The Trump tariffs threatening Mexico, Canada, and now the whole world are intended to benefit US industries and interests and perhaps even lower illegal immigration and drug smuggling. But analysts and industries closest to the unfolding drama are concerned the new tariffs will actually have the opposite effect.
What may sound like a common-sense approach to international trade and a sound “America First” policy could wind up hurting a crucial sector of the United States economy: US automakers. Due to the highly integrated nature of the North American trade bloc, US automakers rely heavily on parts and materials sourced from Mexico and Canada. And analysts are pointing out that the Trump tariffs may actually have a net negative impact on US automakers as well as on the American consumer.
Incoming President Donald Trump immediately made good on his campaign promise to slap high tariffs on some of the nation’s top trading partners, including Mexico. On Feb. 1, he signed an executive order to override the duly ratified USMCA treaty that guarantees duty-free trade between the countries on almost all items and materials. Originally known as NAFTA, this free-trade agreement has been in place for decades, and the US economy and US carmakers have grown heavily dependent on this favorable cooperative arrangement.
In fact, most automobiles sold in the United States contain a mix of labor, parts, and materials from all three signatory countries. The United States-Mexico-Canada agreement that Trump, himself, negotiated in his first term contributes directly to US jobs. It is estimated that 40% of the inputs for vehicles assembled in the US come from Mexico and Canada.
However, President Trump quickly postponed the 25% tariffs on Canada and Mexico for 30 days after receiving some concessions from the governments of those respective countries. Specifically, Mexico’s President Sheinbaum agreed to send 10,000 national guard members to the northern border to help prevent the flow of fentanyl and illegal immigrants into the US (although most fentanyl is smuggled by US citizens) and asked that the US president also stop the flow of illegal US firearms and weapons into Mexico, where they are used to arm the cartels there.
However, the 25% blanket tariffs on Canada and Mexico are set to go into effect in early March, and a 10% tariff has already gone into effect on Chinese imports. Likewise, high tariffs are scheduled for all steel and aluminum imports globally on March 12, and “reciprocal tariffs” on all countries currently levying tariffs on US goods is imminent, likely to be implemented this week.
Mexico, Canada, and others have also announced they will respond with high tariffs on US goods, themselves, stoking fears of a developing trade war on a global scale.
Automotive manufacturing is one of Mexico’s biggest industries, largely due to the integration with the US automotive industry and direct role they play in manufacturing major US and other brands. As such, several industry leaders are eyeing the incoming tariffs with concern and frustration. These American carmakers are among the biggest players in Mexico’s and Canada’s automotive industries and will likely be hurt the most from what is possibly an illegal violation of the terms of the USMCA.
General Motors (GM) builds the Chevy Blazer, Chevy Blazer EV, Equinox EV, and other electric vehicles at its plant in Ramos Arizpe, Mexico. They also rely heavily on their plant in San Luis Potosí to manufacture their second-bestselling vehicle, the Equinox. Their Silverado and other popular vehicles are also manufactured in other plants in both Mexico and Canada. Losing duty-free access to these locations would place a huge burden on their Indiana and Michigan assembly lines, resulting in shortages and price hikes.
Ford builds some of their most popular and affordable models like the Bronco Sport, Mustang Mach-E, and Maverick in Hermosillo and Cuautitlán Izcalli, Mexico as well as in China. Ford CEO, Jim Farley, has said that the company will have to make major shifts in their supply chain to adapt:
There is no question that tariffs at 25% level from Canada and Mexico, if they’re protracted, would have a huge impact on our industry with billions of dollars of industry profits wiped out and adverse effect on the U.S. jobs as well as the entire value system in our industry. Tariffs would also mean higher prices for customers. – Jim Farley, Ford CEO
Toyota, Honda, Nissan, Mercedes-Benz, and other non-domestic brands popular in the US would also suffer from the impact of the Trump tariffs. These automakers rely heavily on production in Mexico and Canada to supply US consumers at an affordable price point. 25% tariffs could mean huge price hikes on new cars and even the discontinuation of popular models sold in the US, as well as a deep disruptions in US supply chains, resulting in job losses and even plant closures in the United States.
The Detroit Three, which comprise the lion’s share of domestic auto production inside the United States, would experience substantial losses. Indeed, the impact of the Trump Tariffs on these US Automakers is difficult to measure.
Stellantis manufactures approximately 39% of its North American units in Mexico and Canada. GM manufactures approximately 36% of North American vehicles there. And Ford makes about 18% in these USMCA countries. Industry analysts estimate the initial tariffs (not counting the ensuing retaliatory and reciprocal tariffs) could cost US automakers $110 million USD per day and approximately $40 billion per year. These costs would drastically reduce profitability for these US automotive companies and dramatically raise the prices on their popular models sold here.
Even for those automobiles assembled entirely in the United States, US automakers rely on parts made in Canada and Mexico for about 40% of each vehicle. These parts would be subject to the 25% tariffs.
And the additional 25% tariffs about to be imposed on all imported steel and aluminum would only increase the burden on these US automakers further. What is among the primary materials used to manufacture cars and trucks is expected to become increasingly scarce and come at a much higher price to the US companies sourcing these materials for vehicles sold in the US.
Glenn Stevens Jr., Executive Director for MichAuto, an industry association for Michigan’s automakers sounded this alarm:
We’re concerned about the downstream effects…the short-term benefits of higher prices for steel and aluminum for domestic production are outweighed by a decrease in downstream effects…you can’t change supply chains very quickly, and you certainly can’t change manufacturing locations very quickly. – Glenn Stevens Jr., Executive Director, MichAuto
Marcus Noland, trade policy expert at the Peterson Institute for International Economics, noted the irony in all of this, pointing out that these Trump tariffs will not only impact on US automakers and consumers, but could actually result in even more illegal immigration:
The tariffs would really hit the automobile industry hard because the motor vehicle industries of the U.S., Mexico and Canada are very intertwined…Parts will cross the border seven to eight times before final assembly, and the tariffs are applied every time a part crosses — so costs would go up very quickly…you’ll have unemployed people along the U.S. border, and the ironic thing is one of the reasons for this action was illegal migration, and it could actually incentivize illegal migration. By damaging the Mexican economy, you would probably increase the levels of illegal migration.” – Marcus Noland, Peterson Institute for International Economics
