Tariff Car-nage 🚗

Mar-a-Lago, President Trump’s personal resort in Florida, was more than just a residence during his first presidency. It was a stage for diplomacy and high-stakes decision-making. It was here that he hosted his first summit with Chinese President Xi Jinping and where he reportedly gave the order for a Syrian airstrike. Now, in his second term, the strikes continue — only this time, they come in the form of tariffs!

On February 18, after signing a series of executive orders at the Mar-a-Lago resort, President Trump addressed a group of journalists. With camera flashes lighting up the room and questions flying about policy, he made a bold declaration: his plans to impose 25% tariffs on automobile imports. 

However, this isn’t the first time the new administration has placed the U.S. auto industry at the center of trade policy. Earlier this year, Trump’s 25% tariffs on Mexico and Canada, along with tariffs on steel and aluminum, have already put immense pressure on American car manufacturers. 

In this issue of CrossDock, we’re breaking it all down — analyzing the impact of these proposed tariffs on the U.S. auto industry and what they mean for consumers. 

Additionally, we answer the pressing question: Are vehicles about to become significantly more expensive in the U.S.? 

To understand all this better, we need to look at how the North American auto industry became so deeply intertwined in the first place. That journey began in 1994 when the U.S., Canada, and Mexico signed a trade agreement that would go on to create the world’s largest free trade zone.

Cars without borders 

The North American Free Trade Agreement (NAFTA) was a groundbreaking trade pact that reshaped economic relations between the United States, Canada, and Mexico. Officially implemented on January 1, 1994, it was first proposed by President George H.W. Bush and later signed into law by President Bill Clinton. 

So why was NAFTA created?

NAFTA aimed to eliminate tariffs and reduce trade barriers, creating a seamless flow of goods and services across North America. 

It transformed the region into a unified trade zone, allowing businesses to operate with minimal restrictions and fostering deeper economic integration between the three nations. 

And one of the biggest winners in this great North American trade experiment was the automobile industry.

Before NAFTA, selling American-made cars in Mexico was a costly and complicated effort (the US already had an Auto Pact with Canada). The U.S. automakers faced steep 20% tariffs and strict trade regulations that mandated a high percentage of locally sourced content in vehicles. These barriers made exporting cars and auto parts to Mexico a logistical and financial challenge for US companies. 

But with the arrival of NAFTA, everything changed. 

Tariffs were slashed, investment rules were eased, and American automobile manufacturers gained smoother and more direct access to the North American market.

And the impact was immediate. 

Within just two years of NAFTA's implementation, U.S. motor vehicle exports to Mexico surged. In 1996 alone, the U.S. exported 51,000 new cars and 31,500 new trucks, totaling $1.2 billion in value, according to a 2017 US Congressional Service Report. 

By 2016, U.S. motor vehicle exports had skyrocketed, exceeding 2 million units annually. Canada and Mexico emerged as the largest markets for U.S.-made vehicles. In 2024, the US exported 781,257 passenger vehicles to both these neighbors. 

However, the benefits of NAFTA weren’t limited to American automakers; Canada and Mexico saw their automotive sectors flourish as well.

Mexico, in particular, became a major hub for vehicle and parts manufacturing in North America. In 1986, the country produced just 2.5% of all North American vehicles. 

Fast-forward to 2016, and that share had grown to 20%. Furthermore, Asia—and Europe-based automakers began setting up their manufacturing plants in the NAFTA region, especially Mexico, to take advantage of the trade benefits and lower production costs. This increased interest soon made Mexico the seventh-largest vehicle producer in the world. According to Mexico's Secretariat of Economy data, since NAFTA, automotive exports have multiplied by 11, growing 11% per year on average.

And where do all these vehicles go? 

According to the USMCA auto report, nearly 90% of vehicles produced in Mexico are destined for export, with 79% of those shipments heading to the United States. According to a 2017 Congressional Research Service report on NAFTA, between 1993 and 2016, US auto exports to Mexico increased 262% while imports increased by a whopping 765%! 

Canada, too, experienced a manufacturing boom under NAFTA. The agreement allowed American companies to establish plants in Canada without facing restrictive legal barriers, making it easier for automakers to integrate production across borders. 

Ontario, often referred to as Canada’s "Auto Alley," is today the epicenter of the country's vehicle production. It houses major plants for GM, Chrysler, Toyota, Ford, and Honda. 

