Heartburn

Trump's 'massive' deal with Japan is giving US automakers heartburn

The preliminary agreement suggests there is a path forward to lowering the auto duties on other major trading partners, as well.

By Daniel Desrochers and Chris Marquette

President Donald Trump’s “massive” trade deal with Japan is buoying foreign carmakers — and alarming American car companies who fear they are now at a disadvantage.

Trump imposed a 25 percent tariff on all foreign auto manufacturers in early April, a duty that also applies to cars made by U.S. companies from parts imported from Mexico and Canada. But now, the president is planning to lower the tariff to 15 percent for Japanese autos and auto parts, the White House confirmed Wednesday. That means some cars manufactured by U.S. companies could end up facing higher duties than some cars built entirely overseas.

The new deal with Tokyo suggests there is a path forward to lowering the auto duties, an issue that has bedeviled trade talks with other major trading partners like the European Union and South Korea. And it’s causing angst for U.S. automakers, who warn that it would hurt domestic industry due to the complex North American auto supply chain.

“American Automakers still need to review the details of the U.S.-Japan agreement, but any deal that charges a lower tariff for Japanese imports with virtually no U.S. content than it does North American-built vehicles with high U.S. content is a bad deal for the U.S. industry and U.S. auto workers,” said Matt Blunt, president of the American Automotive Policy Council, which represents the American companies Ford, General Motors and Stellantis.

The White House did not respond to a request for comment.

Treasury Secretary Scott Bessent, in an interview on Bloomberg television Wednesday morning, credited the decision to lower Japan’s auto tariff rate to its offer of new investments, which he doubted other countries could replicate. But one auto industry lobbyist said that Commerce Secretary Howard Lutnick has been floating similar deals to the EU Union and South Korea, both of whom have large and influential auto sectors. And four EU diplomats confirmed that the 27-country bloc is in talks with the U.S. about a deal that would set a 15 percent baseline tariff, including on cars, mirroring the Japan accord. They were all granted anonymity to share details of the sensitive discussions.

The auto industry lobbyist called the agreement with Japan “another abandonment of U.S. autos.”

Though the White House has argued the tariffs will help the U.S. build more cars at home, domestic automakers have also taken a hit from the duties, due to the integrated nature of North American auto supply chains. U.S. companies rely on Mexico and Canada to help build cars and supply parts, particularly after Trump renegotiated a North American trade deal lowering duties between the countries. To ease some of the pain, the White House has offered a complicated rebate scheme for portions of certain North American-made cars’ sales value over the next two years, but automakers are still struggling.

One of the country’s “Big Three” auto giants, General Motors, reported on Tuesday a $1 billion drop in second quarter profits in part due to the tariffs, and warned in an earnings call that losses in the next quarter will be even higher. Stellantis, which owns Chrysler and Jeep, announced earlier this week it expects to lose $2.7 billion in the first half of 2025,.

And Elon Musk’s Tesla on Wednesday posted another quarter of meager profitability and revenue, in part due to the tariffs. Tesla said its profitability decreased for the quarter because of lower regulatory credit revenue, a decline in vehicle deliveries and a lower cost per vehicle due to “mix and lower raw materials partially offset by lower fixed cost absorption and an increase in tariffs.”

Those losses will be tougher to swallow if other major trading partners succeed in negotiating better tariff rates for their own automakers. Reuters reported Wednesday that stocks in Japanese car companies Toyota and Honda soared on the news of the deal, but so did shares of South Korean and European carmakers, as hopes rise that their leaders could strike similar deals.

Trump’s auto tariffs have been a sticking point in trade negotiations with the EU for months, with Germany vocally pushing the 27-member bloc to make major concessions to Trump in hopes of winning a reprieve for its large auto manufacturing sector.

“The costs for our companies are already in the billions — and the sum is growing every day,” said Hildegard Müller, president of VDA, the German automobile association, which represents companies such as Volkswagen, BMW and Mercedes. “The damage to the previously functioning supply chains is enormous and must not be allowed to increase any further.”

German auto companies are reporting double-digit declines in exports to the U.S. in April and May, and they aren’t the only ones. Volvo, the Swedish car company, has had to pause sales of some of its cars in the U.S.

South Korean car companies Hyundai and Kia will announce their second quarter financial results later this week and both companies are projecting significant losses from the tariffs, as well. Auto exports from South Korea to the U.S. have exploded over the past 20 years, from $8.7 billion in 2005 to $37.3 billion in 2024, according to data collected by the Census Bureau.

As with Japan and the EU, the duties have been a focal point of trade talks with the Trump administration, which has grown frustrated by the lack of progress. Trump sent a letter to new South Korean President Lee Jae-Myung on July 7 threatening a 25 percent tariff on all its exports to the U.S. — a sign of dissatisfaction with the state of the talks. (He sent a nearly identical letter to Japan’s prime minister the same day.)

After imposing the auto tariffs this spring, the administration assured American automakers that they would not become a bargaining chip in other trade negotiations, a person familiar with discussions between the administration and Detroit’s “Big Three” auto companies, granted anonymity because of the sensitive nature of the talks, told POLITICO at the time. The president sought to cast the UK deal, which reduced duties on auto and auto parts to 10 percent for the first 100,000 cars entering the U.S., as an exception.

“I won’t do that deal with cars” for other countries, Trump said when announcing the terms of negotiation on May 8. The British auto brand Rolls-Royce is “a very special car and it’s a very limited number, too. It’s not one of the monster car companies that makes millions of cars,” he noted, although some British brands like Land Rover compete with American SUVs.

A White House official, granted anonymity to discuss the trade talks, struck a similar note on Wednesday, downplaying the prospect that Trump will agree to lower the car tariffs for any more countries. “It’s a negotiation,” the person said, pointing to the $550 billion investment Japanese businesses pledged as a sign that the country had made an unparalleled offer.

In Japan, embattled Prime Minister Shigeru Ishiba celebrated the agreement, saying it was focused on “prioritizing investment over tariffs.”

But others were less enthusiastic about the outcome, given the double-digit tariff rate still hitting Japanese goods.

“If 15 percent is applied to autos and auto parts, Japan did not get what it was aiming for,” said former Japanese Vice Minister Tatsuya Terazawa.