A trailer drive for a car carrier traveled to the US at the Otai commercial port in Tijuana, Mexico on January 31st. President Donald Trump’s threatening tariffs in Mexico and Canada are scheduled to come into effect Tuesday, and will damage automotive plants via Getty Images at the U.S. Guillermoarias/AFP.
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Guillermo Arias/AFP via Getty Images
With President Trump once supported 25% tariffs in Canada and Mexico, he is poised to move away from the threat to reality, and the automotive industry is preparing for higher costs and extraordinary disruptions to North American supply chains.
“All tariffs are set,” Trump told reporters Monday afternoon, saying there is no room for Canada or Mexico to negotiate another respite. “They will come into effect tomorrow.”
Trump also said he would double the tariffs he imposed on China last month from 10% to 20%.
Speaking Monday, Trump called his announcement “very exciting” for the automotive industry and said he would benefit from his tariff plans. “So all they have to do is, frankly, build their car plants, and the rest of the US. In that case, they don’t have tariffs,” Trump said.
However, the automotive industry itself is vocally opposed to these tariffs. And that’s largely because US auto plants rely on parts of Canada and Mexico.
“Try to be honest,” Ford CEO Jim Farley told the Investors’ Conference in February. “In the long term, a 25% tariff across the Mexico-Canada border will blow a hole in the US industry we’ve never seen before.”
In fact, US plants are building supply chains across North America, which is particularly hard to hit US-based manufacturing. Analysts at Bernstein Research have similarly found that Detroit automakers are particularly vulnerable compared to their international competitors.
When parts cross boundaries, tariffs increase prices
North American automotive supply chains are “highly integrated” to use industry jargon. That means back and forth at ship parts factories in the US, Canada, Mexico and Mexico. For decades, trade agreements (first NAFTA, then the Trump-related exchange, USMCA) supported the arrangement.
In fact, parts from the same car can cross the US border multiple times as they pass through the manufacturing process. NPR has previously shown how this happens with a bundle of wires, and the Wall Street Journal has recently visualized the sending module journey.
Workers will assemble electronic keys at a manufacturing plant in Tsunigadezniga, Jalisco, Mexico on February 20th. The small handheld remote control is assembled in Mexico, but crosses the boundary several times in North America before being completed like countless other auto parts. Ulises Ruiz/AFP hides captions via Getty Images
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Ulises Ruiz/AFP via Getty Images
So, cars made in the US are not subject to these tariffs, but the parts that go into them are often so. In February, Patrick Anderson of Anderson Economic Group presented his research to the Press Association that automates the increase in component costs for certain US-made vehicles models. He said tariffs could increase manufacturing costs by $4,000 per vehicle, depending on the vehicle model.
Nowadays, businesses can try to reduce these costs by stockpiling parts and moving some production. Automakers have been guaranteed to investors for months now, with contingency plans in place. Also, to protect the sale, they may absorb some costs rather than handing over to the car buyer.
However, several analysts still expect consumers to see car prices rise. Thousands of additional overnight production costs are difficult to avoid, even for experienced management. Investment bank Jeffries predicts prices will rise on average or $2,700, but two analyses cited by Kelly Blue Book agreed to an average price increase of $3,000.
Of course, the price of the vehicle is already very high, averageing around $48,000, which is out of reach for many car shoppers. They have been levelled recently, but prices have risen significantly from pre-pandemic levels.
Other tariffs, and uncertain timelines, complicate plans
Meanwhile, other tariffs — those already scheduled and some simply proposed — overturn the supply chain of automakers. This month, higher tariffs on two main raw materials, steel and aluminum. Trump has proposed a 25% tariff on imported vehicles from Europe, as well as other country-specific tariffs.
For weeks, automakers have hoped that tariffs in Mexico and Canada remained a threat rather than a real policy. Now they want the tariffs to be short-lived.
And as businesses try to navigate these changing trade policies, one challenge is that tariff targets mentioned by the Trump administration are often inconsistent. Tariffs designed as diplomatic levers can be lifted as soon as the target is achieved. The Trump administration has said tariffs in Canada and Mexico are a response to inadequate border and drug enforcement. However, tariffs aimed at promoting employment and raising profits in the United States could become permanent.
Companies are reluctant to develop long-term plans with so much uncertainty, such as building new factories.
“The only thing we certainly know is we don’t know what Trump is going to do,” a Jeffries analyst wrote in a note to a client Monday. Last month, automotive data and intelligence company S&P Global Mobility warned that “uncertainty disruptions” around tariffs would delay companies’ decisions about which vehicles to build and where they are.
And that’s before considering the illusion of retaliatory tariffs – hiking imposed by other countries in response to US actions.
Gustavo Flores Masias, a professor of government and public policy at Cornell University, focusing on economic reform, believes that is likely to come next. “Canada and Mexico are trying to find diplomatic solutions to the White House’s demands regarding undocumented migration and fentanyl trafficking, but both countries are likely to retaliate in kind, even if they stand more to be economically lost,” he said in an emailed statement.
