US Tariffs Deal Heavy Blow to Germany Auto Industry

Since 2025, following the return of President Trump to the White House, the aggressive tariff policies he implemented have dealt an unprecedented blow to the global automotive industry. German automakers have become the "hardest hit" by these tariff policies. Recently, the United States and the European Union reached a trade agreement to lower the tariff rate to 15%, providing some relief to the pressure on German car companies, though it remains higher than the 2.5% level at the end of 2024. Against the backdrop of rising manufacturing costs, declining sales, and the pressure of transitioning to electric vehicles in the global automotive industry, the new agreement has averted a full-blown trade war but has not completely eliminated the difficulties faced by German car manufacturers.

The U.S. tariff increase measures not only target German car manufacturers but also include other major automakers from Japan, South Korea, and others. As the largest passenger car exporter in Europe, Germany is particularly significantly impacted. German automakers are highly dependent on the U.S. market, with cars and components exported to the U.S. in 2024 accounting for nearly 20% of its total exports. The U.S. tariff increase measures have directly raised the export costs of German car companies, forcing them to reassess their global supply chain and production layout.

After several months of intense negotiations, on July 27, the United States and the European Union reached a new trade agreement. The agreement will reduce tariffs on most EU goods to 15%. It also includes the EU's commitment to purchase $750 billion worth of American energy products by 2028, an additional $600 billion in investments in the US, and provisions regarding certain goods (such as aircraft and parts, certain chemicals, and...Agricultural products… to achieve “zero tariffs.” German Chancellor Merz stated that the agreement avoided a “full-scale trade war,” but the German industrial sector believes that the 15% tariff still poses a “huge negative impact” on Germany’s export-oriented economy.

The German automobile industry, due to its highly globalized production model and dependence on the US market, has become the main victim of the US-EU trade war.

Firstly, the U.S. tariff measures have severely impacted the financial situation of German car companies. According to media analysis, due to the impact of U.S. tariffs, it is expected that the cash flow of Germany's three major car companies (namely Mercedes-Benz, Volkswagen, and BMW) will decrease by over $10 billion this year. Specifically, Mercedes-Benz's cash flow is expected to plummet from $11 billion to approximately $3 billion; Volkswagen's cash flow is expected to drop to $3.8 billion, less than half of last year's $9.5 billion; BMW's cash flow is expected to slightly decline to $5 billion.

Tariffs have directly increased the cost of exporting cars and parts to the United States, squeezing the profit margins of companies. Recent financial data released by several German car manufacturers show that Audi's after-tax profit fell by 37.5% year-on-year in the first half of this year, Porsche's operating profit plummeted by 91% year-on-year in the second quarter, and Mercedes-Benz's net profit dropped by 69% year-on-year in the second quarter. These figures reflect the heavy impact of U.S. tariff policies on the financial situation of German car companies.

Secondly, in recent years, Germany’s automotive industry has faced rising raw material prices, an energy crisis, and the high costs of transitioning to electric vehicles. U.S. tariff policies have further pushed up export and supply chain costs. The high-end models sold by German carmakers in the U.S. largely rely on parts produced in Europe; although the 15% tariff is lower than previous levels, it still significantly increases costs. In addition, the U.S. maintains a 50% tariff on steel and aluminum, placing extra pressure on the automotive supply chain. Although the U.S.-EU trade agreement proposes replacing high tariffs with a quota system, specific details remain unclear, making it difficult to alleviate supply chain tensions in the short term.

Finally, high tariffs have pushed up the prices of German cars in the U.S. market, weakening their competitiveness. After tariffs increased from 2.5% to 27.5%, the sales volume of German cars exported to the U.S. has declined. The new agreement reduces tariffs to 15%, alleviating some pressure, but they remain higher than historical levels. The increased cost for consumers may further suppress demand. Following the announcement of the U.S. tariff policy in March this year, the stock prices of German car companies plummeted, with BMW, Volkswagen, and Porsche falling between 13% and 25%. After the announcement of the U.S.-EU trade agreement, car company stock prices briefly rose but then fell back, reflecting the market’s concerns about the long-term profitability of these companies.

The trade agreement between the US and Europe reduces car tariffs from 27.5% to 15%, providing a brief respite for German car manufacturers. The European Automobile Manufacturers Association stated that the agreement brings "much-needed certainty" to the industry, avoiding the worst-case scenario of a 30% tariff. Merz said the agreement "safeguarded core interests," preventing retaliatory tariffs from affecting cross-border trade.Atlantic OceanFurther disruption of trade. In addition, the agreement establishes "zero tariffs" for certain components, which may indirectly reduce supply chain costs.

However, despite the reduction in tariff rates, the 15% rate remains significantly higher than the previous tariff rates, putting considerable pressure on the profit margins of German car manufacturers. Siegfried Russwurm, chairman of the Federation of German Industries, described the agreement as a "painful compromise," highlighting its "huge negative impact" on export-oriented industries. Additionally, while the U.S. maintains a 25% tariff on cars produced in Canada and Mexico, EU vehicles benefit from a 15% tariff, which may provide German carmakers a relative competitive advantage in the U.S. market, though the complexity of supply chains might offset some of these benefits.

In addition, the US-EU trade agreement poses potential risks to German employment and production transfer. Dudenhof, director of the German Automotive Research Center, stated that a 15% tariff could cause European car companies and their suppliers to lose up to 70,000 jobs, as companies might transfer production to the US to avoid tariffs. For example, Volkswagen is considering building a new Audi factory in the US, and BMW and Mercedes-Benz may also expand their production capacity in the US. However, constructing factories requires several years and substantial investment, making it difficult to offset losses in the short term.

The US tariff measures are not the only challenge facing the German automotive industry. In recent years, the global automotive sector has been undergoing profound changes, and German car manufacturers are struggling to survive amid multiple crises. On one hand, German car companies are investing heavily in the transition to electric vehicles in order to meet global carbon neutrality goals. Volkswagen, for example, plans to invest 180 billion euros by 2030. However, reduced cash flow caused by US tariff policies may force companies to cut research and development budgets and delay the transition. Although the US-EU trade agreement has alleviated some pressure, high tariffs may still limit the competitiveness of companies in the electric vehicle sector.

On the other hand, the energy crisis and chip shortages triggered by the Russia-Ukraine conflict have impacted German car manufacturers. The U.S. imposition of tariffs and U.S.-EU trade tensions have further disrupted supply chain stability. The U.S. has imposed a 50% tariff on steel and aluminum and a 25% tariff on Mexico, increasing the cost of components for German car manufacturers. Quota negotiations in the U.S.-EU trade agreement may provide some relief to the supply chain, but uncertainties remain.

In summary, the US-Europe trade agreement has provided some relief for the German automotive industry, avoiding a more severe trade war. However, the 15% tariff still puts pressure on profits, sales, and supply chains. Coupled with the transition to electric vehicles and geopolitical risks, German car manufacturers face multiple challenges. In the future, Germany’s automotive industry must seek opportunities amid crises, regain competitiveness through innovation and strategic adjustments, and remain vigilant against the potential backlash of trade protectionism on the global economy.