Germany’s carmakers appear at first glance to be rare European beneficiaries from last month’s lopsided trade deal with the US. For them, the new flat US tariff rate of 15% is a big relief from a previous sector-specific levy of 27.5%.
But the political deal suggests that the 15% tariff rate — still high for expensive consumer goods such as cars — is here to stay, and carmakers will have to find a way to build it into their long-term business models.
Suddenly, decisions made years or even decades ago weigh heavily on the health of Germany’s industrial giants. Analysts say that BMW Group should emerge relatively unscathed due to its longstanding US production hub, financing arm and political relationships. Volkswagen Group, by contrast, looks more vulnerable after deciding to focus production in Europe and Mexico.
“In the short term, Volkswagen remains significantly more vulnerable to the current trade barriers than BMW,” said Rico Chmelik, the managing director of Automotive Thüringen, which represents the German state’s large car parts industry. “Companies without production facilities in the US remain at a disadvantage … In the coming years, more new capital is likely to flow into US locations than into Germany.”
The supply-chain and financing differences are just one example of how sustained tariffs may compel more European manufacturers, of cars and other goods, to build facilities in the US to ensure long-term stability — a central goal of US President Donald Trump’s reshoring trade policy, and a big obstacle for European economic growth.
BMW’s US investments come good
BMW has spent decades building up its production capacity in the US. Its plant in Spartanburg, South Carolina, operational since 1992, produces nearly 400,000 cars per year and exported X-model SUVs worth more than $10 billion last year to markets around the world — including Germany. In 2024, nearly half of BMWs sold in the US were built at the Spartanburg plant. Moreover, the trade deal includes an EU tariff exemption for 185,000 cars built in the US by European companies.
“Our footprint in the US is helping us limit the impact of tariffs,” BMW’s finance chief Walter Mertl said last month. While profits slid in the second quarter, Mertl said the company’s global footprint would allow it to “adapt swiftly to changing market conditions.”
The Bavarian carmaker is also protected by its in-house US financing company, which operates the consumer leasing model common in the US car market. By leasing cars rather than selling them, the manufacturer holds on to their residual value, meaning that an overall rise in prices — which will trickle down to the second-hand market — buoys the assets on its balance sheet.
“Import tariffs drive up car prices, but lease contracts partly absorb the impact by factoring it into residual values,” said Koen Meynants, an automotive executive specialised in accounting standards and financial services, formerly active in BMW Group. “Tariffs may raise sticker prices, but leases soften the blow by baking it into the car’s future value.”
According to Meynants, the increase in value of leased cars already on BMW’s balance sheet could immediately boost its value by billions of dollars. That financial cushion gives BMW room to ride out Trump’s tariffs, while competitors with a different strategy on lease financing scramble to catch up.
In the court of Trump, politics also plays a role. BMW’s longstanding relationships in South Carolina, a Republican-controlled state in the American South, are likely to shield it from the president’s wrath. After Trump’s trade advisor Peter Navarro accused the company earlier this year of only assembling cars at the Spartanburg factory, South Carolina Senator Lindsay Graham leaped to BMW’s defence, writing on X that “BMW has been in South Carolina for over 30 years and has proven to be one of the best corporate citizens in our state.”
Volkswagen vulnerable without US presence
By contrast, Volkswagen pursued a different strategy, opting for Mexico as its primary production site in the Americas. Last year, it produced nearly 400,000 vehicles and over 500,000 engines in Mexico.
Before Trump’s first term began in 2017, that seemed like a safe bet to gain access to the US market while taking advantage of lower labour costs: Mexico, along with Canada, was in the North American Free Trade Agreement.
“Mexico and Canada were then seen as part of the American trade area … At the time, that was a very wise decision,” said Christian Dustmann, a professor of economics at University College London and the director of the Rockwool Foundation Berlin. “The political developments happening in the US now under Trump were not foreseen 20 years ago.”
Volkswagen has just one US manufacturing site — a plant in Chattanooga, Tennessee, which produces 234,000 cars per year of the core Volkswagen brand, such as the Atlas and ID.4. The majority of its US sales — which totalled some 658,000 cars in 2024 — are subject to tariffs, which led to a reduction in profit of $1.5 billion in the first half of this year, Volkswagen Group reported at the end of July.
The company is building a new factory in South Carolina but production is not set to begin until 2026. It is also in talks to build new facilities for its Audi and Porsche brands. Meanwhile, in another sign of how Trump’s tariffs have already begun to reconfigure production chains, it has already halted shipments of cars to the US from Mexico, trade publication Automotive Logistics reported.
Electric transition, Chinese competition pile on pressure
The US tariffs are not the only challenge facing German carmakers, which also face pressure from both regulators and consumers to transition to electric powertrains — a race in which Chinese manufacturers, which could never match the Germans for quality on combustion cars, are starting to pull ahead.
“All European producers have been very sluggish in responding to that change,” said Dustmann. “German carmakers have missed the train on electric-driven technology. It’s not just the tariffs, it’s also the challenge of this transition.”
Volkswagen's most recent earning report showed a 33% decrease in operating profit in the first half of 2025, a number that Dustmann chalked up to the joint challenges of retooling the company for the electric car future and the rivalry from China — as well as dealing with tariff troubles.
German auto manufacturers now face a tough decision. If they believe the tariffs will stick for the long term, they might be best off investing heavily in US production. But if the tariffs are reversed a few years from now, they’ll still be paying back the investments while they could be producing cars more cheaply in their home markets or in places like Mexico.
For European policymakers, it’s not so much a choice as a hope that Washington changes direction, whether under Trump or his successor. The loss of jobs and production value to the US market is at odds with the EU’s plans to reindustrialise and bolster Europe’s competitiveness.
“There is a risk that, if tariffs remain high and investment conditions in the US continue to be attractive, an increasing share of production volumes will be permanently relocated there,” said Chmelik. “In this scenario, Germany would remain a centre for development and innovation, but would face a gradual decline in industrial value added in vehicle manufacturing.”
Sign up to The Parliament's weekly newsletter
Every Friday our editorial team goes behind the headlines to offer insight and analysis on the key stories driving the EU agenda. Subscribe for free here.