Tariffs Loom, Threatening to Spike US Car Prices
New York (CNN) — The auto industry is bracing for potential tariffs on Canadian and Mexican imports, a move that could send car prices soaring even for vehicles assembled in the United States. Decades of operating within a single North American market, where parts and vehicles move freely across borders, have created a complex supply chain. Consequently, there’s no such thing as a completely ‘all-American’ car.
President Donald Trump recently announced tariffs of 25% on imports from Mexico and, with some exceptions for energy products, from Canada. While a previous announcement was quickly reversed, the industry now faces the potential for significant disruption, particularly if tariffs are not delayed.
“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, in an interview with CNN. He anticipates price changes within one to two weeks after tariffs are imposed.
Defining ‘American-Made’
The US government tracks the percentage of domestically made parts in each vehicle. However, current trade laws treat Canadian and US-made parts as coming from a single country. Even with this broad definition, no vehicle exceeds 75% ‘American-made.’
Only two vehicles are considered 75% ‘American-made’ by the US government: the Tesla Model 3 and the Honda Ridgeline. Notably, this figure can include Canadian parts.
Cars with 50% or more of their parts from American or Canadian suppliers are largely produced by Tesla or ostensibly foreign brands but assembled in the United States — think Honda, Hyundai, Kia, Nissan, Mazda, Subaru and Toyota. The widely popular Ford F-150, the best-selling vehicle in the US for over 40 years, has the highest percentage of domestically produced parts among the Detroit automakers. Yet, even though the trucks are assembled in Michigan or Missouri, only about 45% of the parts originate from American or Canadian factories. The larger versions of the engines often come from Mexico.
“Yes, it’s America’s truck, assembled in America, but not with American parts,” Ivan Drury, director of insights for the automotive site Edmunds, confirmed to CNN.
Sticker Shock for Consumers
Tariffs on vehicles assembled in Canadian or Mexican plants will result in price hikes, impacting even those assembled in the United States. These costs are poised to be passed to consumers quickly. This includes vehicles like the Chrysler Pacifica and some Chevrolet Silverados, both assembled in Canada, as well as models such as the Ford Mustang Mach-E and Honda HR-V, assembled in Mexico.
Ford CEO Jim Farley warned investors that “a 25% tariff across the Mexico and Canada borders would blow a hole in the US industry that we’ve never seen.”
Car dealers currently hold approximately a two-month supply of vehicles. Data from Edmunds indicates that inventories range from a 36-day supply at Toyota and Lexus to a 92-day one for Ford and Lincoln. Yet prices of vehicles built before any tariffs are implemented could increase as dealers aim to conserve existing inventory.
Nagle says that “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.”
Production Cuts and Economic Impact
A likely cutback in production is expected to rapidly drive up prices, mirroring developments during the first year of the COVID-19 pandemic. Car shortages resulted from a scarcity of computer chips. If a vehicle is missing even a single part, it cannot be built. Buyers quickly paid record prices, and even used car prices subsequently climbed because of constrained supplies of new cars.
Nagle anticipates a possible “return of what happened during the chip crisis, when most people were paying above the sticker price.” He stresses that “affordability could be in jeopardy pretty quickly.”
The average sale price for a new car in December reached a record $49,327 and dropped only $1,200 in January, according to Edmunds. Average prices, however, are expected to top $50,000 by March, just as tax refunds become available during a busy buying season for manufacturers. “There’s going to be a lot of sticker shock,” said Nagle.
Automakers Prepare, But Uncertainty Remains
Automakers have attempted to cope by stockpiling parts from Mexico and Canada while building up inventories of vehicles assembled in those countries. However, these measures offer only a short-term solution. Based on analysis by the Anderson Economic Group, the cost of car production across North America may rise between $3,500 and $12,000. Production cutbacks are also predicted by Patrick Anderson, the group’s CEO.
Moving a production plant is not a quick process. “I don’t see how you can move a production plant across a border within months or even a year,” Anderson said. “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 the previous tariff threats, despite not being implemented, triggered financial and logistical challenges for automakers. At a Wolfe Research conference on February 11, he mentioned that “So far what we’re seeing is a lot of cost and a lot of chaos.”
General Motors CFO Paul Jacobson said that “If [tariffs] 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.” But he acknowledges that it’s difficult to make such costly changes given the existing policy’s uncertainty. “Those are questions that just don’t have an answer today,”
Layoffs and Market Shock
In the immediate future, reductions in production could lead to temporary layoffs in factories across the United States, potentially affecting some of the one million people in the auto industry. Around 300,000 work at US auto assembly plants.
Autoworkers at General Motors, Ford and Stellantis have some protections in the event of layoffs. But about half of the US auto plant workers do not have these union-negotiated protections. Many of the million factory workers are at parts manufacturers, and job cuts at these supplier companies could be extensive.
“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.”
