President Donald Trump said he would place 25% tariffs on all cars made outside of the U.S., a much wider net than auto makers had expected. He also announced a plan to make car loan interest deductible from income taxes -- like mortgage interest.

 

U.S. car maker stocks were lower after the president's announcement. Shares of Ford Motor and General Motors were down 3% and 5.1%, respectively. Tesla shares were 0.4% higher and Stellantis shares were off 4.3%, respectively.

 

The industry was hoping for better news such as a delay in the implementation, lower percentage, or carve-outs.

 

The auto sector doesn't look ready for the proposed tariffs and the stakes coming into the tariff announcement were already high. Trump's tariffs on Canadian and Mexican imports threatened to upend the auto industry, destroying billions in profits. That remains the case, but now other auto markers importing vehicles from Europe and Asia face a similar fate.

 

It is relatively easy to see how profits would evaporate. Millions of cars annually are imported to the U.S. What's more, 50% or more of the parts on many popular models assembled in the U.S. come from Canada and Mexico.

 

It isn't clear if car parts from Canada and Mexico are part of the plan. The White House didn't immediately respond to a request for comment.

 

Estimates of cost increases from new tariffs are in the thousands of dollars per new car. Higher costs could turn into higher prices, destroying demand for new cars, or they could eat into profit margins.

 

Any impact would be uneven, though. The Chevy Equinox is made in Mexico. The Toyota RAV4 is built in Ontario, Canada. The Ford Escape is made in Kentucky. It isn't easy to untangle 30-plus years of free trade.

 

Tesla is the least exposed to tariffs, based on domestic production. It assembles all the cars it sells in the U.S. within the country. The figure for Ford is about 80%. For GM and Stellantis, the number is about 55%. Hyundai and Kia import about 65% of U.S. sales. Most of those imports, however, come from South Korea. Those imports faced no or low import tariffs.

 

Wall Street and investors, frankly, looked asleep at the wheel prepping for tariffs, preferring to believe the worst outcomes won't happen. Coming into Wednesday trading, Ford Motor and General Motors shares were down just 2% and 3% since the Nov. 5 election.

 

Most automotive experts didn't believe tariffs will ever happen, says RBC analyst Tom Narayan, adding they would be "so destructive to the auto industry." He characterized 25% tariffs as a potential "disaster" but a "low probability" one.

 

The 25% tariff level now seems like a reality, with the net cast wider around the world. President Trump's aides said tariffs would generate $100 billion in annual revenue for the government. That implies tariffs on $400 billion of car sales, which gives investors some idea of the scope of the decision.

 

Wall Street was just waiting to see what happens. It currently expects profits for major U.S. auto markets and parts companies to remain flat year over year in 2025. No significant tariff impact is baked into the numbers.

 

UBS analyst Joseph Spak had prepped some scenarios. "Depending on the hour you look at your [stock market] screen, auto tariffs are either coming or not coming," wrote Spak on Wednesday before the announcement. He projects the earnings impact of 25% tariffs with no relief for the industry and no price increases for automakers. Under that scenario, both Ford and GM would lose money in 2025, Spak writes. About $18 billion in incremental costs wouldn't be recovered.

 

The most benign scenario imagined is 25% tariffs on parts and cars that don't comply with existing trade laws. That would eliminate less than 15% of the forecasted operating profit.

 

Overall, Wall Street expects Ford, GM, Stellantis, and Tesla to generate about $32 billion in 2025 operating profit, roughly flat with 2024. Including major parts suppliers in the mix brings operating profit to about $37 billion for 2025 and 2024.

 

"We think the administration's proposed tariffs are largely being driven by frustration with the fact that the U.S. imports over three times the value of automobiles it exports," wrote CFRA analyst Garrett Nelson in a recent report, adding that Mexico is a more significant exporter to the U.S. than Canada.

 

The president wants to make more things in the country, but it would take years and tens of billions in capital to completely reorient North American production. It is difficult to estimate just how punitive tariffs have to be to achieve his goals.

 

Investors and the industry are about to find out if 25% will do it.

 

Ford and GM shares slid earlier in the day in anticipation of the tariff talk. GM shares closed down 3.1%, but Ford stock rallied late to close up 1 cent at $10.30 a share. The S&P 500 and Dow Jones Industrial Average dropped 1.1% and 0.3%, respectively.

 

Write to Al Root at allen.root@dowjones.com

 

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.