Trade war: UK car exports to US halved in May ahead of truce

UK car exports to the US plunged 55.4% in May due to the Trump administration's 25% tariffs imposed on April 3rd, significantly impacting the UK's most valuable automotive market and key luxury brands like Jaguar Land Rover. While the US has since reduced tariffs to 10% for up to 100,000 vehicles annually, the broader UK automotive sector saw overall production fall 33% in May (the worst performance since 1949 excluding COVID), compounded by declining domestic and EU shipments. Despite these challenges, the Society of Motor Manufacturers and Traders (SMMT) expresses cautious optimism for recovery, citing the recent tariff reduction and anticipated government industrial strategy support, particularly regarding energy costs.

Analysis

The UK automotive sector experienced a severe shock in May, with exports to its most valuable market, the US, plummeting 55.4% year-over-year. This decline was a direct consequence of the 25% tariffs imposed by the US on April 3rd, which prompted major exporters like Jaguar Land Rover to temporarily halt all shipments. The broader industry context is equally concerning, as overall UK car production fell for the fifth consecutive month, declining 33% in May to its lowest level for that month since 1949, excluding the pandemic years. This weakness was compounded by a 22.5% drop in shipments to the EU and falling domestic demand. However, a recent development provides a degree of relief; US tariffs have been reduced to 10% for the first 100,000 vehicles annually. While this mitigates the worst-case scenario, it does not eliminate the tariff headwind. The Society of Motor Manufacturers and Traders (SMMT) expresses cautious optimism for a recovery, but this is heavily contingent on the rapid implementation of the UK government's industrial strategy, particularly measures to address high energy costs and bolster sector competitiveness.

Key Decisions for Investors

• Investors should closely monitor UK automotive export data for the coming months to quantify the rebound in US-bound shipments following the tariff reduction from 25% to 10%.
• The sector's recovery is highly dependent on government action; therefore, tracking the timeline and substance of the promised industrial strategy, especially regarding energy cost support, is critical for assessing long-term competitiveness.
• For portfolios with exposure to UK luxury automakers, it is prudent to reassess earnings forecasts based on the new 10% tariff structure, as this lingering cost pressure will continue to impact margins in their most valuable export market.