Higher Import/Export Taxes Could Reduce American Supply of Luxury Vehicles

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President Trump threatened to raise tariffs on cars from the European Union by 20 percent. As a wealthy man who enjoys driving luxury German cars, Trump will still be able to afford imports. The average American, however, might think twice about buying that new Mercedes roadster. Higher tariffs will mean most likely mean higher prices to cover those tariffs.

How the Tariff Will Affect European Businesses

E.U. car manufacturers depend on American buyers as significant portion of their market. Many are now considering how they might partner with one another to share costs. Others are seeking ways to design less expensive cars.

Luxury convertibles, in particular, are expensive to build. As a result, Americans might see fewer of them on the road as long as the high tariffs last. Carmakers will take a hit if Americans opt not to pay higher prices for convertibles. Top-down models do not sell well in Asia due to the heat and pollution. Europeans and Americans are the only viable market for such cars.

The increased tariff could mean a $5.24 billion loss for German manufacturers, say analysts at Evercore. And besides increased taxes for exporting to the U.S. foreign car makers will need to pay higher taxes for importing steel from the U.S. This is a result of reactionary trade agreements. As one country raises tariffs on some goods, the next country reacts in kind by raising tariffs of their own.

Switching Production to American Facilities

Some European companies could produce their luxury models in U.S.-held facilities. Volkswagen, Daimler, and BMW all have American-run factories. But they don’t produce luxury models. These companies use their American plants to produce sedans, SUVs, and crossovers for the wider market. It would be expensive to switch or expand operations to make luxury models.

Increasing tariffs and the looming global trade war could cause some companies to invest in more flexible facilities.

Balancing the Books

The increased tariff might not affect car manufacturers as much as some think. LMC Automotive reports that sales for convertibles in the U.S. are already falling. In 2012, Americans bought 177,000 convertibles. In 2017, they only bought 127,000. They believe that trend would continue to Americans only buying 113,000 convertibles in 2019 if tariffs remain the same.

They except Mercedes to only sell 20,000 and BMW 16,000 convertibles this year.