A “tariff winter” could batter the U.S. auto industry with high prices and reduced sales for years if the 25-percent tariffs on Canada and Mexico threatened by U.S. President Donald Trump go into effect, S&P Global Mobility analysts say.
While this is a worst-case scenario, even the 50 percent likely “extended disruption scenario” will see the Trump tariffs cause four to five months of production stoppages, higher prices and reduced supply, according to the firm’s statistical modeling.
President Donald Trump has been threatening robust tariffs against imports of a wide range of goods, including completed automobiles and vehicle components, from America’s northern and southern neighbors since his inauguration. Currently, a one-month exemption for the auto sector is in place, but this is set to expire on April 2nd, when, if nothing has changed, the 25-percent tariffs will go into force on automotive products and parts as well.
Notably, the Big Three automakers, including GM, Stellantis and Ford, have excess capacity in the U.S. they could use to offset some of the effects if the tariffs go into place. These companies are reviewing their supply chains in detail for ways to mitigate the tariff impact. Other car companies lack this cushion of idle U.S. manufacturing capacity and will receive the full brunt of the duties imposed by the Trump administration if the tariffs do in fact come into effect.
S&P Global Mobility has three possible scenarios that could result from the Trump tariffs:
- Quick resolution scenario: with a 30-percent chance of happening, this scenario would see disruptions limited to about a month (4 weeks), with some lost production.
- Extended disruption scenario: the most likely outcome according to analysts, with a 50-percent chance of occurrence, the extended disruption scenario will see production of some vehicle models limited or halted by companies. Supply will be reduced, incentives will shrink or be temporarily eliminated, and “a 25-percent tariff on all vehicle imports starting April 2 would impact 45 percent of US light-vehicle sales.” Prices for everything, not just vehicles, would rise. This scenario would last four or five months but create economic fallout for several years.
- Tariff winter:Â 20 percent likely to occur, the “tariff winter” would see the 25-percent tariffs in place for years. Vehicle prices would rise significantly and sales of new vehicles will likely drop by approximately 10 percent in the U.S., slightly less in Mexico and by 15 percent in Canada. Shifting production to the U.S. – even if it actually occurs – won’t alleviate the price hikes and sales drops because production in America is costly and inefficient.
GM Worker At The Canadian Oshawa Plant
With auto sector tariff enforcement rapidly approaching S&P Global analysts see the possibility that overall North American vehicle production will plunge by 20,000 units daily in the very near future. Prediction of Trump tariff and trade policy is difficult because of the apparently ad hoc nature of the President’s decisions, the analysts claim, noting that the existence of “a structured plan is questionable.”
The uncertainty caused by the seemingly off-the-cuff policy decisions is hindering automakers from deciding how to invest for future production, since it’s unclear where their money would be best deployed.
