President Trump and his supporters have clashed with mainstream economists for years about the merits of tariffs. Now, the world will get to see who is right, as the president’s sweeping levies on automobiles and auto parts play out in a real-time experiment on the global economy.
In Mr. Trump’s telling, tariffs have a straightforward effect: They encourage companies to move factories to the United States, creating more American jobs and prosperity.
But for many economists, the effect of tariffs is anything but simple. The tariffs are likely to encourage domestic car production over the long run, they say. But they will also cause substantial collateral damage that could backfire on the president’s goals for jobs, manufacturing and the economy at large.
That’s because tariffs will raise the price of cars for consumers, discouraging car purchases and slowing the economy. Tariffs could also scramble supply chains and raise costs for carmakers that depend on imported parts, reducing U.S. car production in the short term.
They could also lead to retaliation on U.S. car exports, as well as other products American companies send abroad, leading to damaging global trade wars.
On Thursday, global stock markets fell, with auto stocks hit hardest, as investors absorbed the scope and severity of Mr. Trump’s plans. Shares in General Motors, which imports many of its best-selling cars and trucks from Mexico, were down roughly 7 percent in midday trading. Stellantis and Ford shares were also lower. European shares closed lower Thursday, with carmakers suffering the worst losses.
As automakers and economists scrambled to rework their growth forecasts, America’s allies slammed Mr. Trump for imposing tariffs, saying the levies would destabilize the global economy, and vowed to retaliate.
Brad Setser, an economist at the Council on Foreign Relations, said the tariffs were likely to lead to more domestic auto production in the long run. But getting there would be “really disruptive,” he said, and costly to both American consumers and the U.S. economy.
Mr. Setser said foreign automakers would be unlikely to give up on the U.S. market, and that brands like Toyota, Hyundai and Mercedes could end up making more cars in the United States to avoid paying the tariffs. In the shorter run, however, higher prices could convince some American consumers not to buy cars at all.
And that, along with disruptions in supply chains that run through Canada and Mexico or depend on foreign parts, could actually cause U.S. auto production to fall in the near term.
Nearly half of all vehicles sold in the United States and 60 percent of all parts used in auto factories are imported. Daniel Roeska, an analyst at Bernstein, predicted that automakers could see costs rise by $6,700 per vehicle sold.
“You could, because of the disruption along the way, have something that looks like a cyclical downturn in the auto sector, with layoffs, with lost jobs, even in places that will attract new investment and grow over time,” Mr. Setser said.
“This is a fairly risky move,” he added.
Economists said the approach is likely to have downsides not just for foreign automakers like Toyota and Mercedes, but also for U.S. brands.
Jim Reid, a research strategist at Deutsche Bank Research, noted that it was not just overseas auto stocks that had tumbled, but also those for General Motors, which assembles just over half of its cars purely in the United States, he said. “So the pain is happening domestically as well as abroad.”
“The more you listen to the current U.S. administration, the more you appreciate that they are prepared to sacrifice near-term market performance and economic growth if it’s required to meet their longer-term objectives,” he said.
Economists have also questioned Mr. Trump’s assertions that tariffs will bolster economic growth, investment and hiring, suggesting that they could do the opposite.
In a note on Thursday, economists at Barclays Research said they had revised their forecasts and now expected global and U.S. growth to slow considerably from 2024 levels. “But if worst-case outcomes on tariffs are realized, even those forecasts may end up being too optimistic,” they wrote.
Marc Giannoni, the chief U.S. economist at Barclays, said that uncertainty over the direction of trade policy would encourage businesses to hold off on making new investments in factories and hiring more workers in the coming months.
“We expect businesses to hire less in the next few months,” he said. “Businesses that are pausing the investment decision are likely also to pause the hiring decision. So we see a lot of reduction in demand for labor.”
Mr. Trump has denied that the tariffs would have much negative effect, instead pointing to multiple company announcements of new investment in the United States. In addition to introducing additional tariffs on imports from China, Canada and Mexico in the last few months, Mr. Trump is planning to announce more tariffs next week, which he has said will make the global trading system more fair.
