If you think the cost of goods is expensive now, come January, price tags could appear with some extra weight if the incoming Trump administration follows through with its threat of widespread tariffs. Not only would items from across the sea be affected but also anything made in Canada and Mexico. Autos, in particular, could see MSRP increases by the thousands.
Tariffs are a touchy thing, as is anything that involves parting or making money. However, they are the cost of entry and exit to keep trade moving while also protecting the domestic market. Raising or lowering a tariff isn’t a straightforward price increase or drop passed on to the consumer, though. While that can happen, sometimes the importer absorbs the costs or the exporter does, or a combination of all three groups. “It depends” is the vague answer because the product, market, and scale all come into play.
For example, the Biden administration implemented a 100 percent import tariff on Chinese-built EVs. The tariff was 25 percent before then. Oh, plus a 2.5 percent import tax. Why? To prevent cheap Chinese cars from undercutting those built in North America. But what did the Chinese automakers do? Buy up land and build manufacturing plants in Mexico to take advantage of the United States-Mexico-Canada Agreement (USMCA).
Regarding the automotive industry, the agreement states that as long as “75 percent of a vehicle’s content (70 percent for heavy trucks) be produced in North America, and that core auto parts originate from the United States, Canada, or Mexico,” then the vehicles will receive duty-free import and export access. Chinese companies didn’t find a loophole; they just know how to do business.
The Trump administration offers a different approach: everybody gets a tariff, including our neighbors. According to Automotive News, the president-elect is floating a 60 percent increase on Chinese products and 20 percent increase on all other imports. For Canada and Mexico, a 25 percent tariff would be added to “all goods.”
Canada has several manufacturing plants that produce vehicles for its domestic market and the U.S. Mexico, however, has grown to become the world’s seventh largest passenger vehicle manufacturer and, in general, is the U.S.’s largest trading partner.
According to the International Trade Association, 88 percent of the 3.5 million vehicles built annually in Mexico are exported. Of that number, 76 percent are slated for the U.S. Mass-market automakers like Ford, General Motors, Honda, Tesla, and Toyota have facilities south of the border, as do luxury brands Audi, BMW, and Mercedes-Benz.
However, the suggested tariffs will greatly affect GM and Stellantis who produce high-volume, high-profit vehicles in Canada and Mexico (i.e., full-size pickup trucks). CNBC reported last week that GM shares dropped by 9 percent while Stellantis fell by 5.7 percent after the tariffs announcement. Separately, Reuters referenced an S&P Global report when stating that American and European automakers would lose up to 17 percent of their core profits should the tariffs come to fruition.
Because manufacturing plants tend to be platform and vehicle-specific, switching an assembly line to produce another product is more than just a matter of programming. Even if a production flip were doable, Automotive News says Canada and Mexico produce nearly $100 billion in parts for vehicles assembled in the U.S. Essentially, prices are going up regardless of where the vehicle is built.
So, how much more will be added to the monroney? The same AN article suggests a $3,000 average markup. Maybe that doesn’t seem too high a price for a “Made in North America” label, but the latest numbers from Kelley Blue Book list the average new-vehicle price currently at $48,623. Huh, 50 grand for a new car? How much for a truck or SUV? The higher prices could also lead to a drop in U.S. demand, as much as one million units. That means fewer people are needed to work the assembly lines.
Whether any of this actually happens, though, and by how much remains to be seen. Considering the amount of international chatter, however, the proposed tariffs create possible leverage on current and future trade negotiations.
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