Your Next Car May Cost More

Buying a new car may get more expensive as tariffs begin to kick in, even after recent adjustments aimed at giving relief to US domestic carmakers.

Auto sales rose 11% year over year in both March and April, likely reflecting consumers and businesses front-loading ahead of tariff increases, according to Goldman Sachs Research.

Imported vehicles and certain imported parts are now subject to a 25% tariff, but vehicles assembled in the US are eligible for a credit to offset some or all of the auto parts tariffs over the next two years, writes Mark Delaney, lead US Autos & Industrial Tech analyst in Goldman Sachs Research, in his recent note.

A fact sheet provided by the White House gives an example of a vehicle built in the US with 85% US auto parts or parts compliant with the United States-Mexico-Canada Agreement (USMCA). In this scenario, with the credit the manufacturer would receive of up to 3.75% of the MSRP (manufacturer's suggested retail price), there would be no effective tariff costs for that vehicle for the next year. In the second year, the tariff credit would still apply but at a reduced rate.

The tariff reprieve is intended to encourage more cars and auto parts to be manufactured in the US, according to the White House.

How tariffs will impact the cost of cars

According to the White House’s fact sheet, only about half of vehicles sold in the US in recent years were produced domestically while the rest were imported.

Based on Goldman Sachs Research’s analysis, a 25% tariff on imported cars could raise the cost of the vehicle to the company by $4,000 to $15,000 (assuming costs of $15,000 to $60,000 that are subject to tariffs for illustrative purposes).

But for cars made domestically in the US, the tariff exception for USMCA compliant parts, coupled with tariff credits for assembly, will reduce the added cost burden from tariffs. Still, Goldman Sachs Research expects fewer cars will be sold compared with pre-tariff levels due to higher prices.

Uncertainty over trade policy has prompted some major US carmakers and suppliers to suspend or pull back on their guidance. They note that the potential for changing US tariffs and policy uncertainty, as well as the related effects on the economy, makes predicting future financial outcomes difficult.

Two of the leading traditional US auto makers estimated that tariffs, including government offsets, will be a net headwind that is equivalent to about 20% of the profit guidance for 2025 given at the start of the year.

Some auto companies now expect pricing for the US market to be flat to slightly higher in 2025, when previously the outlook before tariffs was a modest drop in car prices. Goldman Sachs Research expects that some of the increased costs will be passed on to car buyers through higher prices but believes the overall level that prices will rise to, on average, over the next several months will be near the low end or modestly below their initial expectation of $2,000-$4,000 (given the reduced tariffs compared to what was initially proposed).

US and USMCA-compliant car parts

For Goldman Sachs Research, one of the most important factors to monitor will be the treatment of USMCA-compliant auto parts. A previous White House executive order directed tariffs to eventually be applied to non-US auto parts (even if they are USMCA-compliant) once the government has a process to apply the tariff exclusively to non-US content.

According to filings from the National Highway Traffic Safety Administration (NHTSA), a large percentage of parts on many vehicles, including those assembled in the US, come from Mexico and/or Canada.

As the fact sheet from the White House implies, since tariffs will not be imposed on USMCA-compliant parts for at least the first year, Goldman Sachs Research anticipates these parts would be exempt from tariffs for at least a period of time.

Beyond tariffs and the direct effect on auto sales, our analysts believe it will be key to monitor underlying consumer demand given recent deterioration of consumer sentiment and housing data.