In the whirlwind of activity in his first few weeks in the White House, Donald Trump has sought to remake the world to his advantage by blowing up alliances and trading relationships that took decades to build. His latest attempt to bend America’s allies to his will has also created an atmosphere of uncertainty for carmaking in America, an industry of both economic heft and outsize cultural significance. On March 4th the president imposed tariffs of 25% on imports from Mexico and Canada that were originally due to take effect a month earlier. The next day he exempted firms for another month from levies on cars and parts. These would have hit the industry hard and pushed up the price of the mode of transport that Americans hold most dear.
But the stay of execution will not spare the industry from its dilemma. Either carmakers remake supply chains that were decades in the making or, sooner or later, they will suffer the hammer blow of tariffs that could add thousands of dollars to the cost of a vehicle. Which will they choose?
Last year 3.6m cars, half of America’s passenger-vehicle imports by value, arrived from its two neighbours, 2.5m from Mexico (see chart 1). Many of those vehicles were made in factories owned by Detroit’s “Big Three” firms. That persuaded their bosses to plead their case with the president. The short delay they secured is welcome, and extends to other carmakers that comply with the free-trade agreement between America, Mexico and Canada. But they will need to persuade Mr Trump that relief should be permanent.
A month’s reprieve will not make much difference to an industry whose integration across the borders based on successive free-trade deals is long-standing and complex. It is not only finished cars that make the journey. Parts valued at $100bn were also exported to America from Mexico and Canada and many cross the borders up to half a dozen times as they are made up into larger components.
Tariffs would upset an industry vital to America’s trading partners. Cars and parts account for 31% of all Mexico’s exports to America, worth around $150bn, and 14% of Canada’s, valued at over $55bn, according to Barclays, a bank. Those exports also make up a big chunk of the American market. Cars made in Mexico and Canada accounted for 22% of sales by volume in America in 2024 and 16% by value. Every car made in America may contain components made in one of the two countries.
Mr Trump’s tariffs are supposedly intended to encourage Mexico and Canada to stem the flow of migrants and illegal drugs across the borders, to reduce trade deficits and to encourage American companies to move manufacturing back home. It may do none of these, but it will certainly damage carmakers—and Detroit’s will take the worst battering. Jim Farley, the boss of Ford, is not a man given to hyperbole. Yet he has described the impact as “devastating”.
Mr Farley has cause for alarm, even though Ford is the least troubled of the Big Three by the new tariffs. Only a quarter of its sales cross the borders (see chart 2), and these are mostly smaller, cheaper vehicles. Stellantis (whose largest shareholder, Exor, is a part-owner of The Economist’s parent company) imports around 40% of all the cars it sells in America from Mexico and Canada, according to Bernstein, a broker, while General Motors’ share is nearly a third. Both assemble around 40% of their pricey and profitable pickups in Mexico or Canada. Tariffs of 25% would wipe out the profits of Detroit’s car giants if they did not raise prices or alter production, estimates Barclays.
The damage would not be confined to American firms. Mexico’s allure as a destination to make and export cars has been boosted by free-trade agreements with 50 other countries, encouraging many of the world’s car firms to supplement factories in America with plants in Mexico, serving markets there, in America and elsewhere. Over 43% of Volkswagen’s and 27% of Nissan’s American sales are of cars made in Mexico, points out s&p Global Mobility, a data firm.
Tariffs would add another layer of uncertainty to an industry undergoing fundamental upheaval, as electrification and the rising importance of software hand the advantage to younger, nimbler Chinese manufacturers. At least 100% tariffs on Chinese electric vehicles, imposed during Joe Biden’s presidency, will keep America’s car firms safe from that competition.
The question is what carmakers can do in a month to lessen the shock. That is complicated by uncertainty over whether the carve out could become permanent or, even if levies are imposed in April, whether they would endure. And if they do it remains uncertain whether parts will be taxed every time they cross a border or whether the tariff will apply to total added value. Nor is it obvious what effect administering the new levies will have on the speed of flow of cars and parts.
Car firms have few options to reduce the impact. At least an extra few weeks will help them avoid some added costs. They will have more time to move cars across the borders and to stockpile imported parts. Companies have more leeway to replace imported components with American-made parts. Employing unused capacity to shift production may help a little, too.
But without an extension or a permanent free pass the agony facing firms will undoubtedly be passed on to their customers. Bernstein reckons that if trade flows remained unchanged, the levies would cost the industry $110m a day and add up to around $2,700 to the average cost of every car sold in America. Even if carmakers absorbed some of the costs, rising prices would still hit sales.
So far the industry is not contemplating big shifts in investments, nor unwinding decades-long trading relationships, to accommodate tariffs that seem based on whim rather than economic logic. Opening and closing factories is expensive. Economists at td Bank, a Canadian lender, put the price of bringing home production of all the 7m-8m cars that America imports each year at around $50bn. The investment and extra costs of making more cars in America would be a drag on the industry and “depress earnings for years”, reckons Daniel Roeska of Bernstein.
The fact that Mr Trump is delaying tariffs for a second time might suggest that he is now aware of the calamity facing American firms and will let carmakers off the hook entirely. But there is no indication that the president’s fundamental belief in tariffs has been shaken. If, in one month’s time, the duties do come into effect, it will be as if America were taking up another item of great cultural significance—and shooting itself in the foot.