Speaking at the White House on Thursday, the president said that “business is coming back to the United States so that they don’t have to pay tariffs.”
“A lot of companies are going to be in great shape because they’ve already built their plant, but their plants are underutilized, so they’ll be able to expand them inexpensively and quickly,” he said. He added that, “others will come into our country and build, and they’re already looking for sites.”
But others say that carmakers are likely to wait to see whether the tariffs will last. Though Mr. Trump said Thursday that they would be permanent and the White House said that no exclusions would be granted, both foreign countries and companies appeared to be hoping that the president would relent.
“Although he’s been pretty clear he intends to, we know from previous experience we shouldn’t assume these things are a done deal until they really are,” said Jennifer McKeown, the chief global economist at Capital Economics.
Kit Johnson, a customs broker in Savannah, Ga., who helps car manufacturers with their importing, said he had been on the phone with customers all morning on Thursday, and there was “a big scramble right now to figure out what to do.”
The tariff pronouncements in the last few weeks had made it difficult for his clients to plan. “Every announcement that comes out, there’s planning sessions, they’re running different models to figure out what the financial impact will be,” he said. “It’s been one thing after another.”
Mr. Johnson said he believed the tariffs were “counterproductive to what the administration’s stated goals are.”
Many companies wanted to manufacture more in the United States, and gradually bring their suppliers over as they do so. But tariffs would “put a financial strain on them” as they tried to devote more resources to expanding U.S. investments, Mr. Johnson said. “It’s kind of a Catch-22.”
The other main question is whether tariffs will spiral into bigger trade war. Mr. Trump said on social media early Thursday that he would punish the European Union and Canada if they tried to work together to fight back against his tariffs.
“If the European Union works with Canada in order to do economic harm to the USA, large scale Tariffs, far larger than currently planned, will be placed on them both in order to protect the best friend that each of those two countries has ever had!” Mr. Trump wrote.
Foreign leaders responded angrily, though none immediately announced retaliation. Mr. Trump introduced his tariffs on the basis of U.S. national security, a concept that has rankled traditionally close allies like Canada, Europe and Japan.
Canada’s prime minister, Mark Carney, said his country would introduce additional retaliatory tariffs on the United States but they will not be finalized until Wednesday, when Mr. Trump plans to introduce his so-called reciprocal levies.
“We will respond forcefully,” Mr. Carney said. “Nothing is off the table to protect our workers and our country.”
President Emmanuel Macron of France said Thursday that he had told Mr. Trump during a discussion the day before that tariffs were “not a good idea,” and said that Europeans would respond by reciprocating in hopes of getting the U.S. president to reconsider.
Mexico’s president, Claudia Sheinbaum, told reporters, “We are always going to protect Mexico.” The Mexican government would issue “an integral response” to all U.S. tariffs — which so far also include levies on steel and aluminum — hitting the country on April 3, she said.
“That does not mean we close the door on the United States on April 3,” she said. “The door is open for talks with the U.S. government.”
Economists predicted that the tariffs could be particularly devastating for Canada and Mexico, which have been integrated into the North American auto supply chain for decades. The tariffs also raise questions about the U.S. commitment to various trade pacts.
Wendy Cutler, the vice president of Asia Society Policy Institute, said that the tariffs would have “a devastating impact on many of our close trading partners — Japan, Korea, Mexico, Canada and Europe,” and that the United States had free-trade agreements with three of those five governments.
Flavio Volpe, the president of the Auto Parts Manufacturers’ Association of Canada, said that the tariff could lead to industry shutdowns through North America within a week.
“He is using a really blunt instrument,” Mr. Volpe said of Mr. Trump. “One million cars in Canada a year are made by American manufacturers with 50 percent American parts and 55 percent of American raw materials and he’s ready to push them off a cliff to make a point no one understands.”
Reporting was contributed by Danielle Kaye , Ian Austen , Liz Alderman and Emiliano Rodríguez Mega .