Americans purchased a record number of new vehicles last year — 17.5 million — and about 2.25 million of them were assembled in Mexico. Now they face a new kind of sticker shock: rising prices on new car models, resulting from tariffs on imports.
President Donald J. Trump has spoken about imposing a tariff of as much as 20 percent on Mexican imports to pay for a border wall. The tariff idea has led to some sensational headlines and articles using back-of-the-envelope math to figure out how much car prices may go up, in some cases by many thousands of dollars.
But experts say there is good reason to be skeptical of the dramatic price-change estimates, and car shoppers should not panic. Consumers need to understand that any tariff will influence car pricing, but it is not necessarily a "buy now or pay a lot more later" environment. And the outlook for the border tax in Congress remains uncertain.
Car buyers should have some basic facts straight: Even cars from the biggest automakers — including Ford and GM assembled in U.S. plants — rely on parts, including engines, imported from Mexico. Our biggest import from Mexico is cars and auto parts, with the United States spending $74 billion in 2015, according to the Office of the U.S. Trade Representative. That scale, coupled with the auto industry's interconnectivity, means a tax on Mexican goods will hit the overall U.S. marketplace, and American consumers.
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If Trump's proposal passes in some form — a direct tariff on imports, a border adjustment tax or a giant floating toll booth on the Rio Grande — it would raise prices for vehicles across the United States, experts say.
That's big news for car shoppers, but not a reason to rush purchases.
Michael Harley, executive analyst for the vehicle valuation and research company Kelley Blue Book, said manufacturers would amortize the cost increases across their lineup. "The entire product line will bear the weight of the additional tax," Harley said.
(Source for sales: Kelley Blue Book; Source for domestic content: 2016 Kogod Made in America Auto Index. Note: Popular vehicles are often built in multiple plants, which can change their domestic content. The chart shows their highest domestic content score.)
Frank DuBois, chair of the International Business Department at American University's Kogod School of Business and author of the Kogod Made in America Auto Index, which tracks the domestic content of vehicles, said the amount of a car made in America can vary widely. He found vehicles sold in the United States have as much as 90 percent domestic content (such as Buick's Enclave and Chevy's Traverse) to as little as 1 percent (such as Mercedes' E-Class and the Toyota Yaris). DuBois noted that the percentage of cars and parts from Mexico has been on the upswing in recent years, but he was not sure a tax would significantly alter that trend.
"The wage difference is still a factor," he said, noting that Mexican workers earn far less than their American counterparts. "Plus, the peso has dropped about 20 percent in value in the last three months, which would even out the tariff."
DuBois said consumers should try to keep things in perspective: There's never been a truly 100 percent American-made vehicle, since materials such as copper for wiring and rubber for tires would have come from abroad. "I had a 2001 (Volkswagen) Jetta that was assembled in Mexico, but the engine came from Germany and the transmission from Argentina. Cars are like DNA — they're made up from all these different strands."
One headline from earlier this week predicted a price hike of as much as $17,000 on a Land Rover.
"That's a wonderful attention-grabbing headline, but it paints an unrealistic picture," Harley said.
Why? Vehicle manufacturer suggested retail price (MSRP) is based on manufacturing costs and what the regional market will bear. "Consumers in the U.S. simply won't accept a $17,000 price hike on a Land Rover (and the British automaker would never slap such an addendum on its vehicles for fear of insulting its U.S. market)," Harley said.
Take the Buick Envision. It is manufactured in China, which has much lower manufacturing costs than domestic factories, but its MSRP doesn't reflect that. It is priced like every other crossover in its segment. Automakers deal with taxes and tariffs in markets around the globe and will absorb fees until they are able to move manufacturing.
If lawmakers choose to enact such a tax, it needs to be phased in over a period of years, which will allow automakers to adjust production accordingly, Harley said. "Moving production, in a cost-effective manner, typically takes years as supply chains are set up/taken down, facilities are manufactured/removed and workers are hired/laid off/relocated."
Meanwhile, "the U.S. market will not accept a $45,000 Honda Civic," he said.
Harley predicts that a border tax would not have an immediate effect of sales but would eat into automakers' profit margins, a bigger issue for auto stock shareholders than car buyers. DuBois noted that Volkswagen would be especially hard-hit by a tax, since it builds about 400,000 cars for the U.S. market in Mexico — about 80 percent of its total sales here. Meanwhile, Fiat Chrysler may stand to benefit.
(Source: 2016 Kogod Made in America Auto Index)
Consumers thinking of buying a new car in the next year should weigh other factors that may have a greater influence over car prices than a tariff that is not even a reality yet, DuBois said. Auto sales were weak in January, and if the economy slows down and sales continue to drop, manufacturers might offer better deals. Conversely, interest rates could go up to pay for infrastructure projects the new administration has proposed; or the dollar might strengthen, meaning possibly better deals on imported vehicles. "It may still be many months before a tariff or border adjustment tax is put in place, so I would wait," he said.
Jeff Schuster, senior vice president at LMC Automotive, an automotive production and sales forecasting company, thinks now is a good time to buy. Since manufacturers have been operating and planning their business under the North American Free Trade Agreement, "changes to the rules of the game in the middle of the game can pose significant challenges and implications. If a border tax is put in place, I certainly would expect vehicle prices to rise. … I wouldn't necessarily wait if I was in the market," he said.
But Schuster said some of the most compelling reasons to buy don't relate directly to the tariff issue. "At minimum, prices on select models could rise. Competitive pressure is high right now, as are incentives on vehicles. That, combined with a significant increase in new models coming out this year, create a favorable time to buy a vehicle," he said.
— By Joe D'Allegro, special to CNBC.com