Iran: US' fresh tariff threats throw global production into turmoil

President Donald Trump announced on 13 January a 25% tariff on any country conducting business with Iran, escalating beyond traditional trade policy into territory where foreign relations dictate manufacturing economics. The declaration, delivered via Truth Social without accompanying executive order or implementation guidance, declared the measure "effective immediately" and "final and conclusive". Yet the White House provided neither definition of what constitutes "doing business" with Iran nor clarification on whether these duties would layer atop existing tariff regimes.

For automotive manufacturing operations, already contending with the most turbulent trade environment in decades, this latest development introduces a dimension of uncertainty that renders medium-term production planning near impossible. The targeted nations include China, India, Turkey and the United Arab Emirates. Collectively, these countries host manufacturing facilities producing hundreds of billions of dollars in automotive output annually whilst simultaneously maintaining substantial commercial relationships with Tehran.

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China purchases approximately 90% of Iranian oil exports through independent refineries, India conducted $1.34 billion in bilateral trade with Iran through October 2025, whilst Turkey maintains $5.68 billion in annual commerce with its neighbour. The automotive sector's exposure stems not from direct Iranian trade but from operating production facilities in countries that trade with Tehran.

The announcement follows Trump's Greenland tariff threats against eight NATO allies and compounds an already volatile tariff landscape. Automotive manufacturers confront tariff rates that shifted 27-fold year-on-year in some categories, legal challenges proceeding through federal courts, and policy instruments deployed for geopolitical objectives disconnected from traditional trade considerations.

Production footprints face comprehensive reassessment

Chinese automotive manufacturing operations dominate global output with cost advantages and production scale European and American facilities struggle to replicate. Independent Chinese refineries purchase nearly 90% of Iranian oil exports, positioning Chinese manufacturing at the centre of Trump's secondary tariff strategy. The measure would potentially affect tens of billions of dollars in production output, reshape factory investment decisions and impose massive costs on American consumers.

China's automotive manufacturing encompasses everything from complete vehicle assembly to specialised component production facilities. The new tariff could mean a minimum 45% tariff rate on goods from China versus the current rate of 20%. China's foreign ministry declared that there are no winners in a tariff war and that China will firmly safeguard its legitimate rights and interests. The threatened escalation would effectively nullify the October trade truce that reduced Chinese tariffs from their 145% peak following months of negotiation.

Turkey's automotive production presents different strategic calculations. The country has emerged as a critical manufacturing location where Chinese producers leverage its customs union status with the European Union. BYD, Geely and other Chinese electric vehicle manufacturers view Turkish facilities as production platforms for European market penetration whilst avoiding direct tariff exposure from Chinese exports. Turkey operates substantial automotive manufacturing capacity including commercial vehicle assembly, with facilities producing for both domestic consumption and European export.

India's automotive manufacturing sector, meanwhile, confronts cumulative tariff burdens that threaten production viability. The U.S. already hit India with a 25 per cent tariff for buying Russian oil—a secondary sanctions tariff that functions as a country-level punishment for India's foreign policy choices. Adding another 25 per cent tariff for India's trade with Iran would impose cumulative tariff burdens on Indian production that would make it impossible to export profitably to the U.S. Major Indian exports to Iran include rice, tea, sugar, pharmaceuticals and electrical machinery, whilst New Delhi primarily imports chemicals and glassware.

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Legal foundations remain fundamentally uncertain

Trump's Iran tariff announcement invokes the International Emergency Economic Powers Act, the same statute underlying his reciprocal tariffs and country-specific duties that federal courts have questioned. Both the Court of International Trade and the Federal Circuit ruled in 2025 that IEEPA does not authorise tariff imposition. Those rulings now sit before the Supreme Court, which heard oral arguments on 5 November 2025.

Automotive manufacturers, electronics companies, retailers, and countless other sectors that rely on imports cannot plan ahead because tariffs could change dramatically based on court rulings or presidential decisions. The Supreme Court's decision, expected in early 2026 though potentially delayed until June, will determine whether presidents possess effectively unreviewable authority to impose tariffs through national emergency declarations.

During oral arguments, Justice Amy Coney Barrett noted that reversing tariffs already collected and issuing refunds could become "a complete mess". Other justices focused on constitutional dimensions, questioning whether IEEPA authorises tariffs and what prevents presidents from imposing them whenever threats are declared. The major questions doctrine requires Congress to speak clearly when delegating power over matters of vast economic significance.

Should the Supreme Court strike down IEEPA tariffs, the government faces potential refund obligations exceeding $130 billion on duties already collected, with some estimates reaching $1 trillion if all IEEPA-based tariffs prove unlawful. For automotive manufacturers, this creates impossible planning scenarios. Investment decisions requiring five-to-seven-year horizons must now account for tariff regimes that might not exist in six months or might multiply overnight through additional declarations.

