Recently, Trump announced a 25% (import) tariff on foreign-made autos and light trucks. Trump expects this will result in over $100 billion of new annual tax revenues (eg, AP News, Nikkei, National Review). What about the impact of price elasticity on American demand?
Currently, this tariff on cars is 2.5% on passenger vehicles, and 25% on pickup trucks (Nikkei Asia). The impact might be big because “about half of all cars sold in the U.S. are imported from other countries” (NatRev). This is due to an inefficient fuel consumption and a rather low quality, both of American cars.
In the 1980s, I drove an expensive, brand new, American rental car during a vacation. Several Americans congratulated me with that new American car. They were not at all surprised about my complaints on its rust spots. In their view, rust spots were entirely normal in American cars. Little has changed (eg, Tesla).
The above may explain why American price elasticity (PE) on foreign cars may be far less than one would expect: a 25% price increase equals a c.25% decline in demand, following an assumed PE= -1.
A recent Bloomberg article might suggest a PE of c.15% rather than a 100% (PE=-1).
“Porsche and Mercedes-Benz will be hit hardest by President Donald Trump’s latest trade salvo, facing a potential €3.4 billion ($3.7 billion) blow from new U.S. tariffs on imported cars.”
Source: Automotive News Europe, 28 March 2025, as based on a Bloomberg article, dated 27 March 2025
Given the above, I fail to see how a 25% tariff increase on an imported volume of $225 billion (2023) could and would result in an additional $100 billion of tax revenue. Even with a zero PE, the maximum additional tax revenue would amount to (0,25 x 225b =) $56,25 billion rather than a $100 billion.
Any negative PE would lower the additional tax revenue, like (0,25 x 225b x 0,85PE =) $47.8 billion but probably much less because German cars have a better price elasticity ratio, compared to the other countries in my diagram.
Black Cars (1984) by Gino Vannelli
artist, lyrics, video, Wiki-artist, Wiki-album+song
I say
Black cars look better in the shade
Black cars (Black cars)
Note: all markings (bold, italic, underlining) by LO unless in quotes or stated otherwise.
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