No one gains from American tariffs on cars from Mexico and Canada
The flurry of executive orders issued by Donald Trump on his first day back as president showed the high priority he places on making America’s borders less porous. His efforts to “repel the disastrous invasion of our country” by migrants and drugs from Mexico and Canada may soon include stemming the passage of cars. A promise to impose sweeping tariffs on “day one”, including a 25% levy on goods from the two countries unless they do more to stop the flows of people and illegal drugs, was pushed back, but only to February 1st. Whether tariffs are imposed then or at a later date, the consequences for the car industry would be immense.
Carmaking across North America is as complex and interconnected as the components of a combustion engine. The industry has spread across the region on the back of free-trade deals, first with Canada in 1965, then with the inclusion of Mexico in the North American Free-Trade Agreement in 1994. (NAFTA was replaced by the United States-Mexico-Canada Agreement, USMCA, in 2020.) As the industry became ever more global and competitive, American firms, seeking cheaper manufacturing, looked south. Last year 3.6m cars, around half of America’s car imports by value, arrived from its two neighbours, some 2.5m of them from Mexico.
Making those cars, which accounted for 22% of sales by volume in America and 16% by value, has given rise to complex supply chains that straddle both frontiers, built up over decades. In 2024 automotive exports from Mexico and Canada to their neighbour were worth around $200bn, with as much as half of that being components for vehicles assembled in America. The upshot is that Mr Trump’s proposed tariffs would have a “massive impact” on the car industry, according to S&P Global Mobility, a data provider. Daniel Roeska of Bernstein, a broker, describes the effect even more succinctly: a “disaster”.
Detroit’s big three would bear the greatest burdens. Around two-fifths of the cars sold in America by Stellantis (whose largest shareholder, Exor, is a part-owner of The Economist’s parent company) come from Mexico and Canada, according to Bernstein. For General Motors (GM), the share is nearly a third. Ford is more insulated. Only a quarter of its sales cross America’s borders, and these are largely smaller, cheaper vehicles such as the Bronco Sport and Maverick. gm and Stellantis, by contrast, import their lucrative Silverado and Ram pickup trucks, respectively, into America.
The impact would be so severe that a 25% tariff would wipe out Detroit’s profits if its three car firms took no action to raise prices or alter production, estimates Barclays, a bank. It would inflict a blow on other carmakers, too. Tesla, Elon Musk’s electric-car company, makes its cars in America but brings in up to a quarter of components from Mexico. European and Asian carmakers rely on Mexico to varying degrees as well. Volkswagen is the most exposed. Mexican production makes up over two-fifths of its American sales.
Foreign carmakers have also been threatened by Mr Trump with separate tariffs on imports from elsewhere. These would cause additional pain. America is the main destination for automotive exports from Europe, accounting for a fifth by value, some €56bn ($60bn), in 2023, according to Oxford Economics, a consultancy. Tariffs on these exports would hit Germany’s three big carmakers hard. In total, exports to America account for nearly 10% of the sales of bmw and Mercedes-Benz, and 15% for vw. Bernstein reckons that a 20% tariff would cost VW €3.3bn if it did not pass it on in higher prices.
Consumers would undoubtedly share the suffering. The likely outcome is that the price of the average car in America would rise by $3,000, says Wolfe Research, a consultancy. Higher prices would hit overall sales just as the industry faces other potential upheavals. Mr Trump has signalled his intention to ease emission regulations and eliminate sales subsidies on electric vehicles (evs). Slowing the transition to battery power would add more complications for carmakers, particularly Ford and gm, which have invested heavily in ev production both at home and across America’s borders.
The tariffs would put carmakers in a quandary. It is highly unlikely that the duties, if implemented, would stay for ever, says Bernstein’s Mr Roeska. But it is not clear how long they would last. The mere threat to Colombia of tariffs and other sanctions in a dispute over returning migrants on January 26th, for instance, was enough to cause the South American country to back down in just hours.
Bordering on the ridiculous
If tariffs lasted only for a few weeks, until Mr Trump wrung concessions on migration and drugs that he could present as a victory, they would still be highly disruptive. If they persisted, it might be possible to relocate some production to America. But reconfiguring factories and supply chains takes time, and would raise costs permanently. One theory is that there is another motivation for the threats: that they act as a bargaining chip to bring forward a renegotiation of the usmca, currently up for review in 2026, on terms far more favourable to America, with a view to advancing Mr Trump’s goal of bringing manufacturing back home. He has argued that tariffs are the only way to save America’s auto industry. But they could also cause a car crash. ■
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