New US Electric Vehicle Rules Put Japan's Auto Industry in the Fast Lane

The United States remains the most important export market for Japan's core industry, the automobile sector. In a welcome development, the recently concluded Japan–US tariff negotiations saw tariffs on cars and auto parts reduced from 27.5%, a rate imposed by Donald Trump's administration earlier this spring, down to 15%. This comes as a relief for Japanese automakers, whose profits had been under pressure. Beyond tariffs, shifts in electric vehicle (EV) policy are also working in their favor.

'One Big Beautiful Bill'

On July 4, US Independence Day, President Trump signed into law a sweeping legislative package he dubbed the "One Big Beautiful Bill Act." With that legislation, he reversed the decarbonization policies championed by the Joe Biden administration's "Green Transformation (GX)," under which Biden had promoted EVs with the slogan "the future of the American auto industry is electric."

In contrast, Trump remained steadfastly critical of EVs throughout his campaign. He often argued that electric vehicles might be enjoyable at first but soon raise practical concerns, such as where to charge them. Trump characterized EV subsidies as policies that benefit the wealthy and warned that a full shift to electric cars would make the US auto industry dependent on China, putting American jobs at risk.

Rolling Back the EV Agenda

Upon taking office, Trump quickly acted on his campaign promises. He signed an executive order opposing EV mandates and withdrew from the Paris Agreement on climate change. On June 12, he stripped states like California of their authority to ban the sale of new gasoline-powered cars by 2035. This effectively abolished the Zero Emission Vehicle regulations.

Currently, about 7% of new car sales in the US are EVs, and nearly 70% of those are Teslas. These are mainly purchased in affluent, environmentally conscious areas like California.

*A Tesla electric vehicle (EV) and the company’s logo. June 2023, Colorado, USA (©AP/Kyodo)*

Then came the new One Big Beautiful Bill, which will eliminate EV tax credits, $7,500 for new electric vehicles and $4,000 for used ones, starting September 30. In addition, federal registration taxes will impose an annual fee of $250 for electric vehicles and $100 for hybrids. On the other hand, Americans buying domestically produced cars will now be able to deduct part of their auto loan interest from their income taxes.

Headwinds for EV Decarbonization

One of the most notable aspects of the new bill is the removal of penalties under the Corporate Average Fuel Economy (CAFE) standards. Under the previous administration, the standards grew stricter every year, penalizing automakers for selling more gasoline vehicles.

If manufacturers didn't want to pay the fines, they had to purchase carbon credits from EV companies like Tesla. However, over 90% of American consumers still prefer internal combustion engine vehicles. As a result, both the US Big Three (Ford, General Motors, and Chrysler) and Japanese automakers faced mounting penalties as their sales of gasoline-powered cars increased. Some rushed EV investments to avoid these fines, but their late-to-market EVs struggled to sell.

By contrast, companies like Tesla benefited greatly from this system. In fiscal 2024, Tesla earned $2.76 billion in carbon credit revenue, accounting for about 39% of its net profit. Now, that revenue source is set to disappear.

As the saying goes, when it rains, it pours. On July 2, Tesla announced that global vehicle deliveries for the April–June 2025 quarter fell 13.5% year-on-year to 384,122 units. This represented a double-digit decline. Sales are stagnating, and EV tax credits are ending. Furthermore, subsidies for charging infrastructure and residential solar battery storage are all being phased out. With carbon credit income now uncertain, the business model that had relied on decarbonization incentives is rapidly collapsing.

A Boost for Japan's Strength in Hybrids

Trump has made revitalizing the economy through manufacturing a top priority. He has also introduced tariff hikes to bring back the auto industry, along with a return to fossil fuel–based energy, both key promises from his campaign. For EV manufacturers who relied on subsidies and carbon credit revenue amid flagging demand, this is a disaster.

In contrast, the new policy offers tailwinds for Japanese automakers, who have strengths in internal combustion engines.

Back in 2020, the Japanese government also set a national target of achieving carbon neutrality by 2050 and promoted EVs. However, companies like Toyota stayed grounded in market realities. Had they yielded to political pressure and rushed headlong into full EV adoption, they might now be grappling with sunk investments, significant losses, and widespread job insecurity.

Despite being branded by the media as "behind the curve" on EVs, Japanese automakers stuck to their comprehensive, all-weather strategy — and it's now paying off.

Sales of Japan's signature hybrid vehicles remain strong, with Japanese brands now commanding 40% of new car sales in the North American market. As the politically driven EV push falters, the future of mobility under the Trump administration is being shaped not by mandates but by consumer choice.

Despite the weight of additional tariffs, Japanese automakers are expected to further strengthen their foothold in the region.

(Read the article in Japanese.)

Author: Koko Kato