Rates on engines, transmissions, and electrical components will render powertrains more expensive, even if they undergo assembly in the United States. When this effect interacts with the “border-crossings” tariff accumulation effect, it can multiply the costs of automobile tariffs.
Border-Crossings Accumulation
Automobiles and their parts rarely cross the U.S. border once. Parts like engines, transmissions, or other automotive components potentially crossing the U.S.-Canada and U.S.-Mexico borders up to seven or eight times before being assembled into a finished vehicle. It is unclear whether the proposed 25 percent tariffs by Trump would apply to each component every time it crosses the U.S. border or only once. If the former scenario is true, then the tariff’s accumulation would exacerbate burdens on consumers and businesses alike.
The five largest vehicle manufacturers in North America—General Motors (GM), Ford, Stellantis, Toyota, and Volkswagen—are especially vulnerable to trade disruptions. GM manufactures over 700,000 vehicles each year in Mexico, with more than 80 percent of them exported to the U.S. Ford produces models like the Mustang Mach-E in Mexico, with nearly 90 percent of its output destined for the U.S. Stellantis’ Jeep and RAM brands also depend significantly on Mexican production for U.S. sales.
Imports from Mexico and Canada are set to experience a reprieve. According to the White House, automobile importers will have the opportunity to certify their U.S. content, with systems in place to ensure that the 25 percent tariff is only applied to the value of non-U.S. content. For a United States–Mexico–Canada Agreement (USMCA) qualifying imported car, such as a Chevrolet assembled in Mexico, the importer can pay the 25 percent tariff based on the car’s value minus the U.S. content. For example, if the car’s import value is $60,000 and the U.S. content is 25 percent, the tariff would apply to $45,000. Under the USMCA agreement—negotiated by President Trump and signed in 2020—a compliant vehicle must meet the following criteria: 75 percent of core parts must originate from within the region, other parts must contain 65–70 percent regional content, at least 70 percent of the steel and aluminum must be sourced from North America, and 40–45 percent of the vehicle’s content must be manufactured by workers earning a minimum of $16 per hour.
In contrast, a non-USMCA-qualifying car built in Canada or Mexico would be subject to the full 25 percent tariff on its entire value, regardless of the U.S. content. Current calculations as required by the American Automobile Labeling Act (AALA) and the USMCA show what percentage of a vehicle’s components are from the United States and Canada (AALA) or the United States, Canada, and Mexico (USMCA), respectively. Calculating solely U.S. content will likely add some administrative burden for companies. For now, automobile parts that comply with the USMCA will remain tariff-free until the Department of Commerce, in coordination with U.S. Customs and Border Protection, implements a process to apply tariffs to their non-U.S. content. This functionality is expected by no later than June 24, 2025.
In any case, the Trump administration may be undermining its own goals of reshoring auto manufacturing, given the back-and-forth nature of U.S. automobile supply chains. Companies may well prefer to diversify their supply chains away from the United States altogether and “only” face the cost of a tariff for the fully assembled automobile, rather than face multiple tariffs for multiple parts coming into the United States.
Conclusion
The Trump administration’s automobile tariffs are sure to rock the sector’s supply chains while raising costs for consumers. Critically, they could undermine the White House’s reshoring goals by rendering final assembly manufacturing in the U.S. prohibitively expensive. Perhaps the most damaging long-term feature of the tariffs, however, is their indiscriminate nature. Much like the steel and aluminum tariffs, trade agreement and non-trade agreement partners alike will end up facing U.S. barriers on cars and their parts. The White House’s tariff policy may rapidly diminish the worth of a trading partnership with the United States.
Thibault Denamiel is a fellow with the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
