Potential Tariffs Set to Disrupt North American Auto Market
The Trump administration’s proposal to impose 25% tariffs on all imports from Canada and Mexico threatens to create significant issues within the automotive industry. This move could trigger immediate repercussions, particularly for car dealerships and manufacturing plants across the United States. The potential tariffs would add thousands of dollars to the cost of vehicles, potentially affecting both imported cars and those assembled in the U.S. due to the integrated nature of North American auto manufacturing.
These tariffs could upend production on the continent and drive up already high car prices, placing them out of reach for many consumers. Michael Robinet from S&P Global Mobility has stated that car factories might slow down or even shut down quickly because vehicles, even those assembled in the U.S. depend on parts from Mexico and Canada. This is because within the current trade agreements (USMCA), vehicles and parts flow freely across borders. The resulting increase in production costs could become unsustainable for many manufacturers.
The potential impact is compared to disruptions experienced during the Covid-19 pandemic when limited supplies of new cars caused skyrocketing prices. Automakers are likely to run cost calculations soon after tariffs take effect, potentially slowing or halting U.S. production to avoid the duties on Canadian and Mexican parts. Automakers hope that the trade dispute gets settled before their inventory of cars and trucks on dealer lots runs out.
The imposition of tariffs stands to dramatically affect a wide range of vehicles, regardless of brand or country of final assembly. The Subaru Outback, the BMW X5, Mercedes SUVs, and the Kia Telluride are just a few of the many examples of foreign-branded vehicles manufactured in the U.S. Furthermore, parts are often shipped across the borders multiple times during the manufacturing of each vehicle.
Also, American factories often export vehicles and parts to Canada and Mexico, which mean that some vehicles will be more costly to buy in these countries too because of the tariffs. Mexico and Canada have threatened to apply tariffs on American goods should the Trump administration implement its plan. The U.S. shipped $13.8 billion worth of cars to Canada and $26.5 billion worth of parts in the first 11 months of 2024. During the same period, the U.S shipped vehicles and parts worth $4.2 and $33.7 billion respectively to Mexico.
While automakers may have stockpiled parts to mitigate impacts, the duration of tariff implementation remains uncertain. The industry might not tolerate tariffs for extended periods, and adjustments like halting shipments to the U.S. from Canadian and Mexican plants are possible responses. Dealers and consumers will be the ones paying the thousands of dollars more for each vehicle. The average supply of vehicles at US dealerships ranges from 25 to 73 days, and the issue’s resolution will be especially important by March or April. Those months signify tax refund season, and automakers may experience difficulties if vehicle shortages occur.
