The threat of tariffs on Canadian and Mexican imports is again looming. That could quickly lead to significant price increases for cars, even those assembled in the United States. That's because the auto industry has for decades operated all of North America as a single market, with auto parts and finished vehicles flowing freely between the three countries' borders. Therefore, there is no such thing as an all-American automobile assembled entirely from American-made parts.
The new Ford F-150 truck passes through the production line at the Ford plant in Dearborn, Michigan.
U.S. President Donald Trump said this week that a 25% tariff on all imports from Mexico and Canadian imports except energy products would take effect on Tuesday. The last time Trump announced these tariffs, he quickly changed his mind and delayed them taking effect by a month. But unless the tariff threat is postponed again or abandoned entirely, the auto industry and car prices will face a huge shock.
Peter Nagle, auto industry economist at S&P Global Mobility, said: "There is probably not a car on the market today that will not be affected by tariffs in some form. I think within one to two weeks after the tariffs take effect, car prices will start to change."
The U.S. government tracks what percentage of each vehicle’s parts are “American” made. But under current trade laws, parts made in Canada and parts made in the United States are considered to come from the same country. Even using the broader definition of "Made in the United States," no vehicle has more than 75 percent.
The U.S. government has deemed only two vehicles to be 75% "Made in the United States" - the Tesla Model 3 and the Honda Ridgeline (a pickup truck assembled at Honda's plant in Lincoln, Alabama). Moreover, this 75% ratio also includes parts and components from Canada.
Nearly all vehicles with 50% or more of components sourced from U.S. or Canadian suppliers are either made by Tesla or are vehicles from ostensibly “foreign” brands but assembled in the U.S., including Honda, Hyundai, Kia, Nissan, Mazda, Subaru and Toyota.
The Ford F-150 has been America's most popular vehicle for more than 40 years and has the highest proportion of domestic parts of any model produced by Detroit's Big Three automakers. While all parts are assembled into the pickup truck in Michigan or Missouri, only 45 percent of those parts come from factories in the United States or Canada. Many of its larger models' engines come from Mexico.
"Yes, it's an American truck, assembled in the United States, but it doesn't use American parts," said Ivan Drury, director of insights at the automotive website Edmunds.
That means, in addition to the planned tariffs on cars assembled in factories in Canada or Mexico — even those assembled in the U.S. — the price of each vehicle will soar by thousands of dollars. And those costs are expected to be quickly passed on to consumers. The vehicles include the Chrysler Pacifica and some Chevrolet Silverados assembled in Canada, as well as the Ford Mustang Mach-E and Honda HR-V assembled in Mexico.
Speaking to investors in February, Ford CEO Jim Farley said: "To be honest, in the long run, a blanket 25% tariff on goods coming from the Mexico-Canada border is going to have an unprecedented and huge impact on the U.S. auto industry."
Price shock looms
According to Edmunds data, U.S. auto dealers have an average of two months of vehicles in their parking lots and showrooms, ranging from 36 days of inventory for Toyota and Lexus to 92 days for Ford and Lincoln.
But even cars built before the tariffs took effect could see their prices rise as dealers try to keep them in stock.
Nagel said: "Existing inventory will become more precious, and dealers will try to extend the supply time of tariff-free inventory in the hope that the tariff issue will be resolved as soon as possible."
An employee works at the NPD Technologies plant in Ciudad Juárez, Mexico, which assembles printed circuit boards (PCBs) for the automotive industry and exports to the United States.
Cuts in production could quickly push prices higher, as happened after the first year of the pandemic. At the time, a shortage of computer chips led to another automotive supply shortage, as cars couldn't be produced without even a handful of parts. As a result, buyers were quickly paying record prices. Even used car prices are soaring at an unprecedented rate, not because used cars require new computer chips, but because new cars are in limited supply.
"We may see a repeat of what happened during the chip crisis, when most people paid more than the sticker price," Nagle said. "The affordability of cars could soon be threatened."
The average price paid by U.S. buyers for a new car hit a record $49,327 in December, down only slightly by $1,200 in January, according to Edmunds data. But the average sales price of a new car is expected to exceed $50,000 by March, the start of a relatively busy sales season for automakers as tax rebates begin to be issued.
"There's going to be a lot of shocking price tags out there," Nagle said.
Automakers have been trying to prepare for the tariffs by stockpiling parts from Mexico and Canada and increasing inventories of vehicles imported from those countries. But these measures can only work to a certain extent in the short term.
An analysis of public and private data by the Anderson Economic Group, a Michigan-based think tank, shows vehicle production costs across North America will rise by $3,500 to $12,000. The group's chief executive, Patrick Anderson, said the industry is likely to cut production and layoffs as it will no longer be cost-effective to produce certain models amid sharply rising costs, especially those with cheaper configurations.
"Manufacturers will stop making some models," Anderson predicted. He also said Trump's suggestion that automakers would quickly move production back to the United States was not realistic at all.
"I don't think you can move a production plant to another country in a matter of months or even a year. It takes years to move a plant. It's impossible to move a plant in Ontario to Indiana," he said.
Stellantis Windsor Assembly Plant in Windsor, Ontario, Canada.
Trump's threat of tariffs a month ago, although not enacted, has caused financial and logistical problems for automakers.
"What we've seen so far is a lot of cost increases and a lot of disruption," Ford's Farley said at the Wolfe Research conference on February 11.
Automakers have made clear that if tariffs are imposed long-term, they will drive up their costs. At a separate investor conference last month, GM Chief Financial Officer Paul Jacobson reiterated the company's previous statement that GM was prepared to take steps to deal with tariffs that were likely to be short-term in nature, but would be more difficult to deal with if the tariffs appeared to be long-term.
"If the tariffs become permanent, then you have to consider a lot of different things, like where are you going to locate the factory, are you going to move the factory, etc.," Jacobson said. But he said making such costly decisions is difficult given the uncertainty of policy.
"Those questions simply don't have answers today," he said. "While the market is already pricing in a significant impact from tariffs and lost profits, think about what if we invested billions of dollars and then the tariffs were lifted. We can't let the business flip back and forth."
Layoffs and price increases loom simultaneously
In the short term, production cuts could mean temporary layoffs at factories across the United States.
According to the U.S. Department of Labor, approximately 1 million people work in automobile manufacturing and auto parts production. About 300,000 of them work in U.S. auto assembly plants. Auto workers at GM, Ford and Strantis are all unionized and enjoy certain protections when laid off, such as supplemental pay that makes up much of the difference between unemployment benefits and their regular wages. But about half of the 300,000 U.S. auto plant workers do not have these protections negotiated by unions.
And most of those 1 million factory workers work for parts manufacturers large and small, and the scale of layoffs at these suppliers could be severe.
"The impact of the tariffs will go far beyond the automakers' workforce. There will be huge costs for parts manufacturers, people involved in transportation, even the advertising industry," Anderson said. "It's going to hit the entire market."