Trump's Tariff Threats Darken Outlook for European Auto Industry

Donald Trump's recent tariff threats have cast a long shadow over the European auto industry, which is already grappling with intense competition from Chinese manufacturers and declining sales in key markets. As the incoming U.S. president prepares to take office on January 20, Europe's battered car industry is bracing for additional headwinds amid the threat of new tariffs.

Trump has pledged to impose steep new tariffs on goods coming from China, Canada, and Mexico in one of his first acts in office, a promise that could ignite trade wars. This is bad news for European automakers who have already seen sales and manufacturing decline in top markets like the United States and China.

The potential tariffs would be felt hard not only by leading European car brands like Volkswagen, Volvo, and Stellantis -- the conglomerate that produces Fiat, Chrysler, and Citroen -- but also for the Central and Eastern European countries whose economies rely heavily on making them. Toma Savic, a former director at Zastava, a Serbian international car manufacturer that was shuttered in 2008, said the tariffs would be a particularly hard blow for operations in the Balkan country. "This inevitably would lead to the shrinking of production in Europe and mass layoffs," he said.

Zastava later became Fiat Chrysler Automobiles Serbia, which is owned by Stellantis. Based in Kragujevac in central Serbia, Fiat Chrysler Automobiles Serbia has already been struggling to recuperate its foothold in the European auto industry prior to the breakup of Yugoslavia in the early 1990s when it assembled 200,000 cars annually and exported them to 26 countries.

Germany’s auto industry is also likely to be highly vulnerable to Trump’s promised tariffs, especially given that Europe’s biggest economy is by far the region’s largest exporter of passenger cars to the United States. European and American carmakers could lose up to 17 percent of their combined annual core profits if the United States imposes import tariffs on Europe, Mexico, and Canada, according to some estimates.

Trump’s Tariff Vision
While Europe was not specifically mentioned in Trump’s first tariff announcement in late November, he took aim at the European Union while on the campaign trail earlier this year and accused European partners of unfair trade practices and stealing American manufacturing jobs. "They don’t take our cars, they don’t take our farm products, don’t take anything,” Trump said on the campaign trail in October. “They are going to have to pay a big price.”

The U.S. market is the main destination for European passenger cars. Exports amounted to 42.5 billion dollars in 2023, according to Statista, a German online platform that specializes in data gathering and visualization. In comparison, the value of U.S. vehicles imported to the EU was around 7.8 billion dollars during the same period.

Trump said on the campaign trail in September that he wants German automakers to become "American car companies” and “build their plants here.” He added that he was prepared to offer low taxes and energy costs to draw more companies to set up manufacturing inside the United States. In 2016, German carmakers avoided 35 percent tariffs floated by Trump by investing more in U.S. production. But Trump's new proposed tariffs could make it more costly for European automakers to set up U.S.-based factories.

A Make Or Break Moment
The threat of new tariffs will add to already growing pressures facing the European auto industry as it looks to compete for the future electric vehicle (EV) market that is dominated by Chinese manufacturers. Earlier this year, the EU imposed duties of up to 35 percent for EVs from China saying that the “unfairly subsidized” cars have given them a market foothold. Added to this, car sales for EVs across the EU have dipped downward and some governments have repealed subsidies meant to incentivize consumers to buy the cars.

The rise of Chinese companies, such as EV-leader BYD, has also seen Western car brands lose market share inside China at a steady rate, with Volkswagen in particular grappling with declining sales. Between tougher competition from China, declining sales at home, and new pressure from Trump, many European automakers are facing a bleak outlook.

Back in Kragujevac, Fiat Chrysler Automobiles Serbia is grappling with weak demand, including several fully electric products delayed entirely or produced at tumbling rates. Jugoslav Ristic, a long-time union official in the car industry in Serbia, said the setbacks are a result of “customs wars and unfavorable business conditions.”

