Trump Tariffs on Mexico – Job Destroying Taxes on Workers

AutoInformed.com on Trump Mexican Tariffs - Companies at RiskThe United States plans through a controversial presidential decree claiming a national emergency to impose a 5% tariff on all imports from Mexico, starting on 10 June. The duty will then increase by 5% every month, until reaching a cap of 25% in October.

Ultimately, prices on auto models imported from Mexico could increase by $8500. Factoring in parts for assembly in the US, the average price of all vehicles sold in the US could rise by as much as $2,500-3,000. The substantial increase could lower sales by 500,000-1.5 million units annually.

President Trump says tariffs will remain in place until Mexico significantly reduces the amount of illegal immigration across the US-Mexico border. President Trump is using the authority to invoke such tariffs under the International Emergency Economic Powers Act of 1977, citing national security.

In 2018, a total of $372 billion in goods and services were imported from Mexico, while the US exported $299 billion to Mexico, according to the respected consultantcy LMC. Finished vehicles and auto parts from Mexico accounted for $93 billion, or 25% of the total. Vehicles and parts to Mexico amounted to $22 billion, or 7% of the total.

AutoInformed.com on Trump Mexican Tariffs and Taxes.

At the OEM level, LMC says VW Group carries the highest risk as a percentage of US sales, as an estimated 47% of its 2019 sales are sourced from Mexico – significantly higher than the 16% industry average. Both GM and FCA also have sizeable volume at risk, owing to heavy SUV and Pickup production. Detroit’s Big Three make up 53% of the volume imported from Mexico. Pickups are three of the top five models at risk, and the Ram Pickup line is the highest volume vehicle in jeopardy from tariffs. Excluding Tesla, Subaru and Volvo, virtually every major OEM has some degree of risk.

There are roughly 40 different models are built in Mexico and sold in the US, totaling a projected 2.7 million units in 2019, or 16% of all Light Vehicles sold in the US. Roughly 36% of imports are SUVs, 33% Cars and 28% Pickups.

According to the Center for Automotive Research, 16% of parts used in US assembly plants come from Mexico, including 70% of critical wire harnesses. Many of these parts can cross the US-Mexico border as many as four times, as parts or sub-assemblies, so the impact reaches far beyond fully finished vehicles.

This is a murky, dangerous, politically craven  world view, in AutoInformed’s opinion. If a tariff of 5% is decreed, but lasts only one month, the industry could in theory absorb the average $1,700 price increase on the models and parts imported from Mexico.

However, with tariffs rising by 5% in each successive month, prices – taxes by another name – to consumers would be affected much more significantly, thereby lowering vehicle volume and impelling consumers to delay purchases or resort to the used car market.

Then there’s the car portion of Mexican imports, a temporary tariff could result in further production cuts in Mexico, reducing some of the current concerns over high inventory levels.

Light Vehicle production in Mexico is projected flat in 2019, at 3.9 million units, or 23% of North American volume. CAR predicted in the past it expected volume to grow to 4.5 million units, or 25% of North American production by 2026.

LMC Conclusions

  • A sustained 25% tariff level would have a potentially devastating impact on the auto industry. AutoInformed agrees with the analysis. Prices on models imported from Mexico could increase by an average of $8,500, and when factoring in parts for assembly in the US, the average price of all vehicles sold in the US could rise by as much as $2,500-3,000. Such a substantial increase could lower sales by 500,000-1.5 million units annually.
  • A prolonged period of tariffs on Mexican imports would likely push Mexico into recession and could also threaten a recession in the US. CAR’s partner Oxford Economics estimates that the tariff would cut GDP growth by at least 0.7 ppt in 2020.
  • Timing of new tariffs and related uncertainty could not come at a worse moment for the auto industry as it continues the process of restructuring for the longer term and furthers its investment into electrification and autonomous technologies.
  • While this may be an unconventional tactic used to bring Mexico to the table on illegal immigration, it could also lead to an increase in auto manufacturing in the US. Given the unpredictable nature of the Trump administration, LMC estimates the probability of the tariff being imposed at 50%.

About Ken Zino

Ken Zino is an auto industry veteran with global experience in print, broadcast and electronic media. He has auto testing, marketing, public relations and communications expertise garnered while working in Asia, Europe and the U.S.
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