Elon Musk's Tesla set for major gains as Trump's tariffs are set to reshape auto landscape; know why

A Cybertruck at a Tesla dealership in Dublin, California (File Image)

In a significant escalation of global trade war, US President Donald Trump on Wednesday announced 25 per cent tariffs on all cars shipped to the country. The tariffs, set to come into effect from April 3, are aimed at expanding America’s prowess in the auto manufacturing sector.

Trump has long said that tariffs against auto imports would be a defining policy of his presidency, betting that the costs created by the taxes would cause more production to relocate in the United States. But US and foreign automakers with domestic plants still depend on Canada, Mexico and other nations for parts and finished vehicles, meaning that auto prices could increase and sales could decline as new factories take time to build.

Meanwhile, domestic manufacturers like Tesla are expected to considerably benefit from the auto tariffs, or at least suffer lesser than their competitors.

How Tesla may get an edge

Tesla, whose CEO Elon Musk has a crucial place in the Trump administration, manufactures all the cars that it sells in the US in California and Texas.

By making imported vehicles more expensive, tariffs could potentially increase demand for domestically produced cars, including Tesla. This is expected to give Musk’s company an edge in the crucial and large market of the United States.

Moreover, if tariffs incentivize more automakers to shift production to the US, it could strengthen the domestic automotive manufacturing sector, which could indirectly benefit Tesla.

The company's domestically produced EVs are more price-competitive in the US market. This could lead to increased market share as consumers may opt for Tesla vehicles over higher-priced imports.

Challenges and concerns

While Tesla assembles its vehicles in the US, it relies on imported components, including batteries and electronic parts. Tariffs on these components would increase Tesla's production costs, potentially forcing the company to raise prices or absorb the added expenses.

Tesla has a significant domestic manufacturing footprint, which could provide some insulation from the effects of tariffs on imported vehicles. However, the company’s reliance on a global supply chain for components makes it vulnerable to the effects of tariffs on imported parts.

Tariffs imposed by the US could lead to retaliatory tariffs from other countries, potentially impacting Tesla's export markets, and eventually its sales in the foreign markets.