A Wolfe Research estimate said USD 3,000 could be added to the cost of the average car sold in America, the report said.The automotive industry could be one of the American sectors hit hardest by US President-elect Donald Trump's announced tariff plans on Mexico and Canada. At a time when finding an affordable car in US has already become a challenge for many budget-constrained Americans, new import tariffs on Mexican-built vehicles threaten to make the problem even worse.
Why Trump's tariff plan will hit affordable cars the hardest? This is because today, nearly one third of all vehicles priced below USD 300,000 and sold in US are built in Mexico. These include big names such as Nissan Sentra, Ford Maverick and other popular nameplates, according to an analysis by car-shopping website Edmunds, according to Wall Street Journal report. The firm's data shows ten years ago, Mexico was responsible for one-fifth of the affordable cars sold in the US.
Trump has threatened tariff
A proposed 25per cent tariff on automobiles imported into the U.S. from Mexico could take these vehicles over this pricing level quickly. "The border country has long been a go-to for automakers looking to defray the hefty expense of manufacturing a car, particularly on smaller models that sell for lower price points and have slimmer profit margins than larger trucks and SUVs," noted the report.
Donald Trump has said he would sign an executive order imposing a 25per cent tariff on all goods coming from Mexico and Canada, after being inaugurated on 20 January 2025. This move could mean undoing the free-trade agreement he negotiated in his first term, the report stated. Analysts and dealers have pointed that any new tariff-related costs are likely to be passed along to the consumer -- at least in the near-term -- and would hit the most affordable cars and SUVs the hardest.
Some lower-price models and car parts built in the two neighboring countries would additionally be subject to new trade duties, further pushing up costs for manufacturers and consumers.Trump's tariff proposal could add about USD 3,000 to the average cost of every car sold in the U.S., according to a Wolfe Research estimate.
Which companies will be impacted?
Kia, an automotive company, could be highly impacted by Trump's tariff plans. The company has several models, including the Forte and K4, which were made in Mexico before being imported into the United States. Together, these two vehicles make up about 18per cent of Kia's US sales.
"Everyone's got a pretty big case of anxiety here," said Steven Center, head of Kia's U.S. operations. "In two words: Please don't. Punch me in the arm. Smack me in the head. But please don't put a tariff on." He added that adding more trade barriers in North America would end up being more destructive than helpful to the US economy.
The Honda Civic from Honda Motor Company is made at several manufacturing plants, including one in Canada. Import tariffs on Canada could impact the price of this top-selling sedan model.
What is even worse is these tariff threat comes as many US car buyers are already paying near record sums to drive off the dealership lot in a new vehicle. The average monthly payment on a new car loan today is about USD 700, up from USD 500 in 2016 when Trump first took office, industry data shows. And this sharp increase is hitting the more and more car shoppers, prompting them to downsize into small, less-expensive vehicles, giving a lift in sales to many models now made in Mexico.
For instance, customers are now giving priority to affordability over space and size, a shift that has accelerated within the past year because of inflation, Rob Mathhews, president of Mathhews Auto Group told WSJ.
Why Mexico is a manufacturing hub?
Mexico has often been a place for manufacturing American automobiles that are known for their cheaper price points to help offset some of the costs of production. Around four million vehicles are made in Mexico annually according to the report, with close to 70per cent imported to the United States.
Small sedans and SUVs, some of the most affordable options for consumers, are often manufactured in Mexico. The lower production costs help automotive companies turn a modest profit on these vehicles, which would likely result in losses if produced in the United States.
The signing of the North American Free Trade Agreement, also known as NAFTA, saw American companies turn to Mexico for cheaper labor rates for workers and ample land to build large manufacturing facilities.
Tariffs on automobiles made in Mexico could change the sector, with auto companies deciding to move manufacturing to the United States or keep it in Mexico with the import tariffs. Either way, American consumers may face higher costs, whether from tariffs or increased expenses tied to U.S. manufacturing, potentially leading to the disappearance of many sub-USD 30,000 vehicle models.
A Wolfe Research estimate said USD 3,000 could be added to the cost of the average car sold in America, the report said.
This could be bad news for American consumers already facing higher costs on other items and comes after automotive prices soared during the COVID-19 pandemic due to supply shortages.
