Trump’s Car Tax Would Boost Average New Car and Truck Prices by $1,262 to $5,089

On May 30, the U.S. Department of Commerce issued a Federal Register notice requesting public comments on a new “national security” investigation of automotive tariffs under Section 232 of U.S. trade law. According to a recent statement from President Trump, “I instructed [Commerce] Secretary Ross to consider initiating a Section 232 investigation into imports of automobiles, including trucks, and automotive parts to determine their effects on America’s national security. Core industries such as automobiles and automotive parts are critical to our strength as a Nation.”

Section 232 is a relic of the Cold War that allows the President to restrict imports if the Commerce Secretary finds that imports threaten to impair the national security. Although real U.S. motor vehicle output has increased by 95 percent since the last recession, the administration is nevertheless considering new taxes of up to 25 percent on imported cars, trucks, and parts.

An NTU Foundation analysis of 2017 trade data suggests that a 25 percent import tax increase would have the following effects:1

  • Applying the tariffs to a constant 2017 import volume, overall U.S. import taxes would nearly triple from $33 billion to $98 billion.

  • The average price of imported cars would increase by $4,205 per vehicle as the effective tariff rate increased from 1.3 percent to 25 percent.2

  • Prices for cars assembled in the United States would increase by an average of at least $1,262 per vehicle.

  • Federal taxes on imported pickup trucks would increase by $5,089 per vehicle.

  • The total federal tax on cars, pickup trucks, and motor vehicle parts would increase by more than $65 billion.

  • History demonstrates that reduced competition from imports results in higher prices for domestically assembled vehicles. One analysis of restraints on Japanese car imports in the 1980s found that for every dollar increase in the price of imported cars, U.S. car prices increased by 30 to 40 percent. If that result still holds, then an increase of $4,205 in imported car prices would result in an increase of at least $1,262 for comparable domestically assembled cars.3

These results are in line with a recent Trade Partnership study which calculates that a 25 percent tariff on imported motor vehicles and parts would reduce U.S. GDP and destroy 3 jobs for every job “saved.”

Increased car and truck prices are just the tip of the iceberg. Additional costs would be imposed on U.S. workers as other countries retaliated by imposing tariffs on U.S. exports. In addition, according to Commerce Secretary Wilbur Ross, “Economic security is military security. And without economic security, you can't have military security.” If the United States restricts imports based on vague “economic security” reasons, other countries can be counted on to use similar logic to restrict U.S. exports of food and other products.

The Commerce Department should quickly dispose of this far-fetched and potentially costly “national security” investigation into motor vehicle imports.

1NTU Foundation calculations based on comparing 2017 duties on all imports covered by Chapter 87 of the U.S. Harmonized Tariff Schedule to a proposed 25 percent tariff on those products, assuming no change in import volume. Data from the Census Bureau as reported by the U.S. International Trade Commission, This analysis does not attempt to account for potential changes in sales volume resulting from the tax increase.
2The general tariff rate for passenger vehicles is 2.5 percent, but the effective tariff is just 1.3 percent because many autos currently enter tariff-free under the North American Free Trade Agreement (NAFTA).
3For domestic price impact see Robert W. Crandall, “The Effects of U.S. Trade Protection for Auto and Steel,” Brookings Papers on Economic Activity,, 1987, p. 276. This is a conservative estimate. Imports make up a larger component of total U.S. car sales today than they did in the early 1980s, which would suggest an increase in import prices today would have a larger impact on domestic prices. In addition, the price of U.S.-assembled cars would be affected by $14.6 billion in new taxes on imported parts.