The auto industry is staring down a crisis. Donald Trump’s sweeping new tariffs on imports from Canada, Mexico, and China threaten to upend supply chains, raise car prices, and force automakers to make difficult decisions about production.
The 25% tariff on North American imports and the 10% tariff on Chinese goods, set to take effect this week, will hit nearly every car manufacturer operating in the US.
The industry has spent decades integrating North American production, making these tariffs not just a tax on imports but a direct attack on the way cars are built.
What is the immediate fallout for the industry?
Trump’s auto tariffs apply to nearly everything involved in car production.
Finished vehicles, engines, transmissions, raw materials, and thousands of components will be taxed every time they cross the border.
Since the modern auto supply chain relies on parts moving between the US, Canada, and Mexico multiple times before final assembly, these tariffs will compound costs at every step.
Automakers now face a logistical nightmare.
According to the New York Times, General Motors, Stellantis, Toyota, and Honda each produce about 40% of their North American vehicles in Canada and Mexico.
The new tariffs will immediately increase their costs. GM, which built over 842,000 vehicles in Mexico last year, is severely exposed.
The Chevrolet Silverado and GMC Sierra pickups, two of its most profitable models, are assembled on both sides of the border.
Half of the Silverados sold in the US are made in Mexico or Canada.
Tariffs will add thousands of dollars in extra costs per truck.
Source: Bloomberg
Ford is in a better position, with over 80% of its North American production inside the US, but it still manufactures key models like the Mustang Mach-E and Maverick pickup in Mexico.
Volkswagen, meanwhile, relies on Mexico for 70% of its US sales, leaving it heavily exposed.
Some estimates put the additional cost per vehicle at $10,000 or more, particularly for larger trucks and SUVs.
Automakers will have to decide whether to absorb the cost or pass it on to consumers.
Either way, car prices are set to rise.
Supply chain disruptions will also be immediate.
Auto parts manufacturers in Canada and Mexico are warning that production could grind to a halt within days.
The head of the Canadian Automotive Parts Manufacturers’ Association says the sector cannot remain profitable under these tariffs.
In Ontario alone, up to 500,000 jobs could be at risk if automakers start scaling back production.
The same scenario could unfold in Mexico, where entire cities rely on automotive factories.
What about the EV market?
Initial reactions suggest that the electric vehicle production will not be spared.
Tesla and other EV makers are now scrambling to assess the impact of the tariffs on their supply chains.
Tesla has long advertised that it builds “the most American-made cars”, but even it depends on parts from Mexico and Canada.
Documents filed with the National Highway Traffic Safety Administration (NHTSA) show that:
The Model 3 Long Range is 75% US/Canada-made, but 20% of its parts come from Mexico.
The Model Y has a similar breakdown, with 70% US/Canada and 25% Mexican content.
The Cybertruck is 65% US/Canada, with 25% of its parts from Mexico.
Tariffs on Chinese imports will also hit battery production.
The US still relies on China for much of its lithium, cobalt, and nickel supply.
The 10% tariff on Chinese raw materials will increase the cost of EV batteries, forcing Tesla, Rivian, and legacy automakers to either raise prices or take a hit on margins.
Tesla’s CFO, Vaibhav Taneja, acknowledged on a recent earnings call that tariffs are now a major risk to profitability.
The company has spent years trying to localize its supply chain, but the auto industry is still global.
No automaker is insulated from these tariffs.
Will Trump’s tariffs shrink the trade deficit?
Trump argues that tariffs will help fix America’s trade deficit, which he calls an economic drain. The numbers tell a different story.
The US has actually run a trade surplus with Canada for 16 years when energy is excluded.
Mexico has a trade surplus with the US, but that is largely because US companies manufacture cars there and re-import them at lower costs.
Tariffs are unlikely to change this dynamic. In Trump’s first term, his tariffs on Chinese goods did not reduce the US-China trade deficit.
Instead, China shifted exports to other countries like Vietnam, which then re-exported products to the US The same thing will likely happen now.
Exchange rates will also cancel out some of the tariffs’ effects.
A weaker Mexican peso and Canadian dollar will make exports from those countries cheaper, partially offsetting the tariffs.
If the US dollar appreciates, American-made vehicles will become less competitive in global markets.
The idea that tariffs will bring back US manufacturing jobs is also flawed.
The 2018-2019 steel and aluminum tariffs under Trump were supposed to revive the American metals industry, but steel-consuming industries lost more jobs than steel producers gained.
Broad tariffs make everything more expensive, making it harder—not easier—for American manufacturers to compete.
Will automakers shift production to the US?
Some automakers are considering moving production to the US to avoid tariffs, but this is easier said than done.
Building new factories and retooling existing ones takes years and billions in investment.
Many automakers do not have the capacity to move large-scale production quickly.
Aluminum manufacturers are already looking at ways to avoid tariffs, potentially rerouting production through non-tariffed countries.
This suggests that companies will try to work around tariffs rather than fully relocate production to the US.
Automakers could also retaliate in their own way.
Many have built factories in Southern states like Texas, Tennessee, and South Carolina, where Trump has strong political support.
If tariffs hurt their bottom line, these companies could delay new investments or job expansions as a message to Washington.
Could this spiral into a trade war?
The first wave of retaliation has already begun. Canada has announced $155 billion in counter-tariffs, targeting US exports of appliances, lumber, beer, and other goods.
More tariffs are expected from Mexico and the European Union in the coming weeks.
If this escalates further, the US auto industry could be caught in the middle.
The European Union has long considered tariffs on US-made vehicles, particularly Teslas, as a response to American trade policies.
China could also limit rare earth exports, making it harder to source EV battery materials.
Every time tariffs go up, the cost of doing business rises.
Every time a country retaliates, American exports become less competitive.
What started as a policy targeting imports from North America and China could quickly turn into a global trade war.
What’s certain is that this situation is not looking good for the US auto industry.
The next few months will be critical and such times could force a major transformation in an industry that has been otherwise stable for decades.
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