Economist Arthur Laffer — who was once honored by Trump — warns 25% tariffs could add nearly $5,000 to your new car's price. Here's how to protect your finances amid Trump's trade wars

What's driving this surge in car prices?

At the center of this latest economic storm is the potential elimination of an important trade exemption under the United States-Mexico-Canada Agreement (USMCA). The USMCA, implemented during Trump's first term as president to replace NAFTA, currently allows certain trade protections that shield American consumers from steep price increases.

The auto industry would do better if Trump kept the supply chain rules laid out in the USMCA, according to Laffer’s analysis obtained by The Associated Press. Tariff risks contradict the President’s goals of strengthening the nation’s economic stability, Laffer wrote.

“A 25% tariff would not only shrink, or possibly eliminate, profit margins for U.S. manufacturers but also weaken their ability to compete with international rivals,” Laffer said.

Laffer’s analysis showed if the exemption is removed, the average new vehicle price could skyrocket by an eye-watering $4,711. Even with the exemption in place, Laffer estimates car prices will still climb by about $2,765 due to the tariffs.

Either way, American car buyers are likely to face significantly higher costs at dealerships nationwide. The stakes are high, and the economic fallout could reverberate through households already grappling with high inflation and strained budgets.

Why are Trump's tariffs creating so much turbulence? Vehicles assembled in America still depend heavily on imported parts — particularly from Canada and Mexico, both key partners under the USMCA framework. If these exemptions vanish, tariffs will directly inflate costs for automakers — expenses that will inevitably be passed on to consumers through higher prices.

Adding nearly $5,000 to the average vehicle threatens affordability for many Americans. High vehicle costs could mean larger auto loans, heftier monthly payments and greater financial strain. For families needing new (or newer) vehicles for jobs and other necessities, these increases could delay important life decisions, such as homeownership, education investments or retirement savings.

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How can you protect your finances?

With auto prices climbing, savvy financial strategies become essential. Here’s how to navigate this challenging landscape and ensure you're getting the best possible deal.

Negotiate your auto loan carefully

• Shop around for financing: Compare rates from multiple banks and credit unions before settling. Even a minor reduction in your interest rate could save thousands over the life of your loan.
• Avoid longer loan terms: While stretching your loan might reduce monthly payments, you'll pay significantly more interest over time. Aim for a loan term of no more than four or five years to keep your finances in check.

Be smart about insurance

Don't settle for the first quote. Insurance costs vary widely among providers, so regularly compare rates to secure the most competitive deal.

Bundling your auto insurance with home or renters insurance can also yield significant savings.

Consider buying used

The used car market might be your best bet if tariffs make new cars prohibitively expensive. Buying a reliable, pre-owned vehicle that's two-to-three years old can save you substantial money, as cars depreciate most rapidly during their initial years.

Certified pre-owned (CPO) vehicles often provide peace of mind by including warranties and thorough inspections, offering nearly the same security as buying new.

Timing your purchase

If you can wait out the initial tariff turmoil, consider delaying your car purchase. Prices might stabilize or even drop once the market adjusts and production methods adapt.

Keep an eye on market trends and manufacturer incentives. Dealerships eager to clear inventory or meet sales targets might offer better deals during turbulent economic periods.

Trump's tariffs could push new vehicle prices to levels that challenge household budgets across America. By remaining vigilant, strategically navigating loans and insurance, and considering used or delayed purchases, you can cushion yourself against the economic shock.