Auto Industry Brace Itself for Tariffs Onslaught
President Donald J. Trump signed an executive order to slap 25% tariffs on all light vehicle imports starting the first minute of April 3. In the case of cars and pickups coming from Mexico and Canada that comply with USMCA rules, tariffs will apply only to non-US made content, said the White House on a fact sheet.
The tax will also be levied on auto parts such as engines and transmissions on a date “no later than May 3”.
Likewise, components from Canada and Mexico that comply with USMCA rules will be exempt, albeit temporarily. At the same time, the Department of Commerce implements a system at Customs and Border Protection (CBP) to streamline the classification of goods and the collection of the respective tariffs.
Mexican Secretary of Economy Marcelo Ebrard Casaubon, who was in Washington at the time of the announcement, said that the Mexican government will seek preferential treatment for both vehicles and auto parts.
The official traveled to the US capital to hold talks with US Secretary of Commerce Howard Lutnick and held a public video conference call with President Claudia Sheinbaum, who ruled out implementing tariffs on US imports for the time being.
Skepticism and Pessimism
Trump said the tariffs are intended to encourage the production of more vehicles and auto parts in the United States. Still, several analysts and industry executives have warned that the measure could have adverse consequences.
According to a survey by the Motor & Equipment Manufacturers Association (MEMA), 80% of the companies affiliated with this organization said they would be financially impacted by the imposition of tariffs on Mexico.
Twenty-four percent of these auto parts manufacturers, which supply both automotive assembly plants (OEMs) and aftermarket, said that if the measure lasts more than a month, they would reduce or altogether cancel investments in the United States.
A smaller percentage, 13%, stated they would cut jobs in the United States under the aforementioned scenario.
If tariffs remain in place for six months, the percentage of companies that will reduce or cancel investments rises to 57%, while the percentage of those that will implement job cuts increases to 47%.
Another of the most predictable effects is higher auto prices, which will slow sales and, consequentially, lead to cuts in production volumes.
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“Higher tariffs would cost the OEMs a fortune if they absorb them, but tariffs passed on to the consumer would cost the industry if consumers bought materially fewer vehicles,” said Rob Wildeboer, Executive Chairman and Co-founder of Canadian automaker Martinrea International Inc., during the company's latest earnings conference call.
The executive asserted that it's only a matter of time before tariffs begin to cause assembly line shutdowns.
“Some don’t seem to grasp this. If Tier 2 or Tier 3 suppliers don’t ship product or cannot afford tariffs to get the product, the supply chain breaks down, and people don’t make cars,” Wildeboer asserted.
Martinrea CEO Pat D’Eramo added that it will be difficult to shift production of both components and complete vehicles to the United States, as “there is no capacity in the United States to localize to, at least nothing significant.”
D’Eramo added that even if companies had available production capacity in the United States, the employment rate would not support it. “Plainly, there just isn’t enough people with the right skill sets to take on much more capacity,” he said.
Not Even Tesla Gets Spared
According to GlobalData, Tesla would be the least affected of the automakers operating in the United States, as it produces 100% of the vehicles it sells there.
However, Elon Musk himself said on social media that the impact his company will suffer due to the auto parts it imports “is not trivial.”
Estimates from the latest NHTSA report on the American Automobile Labeling Act indicate that Tesla vehicles contain between 20% and 25% of components manufactured in Mexico.
After Musk's company, Ford, which imports 21% of the vehicles it sells in the U.S. market, is the least exposed to tariffs. The blue oval is followed by Honda, which produces 35% of its U.S. sales abroad, says GlobalData.
Stellantis and Subaru's vulnerability is similar, as they import 45% of their vehicles, while General Motors follows closely behind, with 46% of their sales built out of the US.
Despite having a strong manufacturing base in North America, Toyota is among the companies most impacted, as it imports 51% of its sales volume in that market.
The same goes for BMW, which operates its largest assembly plant worldwide in South Carolina yet imports 52% of its US auto sales. Meanwhile, fellow automaker Mercedes-Benz's percentage is 63%.
Kia and its parent company, Hyundai, which revealed plans to invest $21 billion to expand its manufacturing base in the US before the tariff announcement, import 65% of the vehicles they sell in that market, according to GlobalData.
Volkswagen imports 80%; Mazda, 81%; Volvo/Geely, 90%; and finally, Jaguar Land Rover (JLR), as well as Volkswagen subsidiaries, Audi and Porsche, build 100% of their vehicles sold in the United States abroad.
Affordable Cars on the Brink
As mentioned above, one of the immediate effects will be price increases, which will take only a few weeks to manifest and, according to several analysts, will be most noticeable in affordable vehicles.
Cox Automotive estimates that there are 27 models under the $30,000 price range in the US market, and at least half of these will be severely impacted by the tariffs.
Production of four of these models has already been discontinued, including the Chevy Malibu, while others, such as the Versa and Altima, will disappear from the market in the coming months.
Many of these affordable vehicles come from Mexico, Canada, and South Korea, and according to Cox Automotive estimates, the implementation of tariffs will increase the prices of these units by an average of $5,300.
To measure the impact, the analysis and consulting firm highlighted that this segment represented 13% of sales in the US market in 2024, and that the experience gained during the pandemic can provide a clear idea of what's coming.
“We have seen this movie before. During COVID, supply became constrained, and costs skyrocketed. While the price increase this time may be for completely different reasons, it still stands to reason that the market will not bear another significant increase,” said Charlie Chesbrough, Senior Economist at Cox.
Chesbrough expects fewer consumers looking out for new cars. “Those in need of affordable transportation, especially those households earning less than $100,000. We saw 10% of these buyers exit the new-vehicle market over the same period,” the economist warned
A Slight Hike Followed by Decline
Analysts acknowledged that the tariffs will push a rebound in sales, as dealers are encouraging consumers to take advantage of the last few days with vehicles in inventory remaining at current prices. However, this increase will be temporary, and the downward trend will follow quickly.
“I expect we’ll see relatively strong sales activity for a month or two, but prices will rise, and sales will slow noticeably before the end of Q2. Dealers and OEMs will be pulling back on incentives immediately as the rush to sell existing inventory declines,” said Jeremy Robb, Senior Director of Economic and Industry Insights at Cox.
This situation will contribute to a slowdown in vehicle production in the United States. Still, it will not be the only factor, as tariffs on auto parts will also significantly impact automakers.
According to estimates from the White House itself, cars assembled there contain at most 50% of components produced in the US, while the rest is imported.
For this reason alone, Jonathan Smoke, Cox's chief economist, ventured to say, just hours before the White House announced the executive order, that it would take only two weeks to see a devastating effect.
“If the tariffs take effect April 2, by mid-April, Smoke expects disruption to almost all North American vehicle production, resulting in 20,000 fewer vehicles produced per day – a 30% reduction,” Smoke estimated.
“However, since the tariffs do not at least immediately apply to parts, it may not be as disruptive to U.S. vehicle production as we had feared,” he said on a later note, but remained skeptical.
“As our team has noted in the past, increasing domestic production is an admirable goal, but the current state of the global automotive market has been more than six decades in the making,” Smoke explained.
“Change won’t happen overnight, nor will it happen in just a few years. The evolution will be slow and difficult, and in the near term, after an initial, short surge in buying, we expect vehicle sales to fall, new and used prices to increase, and some models to be eliminated if tariffs persist.”, said Cox Automotive’s Chief Economist.
