The American auto industry could be a domestic casualty of President Donald Trump’s trade battles.
On Tuesday, the president will disrupt over $300 billion in annual U.S. automotive trade with Canada and Mexico if he implements 25% import taxes.
He will also destroy decades-old supply chains and probably raise the already prohibitively high cost of new cars.
According to David Gantz, a fellow at Rice University’s Baker Institute for Public Policy, the tariffs represent an “existential” threat to the North American auto industry.
“The cost of everything imported from Mexico or Canada that goes into a car assembled in the U.S.” will increase as a result.
Trump’s tariffs could increase the average new automobile price in the United States, which is currently close to $49,000, by at least $3,000, according to Kelley Blue Book.
Certain full-size pickup trucks may see a $10,000 increase in pricing.
Laptops 1000The economic suffering would worsen if American exports were subject to tariffs from Canada and Mexico in retaliation.
“A sustained 25% tariff would have a severe economic impact on Canada and Mexico, with full-scale retaliation likely to push the U.S. to a point of stagnant growth and Canada and Mexico into a recession,” writes Andrew Foran of TD Economics.
25% tariffs, according to Foran, would reduce auto sales by 10.6% annually in the US and 13.6% annually in Canada.
Trump’s tariffs would disrupt auto supply systems in North America.
North America has developed into an integrated auto manufacturing powerhouse since 1965, when the United States and Canada removed tariffs on each other’s automobiles and auto parts.
A regional trade agreement that included Mexico was signed in 1994, and Trump himself negotiated another one in 2020.
According to Brett House, a professor at Columbia University’s business school,
“North America is an extremely competitive place to build automobiles because you can tap relatively cheap steel and aluminum from Canada, use relatively cheap labor in Mexico to assemble cars, and leverage the high-tech expertise and technology of the United States together.”
A large portion of production has shifted to Mexico.
For instance, Ford produces the Maverick truck and the compact Bronco Sport SUV in Sonora, northwest Mexico.
Since 1968, Stellantis has operated a plant in Toluca, west of Mexico City, producing the Jeep Compass and Wagoneer S.
General Motors produces GMC and Chevrolet pickups at its facility in Silao, central Mexico.
Canada (No. 4 at 1.1 million) and Mexico (No. 1 at over 3 million) accounted for just over half of the 8 million vehicles and light trucks that the US imported last year.
53% of American auto exports are to Canada and Mexico, the two largest international markets for cars and light trucks made in the United States.
Trump would be throwing a bomb into that complex manufacturing network by taxing goods from Canada and Mexico, the majority of which have been coming into the United States duty-free.
Red tape and expenses would mount.
The duties would be imposed each time goods from Canada or Mexico reach the border, according to a White House official who spoke on the condition of anonymity to discuss the specifics of the tariff plan.
The expenses would go up as auto parts were shipped from American manufacturing to Mexico or Canada and back.
The red tape would also:
“Keeping track of things is an administrative and bureaucratic nightmare,” Gantz remarked.
Additionally, beginning March 12, Trump plans to increase taxes on foreign steel and aluminum in addition to the 25% tariffs on Canada and Mexico.
Trump is increasing the duty on aluminum to 25% and eliminating exemptions from the metals tariffs he imposed during his first term, which were 10% on aluminum and 25% on steel.
This implies that 50% of steel and aluminum imports from Canada and Mexico, two major metals suppliers, would be subject to taxes paid by U.S. importers, including automakers.
K. Venkatesh Prasad, senior vice president of research at the Center for Automotive Research, stated,
“You’re talking about the material costs going up every time (a part) goes into one market and comes back.”
The greater expenses would have a negative impact. According to Prasad, 20% of American consumers with the lowest income could not get a new car ten years ago. “The bottom 40% of the population already cannot afford a new vehicle,” he stated.
Jim Farley, CEO of Ford, has expressed dissatisfaction, saying “so far what we’re seeing is a lot of cost and chaos.”
At the Wolfe Research auto industry conference last month, General Motors CEO Mary Barra stated that the company has been “doing scenario planning and looking at the various things we can change, we can move, we can respond.”
She said she was certain the corporation could figure out how to “mitigate” the impact of the tariffs.
John Elkann, the chairman of Stellantis, recently stated that he believes the administration’s initiatives will increase manufacturing and jobs in the United States.
The timing of Trump’s trade battle is difficult for automakers.
According to Prasad, the tariffs may damage sales and reduce the amount of money available for the EV transition because they are attempting to switch from gasoline-powered to electric vehicles and are financing EV investments with the money made from the sale of conventional automobiles.
Why is Trump acting in this way?
Trump maintains that the significant impact on imports from Canada and Mexico is intended to restrict the flow of fentanyl and illegal immigrants across American borders, not to promote commerce.
Trump posted on his social media platform, Truth Social, on Thursday, saying, “We cannot allow this scourge to continue to harm the USA, and therefore, until it stops, or is seriously limited, the proposed TARIFFS scheduled to go into effect on March Fourth will, indeed, go into effect, as scheduled.”
Given that last year, U.S. customs officers only found 43 pounds of fentanyl at the Canadian border, compared to 21,100 pounds at Mexico’s, Canada doesn’t appear to be a very significant supplier of the drug.
Since the 2020 U.S.-Mexico-Canada Agreement, which Trump negotiated during his first term, is up for renewal next year, many observers believe he has additional objectives.
The USMCA failed to lower America’s trade imbalances with Canada and Mexico, despite the president calling it a win and a significant improvement over the 1994 agreement it replaced.
Indeed, they have grown in size. (In Canada’s case, this is mostly due to the country’s booming energy exports, vital to the Midwest and Northeast of the United States.)
Therefore, he will probably seek changes that would guarantee that more production, particularly auto production, takes place in the US rather than just North America.
He might use the tariffs as leverage to get Canada and Mexico to agree to his desired improvements to the USMCA.
Foran of TD Economics says that “the North American auto industry should still prepare itself for a prolonged period of elevated trade uncertainty and potential trade disruptions” in the interim
