Prepare to pay more for your used car.
If the U.S. Commerce Department adopts President Donald Trump’s proposal of a 25 percent tax on imported new cars and car parts, the higher costs for carmakers to assemble and sell new cars could boost demand for used vehicles, analysts predict.
“The parts would be the most affected for sure, assuming that the administration will put tariffs in place for parts as well,” said Augusto Amorim, senior manager for Americas vehicle sales forecasts at LMC Automotive in Troy. “I don’t think they’d consider any tariff on the used car at this point.”
Automakers have warned their costs to build, and subsequently sell, new cars will rise. That’s because every car assembled in the U.S. contains a large percentage of foreign parts, analysts said.
Toyota has said the costs of its cars could rise by thousands. General Motors last week said it would be forced to downsize and cut jobs.
Carmakers of course could choose absorb some of a 25 percent duty and not raise prices that much, said Maryann Keller, principal of Maryann Keller & Associates in the New York area.
“If a car doesn’t have a lot of imported content, they might raise prices slightly and over time adjust it” depending on the imported parts in the vehicle.
For example, a Mercedes S-class sedan is fully imported, so a 25 percent duty on it would make it “incredibly expensive,” Keller said. The 2018 S-class starts at $89,900.
“Would Mercedes raise the price on that car by 25 percent? I don’t think so,” she said. “They may decide it’s more important to maintain sales. The more likely action would be a measured price increase across all models.”
But even a nominal hike across all the models, Keller said, might be enough to push customers into the used market.
And if a new car is priced higher, its rate of depreciation is now starting at a higher point, said Keller. This will bump up prices on late-model used cars.
Secondly, there are the simple laws of supply and demand, said Ivan Drury, senior manager of industry analysis for Edmunds in Santa Monica, California.
“The used market could be injected with millions of consumers it never had before,” Drury said. “It will cause a huge uptick in demand and we will see prices go up across the board for used cars.”
The supply of used cars might be hit further if the U.S.-Canadian currency exchange rate suffers. Car dealers in Canada regularly send thousands of used cars to the U.S. to sell at auto auctions. It’s lucrative for them because the U.S. dollar is stronger than Canadian currency. But that influx of used cars from Canada could freeze depending on what happens with tariffs, said Amorim.
“If the U.S were to impose this tariff, how Canada would retaliate and how that would impact the currency” isn’t known, said Amorim. “We’d have to see the ratio between the U.S. dollar and the Canadian dollar and if that differs, we could see a higher or lower influx of used cars from Canada.”
Likewise, if consumers can’t afford new cars, new car sales will decline, reducing the number of trade-ins and making the used car supply tighter, said Jonathan Smoke, Chief Economist at Cox Automotive.
If 1 million customers switch to the used car market, the average transaction price could rise about 10 percent, said Drury. The average price of a used car is about $20,000, meaning it would go up by at least $2,000, he said.
The U.S. used car market is already on pace for 39.5 million sales this year, said Charlie Chesbrough, Manheim’s senior economist and senior director of industry insights. By comparison, 16.8 million new vehicles are expected to be sold in the U.S. this year.
Besides the potential impact of tariffs, rising interest rates will pull some consumers out of the new car market altogether or push them into used vehicles, Chesbrough said. That’s because a new-car lease costs about $480 a month. The average loan to buy a new car is about $540 a month. But the average loan to buy a used car is about $400, he said.
If interest rates continue to rise, those monthly payments will continue to swell, making used cars considerably more attractive for many consumers, said Chesbrough.
Keller said despite a consumer shift to the used market, “There isn’t going to be a flame-out, the markets will adjust.”
Drury agrees the rise in the prices for used cars won’t be severe enough to dissuade consumers, analysts said.
“They’ll be a fit there, but they’ll pay the price,” Drury added.
Ultimately, though, “Everything’s a lot of speculation at this point,” said Amorim. “Nobody knows what the administration will do. We think these tariffs, at such a big increase, would be bad for the overall market” new or used cars.