President-elect Donald Trump earlier this week threatened to impose a 25% tariff on all imports from Canada and Mexico. The move is meant to force the countries to stop the flow of migrants and drugs across America’s borders. He also threatened to hike tariffs on all Chinese products by 10%.
The automotive industry has reacted with alarm to the plan, which could dramatically increase the prices of many cars and trucks.
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Economist Patrick Anderson, who studies the car market, told The New York Times the move would be “a two-alarm fire for the auto industry.” He added, “There is probably not a single assembly plant in Michigan, Ohio, Illinois, and Texas that would not immediately be affected by a 25% tariff.”
Yahoo Finance notes, “Shares of U.S. and European automakers dropped on Tuesday” after the move.
Many Cars Built Across Borders
Reuters attempted to tally the cars automakers import to the U.S. from Canada or Mexico. They found vehicles from Audi, BMW, Chrysler, Jeep, Honda, Kia, Mazda, Nissan, Ram, Toyota, and Volkswagen. Chevrolet, Ford, and Mercedes-Benz also import finished cars from Mexico.
Many Built Here Use Imported Parts
But even cars built in the U.S. and Europe use many parts originating in Mexico or Canada. There are so many Mexican and Canadian parts in U.S. cars that the U.S. government itself no longer distinguishes between American and North American parts.
CNN explains, “The U.S. government tracks what percentage of each car’s parts is made ‘domestically.’ But under current trade law, both Canadian-made parts and US-made parts are counted as the same domestic content.”
That’s why, CNN says, “Auto prices could rise sharply if Trump goes ahead with plans to impose steep tariffs on the parts that go into the “American” vehicles found in showrooms nationwide.”
Move Could Add $3,000 to $10,000 to Car Prices
Industry publication Automotive News says the proposed tariffs could “add thousands of dollars to vehicle prices in the United States and undercut automotive competitiveness in all three countries.”
AN explains, “In a research note to clients, U.S.-based Wolfe Research said the 25-per-cent tariff could add about $3,000 (USD) to the average cost of vehicles sold in the United States.”
For larger vehicles, the hit could be proportionally larger. Sam Fiorani, vice-president of global vehicle forecasting at AutoForecast Solutions, told AN that added costs “could run as high as $10,000 for a fully equipped Ram 4500, a model built at Stellantis’ plant in Saltillo, Mexico.”
The auto industry has largely stayed silent in response so far. The Alliance for Automotive Innovation, the trade group that usually speaks for the industry in the U.S., declined to comment.
A Negotiating Tactic?
Some analysts speculate that the move could be a bluff meant to start negotiations over border enforcement.
“This is how President-elect Trump negotiates,” Fiorani told Automotive News. “He steps out big and expects everybody to cave and give him whatever he wants. These are giant economies, and it doesn’t work that simply.”
“People in China and Canada are thinking about concessions they could make before there is even anything on the table,” Richard Baldwin, a professor of economics at the International Institute for Management Development in Lausanne, Switzerland, told The New York Times. “He’s forcing the Canadians and Mexicans to prenegotiate with themselves.”
Chinese Firms Move to Lower Car Prices
Meanwhile, the Times reports that the Chinese auto industry took steps to lower its already low prices this week. BYD and SAIC, two large Chinese manufacturers, publicly called on their suppliers to lower parts prices by 10% next year.
China has become the world’s largest exporter of cars. Chinese brands have displaced U.S. companies as the most popular car brands in Mexico.
