Will President Trump's Tariffs cause New Car Prices to Rise and Cripple an Industry?
There is a trade war brewing and President Trump is on the warpath. He says that other countries are taking unfair advantage of the US when it comes to items that they sell to us. So, Trump says fix it or he will make it more expensive for other countries to sell in the US. Unfortunately, that means companies are inclined to pass those higher costs to the consumer. Of course, it raises uncertainty for a very large important industry in the US - the automotive industry.
Whether or not cars are made in the US or other countries, they are made with foreign parts that are effected by the tariffs (more expensive). This CNBC article points out that "the Peterson Institute said the prices of the top-selling cars in three categories could rise by between $1,400 and $7,000 based on the majority of proposed tariffs being passed on to consumers."
So, will this lead to higher prices? What will be the impact? You have to look at it from the informed consumer versus the uninformed consumer and then the fly in the ointment.
If prices go up on new cars, the informed consumer could just shut down and delay any buying decisions. After all, this is a timing issue to most. The consensus is that this is a negotiation that shouldn't go on forever. Thus a deal should be reached and prices should come back down. Fortunately, for the automotive industry, this represents a small percentage of consumers that walk into dealerships.
Higher prices shouldn't effect the uninformed consumer. Between the smoke and mirrors of the automotive sales process and the fact that the car buying process is more than often an emotional decision that makes no financial sense, this should be business as usual for the automotive industry even with higher prices.
So, what is the fly in the ointment? This goes on way longer than most people expect. After all, they don't call it a trade battle. The problem is that like the word war implies, there is a loser and a winner. President Trump would never allow the US to lose "an easy war to win." This is his legacy we are talking about. Vice versa, countries are not going to go down without a fight. That is already apparent. No one wants to come out the loser, kissing the Donald's gold ring. The great thing about political solutions to problems such as this one is that the losing party is allowed to save face and it comes out a win/win (see North Korea). The challenge is that this is going to be a tough one to solve with a "save face political decision."
If this drags out, the uninformed consumer becomes the informed consumer, and puts off the buying decision. The news cycle will be filled with stories of the higher prices which will be hard to ignore. The bigger question is could this cripple the automotive industry? You might think that statement is over dramatic. Yet, the logic behind an extended trade war makes sense. Just think back to the financial crisis and its almost "dagger to the heart" moment of the automotive industry. This time the very government that bailed out the industry in 2008 is the same entity that could put the industry right back in crisis.
Show me a problem that doesn't have a political solution, and I will show you a real problem. After all, there is a reason we haven't seen a trade war such as the one that this could be since 1930. I am not saying that President Trump shouldn't be waging this war. Trade is a problem and he was elected to fix things. It is just that most politicians don't try and fix things. Once again, why we haven't seen anything like this since 1930.