Do Trade Tariffs Increase Consumer Borrowing Costs for Autos?

Hankins, Momeni, and Sovich (2025) ask whether trade tariffs raise consumer borrowing costs by changing auto loan terms, not just vehicle prices. They examine millions of U.S. auto loans from Regulation AB II data, comparing loans from captive auto lenders (owned by manufacturers) to non-captive lenders before and after the 2018 steel and aluminum tariffs. They find that captive lenders increased interest rates by about 26 basis points after the tariffs, roughly a 10 percent increase relative to pre-tariff rates. The effect was larger for lower-income borrowers and in areas with less lending competition, while other loan terms did not meaningfully change.

Why This Article Was Selected for The Policy Scientist

This article addresses a broadly important policy issue: how trade policy affects households through channels that standard price measures often miss. Tariffs are typically evaluated through changes in goods prices, wages, or firm outcomes, but consumer credit is a central mechanism through which many households experience economic policy. The timing is particularly relevant given renewed interest in tariffs and industrial policy in the U.S. and Europe. The authors have an established research record on consumer credit and finance, and this study builds carefully on influential tariff-incidence work by extending it to financing terms. The Regulation AB II dataset is unusually rich and well suited to this question. The difference-in-differences design is a credible causal inference approach.

Full Citation and Link to Article

Hankins, K. W., Momeni, M., & Sovich, D. (Forthcoming 2025). Consumer credit and the incidence of tariffs: Evidence from the auto industry. American Economic Review. https://doi.org/10.1257/aer.20230432

Central Research Question

The article asks whether trade tariffs affect households through consumer credit markets, rather than only through the prices of goods. Specifically, the authors examine whether the 2018 U.S. steel and aluminum tariffs led automobile manufacturers to pass costs on to consumers via higher auto loan interest rates offered by captive finance subsidiaries. This question matters because many durable goods purchases are bundled with financing, meaning that standard measures of tariff incidence that focus only on sticker prices may miss an important component of the economic burden borne by households. The authors further investigate whether vertical integration between manufacturers and lenders shapes tariff pass-through, and whether the effects are uneven across borrowers and market structures.

Previous Literature

The study builds on a large literature examining the incidence of tariffs, particularly work showing that the 2018 Trump-era tariffs were largely passed through to domestic prices rather than absorbed by foreign exporters. Highly cited studies by Amiti, Redding, and Weinstein and by Fajgelbaum et al. document near-complete pass-through of tariffs to producer and import prices, while evidence on consumer prices has been more mixed. At the same time, a separate literature on captive finance emphasizes why manufacturers operate lending subsidiaries, highlighting their role in facilitating sales, relaxing credit constraints, and enabling price discrimination. Prior work on consumer credit has shown that borrowers are often less sensitive to financing terms than to upfront prices, creating scope for firms to shift costs toward interest rates. This article bridges these literatures by showing that trade policy shocks can transmit through financial contracts, not just product markets.

Data

The authors use loan-level data from Regulation AB II, which requires issuers of publicly securitized auto loans to report detailed monthly information to the Securities and Exchange Commission. The dataset includes millions of auto loans originated between 2017 and 2018, covering loan terms, borrower characteristics, and detailed vehicle information such as make, model, year, and condition. A key advantage of these data is the ability to hold the vehicle choice fixed when analyzing changes in loan terms, reducing bias from consumers switching to cheaper cars. The authors supplement these data with vehicle sales price information from the Texas Department of Motor Vehicles to examine price effects. Overall, the dataset is unusually rich for studying the interaction between consumer credit and trade policy and is broadly representative of large captive and non-captive auto lenders in the United States.

Methods

The empirical strategy relies on a difference-in-differences design that compares changes in auto loan terms from captive lenders to those from non-captive lenders before and after the announcement of the 2018 metal tariffs. Captive lenders are exposed to tariffs through their manufacturing parents, while non-captive lenders are not, making the latter a plausible control group. The authors include extensive fixed effects, including lender fixed effects and vehicle-by-time fixed effects, as well as controls for borrower income, credit score, and state-by-time variation. This approach isolates within-vehicle, within-borrower-type changes in interest rates attributable to the tariffs. The authors conduct numerous robustness checks, including dynamic event-study analyses, alternative control groups, and tests for changes in borrower composition. While the study does not use a randomized controlled trial, the design reflects best practices in causal inference using observational data.

Findings/Size Effects

The authors find that captive auto lenders increased interest rates by approximately 26 basis points relative to non-captive lenders following the tariffs, representing about a 10 percent increase compared to pre-tariff captive rates. Dynamic estimates show that this effect grew over time, reaching nearly 50 basis points by late 2018. Importantly, other loan terms such as loan amounts, maturities, and loan-to-value ratios did not change meaningfully, indicating that interest rates were the primary margin of adjustment. The effects were concentrated among captive lenders whose manufacturers had greater domestic production exposure to the tariffs. The increase in interest rates was also larger for lower-income borrowers, borrowers with lower credit scores, and in areas with less lending competition. The authors estimate that pass-through through financing costs was roughly two-thirds as large as pass-through through vehicle prices, implying that standard price-based measures substantially understate the total incidence of tariffs on consumers.

Conclusion

The article demonstrates that trade policy can affect households through consumer credit markets, not just through product prices or labor markets. By documenting a sizable increase in auto loan interest rates following the 2018 tariffs, the authors show that vertical integration allows firms to spread cost shocks across multiple margins. The findings suggest that evaluations of tariff incidence that ignore financing costs may significantly underestimate consumer exposure. Methodologically, the study offers a careful and credible causal inference design using high-quality administrative data. While the results are specific to the U.S. auto market, the logic likely extends to other industries where goods are bundled with financing, both domestically and internationally. Future research could strengthen external validity by examining other credit markets or jurisdictions, but this article makes a substantial contribution to the literature on trade policy, consumer credit, and economic incidence.