Donald Trump’s decision to impose a 25% tariff on car imports from Europe has drawn significant criticism from European leaders and industry groups, who argue that the tariffs will inflict severe damage on both US and EU economies.

The tariffs, announced recently, will not only affect vehicles but also car parts, including engines, transmissions, and electrical components, and are slated to take effect on April 2.

German Economy Minister Robert Habeck expressed that the “permanent” duties would be detrimental to global trade, stating that they would ”harm the US and the EU.” Habeck's sentiments were echoed by Hildegard Müller, president of the German automotive industry group VDA, who characterized the levies as a “disastrous signal for free, rules-based trade” and highlighted potential negative growth implications for all parties involved.

The US is Germany’s largest auto export market, with shipments of approximately 450,000 vehicles valued at $24.8 billion recorded in the previous year, according to the US Commerce Department.

Germany ranks as the fifth-largest car exporter to the US overall.

In a statement to reporters, Trump indicated that the tariffs would not apply to vehicles produced domestically, saying, “If you build your car in the US, there will be no tariff.”

Following the announcement, stock prices for both EU and US car manufacturers fell sharply.

Major US automakers, referred to as the 'Big Three', experienced declines, with Stellantis dropping by 3.8% and General Motors by 3.1%, while Ford's stock remained mostly stable.

Tesla, an electric vehicle manufacturer, also saw its shares decrease by 5.6%.

German car manufacturers were similarly affected, with Mercedes-Benz falling 3.5% and Volkswagen losing 2% of its stock value by noon CET.

Analysts have expressed uncertainty regarding the long-term impacts of the tariffs on EU car manufacturers' profitability and sales.

Carsten Brzeski, head of macro at ING Research, remarked on the lack of concrete data to predict customer preferences in the US market, suggesting that outcomes could range widely.

He noted that manufacturers might absorb the impact by reducing profit margins, or alternatively, US consumers may face higher prices for imported EU cars.

Sander Tordoir, chief economist at the Centre for European Reform, indicated that vehicle price increases in the US and a contraction in profit margins for EU manufacturers are likely outcomes.

However, Tordoir noted that German manufacturers with US-based plants could have operational flexibility to mitigate some tariff impacts.

In the last year, around 844,000 vehicles were produced by German manufacturers in the US. Meanwhile, the US exported approximately 233,600 vehicles, valued at €10 billion, to the EU, primarily targeting Germany.

While analysts acknowledged the systemic challenges facing German manufacturers, including rising competition and fluctuating energy prices, they posited that the industry has the resilience to withstand tariff pressures.

Brzeski emphasized that while the tariffs may provoke some hardship, they are unlikely to jeopardize the overall stability of German automakers.

Trump’s tariffs come just ahead of the implementation of proposed “reciprocal tariffs” designed to counteract taxes imposed by other nations on US goods.

Following the tariff announcement, Trump issued a warning on social media, suggesting that significant additional levies would be imposed on the EU and Canada if they cooperated in retaliating against US economic policies.

This move is part of an ongoing tension in transatlantic trade relations and could signal further escalation in the trade environment.