Tariffs And Policy Repeals Could Force U.S. Auto Industry To Fail, Ceding Economic Growth To China

During the Great Depression’s darkest days, President Hoover passed the Smoot-Hawley Tariff Act intended to boost America’s economy. But the result was higher prices on more than 20,000 imported goods, which significantly worsened the country’s economic woes.

Now 95 years later, new tariffs coupled with policy repeals proposed by the Trump administration could similarly slam one of America’s biggest economic sectors – the auto industry. Major automakers like Ford, GM, and Stellantis will face a crossroads if new tariffs are placed upon our key trade partners, especially if those tariffs are paired with repealing policies that support this core American industry.

China invested heavily in an automotive sector to meet 21^st century demands, and is rapidly overtaking the U.S. as the world’s largest auto producer and exporter, pushing American automakers out of major markets where they’ve been leading for years. While China supported its auto industry growth – including plug-in hybrid and battery electric vehicles – U.S. automakers spent years deferring needed investment in emerging technologies. Coupled with federal policy that has until only recently failed to stimulate the sufficient research and development, America’s auto industry is in a precarious position.

Policies proposed by the Trump administration like imposing tariffs on key trade partners and eliminating federal tax credits will only worsen this trend, harming some of America’s biggest companies while reducing consumer choice and forcing drivers to pay more.

More than ever, the U.S. auto industry needs supportive policy to position it as a 21^st century leader. What it’s getting instead is policy that sets it up to fail and hands global auto dominance to China.

The Rise of China’s Auto Industry

China has quickly become the world’s leading passenger car manufacturer, producing more than 26 million of the 68 million passenger cars manufactured in 2023, up from about 2 million cars 20 years ago. Increased domestic vehicle manufacturing met much of China’s vehicle demand growth, reducing U.S. automakers’ share in that market, with no indication this trend will change.

Meanwhile, vehicle sales from U.S.-headquartered companies in other markets are freefalling while China keeps rising. China exported more than 5 million cars in 2024, including about 2 million plug-in vehicles. As the Council on Foreign Relations’ Brad Setser notes, “right now nothing – except politics and the risk of further trade action – precludes [China from]

exporting another 6 million or even another 12 million cars.”

In Europe, a major market for U.S. automakers, Chinese imports surpassed Japan, South Korea, and the U.S. in 2022. While European imports across the board generally declined in 2024, China remains well ahead of America. This trend is apparent in other prominent economies across Southeast Asia where China is eating into Japan’s share of those markets, and growth has been especially strong in Brazil and Turkey.

Tariffs and policy repeals threaten U.S. automakers

This all hits as U.S. automakers face enormous uncertainty. The Trump administration’s enacted and proposed tariffs, especially those targeting key trade partners Canada and Mexico, will significantly raise costs to produce vehicles in the U.S. and further threaten the viability of major U.S. automakers.

Steel and aluminum tariffs on Canada and Mexico might help U.S. steel and aluminum producers, but tariffs raise those commodity prices for every other business and factory that require them to manufacture goods. For example, 25% tariffs on steel and aluminum from Mexico and Canada could raise vehicle prices for consumers 1-4%, increasing prices up to $3,000 per vehicle.

Auto manufacturing is already a business of thin margins, and tariffs would simultaneously raise costs for consumers while kneecaping U.S. automakers’ competitiveness, especially in markets where they are already slipping, by making their vehicles more expensive to produce.

Ford CEO Jim Farley proclaimed the proposed tariffs “would blow a hole in the U.S. industry that we have never seen…that kind of a size of a tariff would be devastating.”

Policy can help U.S. automakers compete globally

Given how rapidly U.S. automakers have lost market share to China abroad, smart government policy is badly needed for U.S. automakers’ global competitiveness.

Tariffs harm U.S. automakers, point blank. And equally important, repealing federal tax credits that support research, development, and manufacturing of 21^st century vehicles undermines the ability of U.S. automakers to grow their market share abroad.

The world increasingly wants vehicles with batteries – one in five cars sold worldwide in 2024 were electric, and the International Energy Agency forecasts 50% of all cars sold worldwide will be electrified by 2035, pushing the global stock of plug-in vehicles from about 50 million today to more than 500 million.

