President-elect Donald Trump recently announced a new sweeping tariffs proposition he says will take effect on his first day in office: 25% tariffs on imports from Mexico and Canada.
The new policy, which is meant to pressure the U.S.’s neighboring countries into cracking down on trafficking and migration across borders, could strike the auto industry and drive up car prices for consumers, according to a note from Wells Fargo analysts.
Major automakers General Motors and Stellantis are at serious risk because they “bear the most [Mexican] exposure, Wells Fargo analysts wrote. “Autos are stuck in the middle of Trump’s geopolitics.”
Via two posts on Truth Social, Trump wrote that all goods from Mexico and Canada would be slapped with a 25% tariff, until those countries “clamped down on drugs, particularly fentanyl, and migrants crossing the border, in a move that would appear to violate a free-trade deal,” per Reuters. Chinese goods would also get “an additional 10% tariff, above any additional tariffs.”
If enacted, a 25% tariff on all auto parts from Canada or Mexico will add $2,100 in cost to the consumer for each U.S. assembly vehicle, according to Wells Fargo estimates. As for entire vehicles produced in Mexico or Canada, consumers can expect to pay between $8,000 and $10,000 more. “All in, we see ~$5 billion to $9 billion in EBIT risk for the D3 before pricing or plant closures,” the bank wrote.
The Mexico and Canada tariffs will hit particularly hard, given that, as of last year, the U.S. accounts for 83% of Mexican exports and more than 75% of Canadian exports.
Consumers will pay the price
Because Trump invoked issues related to the two countries’ “open borders” rather than any particular economic imperative, Wells Fargo wrote, there may be “lower risk if border issues can be addressed.” Nonetheless, the move highlights the high risk to Detroit’s Big Three automakers: General Motors, Ford Motor Company, and Chrysler.
The threat of tariffs would be “a two-alarm fire for the auto industry,” Patrick Anderson, CEO of Michigan-based consultancy Anderson Economic Group, told the New York Times. “There is probably not a single assembly plant in Michigan, Ohio, Illinois, and Texas that would not immediately be affected by a 25 percent tariff.”
About 16% of U.S. vehicle imports are from Mexico and Canada, and global automaker margins are roughly 9%; “therefore it would be difficult to offset 25% tariff without raising [the] price.” Honda, Ford, GM, and Stellantis currently have the largest U.S.-based operational scale and parts of any automaker, which means their prices would stand to grow the least.
This is the worst-case scenario for hopeful car owners, given that auto prices have far outpaced inflation since the pandemic. The average cost of a new car today is just over $48,000; in 2019, that figure was just under $37,000.