While President Donald Trump has imposed 25% tariffs on all auto imports, cars imported under the U.S.-Mexico-Canada Agreement are being imported duty-free.
The three countries have until July 2026 to review the USMCA and agree to extend the agreement for another 16 years. Should an agreement not be reached, they have until 2036 to reach an agreement before it expires.
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The tariffs are designed to incentivize consumers to buy domestically and producers to build domestically.
But these auto tariffs, mixed with USMCA rules, could entice manufacturers to increase investment in Canada and Mexico as a base for export, according to Brookings.
“The extent to which this happens will depend on whether countries retaliate and raise tariffs on U.S. exports. When this happens, it will create an incentive to export from Canada and Mexico to avoid tariffs that would apply when exporting from the U.S.,“ the Brookings report said.
The U.S. relationships with Mexico and Canada are critical to the auto industry. Brookings’ economic modeling of a U.S. 25% tariff on auto imports from Canada and Mexico would result in a decline in U.S. exports to those countries by 25% and 23%, respectively.
If Canada and Mexico were to retaliate, U.S. exports would drop by 55% and 65%, respectively.
U.S. car inventories are falling.
Image source: Jianhua/Feature China/Future Publishing via Getty Images
Buyers are snatching up cars amid tariff uncertainty
New vehicle inventory dropped by 4.7% to 2.49 million at the start of May as sales outpaced reinforcements, according to Cox Automotive data.
U.S. dealerships reported 2.69 million units at the start of April, a 10.5% decrease from a year ago.
The new vehicle days’ supply is based on the estimated retail sales pace for the most recent 30-day period. The U.S. currently has a 66-day supply, down 16 days from last year and six days from last month.
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Normally, falling inventory would be a great sign for most industries, as that would mean consumers are snatching up product. However, most industry watchers are waiting for inventory to rise as tariffs cause increased prices and prices tamp down demand.
Prices are already climbing.
The average new vehicle listing price at the end of April was $48,656, up $774 (1.6%) from $47,882 at the start of the month and up $1,318 (2.8%) from a year ago.
The average transaction price of a new vehicle rose 2.5% in April to $48,699 month to month and 1.1% year to year.
At the same time that transaction prices are rising, the incentives that dealers use to attract buyers are falling, down to 6.7% of the average transaction price in April from 7% in March.
U.S. tariffs cause uncertainty in autos
While tariffs have not resulted in the same disruptions or grocery store runs experienced during Covid, one sector has benefited from consumers flocking to buy its products before tariffs make them more expensive.
Car buyers are taking advantage of dealer incentives to clear inventory, boosting demand and girding the automotive industry for what could be some lean times ahead.
U.S. dealerships started April with about 2.7 million new vehicles in stock, a 10.2% decline from the 2.99 million reported at the beginning of March and a 2.4% year-over-year decline, according to Car Edge.
The industry saw consistent weekly sales increases through February and March as President Donald Trump’s vision for a global trade war became clearer.
Current inventory levels are the lowest seen since 2023.
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