Big tariffs on auto parts are now in effect. Here’s how they work.

President Trump’s tariffs on foreign-made auto parts began on May 3, with automakers receiving some concessions from the administration but still feeling the heat on others.

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‘Destacking’Buying time for automakers with ‘offsets’What this means for automakers

Trump signed an executive order formalizing the new rules late last week, which gave some carve-outs to what would have been blanket 25% tariffs on imported auto parts. Everything from foreign-made powertrain components to seats and airbags is affected.

Here’s how the auto parts tariffs work.

‘Destacking’

One of the biggest exemptions Trump gave automakers is preventing parts tariffs from piling up on top of other tariffs, a fix Commerce Department officials call “destacking.”

This means automakers who import steel parts such as body panels won’t have to pay the 25% tariff on foreign parts and the 25% duty on the value of the steel sourced abroad.

Automakers will instead pick the highest tariff that applies to them and pay that only once. In most cases, this would mean just the foreign parts tariff.

The move will be retroactive, meaning automakers could be reimbursed for tariffs already paid. Another big exemption is that United States-Mexico-Canada Agreement (USMCA)-compliant parts made in Mexico or Canada will not be hit by the 25% tariff.

Read more: The latest news and updates on Trump’s tariffs

Buying time for automakers with ‘offsets’

The automakers lobbied hard, arguing that certain parts, such as wiring harnesses, would be difficult to reshore to the US in a short time period. The White House agreed and decided it wouldn’t immediately punish the automakers for those foreign parts, giving them a staged setup with tariff reimbursements, so long as the cars are assembled in the US.

Per the new rules, automakers will be reimbursed for tariffs on foreign-made auto parts up to an amount equal to 3.75% of the value of a US-made car for one year, then 2.5% the year after, before phasing out.

The 3.75% calculation comes from multiplying 15% — the percentage of foreign-made parts automakers said they would need time to replace — by the 25% tariff on foreign auto parts. This would be an “offset” per the Commerce Department against the automaker’s tariff bill for importing those parts.

In the plan’s second year, the 2.5% reimbursement comes from multiplying 10%, which the administration hopes will be the percentage of foreign parts that can’t be sourced yet in the US, by the 25% parts tariff.

The Commerce Department official said these changes to the auto parts tariffs will help automakers get more runway to onshore their supply chain, expand their plants, and hire more US workers.

What this means for automakers

Automakers, particularly the Big Three, sought clarity from the White House on tariff exemptions, and while the moves are welcome, the parts tariffs are still a heavy burden.

Last week, GM announced it would take a $4 billion to $5 billion tariff hit to its full-year EBIT earnings, with CFO Paul Jacobson adding $2 billion of that would come from importing vehicles into the US and the balance from auto parts imports.

Jacobson said the new parts tariff offset announced by the White House will “help greatly” but would not fully alleviate its non-USMCA parts exposure.

Rival Stellantis withdrew its full-year profit guidance altogether, claiming it was due to “tariff-related uncertainties.”

Ford will update its guidance later on Monday when it reports first quarter earnings after the bell. Ford CEO Jim Farley has been a vocal critic of Trump’s tariff policies but struck a conciliatory tone following the limited auto parts relief.

“Ford welcomes and appreciates these decisions by President Trump, which will help mitigate the impact of tariffs on automakers, suppliers, and consumers. We will continue to work closely with the administration in support of the president’s vision for a healthy and growing auto industry in America,” Farley said in a statement.