MW Trump's tariffs, whether implemented or not, have already hurt the U.S. auto industry

By Claudia Assis

As 25% tariffs against Canada and Mexico loom, carmakers are planning to 'just absorb the cost and hope that it does not last very long'

U.S. carmakers and auto-parts suppliers, including many smaller operations that might have no financial cushion to withstand a prolonged standoff, are staring down a tariff abyss that may or may not come to pass, but whose cracks are already starting to show.

The Trump administration is set to enact 25% tariffs on Mexico and Canada products on Tuesday, following an one-month reprieve after the two countries reached agreements with the U.S.

Many in the industry feel that the levies could still be called off. Virtually everyone is hoping that, if enacted, the tariffs will be short-lived. Regardless, uncertainty has already taken its toll.

"That's the ultimate problem, really, for the industry right now," said Glenn Stevens, the executive director of MichAuto, a business organization promoting Michigan's auto industry, and the Detroit Regional Chamber's vice president of automotive and mobility initiatives.

"It's an industry that needs stability, it needs long-term planning," he said. "Anything that disrupts that is not good." Stevens said he's starting to hear more about companies delaying capital expansion plans and other key decisions.

The auto industry is among the most affected businesses should the 25% tariffs on Canada and Mexico be enacted, and it is also dealing with tariffs on steel and aluminum, levies on Chinese products, and the prospect of a 25% tariff on all imported vehicles.

While most Americans think of major carmakers such as General Motors Co. $(GM)$ and Ford Motor Co. $(F)$ and large auto-parts manufacturers such as Lear Corp. $(LEA)$ when they think of the auto industry, in reality small companies are the backbone of the business, Stevens said.

A modern vehicle has about 30,000 parts, counting all its nuts and bolts. Most of those components, particularly the smaller ones, are made by so-called Tier 3 parts makers, which may have revenue of between $10 million and $50 million a year.

"These companies are not in the media a lot and people don't talk about them, but they are absolutely an essential part of it," as the lack of even a small part can halt an entire assembly line, Stevens said. The smaller players have less cushion to absorb tariff-related price increases, and in some cases might not have a way to pass down costs directly.

If they do, and all those costs make their way down the supply chain, it would lead to price increases of between $3,000 to $9,000 per vehicle sold in the U.S., at a time when the average selling price of cars is at a record high of around $49,000.

"The consumer is not going to go for it," and ultimately there will be job cuts in the industry, he said.

As the tariffs loom, automakers are planning to "just deal with, just absorb the cost and hope that it does not last very long," said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions LLC.

There's a flurry of behind-the-scenes lobbying activity from U.S. carmakers to minimize the impact of tariffs, or to advocate for them to be brief.

Ford Chief Executive Jim Farley said as much during a recent conference call with Wall Street analysts after quarterly results. For a couple of weeks, Ford "can make sure nothing crosses the border," Farley said.

"Protracted" 25% tariffs on Canadian and Mexican goods are a different story, the CEO said. They "would have a huge impact on our industry, with billions of dollars of industry profits wiped out and adverse effect on U.S. jobs, as well as the entire value system in our industry. Tariffs would also mean higher prices for customers."

Automakers have kept their 2025 guidance intact amid the fluid situation. If and when tariffs do hit, a lot will ride on inventories, factory capabilities, reaction from their various suppliers and more.

If the tariffs are in place longer term, it will entail finding new sourcing for parts and, worst of all situations, factory relocations, Fiorani said. Most U.S.-sold cars made in Mexico are cheaper, entry-level vehicles, with companies making higher-margin SUVs and pickup trucks largely in the U.S.

"Moving production of vehicles takes a lot of investment and a lot of time, it's not something that can be done quickly," Fiorani said.

Under the U.S.-Mexico-Canada agreement, which replaced NAFTA in 2020, and the prior agreement, "the three countries have been working together as a holistic unit. This industry needs volume in order to be profitable. And using North America as a free-trade area is the only way they are going to compete with units like the EU and China," Fiorani said.

"If you don't visualize North America as a unit, if you are not allowing North America to operate as a unit, the U.S. cannot compete on a global scale and it becomes an economic island. We need all three nations to be a global power. This region has been developed as one machine, as an one unit."

For Shay Natarajan, a partner at private-equity firm Mobility Impact Partners, the question is not whether tariffs will be enacted, but how the likely tariffs will be enacted and structured.

And, depending on that, the impact on automakers and top suppliers would be selective or maybe even small. Smaller suppliers, however, especially those producing commoditized items whose competitiveness is purely based on price, could be disproportionately impacted.

There's an ongoing effort by lobbyists of American original equipment manufacturers, or OEMs, to shape the tariffs to exclude vehicles that have U.S.-made components on them, for example.

"There are many permutations" on how the tariffs could be applied and their blow lessened, Natarajan said. "And you have to question the goal of these tariffs," she said. Broadly speaking, the goal of the tariffs is to decrease the U.S. trade deficit, and they could protect the domestic auto industry from external entrants.

"The goal is not to cause the American OEMs ... so, if the question is, is this a huge detriment to the OEMs, I think they probably won't."

Don't miss: Trump wants a 25% tariff on cars from the E.U. Where he could be going wrong.

-Claudia Assis

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March 03, 2025 10:33 ET (15:33 GMT)

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