EU: Sharply Higher Tariffs on U.S. Auto Imports Affect EU Countries and Carmakers in an Uneven Manner

Yesterday, U.S. President Trump announced a 25% tariff on automotive imports from 2 April onwards. This will raise import duties for EU car exporters significantly, up from its current level of 2.5%. Automotives are a major EU export commodity, accounting for 10% of total goods exports to the U.S. in 2024. This commentary takes a closer look at how auto tariffs are likely to impact EU economies and companies. It highlights that the impact of tariffs is set to differ considerably across EU economies with Germany (rated AAA, Stable trend), Sweden (rated AAA, Stable trend), Slovakia (rated A, Negative trend), Hungary and the Czech Republic likely to be the most impacted countries even though we do not anticipate a credit impact in the short-term. In terms of automotive companies, U.S. tariff hikes will primarily affect premium producers such as BMW AG (BMW, rated A (high), Stable trend), Mercedes-Benz Group AG (Mercedes, rated A, Stable trend) and, to a lesser extent, Volkswagen AG (VW, rated A (low), Stable trend). However, these companies' focus on the premium automotive market provides them with some pricing power to pass on tariff-related cost increases to consumers. Moreover, while it would be very difficult for these companies to absorb these higher tariffs on a sustained basis, their typically strong financial profiles provide them with flexibility to manage such headwinds over the immediate term.

Key Highlights
-- Strong external demand from the U.S. bolstered EU auto export volumes in recent years.
-- The impact of higher U.S. tariffs would differ considerably across EU economies and companies.
-- Carmakers would most likely pass through part of the tariff-induced increase in costs to consumers.

"A large increase in U.S. automotive tariffs would affect EU economies in a highly uneven manner," said Yesenn El-Radhi, Vice President of the Sovereign Group at Morningstar DBRS. "Germany, Sweden, Slovakia, Hungary and the Czech Republic are likely to be the most impacted countries in a situation of high-for-longer tariffs."

"U.S. tariff hikes will primarily affect premium producers such as BMW, Mercedes and, to a lesser extent, Volkswagen," said Robert Streda, Senior Vice President, European Corporate Ratings at Morningstar DBRS. "However, these companies have meaningful pricing power and therefore some flexibility to pass on tariff-related cost increases to consumers. This notwithstanding, the companies' strong financial profiles also enable them to withstand increased costs attributable to the tariffs over the short term."