The Trump administration has announced it will impose 25 percent tariffs on imports of cars and certain auto parts, in most cases from April 3. Cars manufactured in Canada and Mexico, the other parties to the USMCA (NAFTA 2.0), will be treated a bit more gently.
The Financial Times (March 26):
Cars that met the trade terms of the USMCA and entered the US would only face a tariff on their foreign parts, a US official said. Parts entering the US under the USMCA will face 25 per cent levies on their non-US content once a process is developed to calculate them, according to the factsheet.
How does a car satisfy the terms of the USMCA?
The Financial Times (March 18):
For a vehicle to qualify as duty-free under the USMCA agreement, the proportion of a car’s components coming from North America needs to be at least 75 per cent of the total value. The vehicle’s production must also meet other conditions, including on materials used and wages.
The White House had this to say about parts manufactured in Canada and Mexico:
USMCA-compliant automobile parts will remain tariff-free until the Secretary of Commerce, in consultation with U.S. Customs and Border Protection (CBP), establishes a process to apply tariffs to their non-U.S. content.
Like other covered car parts, they will carry a 25 percent tariff, but the reference to “process,” may refer to the fact that, in the course of manufacturing, a component could well cross the border several times. Will a tariff be levied each time?
How much of a problem could this be for Canadian and Mexican components manufacturers?
The FT:
[H]alf of the parts for vehicles built in Canada by the Big Three — General Motors, Ford and Chrysler-maker Stellantis — on average come from the US. The share for cars assembled in Mexico is 35 per cent, according to lobbying group American Automotive Policy Council.
And what about cars manufactured by foreign automakers in North America, of which there are a number. To look at a few, according to the FT, VW, Toyota and Honda are (or are nearly) USMCA-compliant. BMW is not. BMW has production plants in San Luis Potosí (Mexico), and in Spartanburg, S.C. In the latter it employs 11,000 people.
Not only that, judging by this BMW press release (from February), BMW’s Spartanburg facility contributes significantly to U.S. auto exports:
BMW Manufacturing has confirmed that it was the leading automotive exporter by value in the United States in 2024, according to data released this month by the U.S. Department of Commerce. Plant Spartanburg exported nearly 225,000 BMW Sports Activity Vehicles and Coupes last year with an export value of more than $10 billion. Moreover, since 2014, the South Carolina plant has exported more than 2.7 million BMWs — about 63 percent of total production — with an export value of more than $104 billion.
It’s quite a thing, free trade,
The Wall Street Journal cites S&P Global Mobility as a source for the estimate that around half the passenger cars sold in the U.S. are manufactured internationally (including Canada and Mexico). As noted above, many of those should be able to take advantage of the USMCA, although many will have to use more U.S.- sourced components, something that will take time. Will that higher cost be passed on?
Roughly two-thirds of cars imported into the U.S. come from outside Canada and Mexico (I am assuming that number does not include production based in North America). On the basis of some very rough math, roughly one-third of new cars currently sold in the U.S. would be stuck with the 25 percent tariff unless their manufacturers started producing them here (not the work of five minutes). Another 16 percent would be burdened with a tariff (on some components) unless and until they reordered their supply chains. Again, will that be passed on? The same question also applies to those American companies that import some parts for the cars they manufacture.
Guessing a company’s pricing policy is just that, a guess, but those importing cars from beyond Canada and Mexico might choose to pass on a substantial portion of the 25 percent tariffs to their customers, confident that it would take a while for local manufacturers to gear up production by enough to replace them. The way the math works, that’s a bet they can probably take even though the U.S. auto sector is currently running at 65 percent capacity (the longer-term average is about 75 percent).
The administration’s plan, of course, is that car producers, benefiting from the price advantage that tariffs bring, will increase or start production in the U.S. But building new capacity takes time and money. And that money, presumably for investing in the production (mainly?) of conventional cars would have to come on top of the billions that automakers have already invested in electric vehicle (EV) production. Car companies may also be wary of investing “too much” in conventional car production given the survival (so far) of state-level EV mandates and the possibility of a swing of the political pendulum back in favor of EVs. EV and conventional car manufacturing facilities are not interchangeable. If switching conventional production lines in a “standard” plant from conventional cars to EV manufacturing is between $500-$1 billion (one typically imprecise estimate), a change in the opposite direction will probably (I’m guessing) cost something similar.
If new cars become more expensive, so will used cars, as the competition to buy them as a substitute for expensive new cars heats up.
More generally, increases in car prices will have knock-on effects elsewhere. For example, expect car rental prices to rise.
Who Wins from This?
Mark Carney, Trudeau with a brain, the last person that conservatives should want to see winning the approaching Canadian election.
The UAW’s Shawn Fain claims that the tariffs are “a major step in the right direction for auto workers and blue-collar communities across the country.” We’ll see.
Used-car dealers.
The Swamp: Tariffs are the stuff of its dreams.
Who Loses from This?
Car buyers.
Car renters.
And, quite possibly, U.S. auto manufacturers, at least for a while. GM, Ford, and Stellantis have all seen their shares come under pressure.
Republicans in the midterms.
Pierre Poilievre, the leader of Canada’s Conservatives.
And anyone hurt by a trade war that seems to be intensifying. That’s a lot of people, including American people.