Markets have been spooked by further tariff announcements from US president Donald Trump, this time focusing on the car industry.
Trump announced a 25% levy on cars and automobile parts coming into the US, issuing a presidential proclamation on Wednesday, 26 March. The measures will kick in from Thursday, 3 April.
Mexico is the biggest importer of autos into the US, followed by South Korea, Japan, Canada and Germany. US car manufacturers will also be hit by the tariffs, given the cross-border nature of their production lines.
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Trump justified the tariffs by referencing a 2019 investigation from the commerce department, which found that “excessive” automobile imports threatened US national security.
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The Trump administration’s argument is that the defence sector benefits from technological innovations in the autos sector. However, critics will point out that this has become a strategic move from the Trump administration.
By citing national security concerns, Trump is able to bypass Congress and impose tariffs under Section 232 of the Trade Expansion Act of 1962.
Trump has previously cited fentanyl trafficking and illegal immigration as reasons for imposing tariffs, including on countries like Canada.
In reality, there is very little fentanyl crossing the border from Canada into the United States. Government figures cited by CNN suggest just 0.2% of all fentanyl seized last year was found at the Canadian border.
Auto stocks have fallen on the news. Japanese carmaker Toyota closed 2.8% lower on Thursday, while South Korea’s Hyundai shed 4.3%.
European auto stocks also felt the effects when markets opened this morning. “Mercedes Benz fell the most among German automotive stocks, with shares plunging by more than 4% in early trading before rebounding to trade down 3% around midday,” Morningstar writes.
“Volkswagen traded 1.3% lower with BMW down 1.8% and Porsche down 3.6%. Stellantis declined 3.8% while France’s Renault, which has minimal exposure to the US market, bucked the trend and traded slightly higher.”
American auto manufacturers have also opened lower today.
Will auto tariffs hurt US businesses and consumers?
Trump has said tariffs will support US growth and bring jobs and investment into the country, but the reality is quite different. US car manufacturers are actually very worried.
Most US car companies have plants in Mexico and Canada, and parts can cross the northern and southern borders several times during the assembly process.
Trump threatened Mexico and Canada with universal tariffs earlier this month, but wide-ranging exemptions were later granted under the US-Mexico-Canada trade agreement (USMCA), offering car companies a reprieve. This doesn’t seem to apply this time.
All Trump has said so far is that importers can submit documentation to the commerce secretary outlining the amount of US content in each model imported into the US.
Parts that are “wholly obtained, produced entirely, or substantially transformed” in the United States may be eligible for a tariff exemption, but the remainder of the product (any “non-US content”) will be slapped with the 25% tariff.
This is bad news for the US auto industry. Analysis from consultancy Anderson Economic Group, conducted earlier this year, found that tariffs on Mexico and China could push new car prices up by between $4,000 and $10,000.
Take General Motors. Four of its plants are in Mexico and another four are in Canada. Looking at just a couple of the company’s business lines helps bring the scale of the tariff disruption to life.
For example, General Motors is heavily reliant on its Ramos Arizpe plant in Mexico for its transition to electric vehicles, according to Car and Driver’s Caleb Miller.
Meanwhile, the production of Chevrolet’s bestselling model (Chevrolet is owned by General Motors) is split between several plants, including ones in Mexico (Silao) and Canada (Oshawa).
Stellantis and Ford also have part of their production line in Mexico, Canada or both. These companies won’t just be hit by Trump’s tariffs, but also by any retaliatory tariffs that targeted countries decide to impose.
Of course, the long-term ambition for Trump’s administration is that companies move their manufacturing onto American soil – but the reality is that this process is costly and slow.
“With enormous up-front costs… a company could only consider this if there was clear certainty that the policy would be permanent, rather than lasting only the term of the president,” said Lindsay James, investment strategist at wealth management firm Quilter.
“Whilst tax incentives have been suggested, nothing has yet passed Congress. Whether companies have that conviction will be down to their individual appraisals, but in the short term, there is little protection from a move that will have enormous collateral damage.”
