The announcement of the new administration’s 25% tariffs on foreign cars will greatly impact American consumers. This is true even for those wanting a so-called ‘American made’ vehicle.
If we take a Chevy Suburban fresh off the lot and strip it down to its individual parts, we will be surprised to discover that all those parts come from different countries.
Building a car is a labor-intensive, region-exclusive process. If we want cheap labor, we go to China and Mexico. We want sophisticated machinery, so we go to Japan. If the new administration feels these new tariffs can bring manufacturing to the US, they will be surprised to discover that it may not happen.
A global supply chain has been established for the car industry that has been in place for the last 20-30 years. This has been in part due to the friendly relations with neighbouring countries like Canada and Mexico. Sending parts across the border was easy as these three countries were considered one country by automakers due to lax regulations and tariffs.
In a recent report from The Wall Street Journal, cars coming from Mexico and Canada amounted to 24%. This figure understates the impact of the new auto tariffs. The report further stated 53% of cars made in the USA will also be significantly impacted by the new auto tariffs as most parts are assembled from components coming from other countries.
If you consider your alternator which powers electrical systems like your battery, raw materials like the metal and solenoids come from Canada. Therefore, when these auto tariffs are placed in effect, the parts coming in from Canada will be subject to these 25% tariffs, a reciprocal tariff, and a universal Canada tariff.
Budget cars like the Chevrolet Trax, are made in countries like South Korea and Mexico and will be subject to tariffs. Estimates suggest the tariffs will add 3,000$ to 12,000$ to the sticker price. This will make a lot of car buyers skeptical about buying newer cars.
The automakers’ lobby warns of the consequences of these new tariffs. They have considered the US, Mexico, and Canada a borderless, trade free zone for a number of years. Automakers may shrink production or discontinue certain models which are mostly made in Mexico.
People feel there is a potential for states like Michigan to provide more jobs to their people if cars are solely manufactured on US soil. However, that may not be the case. The cost of doing business will rise because of these new tariffs and investors will want to offset that somewhere, probably in the labor process. Reduced demand from car buyers will also worsen the potential of more jobs in these states.
I agree every country should be self reliant and should do things locally to drive down costs. The new administration’s desire to see the sticker “Made in USA” on parts is certainly commendable. However, there is a cost to that. In an already tough market where people are barely getting by, these tariffs will bring more pain to the average American family.
Additionally, shifting manufacturing to the US will not happen overnight and supply chains will be severely disturbed. Other competitors in the market like China will take advantage of this and exports of US cars will be affected. New car buyers will also be discouraged and opt for older cars driving their prices up.
In the final analysis, encouraging local manufacturing is ideal but these tariffs will make life more difficult for American families already struggling under the present high cost of living.
