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Used cars could take a bite out of auto sales this year, and tariffs will make it worse

Key Points
  • Forecasters still think new car and pickup sales could be near record levels in 2018, but the looming threat of tariffs could drive many buyers into an already robust used vehicle market.
  • A record number of cars were leased in 2015. Those vehicles are coming off lease and adding to the supply of used vehicles.

The trade war the U.S. now finds itself in could push more buyers into the used car market, which is already robust enough to take a bite out of new car and pickup sales.

So far, industry forecasters expect 2018's new car sales will be near the record-breaking levels seen in recent years. But a number of headwinds stand to threaten that pace, including higher commodity prices and the looming threat of import tariffs on automobiles built outside the U.S.

"It is not a bad market," said Jeff Schuster, who is president of Americas operations and global vehicle forecasts at LMC Automotive. "Pricing is up, so as far as manufacturers go, margins are still healthy. I think the issue is when you then pull in tariffs and used cars, there are definitely headwinds and uncertainty in the market right now."

Automakers are already assessing the impact of tariffs against China that went into effect Friday morning. As it stands, the relatively small number of Chinese-made vehicles bound for U.S. showrooms will be subject to a 25 percent tariff, and U.S.-made vehicles face a new 40 percent tariff in China.

The U.S. is currently going through the process of determining whether it will impose tariffs on other countries, based on whether imports are threats to national security.

About half of parts and vehicle imports come from Canada and Mexico, so any tariffs put on those countries could have severe impacts on the U.S. car market.

LMC forecasts that if a 25 percent tariff were imposed more broadly it could cut sales by more than 1 million, even if only a portion of the costs were passed on to consumers. LMC's forecast assumed 17 million new vehicles would be sold in the U.S. with about 8 million of those considered built outside the U.S.

"It limits choice," Shuster said. "It puts consumers into a position where they may have to buy cars they would not have purchased previously, and it potentially moves buyers into the used car market, or makes them hold off on their purchasing decision."

Used car sales already dwarf new vehicle sales — between 39 million and 40 million used vehicles are sold in the U.S. every year. And potentially higher prices on new cars come in the midst of an already robust used car market, which was boosted by a record number of leases in 2015. As the leases on these vehicles expire, they are entering the used car market.

The mix of these formerly leased vehicles was much heavier on crossovers and sport utility vehicles, which have been grabbing an ever greater share of the market.

"That is exactly the mix consumers are looking for," said Michelle Krebs, executive analyst at AutoTrader. "What we are seeing now is those vehicles are coming off lease and consumers have a wide array of choice."

So if new cars become more expensive, a buyer can opt for a vehicle just a few years old that likely has much of the same technology and features found in a new car, and it has already taken a hit on depreciation.

"Now you add tariffs into the mix, and that raises prices," Krebs said. "Consumers are already balking at where prices are now because we are seeing incentives rise. That makes used vehicles even more attractive."

Correction: U.S.-made vehicles face a new 40 percent tariff in China. An earlier version misstated the percentage.