OEMs, Consumers Bracing for Tariff Effects

This post was originally published on Wards Auto

If President Trump’s proposed 25% tariffs on vehicles and auto parts imported from Mexico and Canada, and an additional 10% on China, take effect Tuesday, new-vehicle prices in the U.S. are expected to rise significantly in the first half of the year. Analysts estimate that these tariffs could add approximately $3,000 to the average car price, with larger vehicles such as fullsize trucks potentially seeing increases of up to $10,000.  

The North American automotive industry relies heavily on an integrated supply chain, with parts and vehicles frequently crossing borders during the manufacturing process. For instance, approximately 25% of U.S. car sales are vehicles assembled in Mexico and Canada, and domestically produced cars often contain a substantial number of imported components. This interconnectedness means tariffs on imports would affect a wide range of vehicles, not just those directly imported.

In response to these potential tariffs, some manufacturers are adjusting their production strategies. Honda, for example, has decided to produce its next-generation Civic hybrid in Indiana instead of Mexico to avoid the additional costs associated with the tariffs.

Consumers should be prepared for higher vehicle prices if these tariffs are implemented. The extent of the price increases will depend on various factors, including the specific vehicle model and the manufacturer’s ability to absorb some of the additional costs.

If tariffs on vehicles and auto parts imported from Mexico and Canada are implemented, several automakers, according to data from the Mexican Automotive Manufacturers’ Assn. and Canadian Vehicle Manufacturers’ Assn., are expected to be significantly affected due to their reliance on these countries for manufacturing.

The auto industry is deeply integrated among the U.S., Mexico and Canada, facilitated by the U.S.-Mexico-Canada Trade Agreement (USMCA) that replaced the North American Free Trade Agreement (NAFTA) during Trump’s first term, when he campaigned on building up manufacturing jobs in the U.S. Mexico imports 49.4% of all auto parts from the U.S. and exports 86.9% of its auto parts production to the U.S.

The interconnected nature of the North American automotive supply chain means these tariffs could disrupt manufacturing processes and increase costs across the industry. Automakers with significant production in Mexico and Canada may need to adjust their manufacturing strategies to mitigate the impact of the tariffs.

Auto manufacturers “are very good at managing an issue like this, and they are all working really hard to adjust production and supply chains to minimize the impact of the proposed tariffs,” says Patrick Anderson, CEO of Michigan-based Anderson Economic Group, who warns that the costs of GM’s and Ford’s fullsize SUVs, their most profitable vehicles, could increase by as much as $9,000.

To minimize the financial impact of the tariffs, GM, for example, has reduced its inventory levels in international plants by over 30%. “The last thing you want is a bunch of finished inventory that just suddenly became 25% more expensive, just with the passage of time,” GM chief financial officer Paul Jacobson said at the recent Barclays Annual Industrial Select Conference.

Jacobson noted that the company has the ability to shift and balance production across its current plants in ways that are “relatively low cost,” allowing GM to manage the effects of short-term tariffs without significant capital investments or new construction. Jacobson acknowledged that if the tariffs become permanent, GM would need to evaluate more substantial changes to its operations.

The average transaction price of a new vehicle is already high, and automakers cite affordability as one of the chief headwinds to auto sales this year. The average new-vehicle retail transaction price in January 2025 was reported at $44,636, down $238 from January 2024, according to J.D. Power. Increasing that cost burden will add to inflation concerns of consumers.

Wells Fargo estimates the tariffs would cost the Detroit Three automakers billions, with each automaker deciding for themselves how much to pass on to consumers and how much to deduct from profits. The bank estimates the impact of 5%, 10% and 25% tariffs on GM, Ford and Stellantis would collectively be $13 billion, $25 billion and $56 billion, respectively.

When Trump first announced tariffs on Feb. 1, it was through an executive order citing the Emergency Powers Act, the first time in history an emergency power had been used to impose tariffs.

From January 2021 to January 2025, the U.S. manufacturing sector added approximately 1 million jobs, surpassing pre-pandemic employment levels. While this growth is encouraging, addressing ongoing labor shortages will be crucial for maintaining the sector’s momentum.Many manufacturers, however, already face difficulties in filling open positions, with job openings often outnumbering hires. The shortage of adequately trained labor underscores the need for workforce development initiatives to ensure continued growth in manufacturing jobs, especially if automakers feel pressed to permanently shift jobs from Mexico and Canada back to the U.S.