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Will Trump's Tariffs Spell Doomsday for U.S. Automakers?

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After the European Union (EU) announced that from Jun 22 import tariffs of more than $3.2 billion will be levied on a variety of American products, Trump retaliated with auto tariffs. On Jun 22, the American President threatened to levy a tariff of 20% on cars and other automobiles imported from EU countries.

With the President giving warnings of raising import tariffs on foreign-made cars, the Alliance of Automobile Manufacturers, a trade group of mostly U.S. automobile manufacturers, shared its concerns. Auto Alliance warned that such high auto tariffs may eventually raise production costs, reduce car demand and result in high job loss.

Auto Alliance Expects $45 Billion Auto Tariffs

In a letter to the U.S. Department of Commerce, Alliance of Automobile Manufacturers, also known as Auto Alliance said that a tariff of 20% will lead to “increased producer costs,” which in turn will raise overall car costs. Additionally, the trade group estimated that after new tariffs are placed, the average price of a car will increase to $5,800. It also anticipated that the auto industry may have to bear a total tax of $45 billion after tariff raise, following this development.

In fact, the trade group in its letter cautioned that higher auto tariffs will be a drag for car sales and lead to “less tax receipts.” Auto Alliance added that a low level of car sales “will lead to fewer jobs,” which will affect numerous families and ultimately the entire economy.

Meanwhile, the U.S. Commerce Department is investigating whether auto-imports are actually a big threat to the country’s security. If Commerce Department’s probe findings reveal that they are a national threat, Trump’s auto-tariff initiative will gain ground and will create tension for the U.S. automakers.

Automakers Anticipate a Booming Auto-Related Trade War

It has been months now that auto manufacturers have begun discussions with the Trump administration in an attempt to prevent a full-on trade war. Several major automakers of the U.S., in their letter to the U.S. Department of Commerce, showed their concerns of a possible decline in car sales and job losses following high tariffs. Further, they have used a report by the Peterson Institute for International Economics to highlight their worries.

As per the Peterson Institute for International Economics, a private, non-profit research institution devoted to international economics, a 25% auto tariff will lead to “a 1.5 percent decline in production.” Additionally, the institution expects that around 195,000 domestic workers may lose their job for a period of one to three years or even higher. They added that in case other such countries retaliate with similar tariffs, about 624,000 U.S. workers will be rendered jobless.

Given this scenario, companies related to the domestic auto industry will definitely suffer. Market leaders of the Zacks Domestic Auto Industry, General Motors Company (GM - Free Report) and Ford Motor Company (F - Free Report) are visibly at the receiving end. While General Motors holds a Zacks Rank #2 (Buy), Ford Motor has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Other companies that could be affected by the new auto tariffs are PACCAR Inc (PCAR - Free Report) , Tesla, Inc. (TSLA - Free Report) and Harley-Davidson, Inc. (HOG - Free Report) .

Summing Up

Undoubtedly, the auto industry is going through a bad phase, following President Trump’s decision to impose a tariff of 20% on cars and other automobiles imported from other countries. The Alliance of Automobile Manufacturers clearly showed its concern over higher auto tariffs and expects a dip in auto sales and witness steep job loss. So, it can be concluded that Trump-imposed new auto tariffs are expected to dampen investor sentiment for auto stocks in the days to come.

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