Carmakers in the U.S. and Europe could lose up to 17 percent of their combined annual core profits in a worst-case scenario if the U.S. imposes steep tariffs on Europe and the key U.S. allies of Mexico and Canada, a report from S&P Global released Friday showed. President-elect Trump has threatened to impose 25 percent tariffs on all goods from Canada and Mexico, and increase tariffs on China. U.S. automakers import billions of dollars in parts and products from Mexico, where many companies operate plants that work closely with U.S. counterparts. Tariffs on those products could cause steep increases on U.S. car prices after years of staggering increases following the pandemic.

The report warns that Trump’s reelection “will likely intensify the headwinds the global auto industry will face in an already challenging 2025.” According to the report, premium original equipment manufacturers such as Volvo and Jaguar Land Rover could be at higher risk of being exposed to higher tariffs due to their reliance on European production. General Motors and Stellantis are also more likely to be exposed to higher tariffs because of their reliance on production in Mexico and Canada, the report noted. Those companies could see more than 20 percent of their earnings — before interest, taxes, depreciation and amortization — at risk in 2025, the report said.

Meanwhile, exposure for Volkswagen and Toyota are not as high-risk, between 10 percent and 20 percent, and below 10 percent for BMW, Ford, Mercedes-Benz and Hyundai, the report added.

Trump’s tariff plans, which have been his preferred way of boosting U.S. manufacturing and pushing other countries for more favorable trade terms, have faced pushback from both Mexico and Canada. His latest tariff threat is aimed at forcing both Mexico and Canada to crack down on their borders with the U.S. Mexican President Claudia Sheinbaum warned that her country will respond with its own tariffs if dialogue between the U.S. and Mexico fail. She said Tuesday that talks are “the best path to achieve understanding, peace and prosperity for our two countries.”

Top Canadian economic officials also warned Trump against upsetting the “balanced and mutually beneficial” relationship between the U.S. and Canada, pointing out how much Canada imports from its neighbor to the south.

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Table of Contents
Why it matters
What we think and why
Trade Barriers With Mexico And Canada Are The Biggest Risk For Mass-Market Carmakers
EBITDA Exposure Is Driven By Volume, Mix, And Regional Footprints
Tariffs Could Compound Other Downside Risks For Ratings
Company-Specific Considerations
OEMs' Success With Tariff Mitigation Will Matter For Ratings
On-Shoring Can Partly Ease The Tariff Burden
Related Research
In the following, we discuss how additional U.S. import tariffs on LVs imported from Europe, the U.K., Mexico, and Canada could affect the earnings of European and U.S. carmakers, as well as Toyota Motor Corp. (Toyota) and Hyundai Motor Co. (Hyundai-Kia). The scope, magnitude, and timing of new tariffs are uncertain and are therefore not part of our base-case scenarios for the issuers we cover in this article.
Our estimates represent the maximum possible EBITDA at risk from the tariffs before taking into account any strategic responses by OEMs. The figures do not represent a prediction of actual market outcomes but an estimate of the hypothetical tariff burden at pre-tariff import volumes and pricing. This burden would have to be passed through to customers, reduced by countermeasures, or absorbed by lower profits.
We also discuss potential OEM responses and mitigating actions. Based on these, we expect the actual effect will be materially lower than the maximum EBITDA exposure. We do not incorporate the effect of tariffs on imports from China as this region is less material for most automakers in terms of U.S. imports.
Why it matters
Donald Trump's re-election will likely intensify the headwinds the global auto industry will face in an already challenging 2025.
What we think and why
Based on Mr. Trump's announcements during his election campaign, we understand that the president-elect could implement far-reaching changes in the following three areas:
Review of the Inflation Reduction Act and, more specifically, the partial or total removal of the nonrefundable tax credit of $7,500 that supports the sale or leasing of qualifying new battery electric vehicles (BEVs) and plug-in hybrid models.
Introduction of additional tariffs on imports of foreign goods, with higher duties on imports from China. This could include a significant increase in import duties on LVs--which are currently subject to a 2.5% base tariff (excluding light trucks, which are subject to a 25% levy)--and it could raise the 100% tariff introduced by the Biden administration on imported Chinese electric vehicles (EVs).
Revision of the conditions that underpin the free trade agreement with Mexico and Canada, which is due