That New Car Will Cost You an Extra $5,000 Due to Tariffs

Many estimates have been made about how much the price of a new car will rise because of tariffs. Parts and assembled cars come from Canada, and the same holds with Mexico. The problem will deepen quickly, not just for the car industry, if tariffs reach the 25% level across the board. Of all U.S. trade, 14% is with Mexico, and 13% is with Canada.

The tariffs on Chinese cars, particularly electric vehicles, are not as straightforward as the Canada-Mexico trade war. When combined with a trade war, the fact that these cars are banished from the U.S. market makes the inventory challenge even worse.

Several estimates show that car prices would rise an average of $5,000 about 90 days into a trade war. This will vary based on a car’s original price and how much inventory dealers have. A standard measure of inventory is “days on the lot,” which measures the period from when a dealer receives a car from the manufacturer to when it is sold.

The most popular cars will soon disappear. Some popular vehicles will be out of stock within less than a month. These include luxury brands Toyota and Lexus. Dealers could raise prices on these immediately as people shop for vehicles with a fast-falling inventory. Subaru is also usually popular, and inventory may last two or three weeks.

A Silver Lining?

Demand for unpopular cars could rise.

Ironically, the car companies with the longest-lasting inventory may benefit over time. As consumer demand for new cars spreads and inventory drops, people may be forced to look at Jaguars, Minis, and Cadillacs, which can linger on lots for well over a year.

A recent situation similar to the one created by tariffs was the interruption of supply chains during the worst part of the COVID-19 pandemic. Average new car prices rose 17% between 2020 and 2021.

Tariffs will benefit some car companies, but only briefly. Sales will be brisk as people realize some cars will be out of stock. Discounts will disappear until the inventory runs out. The median price of a new American car is $47,000 today. People will pay closer to $54,000 if a real trade war begins.

These Are the Common Misconceptions About Tariffs