Navigating tariffs in the automotive sector

The global automotive industry will be particularly negatively impacted by the recent introduction of Trump’s tariffs, especially given that, for now, it is one of only three sectors not covered by the 90-day pause that Trump introduced to “reciprocal” tariffs as of 9th April 2025.

As for any other affected sector, pause or not, Trump’s tariffs on imported foreign-made cars are effectively a cost increase, likely to become a price increase for consumers. How much of said increase gets passed to the end consumer is down to the manufacturer. The potential impact on US and global inflation rates is still to be understood, but with $6.6 trillion wiped off the US stock market in two days of trading (April 3rd and 4th) after the tariffs were announced on April 2nd - in what observers called “one of the greatest acts of self-harm in American economic history” - the impact of the tariffs will be felt for some time to come, despite Trump’s ‘pause’ announcement.  An additional blow for the automotive sector is the planned introduction of significant tariffs on automotive parts from May 3rd, which will impact finished goods costs even further.  

The tariff impact is certainly coming at a time of mixed fortunes for European manufacturers. On the one hand, new car production levels declined by over 6% in 2024 and new car registrations, despite a slight growth year-on-year, sat well below pre-COVID levels. On the other, the strict combustion engine ban facing manufacturers may be delayed and softened as has been seen in the UK in recent days.

The US is an important market for European and UK vehicle exports. In 2024, the US exported approximately $57.9bn of cars against an import level of $216bn. Therefore the tariffs would indeed seem to be, on the surface at least, an act of economic self-harm, given that each of these cars now will be significantly more expensive if the manufacturers choose to pass the added costs on to the end consumer. In addition, the three biggest markets for the export of US vehicles in 2024 are three of the markets most hit by the new tariffs – Canada $15.5bn, Germany $7.9bn and China (now subject to a 145% tariff on exports to the US) at $4.9bn. Of these, in 2024, China was the fastest-growing export market for US cars.

Total imports accounted for 40% of 2024’s light vehicle sales in the US. The European automotive sector accounted for 5% of all light vehicle sales in the US in 2024, the equivalent of over 760k vehicles. Profits from these sales go into the financial operation of the manufacturers’ businesses at a global level, so if the effective price increases caused by the tariffs for US consumers see a drop in domestic sales of imported cars, then the price of European manufacturers’ cars in other markets will also potentially be impacted as well to offset the lost sales. Because the car industry is globally integrated, with European manufacturers often having production sites in the US, the wider threat could be decreased investment from European manufacturers overall, job losses and plant closures.

The impact of tariffs on different European countries will vary, with reports predicting sales for the largest exporters like Germany and Italy falling by 7.1% and 6.6% respectively. 24% of Germany’s and 30% of Italy’s exports outside other EU countries currently go to the US. The US is the second biggest market for European car sales behind the UK, with 758k cars exported in 2024 source: ACEA). This accounted for 22% of European automotive exports in 2024 and, because of this dependency, any negative price impact for consumers on imported vehicles represents a clear and present danger to the industry.

International manufacturers account for 48% (4.9m vehicles) of total US vehicle production annually, and of these, European manufacturers account for 17% of the total (or 830,00 cars) of which 50 - 60% are exported out of the US each year, delivering a significant positive impact to the US balance of trade. The impact of tariffs on auto parts being imported by European manufacturers into the US from May 3rd would therefore risk seeing a negative impact on the price of US-produced European car brands and therefore harming the US financial trade position. This would be especially true for the more expensive imported components of electrified vehicles like batteries, although at present only about 15% of exports from the US are electrified vehicles – but that figure will only grow as the production of new ICE-powered vehicles is phased out over the next five to ten years.

The danger for manufacturers is that they face a triple whammy if the tariffs persist:

• They need to relocate more production into the US on a greater scale and abandon other production investments that may have been made elsewhere.
• They absorb the majority of the price increases themselves to protect US sales/share, which will impact their profitability and overall investment and growth capabilities globally.
• They accept that they will lose market share in the US due to reduced consumer demand and will have to deal with the knock-on effect of this on the rest of their global financial performance.

So, what can European automotive companies do to try and mitigate the effect of the tariffs? Here are nine strategies they could consider deploying.

One: Improve competitiveness within home markets, by…

• Unlocking savings for each other through more collaborative negotiations between suppliers and manufacturers. There is a need to move towards more of a true sense of joint business planning as a way to try and unlock sources of cost efficiencies to offset the impact of tariffs. The focus needs to be on shared value and mutual benefits.
• Driving joint innovation in materials and processes to lower costs.
• Investing in technological innovations such as AI, connectivity and autonomous driving to make European cars look more attractive vs US options, even if prices rise.
• Investing in manufacturing sites in lower-cost countries in Eastern Europe, North Africa or Asia, to lower the costs of production overall.
• Re-examining the options for sourcing battery production capability elsewhere to lower dependency on China and, in the case of Trump’s tariffs, if current production volumes or future sales forecasts of EVs warrant it, consider moving some of that production to the US to remove risk of tariffs on this core, costly element of EV production.
• Seeking third-party alliances/collaborations to help drive savings in innovation areas.

Two: Focus on alignment, empowerment and trust

One key challenge in changing the way negotiations have historically been approached in the sector is to ensure that there is alignment internally and support for the move to a new way of working. Once this is achieved, the next focus is on nurturing the necessary relationships that will need to exist for true collaboration between manufacturers and suppliers. Central to this is the need to consciously focus on building and maintaining trust.

