Volkswagen and other German car manufacturers face a challenging landscape following the recent announcement of new tariffs by US President Donald Trump. Our automotive sector is at an existential pivot point. Given that Trump has already imposed a 25% tariff on imported cars, a terrifyingly complex trade war would be set to greatly inflate costs and threaten profit margins. As European automakers assess the potential impact, they must make strategic decisions regarding production and pricing in the US market.
Volkswagen is taking decisive action to shore up its position in the United States. Earlier this year, the company bet more than $14 billion (€12.8 billion) to accelerate this push. This investment is a positive signal of VW’s long term commitment to the US market, where about 7% of its global workforce is based. With the new tariffs looming, the company now faces a tough choice: either reduce profit margins and raise prices or increase production domestically to mitigate the impact of the tariffs.
The Landscape of US Investments
With the company already running six production facilities in the U.S., their decision to pour even more funds into the American market isn’t surprising. The company has been banking on even more expansion, aiming to cash in on what it says is a massive growth opportunity. Likewise for Mercedes-Benz – they’ve been in the US almost as long, first setting up shop in 1888. Today, Mercedes directly employs about 163,000 workers at 24 factories in 13 southern states. Their South Carolina plant is currently running at full capacity.
The truth is, European auto makers have over the years become incredibly reliant on the US market. In fact, over a fifth of their automotive exports go directly to the United States. In 2024, this amounts to almost 760,000 replacement vehicles worth €38.9 billion. Germany provides fully two-thirds of these exports. This leaves the country’s automobile industry vulnerable to the new tariffs.
“The new US tariffs pose a serious threat to globally integrated industries with complex supply chains such as the automotive sector.” – Dr. Sonali Chowdry
Strategies in Response to Tariffs
German automakers are taking these challenges, presented by the tariffs, right in stride. They are taking different approaches to cut costs and remain competitive in a challenging market. For example, BMW recently announced that it would eat the costs of tariffs placed on its imports from Mexico. This tactic is meant to protect consumers from price hikes, while still allowing the market to be competitive.
Mercedes-Benz is already swallowing the 25% tariff with its 2025 models. This strategic shift is evidence of their dedication to focusing on first-to-market capabilities instead of short-term profit margins. Now Jaguar Land Rover has stopped shipping to the US. At the same time, they’re feeling their way into understanding just how dramatically the tariffs will redirect their operations.
The automotive sector’s response reflects a broader concern about trade barriers’ impact on global markets. Sigrid de Vries, Director General of The European Automobile Manufacturers Association (ACEA), stated, “The ongoing volatility of global markets is only increasing trade barriers and costs for businesses.”
The Broader Economic Implications
The fallout from these tariffs goes well beyond any one company. Hildegard Müller, president of the German Association of the Automotive Industry (VDA), emphasized that “the tariffs are a form of ‘protectionism’ that will have negative effects on economic growth worldwide and affect jobs.” That attitude is widespread throughout the industry as companies prepare for dips in customer demand and possible supply chain disruptions.
Dr. Chowdry calls for a preventative approach. He leads efforts to improve relationships with existing partners, such as Canada, Mexico, Japan, and South Korea, but pursue new agreements to help reduce our reliance on a few export markets. He notes that “in the longer term, this approach to supply chain diversification acts as a valuable insurance policy protecting European industry from broader shocks.”
“US tariffs and any counter-tariffs will have negative consequences for growth and prosperity in the US and other economic areas. The entire automotive industry, global supply chains and companies as well as customers will have to bear the negative consequences.” – Volkswagen
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