The NAFTA and later the United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA, have made the North American region a seamless automotive supply chain network. 

Here’s an example to show the interconnectedness of the North American automotive supply chain. Today, an average American car will likely have an engine manufactured in Canada, its transmission assembled in Mexico, and its final assembly completed in the United States. Additionally, the parts would have moved 7-8 times across the borders before the final output. 

In fact, the American and Canadian automotive supply chains are so interlinked that the National Highway Traffic Safety Administration’s list does not distinguish between American-made and Canadian-made content embedded in these vehicles.

In such a scenario, what would the 25% tariffs on Canada and Mexico do to the North American automotive industry, particularly the United States? 

Read More: Nearshoring Boom in Mexico

Chain reaction

In 2024, the United States imported approximately 2.96 million new passenger vehicles and light trucks from Mexico, valued at $78.5 billion. From Canada, the imports totaled about 1.07 million units, worth $31.2 billion. These numbers underscore the vital automotive trade between the three countries and its monetary value.

That is why the proposed 25% tariff on imports from Mexico and Canada is expected to have significant repercussions. Analysts estimate that such tariffs could cost the U.S. auto industry $60 billion and potentially increase new vehicle prices by approximately $3,000 for consumers.

Ford CEO Jim Farley has been vocal about the potential impact, stating, "Let's be real honest, long term, a 25% tariff across the Mexico and Canadian border will blow a hole in the U.S. industry that we have never seen."

He further emphasized that such tariffs could advantage foreign automakers, noting, "It frankly gives free rein to South Korean and Japanese and European companies that are bringing 1.5 million to 2 million vehicles into the U.S. that wouldn't be subject to those Mexican and Canadian tariffs."

So, what does this mean for the consumers?  To put it simply, higher prices.

In a news interview, Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association, said, “The auto sector is going to shut down within a week [if the tariffs are implemented].” He added that “at 25%, absolutely nobody in our business is profitable by a long shot.”

Sadly, the impact of these tariffs goes beyond fully assembled cars. The U.S. doesn’t just import vehicles from Mexico and Canada — it also relies heavily on auto parts from these countries to manufacture vehicles in the United States. 

Many vehicles labeled "Made in America" contain components sourced from multiple countries, including China, Mexico, and Canada.

According to International Trade Administration data, in 2024, the U.S. imported $100.65 billion worth of auto parts from Mexico and Canada while exporting just $68.3 billion, resulting in a trade deficit of nearly $40 billion in automotive components.

Now, imagine slapping a 25% tariff on these parts. This wouldn’t just increase the cost of imported cars — it would also drive up manufacturing costs for domestic automakers.

Take the Ford F-150, for example—a longtime symbol of American automotive manufacturing. While widely considered a "made in America" truck, only 32% of its components are actually produced in the U.S. The remaining 68% come from other countries. In fact, in Cars.com’s 2024 American-Made Index, the F-150 ranked 58th, highlighting how globalized modern auto production has become.

While much of the tariff debate focuses on vehicle imports from Mexico and Canada, the U.S. auto industry faces another major cost driver — steel and aluminum tariffs that are set to begin on March 12, 2025.

Made in metal 

Steel and aluminum are the two most critical raw materials in automotive manufacturing. According to the American Iron and Steel Institute, an average passenger vehicle is made up of 55% steel and about 10% aluminum. Tariffs on these materials could further inflate production costs, affecting both domestic and imported vehicles.

Interestingly, this is not the first time that Trump has levied tariffs on steel and aluminum. In his first term, President Trump imposed a 25% tariff on imported steel and a 10% tariff on imported aluminum, citing national security concerns under Section 232 of the Trade Expansion Act. 

And it affected the automotive industry in the US. Steel and aluminum prices spiked by up to 25%, increasing manufacturing costs by an estimated $400 per vehicle, according to a Senate Committee hearing on “Impact of Tariffs on US Automotive Sector.”

Furthermore, a study by the Center for Automotive Research (CAR) estimated that steel and aluminum tariffs in 2018 added $1.4 billion in extra costs to U.S. automakers, which were likely passed on to the customers as additional prices.  

Let’s now move on to the 25% proposed tariffs on automobile imports. 

Read More: Do Tariffs Benefit the United States?

