European automakers face fresh risk as President Trump hikes auto tariffs

President Trump hikes auto tariffs

The European Union and the United States reached a trade deal last year that lowered tariffs on European goods to 15%, offering relief to the bloc's crucial auto sector. However, President Trump reversed course on Friday, announcing higher levies of 25% on auto imports from the EU ^[1]. The increased tariffs on cars and trucks could deal a significant blow to the European economy and its automotive industry.

Road vehicles are among the EU's top exports to the United States, with a 7.5% share in 2025 accounting for €41.5 billion ^[2]. The 2025 tariffs had a direct impact on US sales, with unit exports declining 13.5% according to the European Automobile Manufacturers' Association (ACEA) ^[3]. Europe's economic engine and top auto producer, Germany, saw its vehicle shipments to the US drop 9% according to the German Association of the Automotive Industry (VDA). ^[4]

European automakers face mounting headwinds

President Trump's tariff hike finds the European auto industry at a difficult juncture, as it grapples with the impact of the Middle East conflict and intensifying competition from Chinese manufacturers at home and abroad.

The spike in oil and gas prices from the US-Iran conflict is stoking stagflation risks, raising economic and geopolitical uncertainty. The European economy barely grew in the first quarter (+0.1% q/q) and inflation jumped to 3% y/y according to preliminary April data - the highest in over two years. The European Central Bank acknowledged the heightened risks and despite keeping rates unchanged, members discussed the possibility of a hike ^[5], which markets now expect as early as at the next meeting.

This uncertain environment is weighing on consumer confidence and could dampen vehicle purchases, while also hurting Middle East demand, a key market for premium brands. Higher energy prices alongside logistics and shipping disruptions are creating cost pressures for automakers and threatening shortages of key materials like aluminium. The industry could face another semiconductor scarcity similar to the one seen during the pandemic. Qatar is a major helium exporter ^[6], a crucial component in chip-making, just as the sector grapples with a memory chip crunch driven by rising AI demand.

These challenges come as legacy automakers attempt to shift toward electrification and fend off the onslaught of innovative and affordable Chinese EVs, requiring substantial investment. ACEA data show that EU imports from China jumped 30.7% last year, surpassing one million units for the first time . The world's top BEV maker, BYD, recorded a 169.7% surge in EU registrations in the first quarter of 2026 ^[7], offering a competitive entry point with the Dolphin Surf. But BYD is not the only contender - Xiaomi, which has taken the Chinese market by storm, is preparing to enter the European market in 2027 ^[8]. European OEMs like Volkswagen and BMW are also grappling with declining sales in China.

Results and guidance reveal challenges and resilience

After a poor 2025, the Volkswagen Group, Europe's biggest automaker, saw Q1 revenues drop 2.5% y/y and operating profits slump 14.3%. Deliveries in the same period declined due to weakness in China and North America, underscoring the two most challenging regions. CEO Blume highlighted the tough operating environment, citing "geopolitical tensions, trade barriers, stricter regulations, and intense competition". ^[9]

The 2026 outlook points to continued headwinds and assumes a stable tariff environment, an assumption now under question. Management expects flat Group deliveries, revenue growth of 0%-3% and an operating margin of 4%-5.5%. While underwhelming, this guidance, if achieved, would mark a significant improvement over 2025.

To deliver better outcomes, VW is betting on a refreshed lineup including affordable EVs like the new Polo and a model offensive in China. It is also staying committed to cost cuts, efficiency gains and technological advancement.

Mercedes-Benz is facing similar difficulties, with revenues dropping 4.9% in the first quarter, EBIT profits contracting 16.8% and deliveries declining 6%, led by weakness in China ^[10]. The premium carmaker acknowledged that the Middle East conflict is "exacerbating existing uncertainties" but assumes the war is not protracted in its 2026 outlook. Guidance points to flat revenues and deliveries, a significant rise in EBIT profits and a lower car segment margin, highlighting the adversities. Its CEO spoke of "disciplined execution" of the new model rollout and "tight cost control" as the tools to help Mercedes weather the challenges.

BMW, which reports later this week, is less exposed to US tariffs given its large manufacturing base in the country, but remains vulnerable to the tough environment, Chinese competition and complications from Middle East demand. Deliveries in the first quarter dropped globally, led by a 10% y/y decline in China, while US sales fell 4.3%. For the full year, BMW guides to soft auto segment margins of 4%-6%, down from 5.3% in 2025, alongside flat deliveries and lower total profit before taxes. ^[11]

Stellantis is largely shielded from levies on EU imports as it mainly produces vehicles for the US market in the country, Mexico and Canada. Moreover, it has unveiled a $13 billion plan to increase US production by 50% over the next four years and launch five new vehicles ^[12]. Total shipments rose 12% in Q1, revenues increased 6% and profits were slightly lower. CEO Filosa acknowledged geopolitical tensions but the company still expects better results in 2026, with revenues and adjusted operating margin expected to return to growth. ^[13]

Renault is another company somewhat insulated from Trump's auto tariffs as it does not sell its vehicles in the United States. The company is a frontrunner in affordable EVs among European OEMs thanks to the Model 5, and targets a 23% increase in annual sales by 2028 as it launches new models and accelerates its EV roadmap ^[14]. Q1 revenues rose 7.3% and Renault brand deliveries increased 2.2%. The company is committed to cost reductions and additional measures to mitigate the potential impact of the Middle East conflict, and sees a solid 5.5% operating margin in 2026, still below last year's, underscoring the ongoing difficulties. ^[15]

EU auto industry navigates a fragile recovery

President Trump's announcement of higher tariffs throws another curveball at a European auto industry already grappling with a difficult environment, which is also refelced in their stock performance tis year. The Middle East conflict and the resulting spike in energy prices threaten to inflate costs, erode margins and dampen global demand. Meanwhile, Chinese rivals are gaining significant traction, directly challenging the market share of established legacy brands.

Yet the 2026 outlook is not entirely bleak. Paradoxically, the surge in oil prices may support faster adoption of electrified vehicles. European automakers are responding to this adverse environment and increased competition with a wave of new models, aggressive cost-cutting and efficiency gains. Furthermore, the premium nature of brands like Mercedes-Benz and BMW offers a degree of resilience, while others such as Renault and Stellantis remain less exposed to US levies. Ultimately, the industry will need to see how the tariff situation plays out. For now, EU automakers undergo a "defensive transformation" to weather these ongoing adversities.