Implementation ambiguity paralyses production strategy

The Iran tariff announcement provides neither enforcement mechanisms nor compliance pathways. What constitutes "doing business" with Iran remains undefined. Under these circumstances, for example, would a South Korean automotive manufacturer that maintains industrial equipment contracts with Iranian clients, trigger tariff exposure for all Korean vehicle exports? Would Turkish production facilities supplying European markets face duties because Turkey maintains natural gas contracts with Iran?

For manufacturing operations to adjust, plant managers must have clarity on which production locations face tariff exposure and which remain viable. A country-wide tariff applied on the basis of undefined "doing business with Iran" would inevitably affect manufacturers with no connection to Iran whatsoever. US importers receiving vehicles from Korean assembly plants manufactured with no Iranian input would face tariffs simply because South Korea conducts some trade with Iran.

Alternatively, applying tariffs on a firm-specific basis designating particular Chinese manufacturers as ineligible because they trade with Iran would transform the tariff into a sanctions designation regime, raising serious fairness concerns about notification and appeals processes. The Trump administration's announcement provides no definition of "doing business with Iran", no mechanism for determining which production facilities or companies are affected, no process for appealing designations and no implementation timeline.

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Pete Mento, director of global trade advisory services at Baker Tilly, observed that China is Iran's largest trading partner, followed by Iraq, the United Arab Emirates, Turkey, and India—a list that reads less like a sanctions target set and more like a comprehensive catalogue of automotive manufacturing locations. The practical effect renders production planning impossible without published guidance on facility classifications, country determinations and exclusion procedures.

Manufacturing operations bear disproportionate impact

The automotive sector's vulnerability stems from production complexity and geographic dispersion of manufacturing facilities. Vehicles frequently involve components manufactured across multiple countries during assembly. A transmission might begin with aluminium refined in China, castings produced in Mexico, machining completed in the United States and final assembly in Canada before installation in vehicles destined for American consumers.

Manufacturing operations under stacked tariff regimes face costs that defy simple calculation. When tariffs apply cumulatively across production stages, even determining final vehicle manufacturing costs becomes extraordinarily complex. Relocating production addresses only surface-level exposure. Replicating specialised manufacturing capabilities such as aluminium casting facilities, establishing quality control systems and ensuring operational continuity requires years of capital investment and workforce development.

The automotive industry employs just-in-time manufacturing principles that assume reliable production networks and predictable cost structures. Tariff regimes that change "by day", as economist Joseph Foudy observed, undermine fundamental assumptions about production planning, manufacturing contracts and pricing strategies. Manufacturers cannot absorb 25% cost increases on significant production categories without either accepting unsustainable margin compression or passing costs to consumers already resistant to elevated vehicle prices.

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European manufacturers face particular vulnerability given their global production footprint. Whilst premium German manufacturers maintain some US production capacity, significant portions of their North American sales rely on European factory output or Mexican assembly operations. Stellantis, Volkswagen Group and Mercedes-Benz all operate production facilities or maintain manufacturing partnerships in countries potentially affected by Iran tariffs, compounding existing pressures from European tariff threats and Chinese competition.

Chinese electric vehicle manufacturers expanding into European and emerging markets operate assembly facilities touching multiple countries with Iranian commercial relationships. BYD's European production strategy relies on Chinese manufacturing expertise and regional assembly partnerships. Secondary tariffs targeting China would affect not just vehicles assembled in Chinese factories but also manufacturing operations integrated into production elsewhere.

Battery manufacturing faces compounded disruption

The automotive industry's electrification transition adds complexity to production exposure. European battery cell manufacturing capacity reached modest levels in 2025, with Asian companies including LG Energy, Samsung SDI, SK On and CATL accounting for approximately 92% of operational manufacturing capacity in the EU. European battery makers represent merely 8% of running production capacity.

Battery manufacturing is now treated as strategic production, and China controlled over 80 per cent of global battery manufacturing capacity as of 2023. Critical raw materials processing presents another vulnerability dimension. European automotive manufacturers require facilities capable of processing lithium, cobalt, nickel and other materials concentrated in geopolitically sensitive regions. Trump's tariff threats compound existing concerns about production resilience, particularly given China's dominant position in battery material processing facilities.

More than 95 per cent of EU rare earth element processing operations rely on Chinese capacity. Rare earth elements prove essential for electric vehicle motor production and electronic systems manufacturing. The volatility of processing facilities for critical raw materials threatens manufacturing operations that cannot easily substitute inputs. Tariff-driven trade friction could complicate technology transfer agreements essential for scaling European battery production facilities.

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India emerged as a potential alternative for battery materials processing, with government incentives supporting domestic refining and production capacity. Yet India faces its own cumulative tariff exposure. The country already confronts 50% duties on steel and aluminium production alongside the 25% Russian oil penalty. Adding another 25% for Iranian trade would render Indian manufacturing uncompetitive in American markets regardless of production quality or strategic value.

