US plans to hike tariffs on EU cars to 25% will hit luxury market the most

The United States is set to impose 25 percent tariffs on the European Union’s auto sector, a move that would reverse an agreement reached in August between Washington and the bloc.

US Trade Representative Jamieson Greer told CNBC on Monday that the White House is “moving forward with this action”.

Earlier this year, the US Supreme Court ruled that President Donald Trump could not impose his global tariffs through the International Emergency Economic Powers Act (IEEPA), limiting the president’s sweeping global tariffs.

However, last year, Trump imposed a 25 percent tariff on global automotive imports under Section 232, citing national security risks. In August, the White House reached a deal with the EU to lower those levies to 15 percent.

“He does have authority to do this. What’s less clear is what the US issue is. Europe had needed EU-level implementation of the agreement, which delayed some implementation,” Rachel Ziemba, adjunct senior fellow at the Center for a New American Security, told Al Jazeera.

Why is Trump targeting Europe?

Trump claimed that the bloc had not complied with the deal — an assertion EU officials rejected. Trump accused the countries of violating the agreement after a slate of European countries declined to send their militaries to help the US Navy open the Strait of Hormuz.

“This threat is a negotiating tactic, of course. However, the US leverage is somewhat less after the IEEPA tariff rulings,” said Ziemba.

Trump’s tariff threats would impact German car companies hardest as BMW, Mercedes, and Volkswagen maintain a large US presence.

This comes as the White House announced plans on Friday to withdraw 5,000 troops from Germany after Chancellor Friedrich Merz said the US was being “humiliated” in negotiations with Iran.

Which car companies would be hit the hardest?

European carmakers would be hit by tariffs. Car trade is a significant portion of EU-US business, making up 8 percent of all trade, according to the European Automobile Manufacturers’ Association (ACEA), and the US is the number one destination for EU-built cars, accounting for 29 percent of the total EU export value.

“The Trump administration continues to use coercive threats. In this case, it would be Germany that would be hardest hit by the tariffs because of the importance of its car industry. Europe so far has yet to push back on Trump’s tariffs, in large part because of security concerns,” Gregory Shaffer, professor of international law at Georgetown University, told Al Jazeera.

The tariffs would mostly hit higher-end and luxury vehicles.

“It [the tariffs] has more impact on higher-end cars since those are the ones primarily imported as finished items. European automakers tend to produce mid-level cars in the US given the USMCA-related incentives,” Ziemba said, referring to the trade agreement between the US, Mexico and Canada that exempts qualifying goods from tariffs.

Germany’s Volkswagen is among the carmakers with a significant presence in the US. The company operates a major production facility in Chattanooga, Tennessee, where it builds the Atlas, Atlas Cross Sport, and Volkswagen ID.4. Its Golf models are produced in Wolfsburg, Germany.

It is still unclear how the car companies will respond.

“We’re reviewing the recent tariff action and waiting for additional details,” a spokesperson for Volkswagen told Al Jazeera.

Mercedes-Benz also maintains a US manufacturing footprint, producing many of its SUV models at a plant in Alabama. However, several of its sedans — including the Mercedes-Benz S-Class — are still manufactured in Germany.

Similarly, BMW builds its X series SUVs at a large facility in Spartanburg, South Carolina. Other models, such as the 3 Series and 4 Series, are primarily produced in Germany.

BMW did not respond to Al Jazeera’s request for comment.

Mercedes referred Al Jazeera to the ACEA, but the association did not respond to a request for comment.

Stellantis also has some exposure. While it produces Jeep, Ram, and Chrysler vehicles stateside, it produces brands like Fiat and Peugeot in Europe. Fiat has a limited presence in the US, and Peugeot has none.

Some brands are more exposed to tariffs than others, particularly at the higher end of the market. Porsche and Audi — both owned by Volkswagen — do not manufacture vehicles in the US.

Following the United Kingdom, the US is still the largest market for EU auto exports, and 25 percent of US global car imports by value are from the EU, according to the ACEA, which puts pressure on automotive manufacturers to reconsider their strategies.

In March, Automotive News reported that Porsche was considering expanding production to the US to offset the potential impact of tariffs.

Ultra-luxury brands face even greater exposure, including Ferrari and Lamborghini. The two brands produce all of their vehicles in Italy.

It would also impact companies that make parts created in the US, including manufacturers that make clutches, emissions and engine parts, according to Kyle Peacock, who runs Peacock Tariff Consulting.

“Manufacturing plants that produce them overseas have stopped or slowed ordering materials from the US, so they’re ramping down production because they anticipate their volume is out of sync on these products due to the additional tariffs,” Peacock said.

“One of our clients produces clutches for Stellantis and Volkswagen that they ship to Germany and the UK for production. We’ve seen those sales slow down because they don’t anticipate bringing those products into the US.”

How would this impact consumers?

Trump’s tariffs have cost US families an average tax increase of $1,000 per household, according to an analysis from the nonpartisan Tax Foundation. Since the change in tariffs on the back of the Supreme Court ruling, that is expected to drop to $700 per US household for this year.

With mid-range and high-end vehicles predominantly affected, the hit to consumers would be limited.

“So this will be, from my understanding, passed directly onto the consumer, more so than some of the other tariff initiatives that have happened in the past, due to the fact that the individuals buying these vehicles are more able to absorb the tariff than lower-income consumers or those affected by previous tariffs,” Peacock said.

“Corporations won’t eat these tariffs; they’ll just pass them directly on to the consumers, [is] my indication from clients,” he said.

Politically, tariffs have weighed on consumers. A Harris Poll in March found that 72 percent of Americans said that tariffs had a negative impact on their lives, and that was echoed by a Pew Research Center poll in April, which found that 63 percent of Americans are not confident in Trump’s handling of tariff policy.

“At some point, however, there will be a tipping point where Europe would retaliate, aiming to hurt Trump by targeting US exports from key swing states,” Georgetown University’s Shaffer said.

Peacock says that in his consultancy, European automakers like Volkswagen have been more hesitant to buy with US producers, many of which are in swing states like Virginia and New Jersey.

The White House did not respond to Al Jazeera’s request for comment.