New York
CNN
—
Tariffs on Canadian and Mexican imports are looming again. And that could quickly send car prices soaring, even for those assembled in the United States.
That’s because the auto industry has spent decades operating as if all of North America is a single market, moving cars parts and vehicles freely across borders of the three countries. As a result, there isn’t such thing as an all-American car built with parts made solely in the United States.
President Donald Trump said this week that tariffs of 25% on the value of all imports from Mexico and imports other than energy products from Canada will take effect Tuesday. The last time Trump announced these tariffs, he quickly reversed course and delayed them from taking effect for a month. But unless there’s another delay or the threat of tariffs is completely dropped, the auto industry — and car prices — are set to experience a seismic shock.
“There’s probably not a vehicle on the market today that wouldn’t be affected in some form or fashion by tariffs,” Peter Nagle, automotive economist for S&P Global Mobility, told CNN. “I would think prices would start to change in the one-to-two weeks after the tariffs go into effect.”
The US government tracks what percentage of each car’s parts is made “domestically.” But under current trade law, both Canadian-made parts and US-made parts are counted as effectively coming from one country. Even with the broader definition of “American made,” none exceed 75%.
There are only two vehicles that are considered to be 75% “American-made” by the US government — the Tesla Model 3 and the Honda Ridgeline, a pickup assembled at a Honda plant in Lincoln, Alabama. And once again, that 75% figure includes parts from Canada.
Almost all of the vehicles that have 50% or more of their parts from American or Canadian suppliers are either built by Tesla or brands that are ostensibly “foreign,” but assembled in the United States — Honda, Hyundai, Kia, Nissan, Mazda, Subaru and Toyota.
The Ford F-150, the most popular vehicle in the United States for more than 40 years, has the most domestically produced parts of any vehicle made by one of the Detroit’s three automakers. While all the parts are assembled into a pickup truck in either Michigan or Missouri, only 45% of those parts come from American or Canadian factories. Many of the larger versions of its engines come from Mexico.
“Yes, it’s America’s truck, assembled in America, but not with American parts,” Ivan Drury, director of insights for automotive site Edmunds, told CNN.
That means in addition to the tariffs scheduled to go into effect on cars assembled at Canadian or Mexican plants — even the ones assembled in the United States — will also soar by thousands of dollars each. And those costs are expected to quickly be passed onto consumers. These vehicles include the Chrysler Pacifica and some Chevrolet Silverados, which are assembled at Canadian plants, and the Ford Mustang Mach-E and Honda HR-V, which are assembled at Mexican plants.
“Let’s be real honest: Long term, a 25% tariff across the Mexico and Canada borders would blow a hole in the US industry that we’ve never seen,” Ford CEO Jim Farley said in comments to investors in February.
US car dealers have an average of a two-month supply of vehicles on their lots and showrooms, ranging from a 36-day supply at Toyota and Lexus, to a 92-day supply for Ford and Lincoln, according to data from Edmunds.
But even the prices of those cars built before any tariffs go into effect are likely to see prices climb as dealers try to preserve that inventory.
“The inventory on hand will become much more valuable, and they’ll try to stretch out the supply of no-tariff supply as long as possible in hopes that it will be resolved quickly,” Nagle said.
A cutback in production is likely to drive prices up quickly, which is what happened coming out of the first year of the Covid-19 pandemic. Then a scarcity of computer chips caused another car shortage, because cars can’t be built if they’re missing even a small number of parts. As a result, buyers were quickly paying record prices. Even used car prices soared at an unprecedented pace, not because they needed new computer chips, but because there was a limited number of new cars available.
“We could see a return of what happened during the chip crisis, when most people were paying above the sticker price,” said Nagle. “Affordability could be in jeopardy pretty quickly.”
The average sales price for a new car purchased by US buyers hit a record $49,327 in December and edged only $1,200 lower in January, according to data from Edmunds. But new cars are expected to sell for more than $50,000 on average by March, which is the start of a relatively busy buying season for automakers as tax refunds become available.
“There’s going to be a lot of sticker shock,” said Nagle.
‘A lot of cost and a lot of chaos’
Automakers have been trying to prepare for tariffs by stockpiling Mexican and Canadian parts and building up inventories of vehicles from those countries. But those measures will only help for a short period of time.
The cost of producing cars throughout North America will rise between $3,500 and $12,000, according to analysis of both public and private data by the Anderson Economic Group, a Michigan-based think tank. And because it won’t make sense to make some of the models at those higher costs, particularly cars with cheaper option packages, there are likely to be cutbacks in production, and jobs, across the industry, said Patrick Anderson, the group’s CEO.
“Producers will stop making some of the models,” Anderson predicted. And he said the suggestion by Trump that automakers will quickly shift production back to the United States in response isn’t at all realistic.
“I don’t see how you can move a production plant across a border within months or even a year,” he said. “It’s a multi-year process to move a plant. There’s no pathway to pull up stakes in Ontario and move to Indiana.”
Trump’s earlier tariff threat a month ago caused financial and logistical problems for automakers, despite not going into effect.
“So far what we’re seeing is a lot of cost and a lot of chaos,” Ford’s Farley said on February 11 at a Wolfe Research conference.
Automakers have made clear that if tariffs are imposed long-term, it will drive up their costs. In comments at a different investors conference last month, General Motors CFO Paul Jacobson repeated earlier statements from the company that it was prepared to make moves to adjust for tariffs that might be short-term in nature, but that it would be more difficult if it appears tariffs are in place long-term.
“If they become permanent, then there’s a whole bunch of different things that you have to think about, in terms of where do you allocate plants, do you move plants, etc.,” Jacobson said. But he said making those kinds of costly moves is difficult given the policy’s uncertainties.
“Those are questions that just don’t have an answer today,” he said. “As much as the market is pricing in a big impact of tariffs and lost profitability, think about a world where we’re spending billions in capital, and then it ends. We can’t be whipsawing the business back and forth.”
In the near-term, cutbacks in production could mean temporary layoffs at factories across the United States.
There are about 1 million people building cars and making auto parts, according to the Labor Department. About 300,000 work in US auto assembly plants. Autoworkers at General Motors, Ford and Stellantis are unionized and have some protections when laid off — such as supplemental pay to cover most of the difference between unemployment benefits and their normal pay. But about half of the 300,000 US auto plant workers do not have those union-negotiated protections.
And most of those million factory workers are at parts manufacturers, both large and small, and job cuts at those suppliers could be severe.
“The effect of this is going to go far beyond people who are employed by the automakers,” said Anderson. “Parts makers, those involved in shipping, even advertising, the cutbacks are going to be a huge cost. It’s going to be a shock to the whole market.”