Why tariffs could mean expensive trouble for the U.S. auto industry
Why tariffs could mean expensive trouble for the U.S. auto industry
President Trump told reporters Monday night that he wanted to impose 25% tariffs on Canada and Mexico, possibly by February 1st. He claimed the two countries are allowing undocumented migrants into the U.S.
Canada and Mexico are the the United States’ two largest trading partners and tariffs spell trouble for one industry in particular that’s spread across all three countries: the auto industry.
The U.S. trades all kinds of things with Canada and Mexico — milk, timber, meat, minerals. But the biggest of them all is cars and their parts.
“A third of the engines that are put in our gas cars cross one of the borders,” said James Rubenstein, professor emeritus of geography at Miami University in Ohio.
The automotive supply chain is draped across the three countries like a cluster of spiderwebs. For electric cars too — take the Tesla Model 3. Technically, it’s 100% assembled in the U.S.
“But the Model 3 has 20% of its content from Mexico,” said Jonathan Smoke, chief economist at Cox Automotive. “No vehicle that’s assembled in the U.S. has more than 70% of its content coming from the U.S.”
A transmission or an engine can have hundreds or thousands of individual parts that are used to make other parts in multiple places.
“It’s not unusual for a part to go back and forth seven or eight times,” said David Gantz, a fellow at the Baker Institute for Public Policy.
The auto industry is like this because that’s how it’s developed over 60 years.
“Trade in autos and auto parts between Canada and the U.S. has been pretty much duty-free since 1965,” Gantz said. Mexico was added in 1994 with NAFTA.
The supply chain is spread out in part because some factories are just better at doing certain things and those factories are in different places. But it also represents a negotiated sharing of production, said Rubenstein. Take the original free trade agreement with Canada:
“The deal was that Canada could keep what we might call a ‘fair share’ of production up there,” Rubenstein said.
Introducing tariffs of 25% into this decades-old trading system would get difficult and expensive very quickly, said Cox Automotive’s Jonathan Smoke. Take wiring that might go from Mexico to the U.S. to become a seat harness, then back to Mexico to become a seat, and then back to the U.S. to actually get put in a car.
“So does that mean 25% gets applied every time it crosses?” Smoke said.
It’s unclear. But according to Wolfe Research, 25% tariffs on Canada and Mexico would increase the cost of the average new car by about $3,000.
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