UBS On-Air: Paul Donovan Daily Audio 'Tax facts'
Per the full note source, President Trump's 25% tariff on imported cars and car parts is an aggressive tax increase on US consumers, which UBS expects to raise US inflation and lower growth. The full impact will take time due to existing inventories, but the combination of higher new and used car prices plus rising auto insurance costs will feed through over the next year. No consensus target or per-firm forecasts are available for the relevant currency pairs in our internal coverage, and no high-impact calendar events are scheduled in the next 30 days for this jurisdiction, limiting the direct FX angle.
What the desk is arguing
The desk frames this as a supply-side shock to the US auto sector, with a 25% tariff applied at the dock that will raise consumer prices less than the full 25% due to post-import cost components. UBS notes that the tariff covers both finished cars and parts, which will hit foreign producers and US manufacturers reliant on imported components.
The key evidence includes the Department of Commerce's erratic announcement and subsequent clarification, and UBS's expectation that the price increase will be less than the 24% cumulative rise in new car prices since the pandemic. The counterfactual assumes a linear pass-through, which the desk rejects given the tax base only includes the import value, not downstream costs.
Key takeaways
- 0125% tariff on imported cars and car parts announced by Trump, effective immediately.
- 02UBS expects higher US inflation and lower growth, with effects materializing over the next year.
- 03Used car prices and auto insurance costs will also rise, even for non-buyers.
- 04Full pass-through to consumers will be less than 25% due to post-import costs excluded from tariff base.
Market implications
Watch US auto sector equities and bond spreads for the impact on inflation expectations. The tariff risk may also weigh on USD if it depresses growth, though it is not yet a direct FX trade.
Risks to this view
The call would be invalidated if exemptions or delays reduce the effective rate, or if auto manufacturers absorb part of the cost through margin compression. A sharp drop in domestic demand could also offset inflationary pressures.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday the 27th of March.
US President Trump levied some significant tax increases on US consumers yesterday with an announced 25% tax on buyers of foreign cars. The rather erratic presentation of the tax increase was subsequently clarified by administration officials and it includes a tax on foreign car parts and the tax increase is in addition to existing taxes. The direct effect of this will be to raise US inflation and lower US growth though the effects may take some time to come through as existing inventories of cars and car parts will not have been subject to the aggressive tax.
While it is tempting to compare the 25% tax to the 24% increase in US new auto prices since the start of the pandemic, this is not a like-for-like comparison. The tax is applied to the import price when the cars are sitting dockside. All of the costs of buying a car that take place after that point are not subject to tariff.
US car prices for the consumer will rise but they should not rise 25%. The tax on new cars will encourage people to keep hold of their cars for longer and maybe switch to buying used cars rather than new models. That supply and demand effect will raise the price of used cars adding to US inflation.
The rising price of new and used cars will add to auto insurance costs in time. That means the people who were not intending to buy a car will also be affected by this tax leap. These price increases will become apparent over the course of the next year.
Car exporting countries will be affected by the weaker US economy and specifically by slower demand in the United States for autos. However, it is not clear how much, if at all, foreign car producers will lose market share in the States. That will depend on how much US manufactured car prices rise.
The tax on imported car parts will contribute to that but also tariffs do provide domestic companies with an opportunity for profit margin expansion rather than boosting market share. So the negative growth impact to the US economy is a negative for the rest of the world's exports but it's not necessarily the case that foreign companies will suffer disproportionately. Today we'll be getting final fourth quarter US GDP from last year which should show that, using the fiction of annualization, growth was around about the trend rate.
This is not likely to last, although stockpiling ahead of tariffs is one thing that might add to first quarter GDP in the States. There is, however, some evidence that Democrat consumers were front-loading the purchases of more expensive goods into the fourth quarter of last year. We'll also get inventory data for the US retail and wholesale sectors.
The numbers are for February and these figures will assume some greater importance. Inventories are a potential short-term cushion against tax increase effects. That's all for today.
Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. It's subsidiaries, or affiliates, collectively referred to as UBS.
In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research. This material is for your information only and it is not intended as an offer or a solicitation of an offer to buy or sell any investment or other specific product.
The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. This material may not be reproduced or copies circulated without prior authority of UBS. Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.
Sources & References
How we cover this story