Are Tariffs Reshaping Your Competitive Position in the US in Ways You Haven’t Considered?

Tricky Effects of Trump’s Tariffs: Lessons for companies.

Richard Baldwin, Factful Friday 6 June 2025. IMD

Introduction

When President Trump announced his April 2nd tariffs, the headlines focused on the usual themes. Higher prices, lower margins, and disrupted supply chains. Foreign firms selling in the US generally saw the tariffs as bad, or very bad news. But beneath those headlines lies a quieter and more strategic shift that some companies may not yet fully grasped.

Tariffs are very much like a sales tax on imports, but they can complicate effects when not all firms pay the same sales tax. Uneven tariffs, like uneven sales taxes, can alter the competitive landscape in ways that can unexpectedly tilt the playing field. In some cases, they may even improve companies’ position. The most direct effects are familiar. Tariffs on your own products or inputs raise your costs. But there are also important indirect effects. If tariffs hit your competitors harder than they hit you, your relative competitiveness improves, even if your own costs rise as well.

In a world where few companies operate within a single border and most products are built from globally sourced components, the impact of a tariff depends not only on what is taxed but also on how your supply chain compares to that of your rivals. The real story is not just about the tariff rate itself. It is about how that rate changes the competitive balance.

Today’s Factful Friday lays out the various effects. Drawing on examples from cars, motorcycles, and steel, it illustrates how tariffs create second-round consequences that are often overlooked. The goal is to help companies think more strategically about how tariffs are shaping the ground they compete on. Because in this environment, what matters most is not just who pays tariffs, but who pays more than you.

Tariffs on Autos vs Auto Parts.

In April 2025, President Trump slapped a 25% tariff on imported autos and auto parts. But he carved out some big exceptions. Cars assembled in the US, Mexico, or Canada are exempt as long as they comply with the rules of US-Mexico-Canada Agreement (USMCA). These carve-outs depend on where cars are built, not who builds them. Indeed some of the biggest beneficiaries are the Japanese and European brands with North American factories.

Tariffs on Final Goods: A Gift to US-Based Producers.

Consider a Korean-made car, such as Hyundai’s Elantra, shipped to the US, compared to a US-made car, say, the Honda Civic. The 25% tariff makes the Elantra pricier in the American market—bad news for Hyundai but great news for Honda. Why? Because US-built cars don't pay the tariff. Overnight, American-built vehicles become significantly more competitive. This is Economics 101: raising your rival’s costs boosts your competitive edge, even if your own costs stay unchanged.

Tariffs on Imported Inputs (steel, auto parts, etc): A Gift to Foreign-Based Producers.

The same economics 101 works in reverse when it comes to imported auto parts. In 21st-century manufacturing, every producer relies on at least some imported inputs; especially things like steel, aluminium, and sophisticated electronics.

Think about the impact of Trump 25% tariffs on auto parts imported into the USA, say Japanese-electronics that Honda imports to include in the Honda Civics it makes in the USA.

In this case, US tariffs on imported auto parts hit the Honda Civic; but not the Hyundai Elantra. That’s because the Elantra’s parts don’t cross the US border separately; they’re already embedded in the finished car by the time it arrives.

The Elantra cars, after all, are not affected by the US auto parts tariffs since don’t cross the US border separately; they cross the border after having already been incorporated in to the car.

With a moment’s reflection, you can see that the auto parts raise the cost of US-made Honda Civics without raising the cost of Elantras, so the competitive edge shifts to the Elantra.

Result? Tariffs on imported inputs to US-made cars harm US-based automakers and help their foreign-based rivals, exactly the opposite effect of the tariffs on finished autos.

The graphic below makes the point visually.

The left panel looks at the impact of tariffs on final goods – the auto tariffs in this example. Here we see that the made-in-USA auto wins because auto tariffs push down the cost competitiveness of Korea-made autos sold in the United States. This automatically, improves the competitiveness of US-made autos like the Honda Civic.

The right panel shows the impact of tariffs on inputs, such as steel and auto parts, which US-based carmakers must import to complete the manufacturing process. In this case, made-in-USA autos loses. The point is that auto parts tariffs raise the cost of US made autos sold in the US. This pushes down the cost competitiveness of autos like the Honda Civic compared to imported autos like the Elantra.

