How Trump’s tariffs will crush American carmakers

In the whirlwind of activity in his first few weeks in the White House, Donald Trump has sought to remake the world to his advantage by blowing up alliances and trading relationships that took decades to build. His latest attempt to bend America’s allies to his will came on March 4th, in the form of tariffs of 25% on imports from Mexico and Canada, originally due to take effect a month earlier. The tariffs will hurt the neighbours, but they are also a blow to carmaking in America, an industry of both economic heft and outsize cultural significance. They will push up the price of the mode of transport that Americans hold most dear.

The consequences of slamming the brakes on free trade across American borders are potentially immense. Fords were first assembled in Canada 120 years ago; the firm opened a factory in Mexico two decades later. The connections gathered pace with a free-trade deal with Canada in 1965; Mexico was added in the North American Free-Trade Agreement in 1994. (NAFTA was replaced by the United States-Mexico-Canada Agreement in 2020.) Last year 3.6m cars, around half of America’s imports by value, arrived from its two neighbours; some 2.5m of them came from Mexico.

It is not only finished cars that make the journey. Along the industry’s highly integrated, complex supply chains, parts cross the borders up to half a dozen times as they are made up, stage by stage, into larger components.

Together cars and parts are vital to America’s trading partners, accounting for 31% of all Mexico’s exports to America, worth around $150bn, and 14% of Canada’s, valued at over $55bn, according to Barclays, a bank. Those exports also make up a big chunk of the American market. Cars made in Mexico accounted for 15% of sales by volume in America in 2024 and those made in Canada nearly 7%; together they made up 16% of sales by value. It is quite likely that every car made in America contains components made in one of the two countries.

Mr Trump’s tariffs are supposedly intended to encourage Mexico and Canada to stem the flow of migrants and illegal drugs across the borders, to reduce trade deficits and to encourage American companies to relocate manufacturing back home, thus helping to revive America as a manufacturing superpower. It may well do none of these, but it will certainly damage carmakers—and Detroit’s “Big Three” will take the worst battering. Jim Farley, the boss of Ford, is not given to hyperbole. Yet he has described the impact as “devastating”.

Mr Farley has cause for alarm, even though Ford is the least troubled of America’s car giants by the new tariffs. Only a quarter of its sales cross the borders, and these are mostly smaller, cheaper vehicles. Stellantis (whose largest shareholder, Exor, is a part-owner of The Economist’s parent company) imports around 40% of all the cars it sells in America from Mexico and Canada, according to Bernstein, a broker, while General Motors’ share is nearly a third. Both assemble around 40% of their pricey and profitable pickups in Mexico or Canada. Tariffs of 25% would wipe out the profits of Detroit’s car giants if they did not raise prices or alter production, estimates Barclays.

The damage would not be confined to American firms. Mexico’s allure as a destination to make and export cars has been boosted by free-trade agreements with 50 other countries, encouraging the world’s car firms to supplement factories in America with plants in Mexico, serving markets there, in America and elsewhere. Over 43% of Volkswagen’s and 27% of Nissan’s American sales are of cars made in Mexico, points out s&p Global Mobility, a data firm. bmw, Mercedes-Benz, Toyota, Honda and Hyundai also export cars from Mexico to America.

Asian and European firms face further pain if Mr Trump goes ahead with mooted 25% tariffs on their imports from elsewhere in the world. He is unlikely to remain content with current tariffs of 2.5% on cars from Europe (which puts a 10% levy on imports of American cars) and Japan (which puts no tariffs on American cars) and nothing on South Korea (which also imposes nothing in return).

Tariffs add another layer of uncertainty to an industry undergoing fundamental upheaval, as electrification and the rising importance of software hand the advantage to younger, nimbler Chinese manufacturers. At least 100% tariffs on Chinese electric vehicles, imposed during Joe Biden’s presidency, will keep America’s car firms safe from that competition.

The question is what carmakers can do to lessen the shock. That is complicated by uncertainty about the details and duration of Mr Trump’s tariffs. It remains uncertain whether parts will be taxed every time they cross a border or whether the tariff will apply to total added value. Nor is it obvious what effect administering the new levies will have on the speed of flow of cars and parts. Most of all it is unclear just how long the tariffs will endure.

Car firms have few options to reduce the impact, although it is widely expected (or hoped) that the tariffs will be short-lived, or that the industry will be given special dispensation, once their calamitous consequences are clear. In the meantime firms are trying to avoid the added costs where they can. They have rushed to move completed cars across the borders and to stockpile imported parts. Companies are also attempting to replace imported components with American-made parts. Employing unused capacity to shift production may help a little, too.

Some of the agony facing firms may be passed on to their customers. Bernstein reckons that if trade flows remained unchanged, the levies would cost the industry $110m a day and that passing on the levies would add an average of $8,000 to the price of a car made in Mexico and $1,200 to an American-made vehicle—adding up to around $2,700 per car overall. Even if carmakers absorbed some of the costs, rising prices would still hit sales.

So far the industry is not contemplating big shifts in investments, nor unwinding trading relationships decades in the making, to accommodate tariffs that seem based on whim rather than economic logic. If the tariffs do end up looking permanent, they may have to think again.

Opening and closing factories is, however, expensive. Economists at TD Bank, a Canadian lender, put the price of reshoring production of all the 7m-8m cars that America imports each year at around $50bn. The investment and extra costs of making more cars in America would be a drag on the industry and “depress earnings for years”, reckons Daniel Roeska of Bernstein. In imposing these tariffs, it is as if America were taking up another item of great cultural significance—and shooting itself in the foot. ■