The U.S. auto industry is bracing up for a major shake-up as President Donald Trump’s 25% tariff on imports from Mexico and Canada takes effect tomorrow. This decision, which comes after months of threats, could have far-reaching consequences.

For decades, free trade agreements between the United States, Canada and Mexico have shaped the North American auto industry, with automakers relying on cross-border trade to keep costs down and maintain supply chains. Now, these tariffs will throw this interconnected ecosystem into disarray.

With most vehicles sold in the United States having parts or final assembly tied to Mexico and Canada, these tariffs will disrupt operations, increase costs and impact both automakers and consumers.

Automakers to Feel the Heat

Nearly 90% of auto exports from Mexico and Canada are destined for the U.S. market, per the Mexican Automotive Manufacturers’ Association and the Canadian Vehicle Manufacturers’ Association.

Most major automakers in the United States have plants in Mexico and Canada. Companies like Volkswagen VWAGY, Nissan NSANY, Stellantis STLA, General Motors GM, Ford F, Honda and Toyota all have significant production operations in these neighboring countries. These companies depend on their facilities in Mexico and Canada to produce vehicles and parts for the American market. With the new tariffs in place, production costs are expected to rise, putting pressure on profit margins. If these costs are passed on to consumers, vehicle prices will increase, potentially leading to lower demand. Either way, the outlook is challenging.

Tariffs on Mexico are expected to hit the auto industry harder than those on Canada, with Volkswagen facing the highest risk, followed by Nissan Motor and Stellantis, according to S&P Mobility. VWAGY relies on its large plant in Puebla, Mexico, which produces nearly 350,000 vehicles each year. The added tariff costs will likely push up prices for popular models like the Jetta, Tiguan and Taos. The company is also establishing a battery plant in Canada. NSANY runs two major plants in Mexico where it produces key models such as the Sentra, Versa, and Kicks for the US market. STLA has operations in both Mexico and Canada, where it manufactures vehicles like Ram pick-ups and Jeep models, making it vulnerable to cross-border tariffs.

General Motors’ Mexican plants produce popular models like the Chevy Silverado and GMC Sierra pickups, as well as battery-powered versions of the Equinox and Blazer SUVs. In Canada, GM operates three plants that produce electric vans, the Chevrolet Silverado Heavy Duty, and key components such as the V8 engine and dual-clutch transmission.  Ford operates three key plants in Mexico (the Chihuahua engine plant and two assembly plants in Cautitlan and Hermosillo) that contribute a large share of its production for the U.S. market. In Canada, Ford has an assembly plant for the production of its F-Series pickup trucks.

Japanese auto giant Toyota builds its popular Tacoma pick-up trucks in Mexico. With all Tacomas now coming from Mexico instead of U.S. plants, Toyota will see a direct impact on pricing and competitive positioning in the North American market. Toyota’s closest rival, Honda, sends about 80% of its Mexican output to the United States, which makes it highly susceptible to any cost increases from tariffs. The new duty may force Honda to either shift production closer to home or absorb the extra costs, leading to higher prices for its vehicles in the United States.

The impact extends beyond fully assembled vehicles. Many auto parts used in U.S. assembly plants are sourced from Mexico and Canada, and these tariffs will drive up the cost of manufacturing in the United States as well. This could force automakers to rethink their supply chains, which could slow down production or cause shifts in manufacturing locations.

Price Hikes and Consumer Impact

Consumers are likely to feel the effects in the form of higher vehicle prices. Research from automotive consultant AlixPartners suggests that the new tariffs could add $60 billion in costs to the industry, much of which will be passed on to buyers. S&P Global Mobility estimates that a 25% tariff on a $25,000 vehicle could add $6,250 to its final price.

Higher prices can reduce demand for new vehicles. In a competitive market, even a slight increase in cost can change buying habits. Customers may decide to delay purchasing a new vehicle or look for alternatives in the used-car market. With nearly 16 million vehicles sold in the United States each year, this could lead to a steep drop in sales, affecting demand and profitability across the industry.

Retaliatory Tariffs to Increase Tension

The imposition of 25% tariffs on imports from Mexico and Canada will disrupt decades of smooth and cost-effective supply chain operations. Canada has already announced retaliatory tariffs, imposing 25% levies on U.S. imports worth C$155 billion ($107 billion). Of these, C$30 billion in tariffs will take effect on the same day as Trump’s levies, i.e., tomorrow. Mexico president Claudia Sheinbaum has also pledged to retaliate. The tit-for-tat response is only set to make things worse, and the conflict could spill over into other industries, adding uncertainty to an already volatile economic environment.

Last Word

The future of the U.S. auto industry now hangs in the balance. While the full effects of these tariffs will take time to unfold, the immediate impact is clear— higher production costs, rising vehicle prices and disruption of supply chains. Automakers will have to grapple with the challenge of absorbing costs or passing them onto consumers, potentially leading to lower demand and slower sales.

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Ford Motor Company (F) : Free Stock Analysis Report

Nissan Motor Co. (NSANY) : Free Stock Analysis Report

General Motors Company (GM) : Free Stock Analysis Report

Volkswagen AG Unsponsored ADR (VWAGY) : Free Stock Analysis Report

Stellantis N.V. (STLA) : Free Stock Analysis Report

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