The auto industry faces a crisis. Donald Trump’s new tariffs on imports to the United States from Canada, Mexico and China threatens to disrupt supply chains, increase car prices and force automakers into difficult production decisions.
The 25% tariff on North American goods and the 10% tariff for Chinese goods, which will take effect this week in the US, will affect nearly all car manufacturers.
Since the industry has spent decades integrating North American manufacturing, these tariffs are not only a tax on imported goods but also a direct attack on how cars are made.
What are the immediate consequences for the industry?
Trump’s auto tariffs are applicable to almost everything involved in the production of cars.
The tax will be levied on Finished Vehicles, Engines, Transmissions, Raw Materials, and Thousands of Components every time they cross border.
Tariffs will increase costs at each step of the supply chain, since parts are moved multiple times between the US, Canada and Mexico before final assembly.
Now, automakers face a logistical disaster.
According to The New York Times, General Motors Stellantis Toyota and Honda each produce approximately 40% of their North American vehicle production in Canada and Mexico.
The new tariffs are expected to increase their costs immediately. GM, who built over 842,000 cars in Mexico last year is severely exposed.
Both sides of the border assemble Chevrolet Silverado pickups and GMC Sierra trucks, two of its best-selling models.
Half of the Silverados sold by the US are manufactured in Mexico or Canada.
Tariffs will increase truck costs by thousands of dollars.
Ford is in a much better position. It produces over 80% of North American products in the US. However, it still makes key models such as the Mustang Mach-E pickup and Maverick in Mexico.
Volkswagen is heavily exposed because it relies on Mexico to sell 70% of its US products.
Some estimates place the cost of an additional vehicle at $10,000 or even more, especially for larger trucks and SUVs.
Automakers will need to decide if they want to absorb the costs or pass them on to consumers.
The price of cars is going to increase.
The disruption to the supply chain will also be immediate.
The auto parts industry in Canada and Mexico has warned that production could be halted within days.
The head of the Canadian Automotive Parts Manufacturers’ Association said that the sector cannot remain profitably under these tariffs.
If automakers begin to reduce production, up to 500 000 jobs in Ontario could be at risk.
The same scenario could play out in Mexico, where entire towns rely on automobile factories.
What about the EV Market?
Initial reactions suggest that electric vehicle production is not spared.
Tesla and other EV manufacturers are scrambling now to assess the impact on their supply chain of the tariffs.
Tesla has advertised for years that it is the “most American-made car” but it still relies on parts from Mexico or Canada.
Documents filed with National Highway Traffic Safety Administration show that:
- Model 3 Long Range is made in 75% by the US and Canada, but 20% comes from Mexico.
- Model Y also has a similar breakdown with 70% US/Canada content and 25% Mexican.
- Cybertruck is made up of 65% US/Canada parts and 25% Mexican parts.
Batteries will be affected by tariffs on Chinese imports.
The US still relies heavily on China for its lithium, nickel, and cobalt supply.
The 10% tariff on Chinese materials will increase the price of EV batteries. Tesla, Rivian and legacy automakers will be forced to raise prices or suffer a margin hit.
Tesla’s CFO Vaibhav Taniaja acknowledged on a recent earnings conference call that tariffs have become a major risk for profitability.
Although the company has spent many years trying to localize their supply chain, the auto industry remains global.
These tariffs affect all automakers.
Will Trump’s tariffs reduce the trade deficit?
Trump claims that tariffs can help fix America’s trade surplus, which he describes as an economic drain. The numbers tell a very different story.
When energy is excluded, the US has actually had a trade surplus for 16 years with Canada.
Mexico has a surplus in trade with the US. This is largely due to US companies manufacturing cars there and reimporting them at lower prices.
Tariffs will not change this dynamic. In Trump’s first year, his tariffs against Chinese goods failed to reduce the US-China deficit.
It is likely that the same thing will happen now.
The exchange rate will also cancel some of the effects of tariffs.
Tariffs will be partially offset by a weaker Canadian dollar and Mexican peso.
The US dollar’s appreciation will make American-made cars less competitive on global markets.
The idea that tariffs would bring back US manufacturing jobs also has a flaw.
The tariffs on steel and aluminum under Trump for 2018-2019 were supposed to revitalize the American metals industries, but steel-consuming sectors lost more jobs than steel producers gained.
Tariffs are a major factor in raising the cost of goods, and making it more difficult for American manufacturers to compete.
Will automakers shift their production to the US?
Some automakers have considered moving production to the US in order to avoid tariffs. However, this is easier to say than to do.
It takes years to build new factories, and billions of dollars to retool existing ones.
Many automakers lack the ability to move large-scale production rapidly.
Aluminum manufacturers are already looking for ways to avoid tariffs. They could reroute production through countries that do not have tariffs.
This suggests that companies may try to find ways to avoid tariffs, rather than moving production to the US.
Automakers can also retaliate on their own terms.
Many of these factories are located in states such as Texas, Tennessee, South Carolina and South Carolina where Trump is a strong supporter.
These companies may delay new investments and job expansions if tariffs are hurting their bottom line. This is a way to send a message to Washington.
Could this spiral into an international trade war?
The first wave of retaliation is already underway. Canada announced $155 billion worth of counter-tariffs targeting US exports including appliances, lumber, brew, and other goods.
In the coming weeks, Mexico and the European Union are expected to impose more tariffs.
If this situation escalates, the US automotive industry could be caught off guard.
The European Union has considered tariffs on US made vehicles, especially Teslas, for a long time as a reaction to American trade policies.
China could also restrict rare earth exports to make it harder for EV battery materials to be sourced.
When tariffs increase, the cost of business increases.
Each time a country retaliates against the United States, American exports lose their competitiveness.
What began as a policy aimed at reducing imports from North America or China could quickly become a global trade conflict.
It’s clear that the US auto industry is in a bad situation.
The next few months are critical, and they could force a major change in an industry which has been stable for decades.
This post Auto industry turmoil – which carmakers are most affected by tariffs? This post may be updated as new information unfolds
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