Messed-up tariffs are hurting the carmakers they’re meant to help

With gas prices so high, the last thing Americans need are more expensive vehicles.

But that’s what’s coming because of our nation’s byzantine tariff structure — one that, without quick reform, will ironically drive manufacturing overseas.

America benefited from the first Trump administration negotiating the US-Mexico-Canada Agreement trade deal, which effectively replaced the 1994 North America Free Trade Agreement.

USMCA reduced trade barriers, strengthened North American supply chains, created more domestic manufacturing jobs, supported wage growth and resulted in economic transactions valued at almost $2 trillion a year.

The new trade agreement was called the “gold standard” by Trump administration officials, industry groups and senators who overwhelmingly voted to ratify the deal on a bipartisan basis.

But the luster of that gold standard is being dulled by today’s tariff environment.

This is perhaps most apparent in the auto industry — where, shockingly, many vehicles made in North America in compliance with USMCA rules now face higher effective tariff rates than those made entirely overseas with all foreign parts.

After the Supreme Court ruled against the imposition of tariffs based on the International Emergency Economic Powers Act of 1977, the Trump administration issued a flurry of new import charges under several other tariff mechanisms.

These various duties have significantly boosted the cost of foreign-made materials and have ironically made US manufacturing less profitable, particularly in the automotive sector, which has many stages of production and components that cross borders multiple times, leading to double taxation or worse.

For example, raw materials like bauxite, chalcopyrite and iron ore are imported, then processed into useable aluminum, copper and steel.

Those products are exported to Canada and Mexico, where they’re used to manufacture things like sheet steel, wiring, engine-block castings, etc.

Those components are imported back here and used in manufacturing transmissions, alternators, car doors and other parts, which are then sent back to Canada and Mexico to be assembled in vehicles, which are then sold in the United States.

Each time raw materials, parts, sub-assemblies or completed vehicles come into the United States, they’re hit with import duties, increasing the effective tariff rate paid on the final vehicle.

The result? Some vehicles today with nearly 100% North American components are facing higher effective tariff rates than ones made in Japan with no North American parts at all.

It’s causing a manufacturing flight out of America, not the promised renaissance.

Over the last year, automakers worldwide have absorbed more than $35 billion in tariff costs, with Japan’s seven largest carmakers losing a combined $9.75 billion in operating profit in just the first half of fiscal year 2025.

That’s capital the White House hoped would’ve built assembly lines in America.

From automakers’ perspective, there are two choices today. First, produce a vehicle entirely, or nearly entirely, overseas and pay a single import duty via a streamlined process.

Second, pay many different import duties over the entire manufacturing process, maintain a mountain of paperwork covering every conceivable car part and pay a higher effective tariff rate.

In this environment, firms don’t want to build supply chains in North American — they did that already and are now getting punished for it while overseas production fares better.

Nissan, for example, is closing two Mexican plants, consolidating production at the company’s Kyushu complex in Japan.

The US-UK trade agreement is another good example, with 100,000 UK-manufactured vehicles able to enter the United States annually with a 10% tariff and no US content requirement.

A Range Rover assembled in Solihull, England, with no American components has a lower effective tariff rate than a Chevy Blazer assembled in Mexico with an American-made engine and transmission.

Unfortunately, it’s getting worse. The Trump administration has been offsetting parts tariffs with a temporary credit for automakers who assemble vehicles in the US, but that credit began shrinking on May 1 and disappears entirely by April 2027.

That means the cost advantage of sourcing from Japan’s keiretsu networks and Asian supply chains will grow.

To fix this mess, Congress and the administration need to work together to codify customs duties into a coherent framework, replacing the haphazard and relatively high tariff rates that have been imposed over the last year.

They must ensure that USMCA-compliant vehicles receive the best tariff treatment in the world, and vehicles with American-made parts assembled by American workers ought to face the lowest or no tariffs.

Simultaneously, domestic tax and regulatory reform would provide supply-side incentives to reshore American manufacturing, as opposed to just punishing production overseas.

These improvements would reduce cost burdens for consumers, make the US more attractive for investment, create jobs in domestic manufacturing and strengthening North American supply chains.

US trade representatives should push these improvements while the USMCA undergoes its mandatory joint review this year, which is a chance to enhance the deal and move closer to free and fair trade.

E.J. Antoni, Ph.D., is chief economist and the Richard Aster fellow at the Heritage Foundation, and a senior fellow at Unleash Prosperity.