The U.S.-EU Trade Deal and Its Long-Term Impact on European Automakers: Strategic Risks and Valuation Shifts

The U.S.-EU trade deal finalized in July 2025 has reshaped the competitive landscape for European automakers, introducing a 15% tariff on EU car exports to the U.S. while offering exemptions for sectors like aircraft and semiconductors. While this rate is lower than the previously imposed 27.5%, it remains a significant burden for German automakers like Volkswagen, BMW, and Mercedes-Benz, who now face a new era of strategic recalibration. This analysis explores how these firms are navigating trade pressures, adjusting capital allocations, and repositioning for long-term resilience—and what this means for investors.

The Tariff Burden: Profit Margins Under Pressure

The 15% tariff has already had a measurable impact on European automakers. Volkswagen, for instance, reported a 29% drop in second-quarter 2025 operating profit, with tariffs costing the company €1.3 billion in the first half of the year. The German Association of the Automotive Industry (VDA) estimates that the tariff could cost the sector billions annually, particularly as automakers grapple with the high costs of transitioning to electric vehicles (EVs).

The financial strain is compounded by the U.S. dollar's weakness, which makes European imports more expensive, and unresolved trade disputes over steel and aluminum tariffs (currently at 50%). Analysts like Rico Luman of ING warn that the 15% rate, while an improvement, still represents a “significant burden” for automakers operating in a market with razor-thin profit margins.

Strategic Responses: Local Production and Cost Optimization

To mitigate the tariff's impact, European automakers are accelerating cross-border production shifts. Volkswagen has suspended imports from its Mexican plant to the U.S. and is exploring U.S. manufacturing to secure tariff exemptions. BMW, meanwhile, is investing $1 billion to retool its Greer, South Carolina, plant for EV production, with EV rollouts expected to begin in late 2026. The company is also expanding its San Luis Potosi, Mexico, facility to build Neue Klasse models, including a new battery pack assembly center.

Mercedes-Benz has not yet announced specific U.S. plant investments but is part of the broader European trend toward localized EV production. The company's strategy includes leveraging the EU's Climate and Transformation Fund (€100 billion) to accelerate green manufacturing and hydrogen infrastructure.

These moves reflect a broader industry shift toward nearshoring and vertical integration. However, they come at a high cost. Relocating production lines to the U.S. requires significant capital expenditures, and firms like Jaguar Land Rover, which lack U.S. manufacturing capabilities, face steeper challenges.

Valuation Adjustments: Undervalued Stocks or Overexposed Risks?

Morningstar analysts argue that European automakers are trading at significant discounts to their fair value estimates. Volkswagen's fair value is pegged at €172.00, but the stock trades at a 47% discount. BMW and Mercedes-Benz are similarly undervalued, with Morningstar estimates of €117.00 and €90.00, respectively.

However, these valuations come with caveats. The sector's ability to deliver on profitability hinges on resolving trade uncertainties, particularly the U.S. government's authority to raise tariffs if the EU fails to meet its $600 billion investment commitment. Analysts like Rella Suskin of Morningstar caution that while European automakers are undervalued, their long-term prospects depend on successful execution of nearshoring and EV strategies.

Investment Opportunities: Balancing Risks and Resilience

For investors, the key lies in identifying firms best positioned to adapt to the new trade environment. Volkswagen's aggressive push into U.S. manufacturing and its focus on EVs under its ID. lineup present a compelling case, though its current valuation reflects high uncertainty. BMW's strategic investments in North America and its strong brand positioning in the EV market also offer upside potential.

Mercedes-Benz, while less transparent about its U.S. plans, benefits from its global brand strength and higher-margin product mix. However, its exposure to the weak U.S. van market and China's shifting dynamics remains a risk.

Investors should also consider the broader macroeconomic context. The EU's Alternative Fuels Infrastructure Regulation (AFIR) and Germany's National Hydrogen Strategy provide tailwinds for green infrastructure, which could enhance the long-term value of firms investing in hydrogen and EV charging networks.

Conclusion: A Sector in Transition

The U.S.-EU trade deal has forced European automakers into a period of strategic repositioning. While the 15% tariff introduces near-term headwinds, it also accelerates industry trends toward localized production and electrification. For investors, the challenge is to balance the sector's undervaluation with the risks of trade policy volatility and high capital expenditures.

Firms that successfully execute their nearshoring and EV strategies—while navigating labor shortages and geopolitical energy tensions—will emerge stronger. For now, Volkswagen, BMW, and Mercedes-Benz remain compelling but cautious long-term plays, with their valuations reflecting both opportunity and uncertainty. As the trade deal's full implications unfold, patience and a diversified approach will be key to capturing value in this dynamic sector.