A Brief Explainer on How Tariffs Might Affect the Automotive Industry

Let's start by stipulating that it's unclear exactly what the Trump administration has planned -- the administration has already paused tariffs on automakers, and tariffs in general on Mexican- and Canadian-produced goods, since I began writing this draft. Things could change again post publication, and we'll update as warranted.

Still, it seems clear that Trump wants to enact tariffs (unless, of course, the mere threat of tariffs is some sort of cudgel in negotiations). So we'll do our best to work through what they could mean for the automotive industry.

I am going to do my best to keep this fact-based, though some analysis/opinion/prediction may appear where appropriate. I am also very much not an economist, I am a journalist and car enthusiast. So I will be defer to the real economists and trade experts where necessary.

Yeah, I know a lot of our readers understand this stuff -- or at least the basics -- already. But for those of you that don't, well, we're going to try to help.

The Basics

Let's start by detailing what a tariff is. Simply put, it's a tax placed on goods imported from another country, usually as as a percentage of the value of the good being imported.

So if a good coming in is worth $100 and the tariff is 25 percent, the cost is now $125. The tariffs are paid by the domestic company that is importing the good, not the country doing the exporting.

This is where those of you who remember Econ 101 will remember that businesses typically pass these costs on to the consumer. So tariffs could make the items you buy more expensive -- which is one reason economists from across the political spectrum tend to think they're usually a bad idea. Though you will find some economists who argue that in certain, limited cases, tariffs can be good -- good in terms of achieving some sort of geopolitical goal.

We should also note here that the United States, Canada, and Mexico are entered into a trade agreement, called the USMCA, that Trump himself negotiated during his first term as president. This agreement established a free-trade zone among the three countries.

While the current focus is on how Trump might place tariffs on Mexico and Canada, Trump has also placed tariffs on China. His predecessor, Joe Biden, slapped 100 percent tariffs on Chinese-made electric vehicles last year, but so far the Chinese penetration into the North American car market has been miniscule.

What Does This Mean For the Automotive Industry?

While the future is hard to predict, it seems almost certain that tariffs, especially on Mexico and Canada, will drive the cost of new cars up. That's because automakers have supply chains that are intertwined across the three countries, which means automakers could end paying tariffs on parts and components. Vehicles can cross a border seven or eight times during production.

Essentially, it's not simple to determine if a car is an " import" or not. Cars.com even offers an " American-made Index" to help determine a car's origin. It's not as simple as you might think.

So new cars could cost more, perhaps a lot more. This could crater sales as folks who don't need really need a new car stay out of the market. And when new cars cost more, demand for used cars rises, so now used cars cost more. That's not a good situation for consumers or automakers, and the automakers aren't being quiet about it.

Why Don't Automakers Shift Production, Build More Plants in the U.S., Or Use More America-based Suppliers?

It's difficult, if not impossible, for an automaker to move planned production of a vehicle from, say, Canada, to an American plant in a short time frame. Automakers are planning production of their next models years in advance -- it typically takes three-to-five years for a design to move from paper to production. That's because automakers need to test for durability, reliability, emissions, safety, and so on, and of course designs are tweaked and adjusted throughout the process. There are government crash tests and emissions/fuel economy tests that must be performed, too.

Plants need to have assembly lines tailored and tooled for whatever model will be produced there.

So if an automaker has model X planned to launch in three years, and has plans to build that car in Ontario, it will be spending time getting that Ontario plant ready. It will be costly to move production of that model X to Michigan, and it can't be done quickly.

But wait, there's more!

Even cars that are built in the U.S. are produced using components from Canada and/or Mexico. And, as noted above, sometimes cars are crossing the border back and forth during production.

Not only that, but plants themselves are massive, which means new ones cannot be built quickly. There are also things like environmental impact studies and permitting and such that need to be addressed when a plant is built. Those things take time.

And if you're wondering why automakers who are building cars in the U.S. don't use American-based suppliers for all of their components, well there are some components that are only available from foreign suppliers.

Like the OEMS, suppliers need to plan ahead to design, develop, and build their parts, and they have contracts with the automakers to honor.

The supply chain is complex and global.

What's Going to Happen?

The simple truth is we don't know. One day Trump is promising tariffs, the next he's backing off, the next he's talking about tariffs again. Beyond the administration's unpredictability, it's also hard to predict how automakers will react if and when tariffs actually are enacted. The most likely scenario is that costs are passed onto consumers while automakers do shift what production they can -- and, possibly, make adjustments with the supply chain -- to the U.S. We suppose the automakers could eat some costs, but we doubt it.

As noted above, production shifts will take time, perhaps so long that Trump's second (and final, assuming no funny business) term will be over. The next president, regardless of party, might decide to end any tariffs that are in place.

For automakers, auto workers, suppliers, and consumers, the best outcome is probably to not have any new tariffs enacted on cars and automotive parts and components.

What actually happens is anyone's guess. We'll do our best to keep you informed.

[Images: Chip Semodevilla/Shutterstock.com, Honda, Jeep, Fiat, Toyota, Volkswagen]

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