Trade War?
Earlier this year, President Donald Trump’s announced a 25 percent tariff on car parts, and car accessories (e.g., the aluminum and steel that car makers used to make) used to assemble vehicles. The Alliance for Automobile Manufacturers, a Washington-based interest group, stated that the additional tariff will be harmful to the US economy.
Top automakers, Toyota and General Motors have already discussed the possibility of job losses. Experts also project that auto sales will drop and auto companies will be forced to reduce their workforces because of diminished profits caused by the additional tariffs. In the long run, they say, this will weaken these companies.
Once enacted, the tariffs will be immediately implemented. The additional costs will inevitably be passed on to consumers. A 25% tariff on imported vehicles will lead to an increase in the price of imported cars.
In 2017 44% of all cars sold in the U.S. were imported.
Auto retailers have stated that 44% of cars sold in the U.S. last year were imported. However, because of the impending tariff adjustment, they might cut down the purchases of vehicles built abroad and turn to used cars as these have higher profit margins.
“If you put that kind of tariff on a vehicle or an industry, prices are definitely going to go up on average,” said Jeff Schuster, senior vice president of forecasting at LMC Automotive. LMC Automotive gives insights and analysis into how market dynamics, economic, regulatory and technological change impact vehicle sales and production.
Schuster estimated that, for example, a 25 percent tariff added on top of a new car priced at $32,000 after discounts would likely increase its price by an additional $4,000.00 to $5,000.00. The automaker will probably pass on half of the cost of this increase to consumers and absorb the rest.
What do car dealers say?
Car dealer David Rosenberg said, “There is no doubt the retail auto industry will be adversely affected. We’ll see price increases across the board, and a lot of that will be passed on to the consumer. Sales will go down.” Mr. Rosenberg owns a dealership in New England and is taking the risks of President Trump’s policy on the automobile industry seriously. This is the forecast for new and imported vehicles, but how are the tariffs going to affect the used car market?
40 million used vehicles were sold in the U.S. in 2017
Currently, the used car market represents a far more significant share of auto purchases than the new car market. Statistics clearly show that about 40 million used vehicles were sold in the U.S. in 2017. That is more than twice the 17.2 million new cars sold in 2017, nearly a record number.
According to Jonathan Smoke, Cox Automotive chief of Economy, used car auctions have been doing better since President Trump decided to push through the new tariffs on imported vehicles. Experts expect that used car prices will go up until the taxes on imported cars and parts get resolved.
The trade war the U.S.
is engaging in at the moment on account the increase in tariffs will also push consumers into the used car market. This is a market that is strong enough to absorb an additional share from the new car market and pick up sales. Used vehicles will become more attractive to consumers. If new cars prices go up, buyers are likely to consider opting for a used vehicle that is a few years old, has already taken a hit on depreciation, and has much of the same technology and features as a new car.
This is the opinion of Auto Trader’s Executive Analyst Michelle Krebs regarding the impact of additional tariffs for new cars on the used car market. “Now you add tariffs into the mix, and that raises prices. Consumers are already balking at where prices are now because we are seeing incentives rise. That makes used vehicles even more attractive,” Kreb’s said.
Popular Used Car Auctions
The trade war and additional tariffs specifically focused on new car manufacturers will undoubtedly have a significant impact on the used car market. We should expect used cars prices to increase due to rise in demand, which will affect affordability.
The effects of the tariffs could possibly disappear if the plans to impose additional taxes do not materialize. For now, it is still early to make assumptions, and we should wait for other factors to play out.
“We believe at the core of this, if there’s any chance that in three to six months vehicles are going to be more expensive, it’s more rational to buy now,” Chief Economist for Cox Automotive, Jonathan Smoke said.
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