Plug-ins are already approaching cost parity with internal-combustion engines in many economies – they’re already cheaper in China than gasoline equivalents – and the world’s largest auto markets are implementing policies that require higher shares of plug-ins.

For instance, European Union regulations require an increasing share of electrified vehicles including sales of more than 60% zero emissions vehicles by 2030 and 100% by 2035. The opportunity for U.S. auto manufacturers lies in meeting this rapidly growing demand at home and abroad.

Unfortunately, major U.S. automakers are already years behind China’s manufacturers in producing high-quality, low-cost plug-in cars. For example, the BYD Sea Lion 07, highly comparable to the Ford Mustang Mach-E, retails for nearly $13,000 less while offering nearly 60 miles more range – perhaps why Jim Farley says China’s progress is an “existential threat” to Ford. The same is true for other U.S. manufacturers.

Modernize U.S. auto manufacturing, or throw economic growth in reverse?

To compete with China, U.S. automakers must increase plug-in vehicle production and decrease production costs – one of the core ways to do this is cutting costs for plug-in vehicle batteries. America traditionally had comparatively little domestic manufacturing capacity for plug-in batteries but tax incentives passed by Congress, particularly the 45X advanced manufacturing tax credit, strongly incentivize battery manufacturers to locate in the U.S. and produce American batteries.

Since Congress passed this tax credit in 2022, 373 manufacturers announced more than $118 billion in planned investment, alongside 203 EV manufacturing announcements totaling more than $54 billion in investment. U.S. battery output is now forecast to produce more than 10 million EVs per year by 2030.

However even with current incentives, Chinese batteries today are still about one-third cheaper than American batteries. That means battery developers need confidence in long-term market development to know spending tens of billions to build new factories will be reciprocated with a stable market for their batteries that continues growing without unfair barriers as they scale and drive down costs.

Therein lies the need for a holistic strategy to support U.S. automakers. Cutting costs requires policy to encourage development of domestic battery and plug-in vehicle manufacturing, which in turn requires policies supporting plug-in vehicles sales and domestically manufactured batteries to power them.

The good news is existing battery and plug-in vehicle incentives, coupled with backstop standards, are providing this confidence. Existing policies, including the 45X, 30D, and 45W tax credits, as well as national and state tailpipe pollution standards, have are fostering this growth. BEV demand has grown steadily in the U.S. to reach 1.5 million plug-in vehicles sold in 2024, about 9.4% of 16 million new vehicles.

But while plug-in demand is certain to continue growing, the growth pace is uncertain, particularly if the Trump administration guts incentives and policies to foster market growth. Repealing these key policies, especially while adding tariffs, will crater the market – WoodMackenzie modeling predicts ending these policies could cut 2030 annual sales share of plug-in vehicles from 32% to 23%, or about 1.4 million cars.

This policy uncertainty is discouraging some battery developers and auto manufacturers who had announced new investments – in Georgia alone over the past two weeks a battery manufacturer cancelled plans for a $2.5 billion factory and an American EV component supplier halted construction on a new plant.

Major companies share those concerns. Jim Farley warned Trump administration policies could force layoffs, while other U.S. automakers have urged that if they are amended, EV tax credits should be phased out instead of repealed.

A Clear Solution To Unnecessary Damage For America’s Auto Industry

The solution to this uncertainty is relatively straightforward. First, avoid tariffs that harm U.S. auto manufacturers. Second, provide manufacturers with a stable investment environment by preserving existing incentives like the 30D, 45W, and 45X tax credits to encourage investment in battery production and EV manufacturing. Third, maintain existing federal and state tailpipe pollution and vehicle efficiency standards that provide automakers a strong and clear market for plug-in vehicle demand.

America’s automakers have gotten back in the fast lane toward economic dominance, but the race with foreign competitors has barely begun. Preserving existing tax credits and standards will provide the domestic support and demand certainty American battery suppliers and automakers need today to make investments that will position them to succeed tomorrow. Throwing our economic growth in reverse by imposing harmful tariffs and repealing existing laws will only leave the U.S. auto industry in the dust.