Revving in Reverse: Why Tariffs Threaten the Auto Industry, the Climate, and Jobs
By Hengrui Liu
The recent tariffs imposed on the automotive sector will not protect or strengthen the U.S. auto industry as claimed by the White House. Instead, they will harm the industry’s development, increase carbon dioxide emissions, worsen air quality, and potentially eliminate automotive jobs. The true cost of these tariffs extends far beyond the direct price hikes that consumers face. These include broader consequences such as increased emissions, brain drain in the auto industry, reduced R&D investment, and lost business opportunities—costs that are not well captured in policy debates. One of the core problems with the current administration’s policy choice is its reliance on the flawed belief that a complex problem can be solved with a silver bullet. Revitalizing the U.S. auto industry requires a comprehensive and carefully designed policy package, not a single tool. Moreover, good policy should send consistent and clear signals to the market and its stakeholders. Unfortunately, the administration's erratic use of tariffs has had the opposite effect, creating market turbulence and dampening investor confidence.
Although the United States was once a global leader in the auto industry, it has long since been surpassed, by Japan in the economic and compact vehicle market, Germany in the luxury segment, and now by China, the world’s largest EV producer. U.S. automakers have become more domestically focused, especially in the SUV and pickup truck segments, while losing global market share. Over the past four decades, the automotive industry has become one of the most globalized sectors. Today, U.S. automakers outsource around 80% of production to suppliers, retaining only critical component manufacturing, such as engines and transmissions.
Globalization has made vehicles cheaper but also more vulnerable to tariffs. The current policy imposes a 25% tariff on imported vehicles and auto parts, and a 145% tariff on products from China. As of 2024, the United States’ leading trading partners for automotive parts are Mexico (41%), Canada (10%), and China (9%). Tariffs on auto parts will also increase auto insurance premiums, simply because replacing damaged parts will become more expensive. The COVID shock demonstrated that a supply disruption of even a small component can shut down an entire factory. Tariff shocks could cause similar damage if automakers are unable to pivot to alternative suppliers. As input costs rise, companies’ margins shrink, often resulting in layoffs and reduced innovation.
Tariffs will make it more difficult to decarbonize the transportation sector, which currently accounts for around 30% of total U.S. greenhouse gas emissions. The current administration is reportedly considering rolling back CAFE standards (which govern vehicle fuel efficiency) and dismantling EV incentives enacted under the Biden administration. At the same time, tariffs on imported EV components, including lithium-ion batteries and electronic parts (largely from China) will make EVs less affordable. The 25% tariff on imported passenger vehicles will likely devastate the compact, fuel-efficient vehicle market, as many of these cars are the most import intensive. Faced with higher prices and fewer choices, consumers are likely to delay purchasing new, cleaner vehicles, continuing to drive older, more polluting cars. This could not only increase greenhouse gas emissions but also worsen local air pollution.
A central goal of the Trump administration’s tariff policy is to bring automotive manufacturing jobs back to the United States. However, this is highly unlikely to succeed through broad-based tariffs alone. In addition to targeting vehicles and parts, tariffs now also affect steel, aluminum, and rubber, core inputs for auto manufacturing. Today’s automotive supply chains are globally integrated: vehicles are designed in one country, components manufactured in others, and assembly occurs in yet another. Rebuilding this system in the United States will take decades and face major economic hurdles. There are three key reasons why bringing back jobs is impractical. First, relocating supply chains requires long-term investment and policy consistency, and no one knows how long the current tariffs will stay in place. Second, most outsourced manufacturing involves low-value-added parts that are only profitable where labor costs are low. Third, even if manufacturing facilities were relocated back to the United States, a major challenge would be the shortage of skilled labor. Without substantial investment in workforce training and education, it will be difficult to attract sufficient skilled labor back into the sector. According to the National Association of Manufacturers, up to 3.8 million skilled manufacturing jobs may go unfilled between now and 2033. About 65% of manufacturers say attracting and retaining talent is their biggest challenge. On top of that, higher prices for domestically produced vehicles could reduce demand, leading to fewer, not more, automotive jobs. With the IRA under threat of repeal, the added burden of tariffs could further undermine its potential to drive job creation in the automotive sectors.
This is not to say that tariffs are always a bad policy tool. Rather, the issue lies in using them as the primary instrument to tackle a decades-old structural challenge. The administration appears to lack a coherent strategy and has not meaningfully engaged with key stakeholders. As shown in parts of East Asia—such as South Korea’s use of temporary protection combined with an export-oriented strategy—strategically applied tariffs, when paired with well-designed industrial policies, can be effective. But wielding tariff policy impulsively, without sound economic reasoning or evidence, can have wide-reaching consequences. These consequences span not only the auto industry but also financial markets, public health, and climate goals.
Hengrui Liu is a Postdoctoral Scholar at the Climate Policy Lab at the Fletcher School, Tufts University.