Why Trump's proposed tariffs could increase auto costs, reshape supply chains

President-elect Donald Trump's proposed tariffs would raise costs for auto makers, suppliers and consumers while forcing potentially drastic changes to the global supply chain, according to industry executives and analysts.

But whether those tariffs happen is an open question. It's too soon to know which of the famously unpredictable Trump's promises will stick, which might be starting points for broader negotiations and which might be campaign bluster.

Regardless, auto makers and suppliers say they are preparing for any trade scenario.

"Nobody knows exactly what's going to happen in January," said Ryan Grimm, vice president of parts and materials procurement at Toyota Motor North America, during a Nov. 12 panel at a conference hosted by the supplier association MEMA in Detroit.

Trump, a self-proclaimed "Tariff Man," said during the campaign that he would impose tariffs of 200 percent or more on vehicle imports from Mexico, and has suggested placing increased duties on vehicles from Europe and Asia. He's also pledged to use tariffs to prevent imports of vehicles and parts from China.

Such moves could have massive implications for the automotive supply chain. They could accelerate nearshoring and localization underway since the pandemic, which exposed risks and bottlenecks in the global supply chain.

But they could also make vehicles and parts more expensive for companies and consumers, analysts warned.

Tariffs would increase the price of imported automotive components and assembled vehicles. Companies would either absorb the expense, pass it on to consumers, or some combination of both. It would most likely create rising prices and squeeze profit margins at a time of concern over vehicle affordability.

"Any change to the current sourcing model will likely translate to higher costs," said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions.

Trump's goal is to boost American manufacturing, and his tariffs could aggressively target Chinese vehicles, parts and technology to achieve that.

But analysts warned of escalating trade tensions with China, which dominates the mining and processing of critical materials needed for electric vehicle battery production. Retaliatory tariffs on exports of those materials to the U.S. could prove to be disastrous for American EV manufacturing, said Jennifer Safavian, the CEO of industry trade association Autos Drive America.

"They've got almost a monopoly on so many critical materials that it would really strangle the automotive sector," Safavian said.

Trump might also view tariffs as a bargaining chip to attract a Chinese auto maker to open an assembly plant in the U.S.

During the campaign, Trump indicated that while he is opposed to imports of Chinese vehicles, he could green light a Chinese auto maker opening a U.S. factory and selling the vehicles produced there without penalty.

"He doesn't want Chinese imports, but he might be open to a deal," Michael Dunne, CEO of Dunne Insights, said at the MEMA conference.

Such a deal allowing a Chinese auto maker to open a factory could mandate a joint venture with an American partner to ensure the U.S. would have "the final say over that operation," Dunne said.

Chinese vehicle imports look to be a major focus of the 2026 review of the United States-Mexico-Canada Agreement, the North American free-trade pact. Trump and leaders in Canada want to prevent a Mexican assembly plant acting as a backdoor entry for Chinese auto makers.

Under Trump, that review is more likely to look like a full-fledged renegotiation, Safavian said.

Moreover, the gaps between the countries could be so wide that they fail to extend the USMCA, which is set to expire in 2036. The deal would remain in place until then or until all three countries agree to extend the USMCA for 16 years during a future review.

"It's one thing to talk about a few things and make some changes, but a renegotiation is going to be very difficult," Safavian said. "I don't think they'll necessarily renew it."

The Trump administration, which negotiated the USMCA in 2016 as a replacement for the North American Free Trade Agreement, is likely to seek major concessions from Mexico, which has received a large share of automotive investments in North America since the trade deal's passage.

"Mexico has benefited greatly from the USMCA," Safavian said. "I don't think the incoming administration likes the way that the optics are with that."

The U.S. is likely to seek higher tariffs on vehicles assembled in North America that do not meet the USMCA's rules of origin and labor requirements. Those vehicles are subject to a 2.5 percent duty, and they account for a larger share of imports than they did under NAFTA, Safavian said.

"You've got about 700,000 vehicles coming into the country that are not compliant with the USMCA because the tariff rate is so low," she said. "People figure they'll just pay the tariff because it's not that big of a deal versus complying with all those requirements."

A 200 percent tariff on vehicle imports from Mexico could be seen by the Trump administration as a way to get the Mexican government to the table on those issues sooner. But they would raise automotive costs in the region in the meantime.

"If we look at tariffs that impact vehicles that are built in Mexico, it would be devastating to the industry from a volume standpoint," said Jeff Schuster, global vice president of automotive research at GlobalData. "We'll just have to see if we get there or not."

In an Oct. 13 interview with Fox News, Trump said high duties on vehicle imports would prevent the imports from "destroy(ing) Detroit further." But a massive tariff on Mexico-made vehicles could be particularly damaging for the Detroit 3 and their profit-driving pickup programs.

Through September of this year, General Motors used Mexican plants for about 36 percent of its full-size pickup production. That production was 35 percent for Stellantis, according to financial services firm Morningstar. While Ford makes its F-Series pickups in the U.S., its compact Maverick pickup is assembled in Mexico.

About 30 percent of GM's 2024 North American light-vehicle production also comes from Mexico, Morningstar said. About 24 percent of Stellantis' regional production is in Mexico. Ford is at 15 percent.

"We think a large-scale tariff on any imported vehicle regardless of production origin would cost each firm billions in profit, be painful to middle-class workers at the auto makers, and cause more vehicle-affordability problems for all American consumers," Morningstar analysts wrote in a Nov. 6 note.

Even smaller tariffs only on parts or from changes to the USMCA are likely to mean higher prices, Morningstar said.

"We think the Trump administration needs to be very careful with how it pursues its agenda to promote American manufacturing so that it doesn't hurt American manufacturing and American consumers in the process," the analysts wrote.

Yet some auto maker and supplier executives signaled confidence they will be able to navigate trade uncertainty during the second Trump administration.

"We fundamentally approach setting up our supply chain in a way that allows us to buy where we build and build where we sell," Tanya Skilton, GM's executive director of strategy, innovation and customer care, said at the MEMA show.

Toyota is "much better prepared" to address trade risks than it was when Trump was elected in 2016, Grimm said.

Pat D'Eramo, CEO of Canadian parts supplier Martinrea International, said he was optimistic the second Trump term would be positive for the company despite trade concerns, pointing to the financial success it enjoyed during the first term.

"I do agree it's going to be bumpy," he said. "It was bumpy at the beginning last time, too, but ultimately I think it'll be good for our business."

Regardless of their outlooks, virtually all auto makers and suppliers are reviewing their sourcing strategies, Fiorani said. Many are looking to localize and simplify their supply chains while reducing the amount of times parts move over the border in order to reduce tariff burdens, he said.

"With the potential of tariffs being applied as they cross the border, in some cases multiple times, costs and profits will be affected," Fiorani said.

Much remains uncertain, but one thing isn't: Auto makers and suppliers will need to be ready for four years of turbulence in U.S. trade policy.

"We know we're in for a rough ride when it comes to tariffs, trade, the USMCA, China and the rest of the world," said Ann Wilson, executive vice president of government affairs at MEMA.