Before even taking office, President-elect Donald Trump has stirred worries in the auto industry with his proposal to impose significant tariffs on goods imported from Mexico, Canada, and China. He suggests a 25% tariff on all imports from Mexico and Canada, as well as a 10% tariff on Chinese products. According to Trump, these measures are aimed at curbing illegal immigration and the flow of drugs, particularly fentanyl, into the U.S.
Such tariffs could have wide-reaching consequences. In 2023, the U.S. imported $1.3 trillion worth of goods from Mexico and Canada alone. For companies that rely on supply chains across these borders, the tariffs could significantly erode profit margins. As Jack Rossbach, an economics professor at Georgetown University, pointed out, “A 25% tariff is quite high. If you have a 10% profit margin, then a 25% tariff completely wipes it out.”
Automakers Face the Biggest Challenge
The auto industry stands to be among the hardest hit if Trump’s tariff plans come to fruition. U.S. automakers, who rely heavily on manufacturing plants in Mexico and Canada, import billions of dollars’ worth of parts and finished vehicles every year. Should these tariffs be imposed, car prices in the U.S. could skyrocket, further straining an industry already struggling with pandemic-related issues.
A recent report from S&P Global forecasts that U.S. and European automakers could see as much as 17% of their combined core profits wiped out due to these tariffs. Premium brands like Volvo and Jaguar Land Rover are especially vulnerable due to their reliance on European production. Meanwhile, major U.S. manufacturers like General Motors and Stellantis, which depend heavily on Mexico and Canada for production, could face losses of over 20% of their earnings.
By contrast, companies like Volkswagen and Toyota are somewhat less exposed, with the potential loss to their earnings ranging between 10-20%. Other companies, such as BMW, Ford, Mercedes-Benz, and Hyundai, are at even lower risk, with less than 10% of their earnings potentially affected.
Higher Costs for Consumers
One immediate effect of these tariffs would likely be a sharp rise in vehicle prices for American consumers. Analysts estimate that a 25% tariff could add as much as $3,000 to the average price of a car in the U.S. Given that motor vehicles and parts from Canada and Mexico accounted for over half of the $403 billion in vehicle imports last year, these tariffs could further squeeze the budgets of U.S. drivers.
Automakers with large operations in Mexico and Canada, like General Motors, Ford, and Toyota, are particularly vulnerable to these cost increases. For example, GM produces several models in Mexico, while Ford manufactures some of its vehicles there and in Canada. Similarly, Toyota produces the Tacoma in Mexico and the RAV4 in Canada, making these companies highly susceptible to tariff-related price hikes.
Will Trump Follow Through?
Despite the alarm caused by Trump’s tariff threats, some analysts are skeptical about whether they will actually come to pass. Wolfe Research noted that investors are likely assuming Trump won’t follow through with such sweeping measures, but there remains a sense of uncertainty.
Odracir Barquera, head of the Mexican Association of the Automotive Industry (AMIA), emphasized that it’s crucial to wait until Trump formally takes office and outlines his policies. He advocated for continued cooperation between the U.S., Mexico, and Canada to strengthen regional competitiveness, particularly in the auto sector.
Flavio Volpe, president of the Canadian Automotive Parts Manufacturers Association, suggested that Trump’s rhetoric may be more bluster than actual policy. “We’ve been exactly here before,” Volpe remarked, pointing out that Trump often uses aggressive tactics in negotiations, only to soften his stance later.
Political and Economic Reactions
Mexico and Canada have strongly opposed Trump’s proposed tariffs. Mexican President Claudia Sheinbaum assured Trump that her government is already managing migration flows to the northern border. However, she warned that Mexico would retaliate with its own tariffs if talks fail, emphasizing the importance of diplomacy for mutual prosperity.
Canadian officials also voiced concern, cautioning Trump against upsetting the “balanced and mutually beneficial” trade relationship between the U.S. and Canada. The two countries share extensive trade ties, with Canada being one of the largest importers of U.S. goods.
