The North American auto industry is set to face ballooning inflation as Mexico and Canada retaliate on US president Donald Trump’s 25% tariffs on all imported goods from its two neighbours.

Trump claims the measure is dictated by economic reasons, as the US has “big deficits” with Mexico and Canada, its main trading partners. China will also be subject to an additional 10% duty.

“Possibly we’ll substantially increase [them] or not, we’ll see, but it’s a lot of money coming to the US,” he said, while citing migrants and fentanyl entering the US through both countries as other reasons to impose the tariffs. Starting from 4 February, the duties cover “all articles” imported for consumption, although Trump’s order does not include a full list of items.

In response, Canada has enforced tariffs on CAD 155 billion ($105 billion) worth of imported US products, including seat covers for motor vehicles, motorcycles, side cars, and pneumatic tyres, also beginning on 4 February. Another list of goods valued CAD 125 billion will be made public later in the week and will be subject to public consultation before being implemented.

“Canada and the US are more than just trading partners. We are highly integrated economies,” comments Canada’s finance minister Dominic LeBlanc. “We want to preserve this relationship, but in the face of the unjustified US tariffs against Canadian goods, we are taking action to protect our economy, our workers and our businesses.”

According to government data, “millions of jobs on both sides of the border depend on this relationship,” with over $2.5 billion worth of goods and services crossing the border every day. Canada is the largest export market for 36 states and is among the top three for 46 states.

Mexican president Claudia Sheinbaum announced on Saturday that the country will soon implement a “Plan B that we have been working on, which includes tariff and non-tariff measures in defence of Mexico’s interests.”

The duties are widely expected to hurt consumers across North America, as the three countries are heavily interdependent on trade for most sectors. According to the Budget Lab at Yale University, US households’ purchasing power will take an annual hit of $1,245, while US GDP would be reduced by 0.2% across three years. Overall, the US faces revenue losses of $130 billion over a decade.

Meanwhile, the United States-Mexico-Canada Agreement (USMCA) is due for review next year, although this may be expedited after Trump ordered an evaluation of all active trade deals.

A tight partnership
The US automotive industry is intertwined with its neighbours, which accounted for around half of US imports of motor vehicles and motor vehicle parts in 2023, for a combined value of around $166 billion, according to the Cato Institute. Similarly, 45% of US motor vehicle exports, worth $38 billion, and 75% of US motor vehicle parts exports, worth $31 billion, were purchased by its two neighbours.

Indeed, a significant share of the cars sold in the US is made in Mexico with core parts from the US and Canada. The Peterson Institute for International Economics estimates that 38% of the total value-added in vehicles imported to the US from Mexico is created by US workers.

It is unclear whether the tariffs will be implemented on individual auto parts or on the finished vehicles, as some parts cross borders multiple times before being installed in the final product. According to the Cato Institute, tariffs on individual auto parts would likely slow, if not completely shut down, the North American automotive supply chain. 

Analysts at RBC Capital Markets say that tariffs on Mexico are “highly disruptive and inflationary to the US auto consumer… especially near term as OEMs would likely have to source components from other suppliers or from production centres requiring expensive transport costs.”

Motors vehicles and parts trade in 2023

Source: US International Trade Commission

General Motors, Stellantis, and Ford are considerably exposed, the analysts note, as production in Mexico could account for as much as 35% of GM’s US sales, and 20% and 13%, respectively, for Stellantis and Ford.

Yet, some OEMs may be able to shift production across the two countries. In an earnings call last week, GM’s ceo Mary Barra reassured investors that the group has “several levers that we can pull.”

However, Maximilian Gauland, founder of Mexico-based consultancy firm Zeitgeist, remains optimistic.

“Over the last two years, there have been huge investments in Mexico from all industries, especially automotive. They have cooled down a bit, but there’s so much money already inside the country and so much American money,” he tells Kallanish. “Mexico is much more solid, much more optimistic, much more secure of themselves… Mexico is close to the US, but it’s not their only possible solution.”

Indeed, Tesla’s proposed $5 billion gigafactory in Monterrey served as a magnet to attract more EV investment in the country, well before reaching a final investment decision. Last summer, ceo Elon Musk said they would wait until after the US election to greenlight the plant, and his tight relationship with Trump suggests the project will not go ahead.

Other investments in Mexico have also been on hold, especially from Chinese companies, as Washington was concerned the country would be used as a “back door” to import Chinese vehicles into the US. Still, Mexico’s EV production has grown by 1,533% since 2020, according to consultancy Prodensa.

Domestic adoption remains slow due to a lack of infrastructure, although the removal of tariffs on imported EVs between 2020 and 2024 was effective in increasing imports, mainly of Chinese models. Sheinbaum is now implementing a series of measures to boost the electrification of transport, including the launch of Olinia, a mini-EV that will be entirely made locally.

As for Canada, Ontario’s premier, Doug Ford, warned last month that the tariffs could jeopardise 500,000 jobs and require “investing tens of billions of dollars” to address. One option for OEMs could be focusing on domestic sales, as Ottawa wants all new cars sold to be electric by 2035. 

The country could leverage its natural resources and its already strong EV manufacturing ecosystem. According to BloombergNEF, Canada was the world’s top country for lithium-ion battery production last year, surpassing China. Moving to the US may not be an option, experts suggest.

“The US is focused on trying to get manufacturing that’s in Canada to shift to the US. But a lot of companies don’t want to manufacture in the US, or are not able to, because they lack a highly qualified, skilled workforce there that we have in Canada,” says Stephen Bieda, director of non-profit advocacy group EV Society. 

“The education level, the benefits that we offer, the healthcare plan and so on that’s available here in Canada is not available in the US. So it’s hard for manufacturing to shift to the US without those highly skilled, very qualified, educated people to run machines.”

Canada and Mexico are also expected to cement trading partnerships further afield. Mexico has already agreed with the European Union that they should modernise their existing deal. This includes strengthening the supply chain of critical raw materials, eliminating non-tariff barriers, and growing EU services exports in “key” areas, including transport.

21st century complexities
Slapping tariffs on its closest trading partners seems at odds with Washington’s mission to challenge China’s dominance on the global stage.

Mexico’s automotive sector was already facing the spectre of tariffs amid concerns that Chinese companies would set up production there to then export vehicles to the US. Now, with Washington turning its back on its neighbour, Mexico may as well welcome more Chinese business to make up for lost trade.

According to analysts at Scotiabank, Trump is pushing “Canada and Mexico to better manage border issues but to also reconfigure trading terms to be more advantageous to the US.”

“Perhaps the tariff process will achieve these aims, whereby a USMCA 2.0 with associated resolution of immigration and illicit drug issues wins with Trump’s base. We believe the Trump Administration is further motivated to curtail Chinese manufacturing and trading interests in Mexico,” the analysts say.

“We seek to look past the noise and ask what the end game is: we believe it is ultimately about optimising North American strength amid an emerging great power competition between the US and China,” the analysts continue. “Buckle-up near-term but, ultimately, we see the potential for opportunities within a North American industrial corridor, with benefits to transport, logistics, and critical resources.”

While Scotiabank says, “uncertainty is the new certainty,” the Cato Institute notes the US automotive industry as “a great example of the complexities of 21st-century manufacturing and the benefits of globalisation.”

The world is now watching to see how effective protectionism and localisation can be.