Foreign imports

According to Commerce Department data, the United States imported $217 billion worth of passenger vehicles last year, of which $101.15 billion worth of cars were from Japan, South Korea, and Germany. These numbers underscore the growing demand for foreign cars in the US, and 25% tariffs on them would affect the sales and revenue of these players who already operate on a thin margin. 

Japanese manufacturers, for instance, would suffer significantly. In 2024, Toyota, Honda, Nissan, and Subaru collectively exported around 1.4 million vehicles to the U.S., making Japan one of the largest foreign suppliers of cars to American consumers. 

If a 25% tariff were imposed, models like the Toyota Camry, Honda CR-V, and Nissan Altima — some of the most popular cars on American roads — would see sharp price increases, forcing consumers to reconsider their options.

South Korean automakers Hyundai and Kia would face similar pressures. According to International Trade Administration data, the US imported around 1.54 million vehicles from Korea in 2024. In fact, many of Hyundai and Kia’s best-selling SUVs and sedans are known for affordability, but a tariff-induced price hike could erode that advantage. 

Meanwhile, European manufacturers such as BMW, Mercedes-Benz, Volkswagen, and Audi, which together send over 700,000 vehicles to the U.S. annually, are already warning of potential retaliation from Germany and the broader EU. Such retaliation would increase the cost of luxury and premium vehicles, which are often imported rather than built domestically.

When it comes to China, vehicle imports have been considerably lower. However, US Trade Commission data shows that the United States imports vehicle parts, especially batteries, valued between $15 billion and $17 billion each year.

So, how are the automotive industry and car manufacturers reacting to the proposed tariffs? 

Tough times 

Several industry experts and leaders have voiced their concerns about the proposed tariffs and their impact on the industry. Ford CEO Jim Farley is vocal about the chaos and confusion that tariffs create. 

Across the border, Mexico’s auto associations, in a joint statement, said the tariffs will weaken North America's most integrated industry. The competitiveness of North America as a whole is at stake.

Ontario Premier Doug Ford warned that more than 500,000 jobs may be lost in Ontario alone, and the majority of those jobs will be in the auto sector.

However, the most notable response came from General Motors, the largest U.S. automaker with a nearly 17% market share.

Interestingly, according to MarkLines, an auto-industry data provider, GM produces more vehicles in Mexico than any other manufacturer — over 842,000 in 2024. 

Ripple effect

According to experts, tariffs will not just drive up car prices, but they will also impact the prices of industries and businesses closely tied to the auto sector. One of the most significant price increases could be car insurance costs. According to Insurify, tariffs could push the national average for full-coverage car insurance up by 8% by the end of 2025, rising from $2,313 to $2,502.

Similarly, industry experts warn that the prices of used cars and auto parts are also set to rise. With higher manufacturing and import costs, replacement parts will become more expensive, making repairs costlier. This, in turn, will drive up demand for second-hand vehicles, further inflating their prices. 

Final words

While many criticize the proposed tariffs, some argue they could yield strategic benefits. For one, tariffs can serve as a powerful negotiation tool to push for more balanced trade agreements. A key example is the tariff disparity between the U.S. and the European Union. The EU imposes a 10% tariff on American-made passenger vehicles, while the U.S. levies just 2.5% on European imports.

Shortly after President Trump announced the 25% auto tariff proposal, EU Trade Commissioner Maroš Šefčovič signaled a willingness to negotiate, stating that the European Union is “ready to discuss” lowering its 10% tariff as part of broader trade talks.

Beyond trade negotiations, a section of experts also argue that higher import tariffs will nudge automakers to expand manufacturing in the U.S., boosting domestic production, job creation, and economic growth over the long term. 

President Donald Trump posted on Truth Social that his tariffs will boost auto manufacturing in Michigan, a state he "just easily won" in the Presidential Election. He claimed these tariffs have already prevented numerous new auto plants from being built abroad, calling it a "gigantic win" for Michigan and the United States.

That said, any tariff policy must strike a careful balance. Announcing sweeping tariffs without giving companies time to prepare could create economic turbulence, forcing businesses to scramble for contingency plans. Moreover, when it comes to these tariffs, there are several key questions that remain unanswered. For example, how long will the tariffs last? Will exemptions be granted?

Until these uncertainties are addressed, the industry remains on edge, bracing for what could be a transformative — or deeply disruptive — shift in the global auto trade. 

This newsletter was written by Shyam Gowtham

Thank you for reading. We’ll see you at the next edition!