25% auto tariffs especially painful in Japan and South Korea

US tariffs of 25% on all automobile and auto parts will weigh heavily on the Japanese and South Korean automotive sectors. A GTAP analysis suggests Japanese and South Korean automotive production will each shrink by approximately 7%. The impact is larger than suggested by bilateral trade data, because vehicles assembled in other countries before being shipped to the US will also be affected, dampening domestic auto parts production.

The US is the biggest automotive export destination for Japan and South Korea. Exports to the US account for over a fifth of sales in South Korea and 7% in Japan. Additionally, Japanese and South Korean auto manufacturers have large production bases in Mexico, one of the biggest car exporters to the US. Reduced car exports from Mexico to the US will hit domestic auto parts production.

The impact will spill beyond the automotive sector. Input-output tables suggest that reduced car production will hit other sectors such as basic metals in the supply chain, which could amplify the hit to total industrial output.

Moving car production to the US could mitigate the impacts, but auto parts makers will also need to follow suit to avoid tariffs. Carmakers could absorb some costs or divert shipments to other markets, but this will be increasingly difficult given the subdued global economy.