In short tariffs on autos help Honda and hurt Hyundai. Tariffs on auto parts to the opposite.

Note that the recent increase that Trump announced on steel imports from 25% to 50% is clearly harming the competitiveness of all US-based manufacturing that uses steel. The point is that the steel tariff reduces competition inside the USA, so the price of both US-made and imported steel rises. Since foreign-made products don’t have to pay the US steel tariff, imported goods (other than steel) get more competitive inside the US. To take our example, the higher steel tariffs would hurt the Honda Civic and help the Hyundai Elantra.

So is Honda better or worse off, once we factor in both auto and auto parts tariffs?

The maths is simple: the full value of a finished car is protected by the final goods tariff, while only about 20% of the car’s cost comes from the tariffed parts. So even though Honda pays more for some inputs, the much bigger benefit comes from having their rivals taxed more heavily.

Bottom line?  Honda, and other foreign brands with US factories, come out ahead. Despite higher parts costs, Trump’s tariffs handed them a clear relative advantage by hitting their competitors harder.

Direct and Indirect Effects of Uneven Tariffs.

Trump’s April 2nd tariffs didn’t just raise barriers - they redrew the competitive map in ways that are often overlooked. This section looks at how Trump’s tariffs can shift the relative competitiveness of different foreign firms.

To keep the reasoning concrete, I’ll take motorcycles as an example. This key point of departure is the fact that Trump announced different tariffs on different countries – at least for most goods. While some tariffs, like the 25% on imported cars were applied uniformly, others weren’t.

We don’t know what US tariffs will end up being, so I’ll take the 2 April tariffs for the sake of illustration. For the major manufacturing nations in the world, these are shown in that table below.

Note that the tariffs are very uneven ranging from 46% for Vietnam to 20 for the EU. That unevenness - what trade economists call tariff discrimination - has surprising implications for foreign firms.

Losing Less = Winning More

It’s a telling sign of America’s industrial evolution that the motorcycles in the standard segment, the affordable, do-it-all workhorse beloved by practical riders, has no homegrown production. Stroll through a US dealership in 2024 and you’ll find the standard segment entirely the domain of foreign brands: Honda, Yamaha, Triumph, and BMW.

America’s own Harley-Davidson and Indian have retreated to their comfort zone of luxury bikes – those costing $15,000 and up. All the rested are made abroad.

So who gains from US tariffs on standard motorcycles? Well, actually no one. Consumers paid higher prices, and the foreign exporters typically end up getting lower prices. The US Treasury takes in some tax revenue since a tariff is like a sales tax in this case. This point is show in the left panel of the graphic.

Nonetheless, the unevenness of the tariffs has big implications, as the right panel shows.

The uneven tariffs shift the relative competitive of the foreign producers. As the table shows, and unlike cars, the new US motorcycle tariffs are tiered by country. The result is anything but a level playing field. European EU bikes pay 20% (although that may rise to 50%). Vietnamese bikes pay more than twice that – a staggering 46%. Japanese motorcycles now face a 24% tariff at the port.

This means that while EU producers are undoubtedly worse off than before, they suddenly find themselves better off relative to their Japan and Vietnam based competitors. Losing less is, in this strange new game, a way of winning more.

It’s all about relative competitiveness. If your rivals are forced to swallow a bigger price hike than you, your position in the pecking order improves, even if everyone’s prices are heading north. This is a perverse kind of advantage. Even a losing hand can beat a worse one. But tariffs have redrawn the map. Now, with Vietnam’s penalty nearly double Japan’s, Japanese producers may find new opportunities.

This is the classic indirect effect of trade policy. Japan’s “gain” comes not from a break for its own bikes, but from the higher hurdles thrown in front of everyone else. In a world where every imported standard motorcycle gets pricier, the relative pain matters more than the absolute. For Japanese firms, the harsh new rules may open a door that was firmly closed before. In trade, as in poker, sometimes the best move is simply to lose less than your neighbour.

Indirect effects of tariffs on intermediate inputs.

