry and workers.”
He acknowledged tentatively that there could be “disturbance and potentially short-term price increases,” but said similar protections from the past helped the automotive industry revive.
But others say that automakers can wait for them to make an investment to see if tariffs continue. Trump said Thursday they were permanent and the White House would not allow exclusion, but both foreign and businesses seem to want the president to be tolerated.
“He was pretty clear about what he intended, but we know from previous experience that we shouldn't assume that these are transactions that have been completed until they actually come into effect.”
Tariff forecasts have already spread through the automotive industry. Kit Johnson, customs broker for John S. James of Savannah, Georgia, said the car manufacturer was helping imports and calling customers all Thursday morning, saying, “We had a big scramble right now.”
Customs declarations over the past few weeks have made it difficult for clients to plan. “There are all the announcements, planning sessions that are being announced. They are running different models to understand what the economic impact will be,” he said. “That's been going on one after another.”
Johnson said he believes tariffs are “counterfect.” He said that while many companies wanted to invest in more manufacturing in the US, tariffs would “put a financial burden on them” when they tried to do so. “It's sort of a catch 22.”
Valerie Benton Smith, senior sales associate at Bill Black Chevrolet Cadillac in Greensboro, North Carolina, said she is enduring tariffs and the price and shortfalls of car models at dealers could be “very damaging.”
She said tariffs were suddenly introduced and companies were not installed to meet customer demand using cars and parts across the country. “I really think we need to have a better plan,” she said. “This has a lot of domino effects.”
Another main question is whether tariffs will swirl into a larger trade war. Trump said on social media that he would punish the European Union and Canada if he tried to cooperate in fighting back against tariffs early Thursday.
“If the European Union collaborates with Canada to cause economic harm to the United States, large tariffs, much larger than currently planned, will be placed on both to protect the best friends each of these countries have ever had!” Trump wrote.
Foreign leaders responded angrily to the tariffs, but no one immediately imposed the tariffs accordingly.
Canadian Prime Minister Mark Carney said his country would introduce additional retaliatory tariffs on the United States, but they would not be finalized until Wednesday, when Trump is scheduled to introduce so-called mutual collections.
“We're going to respond with great force,” Carney said. “Nothing is off the table to protect our workers and our country.”
French President Emmanuel Macron on Thursday said he told Trump during the previous debate that tariffs were “not a good idea,” and that Europeans will respond by going back and forth in hopes of rethinking the US president.
“We're always going to protect Mexico,” Mexican president Claudia Sheinbaum told reporters. The Mexican government will issue “essential responses” to all US tariffs that hit the country on April 3 (which so far includes taxation on steel and aluminum,” she said.
Economists predicted tariffs could be particularly devastating for Canada and Mexico, which have been integrated into North American automotive supply chains for decades.
Flavio Volpe, president of the Canadian Association of Auto Parts Manufacturers, calls tariffs “really blunt instruments.”
“The one million Canadian cars are made by American manufacturers with 50% of American parts and 55% of American raw materials, and he is ready to push off the cliff to make a point no one understands,” Volpe said of Trump.
Report contributed Daniel Kay, Ian Austin, Liz Alderman and Emiliano Rodriguez Mega.
