Highlights
- Potential 25% tariff on all goods from Canada, Mexico into the
US - Virtually all automakers and suppliers would be impacted
- Potential for spring 2025 implementation
Introduction
US President Donald Trump is assessing a 25% tariff on all goods
from Canada and Mexico. While this would impact all industries,
S&P Global Mobility looks at the specific impact of Trump's
automotive tariffs on vehicle assembly.
President Trump has said the tariff could be applied as soon as
Feb 1, 2025. At time of writing, the latest intelligence suggests a
more measured approach may still win out, though tariffs could be
applied by spring 2025.
Regardless of timing, these blanket tariffs would have a massive
impact on the auto industry. It is also likely that Canada and
Mexico will reciprocate through an equal or 'representative'
tariff. Though there is no indication of what that retaliation
might look like at this time, we could see another degree of
complexity if these countries imposed their own tariffs on
automotive components imported from the US and used in Canadian or
Mexican assembly.
From a trade perspective, the move is likely to bring early
changes to the USMCA trade agreement – and make those changes more
favorable to the US. The USMCA trade agreement is due for review in
July 2026.
There are approximately 5.3m light vehicles built in Canada and
Mexico, with about 70% of these destined for the US. Further, many
US-built vehicles use Canadian or Mexican-sourced propulsion
systems and component sets; those components would see a tariff as
well, increasing costs for vehicles produced in the US. Virtually
no OEM or supplier operating under the USMCA is immune.
US automotive tariffs: Current
situation
The current tariff-free structure stems from successive trade
agreements starting in 1965 with Canada and including Mexico in
1994 with NAFTA, which evolved into USMCA in 2020. Free trade has
created a streamlined production ecosystem among the three
partners. Customers and the industry benefit from zero tariffs if
specific North American value-add criteria are met. For decades, a
largely stable environment has enabled a trading ecosystem to
evolve.
In 2024, the US imported some 3.6m light vehicles from Canada
and Mexico, representing 22% of all vehicles sold in the US. Mexico
is currently the largest source of US light-vehicle imports,
passing Japan, South Korea and all of Europe.
Vehicle production in Mexico and Canada has been a significant
part of sourcing strategies for several automakers for decades.
Ford and GM have been producing vehicles in Canada and Mexico for
around 100 years, Volkswagen has been producing vehicles in Mexico
since 1967 and Nissan since 1992. Toyota and Honda have also been
producing vehicles in Canada since the mid-1980s, each opening
plants in Mexico this century.
Automakers and suppliers produce components throughout the
region, with engines among the higher cost-impact items. Over the
years, production in Canada has waned while production in Mexico
has increased, though both are significant in the ecosystem.
Regardless of automaker, in 2024, S&P Global Mobility estimates
that about 54% of US light-vehicle sales were produced in the US,
15% in Mexico and just under 7% from Canada.
The automakers with the longest history of vehicle production in
Mexico also see that capacity more deeply integrated. Mexico is an
attractive sourcing option for Detroit-based OEMs, as well as for
Volkswagen. In 2024, about 23% of Stellantis sales were sourced
from Mexico, while GM sourced 22% and Ford just under 15%.
Beyond the D3, Nissan sources about 27% of its US sales from
Mexico, Honda nearly 13%, and Toyota and Hyundai at 8% each.
Volkswagen is the most exposed to tariff risk, with over 43% of its
US sales sourced from Mexico.
A 25% tariff scenario
Here we presume the US introduces a 25% tariff on Canadian and
Mexican value add, though timing is uncertain. All vehicles and
components moving from Canada or Mexico to the US would face this
tariff on value added outside the US.
Canada and Mexico are likely to implement tariffs in response.
In this scenario, tariffs apply only to the manufactured value of
the component or vehicle added outside the US, not the final
customer-facing MSRP.
A 25% duty on the average $25,000 landed cost of a vehicle from
Mexico and Canada would add $6,250. Importers are likely to pass
most, if not all, of this increase to consumers. With average
vehicle prices near all-time highs, this additional tariff would
put further strain on affordability.
If components and parts are also subject to the 25% tariff,
vehicles produced in the US with any components sourced from Canada
or Mexico would also see costs rise by 25%. Given the free flow of
components across borders, the tariff would impact most vehicles
produced in the US as well.
Impact on automaker
production
S&P Global Mobility sees automaker exposure in three broad
levels. Vehicles produced in the US with US-sourced powertrains and
propulsion systems (among the most expensive components) will have
the least exposure, clearly.
Vehicles built in the US will have another level of exposure;
examples here include the Ford F-Series pick-ups and Mustang cars
with engines from Canada, as well as the Mazda CX-50 which sources
engines from Mexico.
Vehicles at significant exposure risk are those built in Canada
or Mexico, particularly high-volume products where automakers have
little opportunity for re-sourcing. Among the vehicles in that
category are full-size pick-up trucks from GM and Stellantis, as
well as the Toyota RAV4.
Impact on automotive
suppliers
Supplier impact can also be significant, and this will increase
vehicle prices to consumers in indirect, nontransparent ways. We
could see automakers pull back production on tariffed vehicles;
similar to the reaction to the semiconductor shortage and other
Covid-related supply chain shortages, some automakers could slow
production until sales are lost due to lack of product. Reducing
production affects supplier sales and contracts.
OEMs may serve as the main support for tariff exposure since
many smaller tier 1 and tier 2 suppliers lack the capital to cover
ongoing tariffs without help from their customers. Some suppliers
may invoke Force Majeure, refusing to supply parts if they are not
quickly compensated for tariff costs.
However, many OEM tier 1 supplier contracts likely follow
ex-works or free carrier (FCA) incoterms, where parts are delivered
to a local site and the OEM pays duties to export the supplier's
parts to the final assembly location. In that case, force majeure
would not apply and automakers would need to pay the tariff.
Consequently, the impact is more likely to affect smaller suppliers
working with Tier 1s
Summary
A tariff against Canada and Mexico could significantly disrupt
the economics of the region, even if lower than the 25% being
considered. Among the open questions will be how long the tariff
might be in play; given the justification is related to immigration
and stopping the flow of illegal drugs, what metrics will be in
place for Canada and Mexico to meet to see the tariff lifted
again?
Our assumptions remain true whether the tariff is enacted on
February 1 or later. It is also possible that the tariff is tabled
and worked into a larger renegotiation of the USMCA free trade
agreement. However, some level of tariff being deployed against
Canada and Mexico seems to inch closer toward reality.
A full-length analysis is available to
AutoInsight,
AutoIntelligence and AutoTech
Insight customers through the respective web portals
