The Implications of Tariffs on the US Automotive Industry

In many ways, the U.S. automotive sector is thriving.

The U.S. automotive sector experienced a notable rebound in 2024, reaching its highest sales figures since 2019. Total vehicle sales approached 16 million units, marking a 2% increase from the previous year. Leading automakers contributed significantly to this recovery. General Motors reported sales of approximately 2.7 million vehicles, while Ford sold around 2.1 million units, both reflecting a 4% year-over-year increase.

Despite these bright spots, recent tariff policies have thrown a wrench into the process of choosing where and how to source parts. The reintroduction of tariffs on steel and aluminum imports alone has increased production costs, potentially leading to higher vehicle prices. President Donald Trump announced a sweeping set of new tariffs on April 2, 2025, declaring it "Liberation Day" and signaling a major shift in U.S. trade policy. Most notably for the automotive industry, this includes a 25% tariff on all imported automobiles effective April 3, 2025, along with additional tariffs targeting imports from major trading partners such as China (54%), Vietnam (46%), the European Union (20%), Japan (24%), and South Korea (25%). These aggressive measures are aimed at addressing trade deficits and revitalizing American manufacturing but have raised alarms among industry analysts and automakers.

Many essential automotive components, including electronics, engine parts, and interior modules, are sourced from Asia, Europe, or Mexico, and these tariffs could significantly disrupt supply chains and increase production costs further. With consumer preferences varying across segments and regions, automakers strive to keep production flexible and cost-efficient, a challenge intensified by the recent tariff announcements.

In recent years, the restructured United States–Mexico–Canada Agreement replaced NAFTA, prompting modifications in rules of origin and labor standards. While USMCA aimed to modernize cross-border trade, it also introduced complexities for companies looking to harmonize their North American supply bases. The latest tariffs now add another layer of complexity, forcing manufacturers to reassess sourcing strategies, supply chain structures, and pricing models.

Today, manufacturers must strike an increasingly delicate balance between producing vehicles in the most advantageous locations, tapping diverse supplier networks, and meeting consumer demands for customization and quick delivery. The industry’s intricate supply chains, already vulnerable to disruptions, are now facing heightened pressures from these new trade barriers.

Tariff Challenges

Tariff exposure remains a challenge no matter the supplier’s location. Suppliers in Asia often have longer lead times, and simply switching from one Asian supplier to another usually does not remove tariff exposure if the end product is still subject to import duties. By contrast, multiple suppliers may be manufacturing similar parts in North America. In theory, that can provide more flexibility, yet automakers must weigh potential savings against the cost of retooling and qualifying new suppliers.

Moreover, the tariffs affecting Mexico and Canada are largely driven by ongoing concerns around border security, immigration, and drug trafficking. These tariffs could last ten years, or only one year, two weeks, or until the current administration’s term ends, mirroring how quickly policies such as EV tax credits have disappeared since Biden left office. This level of unpredictability makes long-term, capital-intensive investment decisions a challenging call for the automotive industry.

Auto companies have, therefore, looked at various strategies to minimize tariff liabilities. Some consider increasing US-based production, particularly for high-volume segments, to sidestep certain import duties. Others contemplate shifting more production to Mexico, where assembling vehicles or subassemblies could mitigate specific tariffs before shipping to the US market. This balancing act is further complicated by the USMCA’s rules on minimum North American content, as well as potential legal challenges that may arise if certain tariffs are deemed inconsistent with trade agreements.

Amid so much unpredictability, many in the industry agree that tariff-related costs will eventually be passed on to consumers. Companies may initially absorb some of the hit in an intensely competitive market. Over time, however, higher manufacturing and import expenses typically translate to rising sticker prices. The pace of these price increases depends on how long tariffs last, how much competitive pressure each automaker faces, and whether there are viable alternatives for sourcing parts.

Short-, Mid-, and Long-Term Challenges and Opportunities

The effects of tariffs and trade policy shifts on the auto industry can vary significantly depending on the planning horizon. Each poses distinct challenges and prompts different strategic responses.

• Short-Term (0–3 months): Supply contracts, tooling, and production schedules for the next few months have largely been set, limiting immediate options. Still, manufacturers with multiple qualified suppliers could run quick cost scenarios to see if re-allocating orders helps lower tariff impact. Splitting supplier allocations and shifting underutilized production capacity can be executed relatively quickly.
  
• Mid-Term (3–12 months): Companies can renegotiate supply agreements, diversify sourcing, or slightly alter their production footprints. Although more complex, these measures offer meaningful ways to offset tariff-related costs.
  
• Long-Term (1+ years): Investing in new plants or relocating entire product lines carries risk. Should tariffs be lifted abruptly, these significant capital outlays could lose relevance. Nonetheless, if policies endure or if new laws are enacted, building domestic capacity may become a strategic hedge against future trade disruptions.
  

Given the swift policy changes around tariffs, automakers must plan for multiple futures. While few companies can wait years for clarity, they must also avoid overcommitting to paths that may become obsolete if tariffs disappear sooner than expected.

How Leveraging Digital Planning Capabilities Can Help

In a world of quickly changing trade policies, the o9 Digital Brain, the leading enterprise AI software platform provider for transforming planning and decision-making, provides automotive companies with a powerful decision-making engine that integrates data from across the supply chain and runs real-time “what-if” scenarios to enable companies to make better, faster decisions across these time horizons.

1. Telescopic Planning: o9 helps companies plan across multiple time horizons in a single platform. Organizations can simulate near-term changes, such as shifting orders among existing suppliers to minimize tariff exposure, and also explore medium- and long-term strategies like adopting new supply bases or relocating assembly lines.
2. Scenario Modeling and Analytics: By capturing tariff rates, lead times, material costs, and supplier capacity constraints, the platform enables cost-optimization modeling at the click of a button. Users can quickly calculate how different sourcing decisions affect margins, total landed cost, and on-time delivery performance.
3. Resilience and Agility: Tariffs are inherently fluid, and changes in political or economic conditions can turn supply chain assumptions upside down overnight. o9’s real-time collaboration tools and integrated data model empower cross-functional teams, from procurement to finance, to swiftly align on the best response.
4. Future-Proofing Operations: Beyond tariffs, the auto industry faces other disruptions, from consumer demand swings to raw material shortages. Through o9’s advanced planning capabilities, companies can proactively test strategies that fortify their supply chains against the “next” disruption, whether it emerges in global trade policy or shifting local regulations.

For the US auto industry, tariffs represent both a challenge and an opportunity to rethink longstanding practices. Speed and flexibility have become paramount in an environment where border issues, political shifts, and sudden regulatory changes could dramatically alter the trade landscape. Older, rigid mainframe systems simply cannot keep pace with the real-time decision-making required today and in the future.

Companies that invest in digitizing their collaboration and decision-making systems now by evaluating new supplier partnerships, adjusting production footprints, and adopting advanced planning capabilities, stand a better chance of thriving in this evolving trade environment. If there is one constant in automotive supply chains, it is change; those who embrace digital transformation will be the ones most prepared for whatever comes next.

Interested in diving deeper?
Get in touch with our Global Automotive Team:

• Senior Director, North America Industry Solutions: Ryan Manes <[email protected]>
• Head of EMEA Automotive Business Unit: Guillaume Bothier <[email protected]>
• Vice President, Industry Solutions Japan: Peng Shi <[email protected]>
• Vice President, Industry Solutions Brazil: Gustavo Calzavara <[email protected]>

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