Car buyers would probably pay the cost of those tariffs.
“We believe the tariffs on vehicles would undoubtedly be passed on to consumers,” wrote Emmanuel Rosner, auto analyst for Deutsche Bank. If the Trump administration enforces the full 25% tariff, it would increase the price of vehicles sold in the United States by an average of about $1,300, Rosner said.
That price increase would hurt demand for cars, perhaps cutting US auto production by as much as 3 million vehicles a year, an 18% drop from current levels, Rosner estimates.
If that happened, it would be the greatest blow to the US auto industry since the Great Recession sent the industry hurling toward near collapse 10 years ago.
Mexico is by far the largest foreign source of parts used by the industry. About 16% of all auto parts used by US assembly plants come from Mexico, according to an estimate from the Center for Automotive Research, a leading industry think tank.
Automakers can’t easily shift to other suppliers to avoid using parts from Mexico. Mexican parts suppliers specialize in providing low-cost, labor-intensive components, which don’t make economic sense to build elsewhere, said Kristin Dziczek, vice president of industry, labor and economics at the center.
For example, 70% of wire harnesses, the collection of wires that carry power throughout a vehicle, come from Mexico. Few if any wire harnesses are made in the United States. Much of the rest of the harnesses arrive at the US-Mexican border from countries south of Mexico.
“You can’t build the whole car and slap the wire harness in later. This is a big critical part that shuts down the assembly line if you don’t have it.”
A 25% tariff on all imports from Mexico would add about $28 billion a year to the cost of completed vehicles and parts.
Automakers are strong supporters of the new trade deal that the Trump administration negotiated with Mexico and Canada designed to replace NAFTA. That trade agreement, the US Mexico Canada Agreement (USMCA), would continue to allow most auto parts and vehicles to cross the border in both directions without tariffs. But it needs Congressional ratification before it takes effect.
The USMCA “relies on duty-free access to be successful. The imposition of tariffs against Mexico will undermine its positive impact and would impose significant cost on the US auto industry,” said Matt Blunt, president of the American Automotive Policy Council, an industry group representing GM, Ford and Fiat Chrysler.
Costs would rise even further if Mexico responds by imposing tariffs of its own on American goods. That would be a double blow to the US auto industry, because Mexico is a major market for both its cars and its parts.
More importantly, US parts makers shipped another $32.5 billion worth of parts to Mexico, mostly to use in Mexican auto plants.