Tariffs loom over car makers, despite Mexico deal
Specter of new import duties remains a threat; ‘there’s so much money on the line’
The auto industry continues to weather trade-related fallout despite a deal the U.S. and Mexico struck last week that shelved the Trump administration’s plan to impose a 5% tariff on imports.
Auto manufacturers were relieved because a new tariff would have raised costs for car companies and parts suppliers that have grown dependent on Mexico for lower-cost factory labor.
But the specter of new import duties remains a threat to the auto business on multiple fronts, including with the continuing trade dispute between the U.S. and China; the new free-trade deal struck last year with Mexico and Canada that must still be ratified by Congress; and Mr. Trump’s assertion this week that “tariffs are a great negotiating tool.”
“What you crave in trade is equilibrium,” Ford Motor Co. CEO Jim Hackett said in April during an event in Detroit. “You just can’t stand it if you build your [manufacturing] footprint, and it’s always changing.”
The trade unrest comes as auto companies are already facing a slowdown in U.S. car demand that is denting earnings across the sector.
Import tariffs on autos would further pressure profitability, increasing costs throughout the supply chain and on models built abroad and shipped to U.S. dealerships.
Nearly half of all vehicles sold in the U.S. last year were imports, according to forecasting firm LMC Automotive.
The threatened Mexican tariffs, which Mr. Trump first announced on May 29, sent auto makers and suppliers scrambling to blunt the expected impact, according to customs brokers who work with companies to move goods across the U.S.Mexico border.
Eduardo Lozano, a broker working with suppliers at the Laredo, Texas, border crossing, said some clients wanted to double or triple their shipments to get ahead of the 5% tariff, which would have gone into effect Monday, had Mr. Trump not suspended them indefinitely.
That created bottlenecks at the border, confronting companies trying to get goods through with longer lines and a shortage of truck drivers, he said.
Toyota Motor Corp. warned dealers their direct suppliers could lose more than $1 billion this year if the full threatened tariffs are implemented. And General Motors Co. Chief Executive Mary Barra traveled last week to Capitol Hill, where she briefed a delegation of Ohio and Michigan lawmakers about the threat to the company, according to people who attended the closed-door meetings.
Days before the tariffs were to take effect, Mr. Trump said an agreement had been reached and the tariffs would be suspended indefinitely.
“There’s so much deadweight lost in this industry right now to chasing around this policy signal or that policy signal,” said Kristin Dziczek, a labor and economics expert at the Center for Automotive Research. “You have to take them all seriously because there’s so much money on the line.”
Mr. Trump has repeatedly criticized car companies, both foreign and domestic, for moving factory jobs to Mexico and other countries with cheaper labor. The president has characterized his threat to impose tariffs on autos as his biggest weapon in trying to extract concessions from the nation’s top trading partners.
This week, Mr. Trump tweeted that “tariffs are a great negotiating tool, a great revenue producers [sic] and, most importantly, a powerful way to get companies to come to the U.S.A.”
The auto industry is still preparing for the possibility of new tariffs, said Catherine Karol, a lawyer who works with suppliers at Butzel Long PC’s global automotive practice. “As the industry catches its breath here, it’s not going to be reassured by what happened last week,” she said.
The Trump administration is weighing whether to impose a 25% duty on imported vehicles and car parts, a decision it postponed last month until November. Car companies fear such a tariff would raise costs and force auto makers to increase sticker prices for consumers on foreign-built models.
Last month, Mr. Trump directed his administration to open trade talks with Japan and the European Union, and industry observers expect Mr. Trump to use the threat of auto tariffs to gain leverage in those negotiations.
Steel and aluminum tariffs also have squeezed auto makers, with steel accounting for about 53% of the material in a typical automobile and aluminum 11%, according to consulting firm Ducker Worldwide.
Mr. Trump in May rescinded the tariffs on Mexican and Canadian-produced steel and aluminum in hopes of easing the passage of a new trilateral trade pact in North America that would replace the more than two decades-old Nafta.
But the deal hasn’t won lawmakers’ support, prolonging uncertainty for an industry heavily dependent on tarifffree trade within the region. Mr. Trump threatened last year to eliminate Nafta if he didn’t get a trade deal he viewed as more favorable to the U.S.
The trade spat between the U.S. and China also has ricocheted through the auto-industry supply chain. The U.S. last month imposed another round of tariffs on the country, levying duties of 25% on $2.3 billion worth of Chinese-made goods, including bumpers, seat belts and doors.
Unlike auto makers that can charge more for vehicles, suppliers—the manufacturers making seats, windows, dashboards and other vehicle components—would likely have to absorb any costs increases, say industry attorneys. That makes them particularly vulnerable to the tariffs.
“The biggest issue in our end of the business is who’s going to pay these things?” Ms. Karol said. “They just keep coming.”