In addition to increasing vehicle prices, the 25% tariffs imposed on Chinese parts and goods by the Trump administration will complicate the underwriting process for lenders and slow down innovation in the auto industry, Jonathan Smoke, chief economist at Cox Automotive, told Auto Finance News.
“Americans aren’t suddenly making 10% or 25% more income,” Smoke said. “If [the auto industry] already is challenged with payment affordability, then [the problem] only becomes more acute, therefore making the whole credit process even more complex and more important to the purchase process.”
Unlike previous tariffs with Mexico, which were implemented as more of a negotiation tactic, Chinese tariffs are a bigger and more complicated issue, Smoke noted. The concerns surround trade itself and intellectual property, he said, adding it’s more than likely going to be a long-term issue for the auto industry.
In addition, Chinese tariffs are likely to put a limit on how quickly the industry sees progress in the realm of innovation, particularly in the electric vehicle space, Smoke said, noting that the tariffs could permanently push more investment in electronics and batteries to the U.S., making the cost of production higher.
“This is an industry where it takes multiple years to move supply chain and set up production,” Smoke said. “Longer term, that does make the [U.S. auto market] more independent, but the consequence of that is very likely to be much higher cost for the components and for the final vehicles.”
There is, however, a silver lining, Smoke noted, pointing to the Chicken Tax implemented on pickup trucks in 1963. “[That tax] effectively caused a permanent investment in the production of pickups,” he said. “[Now], all the pickups that are sold in the United States are produced in North America. You can clearly see from the price of pickup trucks and the profit margins that manufacturers enjoy that [the Chicken Tax] has made the industry more profitable.”