President Trump has promised to put tariffs of 25% on Mexico and Canada — unless they strike deals with him to cut down on immigration and drug trafficking, or otherwise give the U.S. what Trump considers a "win." Both countries have now negotiated a one-month reprieve from the tariffs.
Trump has called "tariff" the most beautiful word in the English language, but to many U.S. businesses, these particular tariffs are an ugly prospect.
Canada and Mexico are crucial trade partners. The auto industry, in particular, has been watching anxiously for updates. Carmakers have built a vast, complicated supply chain that spans North America, with parts crossing back and forth across borders throughout the auto manufacturing process.
"I think everybody understands that Mexico, the U.S. and Canada are very integrated," Irina Im, a senior analyst at RSM Canada, said in December. "It is hard to imagine how this supply chain that has been built out over a long time can be disrupted."
Tariffs would, of course, sharply raise costs on vehicles imported from Mexico, like the Toyota Tacoma, or Canada, like the Chrysler Pacifica. But it would also raise prices for vehicles that are assembled in the U.S., because many of their parts are sourced from companies in Canada or Mexico. Some parts cross borders multiple times — like, say, a wire that is manufactured in the U.S., sent to Mexico to be bundled into a group of wires, and then back to the U.S. for installation into a bigger piece of a car, like a seat.
This border-hopping supply network was supported by trade agreements such as NAFTA, which Trump reviled, and its replacement USMCA, which Trump signed. And the Detroit 3 — the U.S.-based automakers, who have significant operations in the U.S.'s closest neighbors — would be particularly vulnerable to cost increases.
Analysts at Bernstein Research estimate that 25% tariffs on both countries would be a headwind of up to $110 million per day for the auto industry, hurting the Detroit 3 disproportionately. Analysts at Jefferies, an investment bank, project that it would add about 6%, or $2,700, to the average U.S. vehicle prices for car shoppers.
"We urge all parties to reach a swift resolution in order to provide clarity and stability for the entire U.S. auto industry," Jennifer Safavian, President and CEO of Autos Drive America, a trade group representing international automakers, said in a statement Saturday. The Alliance for Automotive Innovation, the group representing U.S. auto manufacturing, noted that "seamless" trade in North America supports a $300 billion auto industry.
MEMA, a trade group representing companies that make auto parts and components, wrote in a memo on January 31 that the tariffs "would have severe consequences" for suppliers, workers and consumers alike.
On Monday, Trump spoke with the leaders of both Mexico and Canada, and announced that neither country would be immediately subject to tariffs as talks continue.
But he also dismissed concerns about the economic impacts if tariffs were imposed, telling reporters on Monday that the U.S. is not reliant on Canada. "We don't need them to make our cars," he said.
One significant challenge for automakers — and their surrounding ecosystem of suppliers, dealers and repair shops — is Trump has always said these particular tariffs are meant to motivate policy changes, and are not intended to be permanent. That's in contrast to some long-term tariffs on China, which are meant to help U.S. companies compete with subsidized Chinese rivals, or to the prospect of widespread, across-the-board tariffs meant to raise revenue for the federal government.
When tariffs are expected to linger, automakers might be willing to make significant investments in order to avoid them, like relocating where a vehicle is made, or building new supplier relationships. But if a tariff is only going to be in place briefly (or never move beyond a threat), that outlay doesn't make sense.
Mary Barra, the CEO of General Motors, addressed this conundrum in a call with investors last week. The company is prepared to take "no cost or low-cost" actions to mitigate the blow of tariffs, she said. (She didn't specify, but one possibility would be to stockpile some parts ahead of time, or use existing supplier relationships to source as much as possible from the U.S. instead of other countries.)
"What we won't do is spend a large amount of capital without clarity," she said.
And as of Monday afternoon, clarity was in short supply.
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