Tariffs Threaten to Drive Up Car Prices
Tariffs on Canadian and Mexican imports are once again looming, and the auto industry is bracing for the impact. The potential 25% tariffs, proposed by former President Donald Trump, could quickly increase vehicle prices, even for cars assembled in the United States.
The auto industry has operated for decades under the assumption of a unified North American market, with free movement of parts and vehicles across borders. This integrated system means that a truly “all-American” car, built exclusively with U.S.-made parts, is a rarity.
President Trump has proposed tariffs on all imports from Mexico and on imports from Canada, excluding energy products. If implemented, this could send a seismic shock through the auto industry and car prices.
“There’s probably not a vehicle on the market today that wouldn’t be affected in some form or fashion by tariffs,” said Peter Nagle, automotive economist for S&P Global Mobility.
The Reality of “American-Made”
The U.S. government tracks the percentage of each car’s parts made domestically, but current trade laws consider both U.S.- and Canadian-made parts as effectively originating from a single country. Even with this broad definition, very few vehicles exceed 75% “American-made” content.
Only two vehicles meet the 75% threshold: the Tesla Model 3 and the Honda Ridgeline, a pickup assembled in Lincoln, Alabama. Notably, this 75% figure includes parts from Canada.
Vehicles with 50% or more of their parts from American or Canadian suppliers are primarily built by Tesla or by brands that are, on the surface, “foreign”, but assembled in the United States, such as Honda, Hyundai, Kia, Nissan, Mazda, Subaru, and Toyota.
The Ford F-150, the top-selling vehicle in the U.S. for over 40 years, has the highest percentage of domestically-produced parts among the Detroit automakers. However, only 45% of the parts used in the F-150, which is assembled in Michigan or Missouri, come from American or Canadian factories. A significant portion of the larger engine components are sourced from Mexico.
“Yes, it’s America’s truck, assembled in America, but not with American parts,” commented Ivan Drury, director of insights for the automotive site Edmunds.
Impact on Consumers
The impending tariffs will likely inflate the prices of cars assembled in Canadian and Mexican plants, including those assembled in the United States, by thousands of dollars. These costs are expected to be passed on to consumers.
Vehicles potentially affected include the Chrysler Pacifica and some Chevrolet Silverados, assembled in Canada, and the Ford Mustang Mach-E and Honda HR-V, assembled in Mexico.
“Let’s be real honest: Long term, a 25% tariff across the Mexico and Canada borders would blow a hole in the US industry that we’ve never seen,” said Ford CEO Jim Farley.
Sticker Shock and Inventory Concerns
U.S. car dealers currently have about a two-month supply of vehicles on their lots, with inventory ranging from a relatively low 36-day supply for Toyota and Lexus to a 92-day supply for Ford and Lincoln, according to Edmunds data. Even prices for vehicles built before the tariffs take effect are expected to increase as dealers try to protect their dwindling inventory.
“The inventory on hand will become much more valuable, and they’ll try to stretch out the supply of no-tariff supply as long as possible in hopes that it will be resolved quickly,” Nagle said.
Production cutbacks are likely to cause prices to rise rapidly, echoing the supply chain issues experienced during the COVID-19 pandemic and the subsequent computer chip shortage. This scarcity pushed prices to record highs.
“We could see a return of what happened during the chip crisis, when most people were paying above the sticker price,” Nagle said. “Affordability could be in jeopardy pretty quickly.”
The average sale price for a new car in the U.S. reached a record $49,327 in December and only dipped slightly in January, according to Edmunds. This figure is expected to exceed $50,000 by March, as the spring buying season begins with tax refunds becoming available.
“There’s going to be a lot of sticker shock,” concluded Nagle.
Industry Response and Uncertainty
Automakers have prepared for potential tariffs by stockpiling Mexican and Canadian parts and building up inventories of vehicles from those countries. However, these measures are only a short-term solution to a potentially long-term problem.
Analysis from the Michigan-based Anderson Economic Group suggests that the cost to produce cars throughout North America could rise by between $3,500 and $12,000. This could lead to production cutbacks, particularly for models with cheaper options packages, potentially leading to job losses across the industry, according to Patrick Anderson, the group’s CEO.
“Producers will stop making some of the models,” Anderson predicted.
He also dismissed the notion that automakers could quickly shift production back to the United States, deeming it unrealistic within the timeframe suggested by Trump.
“I don’t see how you can move a production plant across a border within months or even a year,” Anderson stated. “It’s a multi-year process to move a plant. There’s no pathway to pull up stakes in Ontario and move to Indiana.”
Ford CEO Jim Farley stated that the uncertainty created by Trump’s earlier tariff threats had already caused significant financial and logistical problems for automakers.
At an investor conference last month, General Motors CFO Paul Jacobson stated that the company was ready to make adjustments for tariffs that might be short-term in nature but would face more significant challenges should the tariffs be implemented for the long term.
“If they become permanent, then there’s a whole bunch of different things that you have to think about, in terms of where do you allocate plants, do you move plants, etc.,” Jacobson said. However, he emphasized the difficulty of making such costly decisions given the ongoing policy uncertainties.
Potential for Layoffs
In the short term, production cutbacks could lead to temporary layoffs at factories across the United States. Approximately 1 million people are employed in building cars and manufacturing auto parts.
Roughly 300,000 individuals work in U.S. auto assembly plants. While unionized autoworkers at General Motors, Ford, and Stellantis have some protections against layoffs, approximately half of the 300,000 U.S. auto plant workers lack these union-negotiated safeguards.
Job cuts among parts manufacturers could be substantial, with potential repercussions throughout related industries such as shipping and advertising.
“The effect of this is going to go far beyond people who are employed by the automakers,” Anderson said. “Parts makers, those involved in shipping, even advertising, the cutbacks are going to be a huge cost. It’s going to be a shock to the whole market.”
