Higher Price Elasticity of Demand: A Double-Edged Sword Amid Rising Tariffs on European Vehicle Makers

The introduction of higher tariffs on vehicle imports by the United States presents a complex challenge for European original equipment manufacturers (OEMs). While much of the focus has been on direct trade impacts and supply chain disruptions, there is a subtler economic dynamic at play: the role of price elasticity of demand. Higher price elasticity, often seen as a competitive advantage, could paradoxically amplify the negative consequences of the tariff hikes for certain OEMs.

This commentary is based on the latest study published by Scope Ratings GmbH on February 6, 2025, titled “US tariffs pose broad challenges for European vehicle makers, but impact will vary.” The study provides an in-depth analysis of the potential consequences of the proposed US tariffs on vehicle imports, highlighting the varying levels of exposure among European OEMs and their ability to adapt to the evolving trade environment.

The Price Elasticity Paradox in Tariff Scenarios

Strategic Implications for European OEMs

1. Mass-Market Challenges: Finding Alternatives
For companies like Stellantis and Volkswagen, the combination of higher price elasticity and increased tariff costs could force a strategic shift. One option is relocating production to the U.S. to mitigate tariff exposure. However, this transition is costly and time-intensive. Another approach is to absorb some of the costs and accept lower margins temporarily, though this risks financial strain if tariffs persist.

2. Leveraging Brand Power in Premium Segments
BMW and Mercedes-Benz, by contrast, are better positioned to absorb these shocks without significant shifts in strategy. Their ability to pass on higher costs to consumers due to lower price elasticity offers them a cushion. Nonetheless, they must remain vigilant about protecting their brand positioning and avoiding over-reliance on price hikes, which could erode long-term customer loyalty.

3. Truck and Capital-Equipment Segments: Mitigated Risks
In segments like trucks and construction equipment, manufacturers such as Volvo AB benefit from high localization of production in the U.S. Volvo’s example demonstrates the importance of diversified supply chains and localized manufacturing to mitigate tariff-related risks. For other OEMs, expanding local production in North America could serve as a long-term hedge against trade policy shifts.

Balancing Price Sensitivity and Market Adaptation

The dynamics of price elasticity demand a nuanced response from European OEMs. While premium manufacturers may navigate the tariff challenges more comfortably, mass-market producers face a greater risk of losing ground in the U.S. market. The following strategies could help OEMs address these challenges effectively:

1. Localized Production: Accelerating U.S.-based production for high-demand models to minimize tariff exposure.
2. Product Differentiation: Increasing focus on features, technology, and quality to reduce price sensitivity in mass-market segments.
3. Cost Management: Streamlining operations and optimizing supply chains to absorb additional costs without significant price hikes.

Conclusion: A Double-Edged Sword for the Industry

The broader implications of price elasticity under tariff regimes highlight a double-edged sword for European carmakers. While premium manufacturers can capitalize on their pricing power, mass-market producers must contend with heightened sensitivity to price increases. This dynamic underscores the importance of strategic agility and market adaptation to navigate the turbulent waters of protectionist trade policies. As U.S. tariffs reshape the competitive landscape, European OEMs must strike a delicate balance between pricing strategies and maintaining their foothold in one of the world’s most critical automotive markets.