Charging more, charging less: A structural analysis of contemporary automotive policies in the United States
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heeney-heeney-sm-tpp-2026-thesis.pdf
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Author(s)
Heeney, Luke
Advisor(s)
Knittel, Christopher
Date Issued
February 2026
Publisher
Massachusetts Institute of Technology
Abstract
US policymakers have recently taken a renewed interest in protectionist trade policy, while enthusiasm has waned for climate incentives of previous years. This thesis quantifies the short- run impact of the US Government’s 2025 automotive policy package which includes tariffs on imported vehicles and automotive parts, alongside the repeal of the Inflation Reduction Act’s electric-vehicle (EV) purchase credits. I estimate a random-coefficients discrete-choice demand system for 2015–2024 with income- and region-specific consumer heterogeneity. I then leverage novel model-level parts-sourcing data to estimate how imported-parts cost shocks transmit to marginal costs for US-assembled vehicles while accounting for heterogeneous foreign-parts exposure and potential endogeneity due to within-year re-sourcing. Combining demand and costs estimated under Nash-Bertrand pricing, I solve counterfactual simulations for alternative tariff and subsidy regimes to assess changes in producer and consumer surplus across heterogeneous firms and consumers, along with fiscal impacts of tariff and subsidy decisions. I find that, with EV credits maintained, applying 25% tariffs (with some country- specific rates) to both vehicles and parts raises average prices by 10.14%, lowers aggregate consumer surplus by $33.8 billion (9.70%), and lowers US producer surplus by $2.07 billion with per-firm outcomes correlated with the percentage of parts imported. Tariff revenue is quantitatively larger than US surplus losses at $42.4 billion. Consumer losses are regressive in percentage terms (Quintile 1: −14.8%) but greater in absolute value among higher-income households (Quintile 5: −$13.6 billion, −7.1%). Exempting parts from tariffs roughly halves consumer costs and delivers net positive outcomes for US firms: a vehicles-only tariff raises average prices by 5.76% and lowers consumer surplus by $15.1 billion (4.40%), while increasing US producer surplus by $1.21 billion and raising the US-assembled share of sales to 67.3%
(from 53.5%). Tariff revenues become $15.7 billion. Stacking subsidy repeal onto the full tariff regime deepens consumer losses by a further $2.6 billion, decreases US producer surplus a further $2.07 billion, and reduces EV sales by 32%. The geographic incidence of consumer welfare changes and US firm production varies across scenarios.
MIT Department
Massachusetts Institute of Technology. Institute for Data, Systems, and Society
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