Turkey's position as an emerging manufacturing hub for Chinese producers seeking European market access now carries tariff risk. Chinese investment in Turkish battery manufacturing facilities anticipated leveraging the customs union for tariff-free European access. Secondary tariffs targeting Turkey would undermine these production strategies whilst offering no clear compliance pathway.

Production planning horizons collapse under policy volatility

Perhaps the most corrosive effect concerns impact on manufacturing investment confidence and production planning certainty. Automotive production operates on extended development cycles with major platform decisions spanning five to seven years. Substantial manufacturing facility investments require stable policy frameworks. When tariff rates seem to change daily, manufacturers face impossible production planning challenges.

Steven Durlauf, professor at the University of Chicago's Harris School of Public Policy, observed that Trump's actions really do represent an end of the credibility of American commitments. That's going to have adverse effects on the world economy. For manufacturers, this credibility erosion complicates every major production investment decision.

Joseph Foudy noted that beyond immediate costs, the real cost of the tariff conflicts, because tariff rates seem to sometimes change by day, is the factories that were never built just because companies aren't certain enough. This observation captures a central dilemma facing automotive manufacturers globally. The industry requires massive capital deployment for electrification transitions and new production facilities, but tariff volatility undermines planning certainty such investments demand.

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The Greenland tariff episode illuminates how trade policy has become detached from traditional economic considerations. Tariffs historically served protectionist industrial policy objectives or revenue generation. Trump's deployment of tariffs to compel territorial acquisition by NATO allies represents something qualitatively different, weaponisation of trade policy for geopolitical ends with minimal regard for manufacturing economics. The Iran tariff follows this pattern, subordinating production planning logic to foreign policy pressure.

When tariff policy responds to traditional economic factors such as trade imbalances or industrial competitiveness, manufacturers can model production scenarios and develop mitigation strategies. When tariffs instead serve territorial ambitions or geopolitical objectives disconnected from economic rationales, production planning becomes speculative guesswork. Norwegian Prime Minister Jonas Gahr Støre's observation that threats have no place among allies captures broader uncertainty Trump's approach introduces into manufacturing investment decisions.

Manufacturing consolidation accelerates under pressure

European automotive production already confronts substantial headwinds. According to McKinsey analysis, the transition to EVs demands an estimated investment of €200 billion to €300 billion ($233 billion to $349 billion) by 2035 to maintain regional manufacturing competitiveness. Meeting tightening emissions standards whilst competing against manufacturers in markets with greater regulatory flexibility adds further complexity to production planning.

Production costs in EU facilities run approximately 30% higher than in China according to recent analysis. Labour costs, energy prices and regulatory complexity all weigh on manufacturing competitiveness. Chinese manufacturers increasingly capture European market share, particularly in the expanding electric vehicle segment. Against this backdrop, additional tariff burdens and trade policy uncertainty could prove decisive for marginal production operations.

Volkswagen announced plant closures in Germany alongside workforce reductions. Stellantis, Ford and other manufacturers paused production at multiple European facilities amid falling demand and rising inventories. European factories operate at approximately 55% capacity utilisation, gradually losing ground to Chinese rivals. Analysts project that Chinese brands will grow their European market share from 5% in 2025 to 10% in 2030, equivalent to 2 million finished vehicles produced for European markets.

Factory closures and workforce reductions announced in recent months reflect slowing electric vehicle uptake and cost pressures on manufacturing operations. Further tariff-driven cost increases or investment hesitancy could accelerate consolidation and capacity rationalisation. The automotive sector faces not merely a tariff challenge but a test of its ability to maintain production competitiveness amid fragmenting trade architectures and geopolitical instability.

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Immediate outlook remains profoundly uncertain

The coming weeks will prove critical for determining whether Trump's Iran tariffs represent serious policy or negotiating theatre. The White House has published neither executive order nor implementation guidance as of 19 January. The lack of documentation mirrors the Greenland tariff announcement's pattern, where threats preceded detailed policy frameworks.

Iranian Foreign Minister Abbas Araghchi warned that Iran is ready for war if Washington wants to "test" it, adding that he hoped the US would choose "the wise option" of dialogue. The escalating rhetoric suggests tariffs represent one element in broader pressure campaign against Tehran, though economic warfare against countries trading with Iran imposes costs primarily on manufacturing operations and consumers rather than Iranian authorities.

For automotive manufacturers, the strategic response options narrow as uncertainty expands. Diversifying production locations away from countries with Iranian commercial relationships proves impossible given the breadth of Tehran's trading partners. Absorbing 25% cost increases without pricing adjustments would eliminate already-compressed manufacturing margins, while passing full costs to consumers risks accelerating market share losses to competitors less exposed to American tariff regimes.

The Supreme Court's pending IEEPA decision could invalidate not just Iran tariffs but the entire framework of emergency-based trade measures Trump has deployed. Yet even if courts strike down IEEPA tariffs, the administration could pivot to alternative statutory authorities including Section 232 national security provisions or seek Congressional authorisation. Each pathway carries distinct procedural requirements, implementation timelines and legal vulnerabilities.