President Donald Trump’s newly imposed 25% tariffs on imports from Canada and Mexico are set to disrupt the North American auto industry, driving up car prices and straining supply chains. The tariffs, which took effect yesterday, have already sent major auto stocks tumbling. Shares of U.S. auto biggies Ford F and General Motors GM declined roughly 3% and 5%, respectively. Japan’s Toyota TM and Germany’s Volkswagen VWAGY lost around 2% each.

For decades, automakers have relied on an integrated supply chain spanning across the United States, Canada and Mexico, where parts and vehicles flow freely across borders. Companies like F, GM, TM and VWAGY face significantly higher production costs, which are estimated to rise by $4,000 to $5,000 per vehicle. Even cars assembled in the United States will be affected, as key components like engines, crankshafts and batteries are imported from Canada and Mexico. The impact on the industry can be severe, with estimates suggesting that up to one-third of North American auto production, which is roughly 20,000 vehicles per day, could be lost in the near term.

Some companies may attempt to shift production entirely to the United States, but that is a long and expensive process requiring new infrastructure, labor force adjustments and regulatory approvals.

The impact on consumer demand is also a major concern. With new vehicle prices already high, adding thousands of dollars due to tariffs could push many buyers out of the market. Higher costs will also trickle down to the used car market as fewer people trade in their vehicles, reducing supply. As sales decline, automakers could be forced to cut production, leading to job losses across manufacturing facilities, assembly plants, supplier networks and dealerships.

Furthermore, companies like Ford and Volkswagen, which have heavily invested in manufacturing facilities in Canada and Mexico, now find themselves at a disadvantage compared to Japanese and South Korean competitors like Yamaha, Suzuki, Hyundai, KIA and Daewoo, who can still access the United States market without these added costs. 

Products from China, on the other hand, also have an additional 10% hike in tariffs, so emerging Chinese automakers like NIO and BYD Co. BYDDY will find it difficult to expand their footprint in the American market. BYDDY, with its latest ‘God’s Eye’ smart driving system, aimed at directly competing with Tesla’s Full Self-Driving (FSD), will also find it difficult to make an impact in America.

Outlook for the Auto Sector

Automakers are now going to make crucial strategic decisions regarding production cuts, car prices and worker layoffs, which will likely strain the economy. The ripple effects will adversely impact suppliers, dealerships and even the insurance industry, as the cost of repairs and replacement vehicles rise. Some companies may scale back investments and shift their focus to the European, Asian and Australian markets to offset losses. Meanwhile, foreign automakers that are not dependent on Canada, Mexico or China for their manufacturing will gain a competitive edge.

The overall outlook for the auto industry, thus, appears grim. If the tariffs remain in place for an extended period, the industry can see production slowdowns, plant closures and a wider economic downturn, pushing the auto sector toward a possible recession, with long-term consequences for both automakers and consumers. 

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This article originally published on Zacks Investment Research (zacks.com).

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