Donald Trump has spared the car industry from his tariff war against Mexico and Canada for 30 days. But for European, Japanese and South Korean car executives, it is hardly a reprieve.
The US president has warned that “reciprocal” tariffs on America’s trading partners would come into effect on April 2 — the same day that the 30-day delay on 25 per cent tariffs on imports from its North American neighbours is set to expire.
Trump has said that he will raise tariffs to retaliate against taxes, levies, regulations and subsidies that Washington considers unfair. But the lack of detail on how reciprocal tariffs will work has car industry executives nervous.
Recent US trade negotiations with Mexico and Canada have placed car parts under the spotlight, raising the prospect that new rules or levies could also be imposed on core components that non-US carmakers bring in from Europe and Asia.
“We are relieved for now [with the extension],” said an executive at a European carmaker. “But we don’t know what will be targeted tomorrow.”
How has the 30-day extension on Mexico and Canada tariffs helped the industry?
Washington’s latest tariff exemption applies to cars assembled in Mexico and Canada that compliant with the terms of Trump’s 2020 free trade deal.
For a vehicle to qualify as duty-free under the USMCA agreement, the proportion of a car’s components coming from North America needs to be at least 75 per cent of the total value. The vehicle’s production must also meet other conditions, including on materials used and wages.
Since the 2020 agreement, the US and other international carmakers have invested in their North American manufacturing capabilities, shoring up their supply chains as well as their workforce.
As a result, half of the parts for vehicles built in Canada by the “Big Three” — General Motors, Ford and Chrysler maker Stellantis — on average come from the US. The share for cars assembled in Mexico is 35 per cent, according to lobbying group American Automotive Policy Council.
If Washington decides to retain the USMCA rules, the majority of the car models produced in Canada and Mexico would meet the threshold for tariff-free trade. The exceptions are mostly smaller volume, high-end cars.
Among international carmakers, Toyota and Honda have said almost all vehicles produced in North America are USMCA compliant, while Germany’s Volkswagen’s VW brand vehicles are compliant.
BMW’s cars will not be part of the exemption as they fail to meet the 75 per cent threshold. Mercedes-Benz declined to comment, but its models are also likely to be non-compliant, according to S&P Global Mobility.
What are the Big Three lobbying for?
The latest delay to tariffs came after the big three carmakers lobbied hard to spare companies that had invested in North American manufacturing to meet the USMCA regulations.
John Elkann, chair of Stellantis, has publicly urged the Trump administration to concentrate instead on car imports from countries such as South Korea, Japan and the EU — rather than vehicles coming from Mexico and Canada.
“The real opportunity set for the administration in order to really boost jobs in America and manufacturing opportunities and investments is by closing the loophole that currently allows approximately 4mn of vehicles into the country”, Elkann told Stellantis investors in February.
Imports from South Korea are at present tariff free, while duties are charged at 2.5 per cent on those from Japan and the EU. Moreover, these vehicles are not subject to US content rules, requiring a proportion of their parts to be made in America.
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Will car parts be included in Trump’s reciprocal tariffs?
US officials have said they would impose reciprocal tariffs on a “country by country” basis, retaliating against non-tariff barriers as well.
If they were to match US import tariffs to those imposed on US goods by other countries, car parts could be included in the case of the EU, which levies 10 per cent on vehicle imports and 3 to 4.5 per cent on imports of automotive parts. The US only charges EU exporters 2.5 per cent on vehicle imports.
But Mark Wakefield, global automotive market lead at AlixPartners, said going after foreign-made components would be “complex and administratively expensive” to pursue.
Still, industry executives remain nervous. Michael Robinet, executive director of automotive consulting at S&P Global, said 25 per cent tariffs against Japan, South Korea, EU and other countries that import either vehicles or parts into the US were “very possible”.
“With Covid, we knew there would be an end to the chip crisis,” he added, “but with this we do not know what the end looks like.”
Which companies are most exposed to reciprocal or new tariffs on components?
International carmakers such as BMW, Toyota and Hyundai already have an established manufacturing footprint in North America with deeply interconnected supply chains. But for smaller-volume luxury models, hybrids and electric vehicles, key components are often sourced from Germany, Japan and South Korea.
According to UBS analyst Kohei Takahashi, Subaru imported all of its powertrains — engines and other key components that power the vehicle — from Japan. Toyota also relies on transmission systems made in Japan for its US-built hybrid models — although it planned to boost American production of the components from this year.
“The definition of US-made vehicles and the possibility of tariffs on auto parts from Japan will need to be sorted out,” Takahashi said.
Shay Natarajan, at Mobility Impact Partners, a private equity fund based in New York, said Hyundai was able to sustain its US sales with existing American plants. But a potential issue is that some of its models built and sold in the US had close to 80 per cent of their parts made in South Korea.
If the US imposed tariffs on South Korea that covered car components, Hyundai would require a significant shift in its supply chain. “Hyundai will need to quickly increase its component manufacturing and sourcing capabilities in the US,” Natarajan said.
Among German carmakers, BMW’s chief Oliver Zipse last week said the trade war between the US, Canada, Mexico, EU and China would cost the company €1bn this year. “There are no winners in such a situation,” he said.
Even Tesla, which is the least affected by Trump’s tariffs, warned that it could suffer from retaliatory duties against the US which could increase the cost of making vehicles in America. “Even with aggressive localisation of the supply chain, certain parts and components are difficult or impossible to source within the US,” it said in an unsigned letter addressed to US trade representative Jamieson Greer.
Reporting by Kana Inagaki and Chris Cook in London, Harry Dempsey in Tokyo, Patricia Nilsson in Frankfurt, Claire Bushey in Chicago, Christian Davies in Seoul and Thomas Graham in Mexico City
