Cancelling federal consumer incentives for purchases and leases will put the BEV incentives burden on manufacturers (and suppliers). At this stage of BEV development, it appears that a $7,500 consumer incentive funded exclusively by OEMs would be problematic. The elimination of consumer incentives would lead to less demand and lower capacity utilization. It will lead to more BEV program delays and push out BEV capacity increases by at least two years.

Eliminating the manufacturing assembly and battery production incentives will only make the situation worse. For the most part, investment decisions through 2027 are well underway. Incentive elimination will lead to employment disruptions in Michigan, Kansas, Kentucky and Tennessee, major hubs of BEV capacity and battery development already approved. For example, rather than running two shifts, manufacturers may elect to only hire one shift. These changes will also hurt U.S. tool and die makers when more programs are cancelled, and parts suppliers who were expecting two shifts of volume. At the same time, Chinese manufacturers will continue their global expansion.

Eliminating all incentives without increasing CO2 regulations at the same time would be a disaster for all manufacturers except Tesla. The disruption would be significant, as changes in all the regulations would not be implemented simultaneously. The baseline U.S. outlook would be relegated to the shredder.

Tariffs to the Rescue?

The potential disruption outlined above will be extensive. Unfortunately, it is not as bad as increasing tariffs on imported vehicles from Mexico and Canada to “bring production back to America.” As Trump stated to the Economic Club of New York on September 5, 2024, “We will bring our auto-making to the record levels of 37 years ago, and we’ll be able to do it very quickly through tariffs and other smart use of certain things that we have that other countries don’t.”

Achieving that objective is a moonshot. Fortunately, a more realistic level of expansion is already underway. There are currently three U.S. plants that will not be operating in the second quarter of this year: GM Fairfax and Orion, and Stellantis’ Belvidere. The good news is that each of these plants are scheduled to start production on battery-electric programs very shortly. Additionally, there are three greenfield plants that will come on stream before the end of 2027. There are also six plants that undergo ICE to BEV partial conversions during the same timeframe.

Will tariff increases help? The short answer is no. History has shown that tariff-induced supply chain changes take time to produce results. The 1981 Voluntary Export Restraint program lasted more than 10 years—and during that time, Japanese manufacturers installed significant capacity into the North American market. It didn’t happen overnight. It would take sustained tariffs over a 10-year window to get General Motors to move Mexico production to Fairfax and Orion, or to get Ford to move Mexico and Canada production back to Flat Rock or Blue Oval. That would be some serious heavy-lifting!

The expected result of increased tariffs will be increased prices on all light vehicles—imported and domestic. Remember, most manufacturers have a vehicle portfolio that encompasses both domestic and imported products. Taken together, these products have an established price and value ladder. Disrupting import pricing with tariffs (including parts pricing) will lead to a natural increase in domestic pricing. More to the point, home-market producers tend to use the tariff umbrella to boost prices and improve their own margins. Overall, first-quarter tariff increases will lead to a reduction in U.S. production as early as the second half of 2025. The size of the reduction will depend on the size and scope of the tariff.

A Balanced Proposal: Growth, Revenue and Protection

First, push the existing CO2 standards out by five years. The 2030 standards would then be equivalent to what are now the 2026 standards, and then decrease at the rate in existing legislation. This would reduce potential penalties (or the purchase of credits) due to non-compliance. That money could be used for additional investment.

Reduce the consumer incentives to $5,000 for BEV and $2,500 for hybrid models that meet the local content requirements. The incentives would be in place until 2032. This would be the tradeoff for increasing CO2 emissions standards.

Implement a federal road tax for battery-electric vehicles at two cents per kWh. This tax would be applied at all public and fleet charging stations. Home charging would be exempt.

Eliminate the tax incentive for imported BEV vehicles.

Continue existing incentives for battery content and assembly requirements. Claw back any funds that have been provided if programs are cancelled.

The U.S. tool and die business has been significantly outsourced to China. Approve an incentive program for U.S. production of tool and die fixtures, injection tools and stamping dies. This would include funds to train a new generation of tool makers.

No additional tariffs on imported vehicles—from anywhere (China exception).

200% tariffs on all Chinese imports assembled in any country for 10 years. China has put in place BEV and ICE/Hybrid capacity increases that are far higher than home market demand; some estimates are as high as 100%. This should be viewed as a national security threat to the United States and our trading partners.

Taken together, these policies provide a better chance of achieving more U.S. production, a smoother transition to a battery-electric future, and boost long-run development expertise. Conversation among all stakeholders is required.

A flurry of day-one executive orders on tariffs and regulations won’t get the job done and could lead to serious unintended consequences.