UBS On-Air: Paul Donovan Daily Audio 'Tax facts'
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Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 27th of March. U.S. President Trump levied some significant tax increases on U.S. consumers yesterday with an announced 25% tax on buyers of foreign cars. The rather erratic presentation of the tax increase was subsequently clarified by administration officials

and it includes a tax on foreign car parts, and the tax increase is in addition to existing taxes. The direct effect of this will be to raise US inflation and lower US growth, though the effects may take some time to come through, as existing inventories of cars and car parts will not have been subject to the aggressive tax.

While it is tempting to compare the 25% tax to the 24% increase in US new auto prices since the start of the pandemic, this is not a like-for-like comparison. The tax is applied to the import price when the cars are sitting dockside. All of the costs of buying a car that take place after that point are not subject to tariff.

US car prices for the consumer will rise, but they should not rise 25%. The tax on new cars will encourage people to keep hold of their cars for longer and maybe switch to buying used cars rather than new models. That supply and demand effect will raise the price of used cars, adding to US inflation.

The rising price of new and used cars will add to auto insurance costs in time. That means that people who were not intending to buy a car will also be affected by this tax leap. These price increases will become apparent over the course of the next year. Car exporting countries will be affected by the weaker US economy, and specifically by slower demand in the United States for autos.

However, it is not clear how much, if at all, foreign car producers will lose market share in the States. That will depend on how much US manufactured car prices rise. The tax on imported car parts will contribute to that, but also tariffs do provide domestic companies with an opportunity for profit margin expansion rather than boosting market share.

So the negative growth impact to the US economy is a negative for the rest of the world's exports, but it's not necessarily the case that foreign companies will suffer disproportionately. Today, we'll be getting final fourth quarter US GDP from last year, which should show that using the fiction of annualization, growth was around about the trend rate.

This is not likely to last, although stockpiling ahead of tariffs is one thing that might add to first quarter GDP in the States. There is, however, some evidence that Democrat consumers were front-loading the purchases of more expensive goods into the fourth quarter of last year. We'll also get inventory data for the US retail and wholesale sectors. The numbers are for February, and these figures will assume some greater importance.

Inventories are a potential short-term cushion against tax increase effects. That's all for today. Have a good day. This material has been prepared and published by the global wealth management business of UBS Switzerland AG, regulated by FINMA in Switzerland. Its subsidiaries, or affiliates, collectively referred to as UBS.

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