The competitive dynamics of local auto production are deeply intertwined with the intricate web of tariffs and the global value chain. Take, for instance, the example of Honda and BMW; two automakers with markedly different supply chain structures. Honda integrates a greater proportion of locally sourced parts, contributing significant value-added within the US, while BMW relies heavily on imported components, particularly from Germany. This distinction creates uneven playing fields when tariffs are introduced.

Consider the US 25% tariff on auto parts. For Honda, the direct impact is relatively contained; tariffs raise the cost of the imported fraction of their vehicle components. However, BMW faces a more profound challenge. With a larger share of its vehicle’s value originating from Germany, the tariff inflates its expenses considerably, giving Honda a competitive edge in terms of production costs. This disparity exemplifies the competitive logic underpinning trade policies: tariffs tilt the scales in favor of companies that have invested in local supply chains, effectively penalizing those reliant on imports.

Expanding on these dynamics, think about the competitive strategies employed by automakers such as Toyota and Ford. Toyota has been strategically increasing its local production in recent years, mitigating its exposure to import tariffs while simultaneously aligning itself with consumer preferences for domestically manufactured vehicles. Ford, on the other hand, has long relied on a strong US-based component ecosystem, positioning itself as a more tariff-resilient automaker. These firms exemplify how relative costs and supply chain strategies are not only shaped by tariffs but are also key determinants of market positioning.

Furthermore, the cascading effects of such tariff policies ripple through the global auto industry. For example, tariffs on European-built vehicles and parts might inadvertently increase the competitiveness of South Korean automakers like Hyundai and Kia, whose exports to the US face fewer trade barriers. The resulting shifts in market dynamics demonstrate how protectionist measures can reshape competitive landscapes, benefiting some players while disadvantaging others.

Ultimately, the logic of competition within the auto industry reflects a mix of strategic foresight and adaptability. Automakers willing to reconfigure their supply chains, invest in local production, and minimize reliance on imports are better positioned to weather the storm of tariffs. Conversely, those with rigid global sourcing models risk erosion of their competitive advantage, underscoring the significant influence of trade policies on corporate strategy and global economic flows.

 A Simple Matrix to Organise the Impacts of Tariffs.

Trade policy, like most things in economics, gets messy fast. It helps to put the logic in a box. Or in this case, a 2x2 matrix. This summarises the analysis above.

There are two dimensions to understanding how tariffs affect global firms.

1.      What’s being taxed?

Is it the final product that rolls off the line and into the showroom? Or is it the intermediate input, like an engine part, a digital control module, a sheet of aluminium? The sort of thing that gets built into something else?

2.      How does the tariff work its way through the system?

Is it a direct hit on the firm’s own costs? Or an indirect effect, shifting the competitiveness of its rivals? That is, what matters to a firm’s success is not only their own price and costs but also the cost of their rivals. Anything that is bad for your rival is good for you.

That gives us four possibilities as shown in the matrix. It’s not the sort of thing you’ll find in a trade agreement, but it’s exactly what foreign firms are puzzling over as the US reshapes its tariff regime.

When tariffs hit final goods, the direct effect is easy: US-made wins, foreign-made loses. But the indirect effect is where it gets interesting. If the tariffs aren’t uniform, say, 24% on Japanese bikes, 34% on Chinese, and 46% on Vietnamese, then even among losers, some lose less than others. And losing less means winning more. Japan may groan about the new tariff, but when it sees its rivals hit harder, the outlook changes. The battlefield’s tilted, but they’re now closer to the top of the hill.

Flip to intermediate inputs, and the picture shifts again. The direct effect flips: now it's US-made that loses. Why? Because many American producers depend on imported parts. Tariffs raise their input costs, eroding their price advantage. And the indirect effect? It depends. If your inputs come from low-tariff countries, you're relatively fine. If they come from high-tariff zones, you’re at a disadvantage. And that even if your final product is made in the USA.

This simple table helps us move beyond the idea that tariffs are just “good for locals” and “bad for foreigners.” The reality is far more nuanced. Tariffs help some firms, hurt others - and often do both at once depending on what’s being taxed and who your competitors are.

Firms need to map themselves into this framework if they want to anticipate how tariff changes will hit their bottom line. Because in global trade, what matters most isn’t who’s paying the tariff - it’s who’s paying more than you.

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