US President Donald Trump has imposed new tariffs on automobiles made outside of the United States. Photo / Tierney L. Cross, The New York Times
New car tariffs come after the United States imposed similar import taxes on steel, aluminum and a variety of goods from Canada, Mexico and elsewhere.
President Donald Trump is using tariffs to rewire the global economic order in a flurry of on-again, off-again manoeuvres, arguing they will boost US factories and generate revenue.
On Wednesday, he imposed new tariffs on automobiles made outside of the United States, adding to similar actions on steel, aluminium and certain goods from Canada, Mexico and elsewhere.
But his strategy of upending decades of established norms – including free trade pacts with some of America’s closest allies – has already triggered retaliation from major trading partners, rattled markets and upended diplomatic ties. The economic strain has begun to show, and consumer anxiety is on the rise.
What exactly are tariffs, and how do they work? Who really pays for them? And what does Trump ultimately want?
A tariff is a Government surcharge on products imported from other countries.
Understanding tariffs means understanding how manufacturing, trade and supply chains function – and how costs build along the way.
Tariffs are directly paid by the companies that import goods into a country. The Governments of China, Mexico, Canada and other countries would not pay any money to the US Government under the new Trump tariffs.
The cost of the tariffs can be passed around depending on how companies and countries react.
Trade policy experts agree that American consumers will most likely bear the cost of the new US tariffs, as they did in Trump’s first term. Retailers often increase prices, and manufacturers that use imported materials face higher costs. Imposing tariffs on imports can also drive up the value of the US dollar, making American exports more expensive.
The tariffs can also affect foreign companies and governments.
Foreign manufacturers may sometimes cut their prices, accepting lower profits. Governments can also institute a tax rebate to help offset the tariff burden, or can devalue their currencies to offset the impact of the tariff, as China has done before.
Trump has described tariffs as an all-purpose tool. His administration has argued that:
Trump also maintains that tariffs will rake in huge sums of revenue that the Government can use to pay for tax cuts and spending and even to balance the federal budget. But economists point out that tariffs can actually reduce tax revenue if the economy shrinks.
Trade experts point out that tariffs cannot simultaneously achieve all of the goals that Trump has expressed. In fact, many of his aims contradict and undermine one another.
For instance, if Trump’s tariffs prod companies to make more of their products in the United States, American consumers will buy fewer imported goods. As a result, tariffs would generate less revenue for the Government.
“All of these tariffs are internally inconsistent with each other,” said Chad Bown, a senior fellow at the Peterson Institute for International Economics, a Washington think tank. “So what is the real priority? Because you can’t have all those things happen at once.”
Hours after the American steel and aluminium tariffs went into effect earlier this month, the Canadian Government said that it would impose new retaliatory tariffs on $20 billion worth of US imports.
Canada’s latest moves centred on imports of:
steel and aluminium
They were imposed on top of 25% tariffs that the country announced earlier this month after an initial round of levies by Trump.
The European Union announced similar retaliatory tariffs. But European officials, already facing a lacklustre economy, delayed their effective date, in part to increase the chances of negotiating a deal with Trump. “Jobs are at stake, prices up; nobody needs that,” said Ursula von der Leyen, president of the European Commission.
In response to a previous round, China’s Finance Ministry placed 15% tariffs on imports of chicken, wheat, corn and cotton from the United States and 10% tariffs on imports of other agricultural products.
“Trade wars and tariff wars all start with harming others and end with harming oneself; the United States should learn lessons and change its course,” said Mao Ning, a spokesperson with the Chinese Ministry of Foreign Affairs.
Retaliatory tariffs like these could very likely hurt US farmers, manufacturers and other American exporters.
Trump’s move has ignited a sense of economic anxiety and anger among Canadians about how they are being treated by their neighbour, ally and best customer. Most are still puzzling over Trump’s motivations and objectives for the tariffs, as well as his comments about annexing Canada as the 51st state.
Mexico made a major effort to fend off tariffs, sending more than two dozen accused cartel leaders to be tried in the United States and dispatching troops to fentanyl laboratories and the US border.
Britain has chosen not to retaliate, as Prime Minister Keir Starmer looks to sign a long-term trade deal with the United States. And Prime Minister Anthony Albanese of Australia said his country would not impose reciprocal tariffs because they would hurt domestic consumers.
Trump’s tariffs target countries that are major suppliers of a wide variety of goods to the United States.
For American families, the likely result is higher prices in grocery aisles, at car dealerships, at electronics stores and at the pump.
Fresh produce, much of which is imported from Mexico, is one of the first categories where shoppers might notice an uptick in prices. It could happen within a couple of weeks for Mexican avocados, tomatoes and strawberries, among other products.
Price increases are poised to hit liquor aisles, too, especially beer and tequila. In 2023, nearly three-quarters of US agricultural imports from Mexico consisted of vegetables, fruit, beverages and distilled spirits, according to the US Department of Agriculture.
It could take longer for prices to rise for durable goods, like cars, thanks to existing inventory, or if companies expect the tariffs to be temporary.
Trump has argued the price increases will be minimal compared with other economic benefits. In an address to Congress on March 4, the President said: “There will be a little disturbance, but we are okay with that. It won’t be much.”
Over the past three decades, since the North American free trade zone was created in 1994, car makers have built supply chains that cross the borders of the United States, Canada and Mexico.
Manufacturers achieve economies of scale by building engine and transmission plants that are large enough to supply a number of vehicle factories in North America. Similar thinking works for other parts, too – seats, instrument panels, electronics, axles.
For example, the 2024 Chevrolet Blazer, a popular sport utility vehicle made by General Motors, is assembled in a plant in Mexico using engines and transmissions that are produced in the United States.
Nissan makes its Altima sedan in Tennessee and Mississippi; the turbocharged version of the car has a 2-litre engine that comes from Japan, and a transmission made in a factory in Canada.
The threat of tariffs has automakers fretting. “Let’s be real honest,” Ford Motor’s CEO, Jim Farley, said at an investor conference in February. “Long term, a 25% tariff across the Mexico and Canada borders would blow a hole in the US industry that we’ve never seen.”
Trump signed the United States-Mexico-Canada Agreement into law in January 2020, during his first term. The agreement updated the 25-year-old North American Free Trade Agreement, with new laws on intellectual property protection, the internet, investment, state-owned enterprises and currency.
The 2082-page pact also includes incentives to make cars in North America, requiring automakers to produce 62.5% of a vehicle’s content in Canada, the United States and Mexico to qualify for zero tariffs.
The new agreement mandates that 40% to 45% of the parts for any tariff-free vehicle come from a so-called high-wage factory, where workers make a minimum of US$16 an hour – about triple the average wage in a Mexican factory at the time the bill was signed.
The USMCA also included expansive changes that, at least on paper, were meant to help level the playing field among workers in the United States, Canada and Mexico.
On March 6, the President said he would allow products that are traded under the rules of the USMCA to avoid the stiff 25% tariffs he had imposed just days earlier.
This article originally appeared in The New York Times.
Written by: Ana Swanson, June Kim and Danielle Kaye
Photographs by: Adam Amengual and Tierney L. Cross
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