When there is pressure in large organizations, like the tariffs, it is easy for the power to migrate back up the hierarchy and coalesce at the very top. This leaves buyers and account managers, who are crucial for negotiating deals and fostering relationships, disempowered and unable to make the necessary impact. The effects of this disempowerment are dramatic and immediate, like the sudden shutdown of a car production line.

Three: Come to a deeper understanding of each side’s priorities

The challenges that the automotive industry faces with the tariffs are the same in many respects as any other industry. It is vital that, if collaborative, mutual value-creating opportunities for both suppliers and manufacturers are to be identified and leveraged, there is a clear understanding of the relative importance of the tradeable variables in any negotiation for each side.

Four: Lean into renegotiated deals

The current situation means there needs to be a change in the way the automotive industry approaches its commerciality. With the introduction of tariffs, all current contracts have arguably become redundant overnight and require renegotiation. Renegotiation of contracts mid-term is often seen as a negative and exploitative option, depending on which side of the table you sit on. However, in these extraordinary circumstances, it offers the chance, and in fact requires, both sides to bring fresh thinking and creativity to the table to find solutions. Both parties need to lean into the challenge and work collaboratively.  One area that presents a barrier to this is the prevalence of claim negotiations within the sector.

Five: Approach claim negotiations with a new mindset

A big profit driver of the industry is claim negotiations and, in most cases, they are extremely tough and highly competitive. Whilst there are clearly potential advantages in manufacturers and suppliers trying to work more collaboratively together to increase options and lower costs, the reality is that this is not a simple change to make, with the spectre of claims ever-present and often drawn-out. Organizational setups, existing contracts on which the claims are based and the historical mentality of the people involved in negotiating these claims can present serious barriers to making a more collaborative approach possible.

One option could be to try to separate operational negotiations from strategic negotiations, with some form of written agreement between the two boards to accept that claim negotiations should not influence progress on key strategic talks. However, the challenge to this approach is that the claim can be a powerful lever in overall negotiations.

A better approach may be to align that the settlement of a claim will be contingent upon a proportion of the settlement amount being invested into mutually beneficial areas, such as setting up production in new, cheaper locations, that will help drive lower costs and greater efficiencies within the total partnership. 

Six: Build deals that offer protection

One impact of tariffs, especially unprecedented ones like Trump’s, is to create uncertainty at both a micro and macroeconomic level. How do you negotiate prices when the risk of inflation, and the possible scale of that risk, is unknown? Incorporating inflation mitigation elements becomes key but requires flexibility on both sides to avoid them feeling punitive or exploitative.

Seven: Protect customer loyalty and maintain affordabilityPassing costs onto the end consumer is obviously one way to mitigate the impact of tariffs for the manufacturers. This takes no skill or imagination, but the risk is that it simply sees a drop in demand and an erosion of profit, and in the case of sales in the US of European models, a drop in market share.  An element of passing some cost increase onto the consumer on items as expensive as cars is arguably inevitable. It may be less of an issue on the luxury end of the market where consumers are typically less price sensitive, but sharing some of the remaining cost burden between the manufacturer and suppliers is another option. However, this is only really possible longer-term if greater efficiencies and cost savings can be engineered through new processes and renegotiated deals.

Eight: Adopt a unified approach to lobbying governments

Ongoing lobbying of governments, trade bodies and influencing of policy makers is a vital step in the general day-to-day health and growth of any sector, and it is especially true for the automotive industry with the new Trump tariffs. Lobbying and influencing must more than ever be further used to address various areas critical to the health of the industry in general, and specifically for combating the new US tariffs. Options include:

• Addressing the affordability of electric cars with buyer incentives and state investment in rapidly expanding the charging networks infrastructure to also impact consumer confidence in moving to electric, and thus sales.
• As seen this week in the UK, seeking support from governments to loosen the penalties for failing to meet zero-emission vehicle targets.
• Lobbying the US government as an industry and, in the case of the European Union, a collective trade body with significant weight, influencing the US trade balance to reduce or eliminate the tariffs, or at least secure a ‘pause’ like other sectors.

Nine: Consider instigating legal challenges to the tariffs

• European manufacturers, ACEA, and local governments could mount legal challenges to the tariffs. Such challenges can cause delays that can take time and might provide a temporary imposed hiatus in tariffs whilst underway.
• EU-US trade agreements could be renegotiated to reduce or eliminate the tariffs on car and parts imports into the US.

The tariffs are here and appear, at least for now, to be staying for the automotive sector. Those European manufacturers and their suppliers that ride the storm the best will be those who can pivot and refocus their efforts to adapt working practices, optimise processes, work more collaboratively and negotiate more win; win-win-focused deals that make the production process more cost-efficient and the end product more attractive and worth what it costs. For those with a greater investment in the US, reviewing what aspects of production to relocate over there will help further offset the impact of tariffs. It is vital, therefore, for OEMs and suppliers to start planning now, developing extended stakeholder mapping, defining strategic priorities and approaches and evaluating risks and contingencies fully. It is imperative to move into aligned, solution-focused conversations with each other and identify optimal routes across the full production landscape to minimize the impact of the tariffs.  

All figures and statistics quoted in this article were accurate at time of publication, May 2025.                                                   

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About the author 

Tim Green is a Principal at The Gap Partnership where he leads strategic growth and supports global client teams as part of the EMEA leadership. He began his career in global FMCG and later founded a consultancy specialising in sports sponsorship negotiations. An expert in the psychology of negotiation, Tim writes for The Negotiation Society and holds a BA in Business and Marketing.