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President Trump’s March 26th Proclamation imposing 25% tariffs on imported automobiles and automobile parts confronts a fundamental reality of modern manufacturing: borders have become increasingly invisible within deeply integrated supply chains.
For example, a 9-speed automatic transmission used in vehicles like the Chrysler Pacifica and Jeep Cherokee illustrates this perfectly, crossing international borders seven times during production, with materials and parts moving between facilities in Ontario, Pennsylvania, Ohio, Coahuila, and Indiana. By completion, 55% of the transmission’s value comes from U.S. production, 35% from Canada, and 10% from Mexico.
This standard North American manufacturing model raises a critical question: What happens when national trade measures contradict a continental manufacturing ecosystem? This misalignment creates a situation where tariffs intended to protect American industry may effectively tax American-made components multiple times as they cross borders during production. Rather than simply protecting domestic manufacturing, these tariffs risk disrupting the integrated production ecosystem that has made North American automotive manufacturing globally competitive, potentially raising consumer prices significantly while failing to address the underlying workforce and competitiveness challenges they aim to solve.
The 25% tariff, scheduled to begin April 3 for vehicles and no later than May 3 for parts, arrives at a critical moment for an industry already looking at significant transitions. The administration cites national security concerns, noting that only about half of the vehicles sold in the United States are manufactured domestically and pointing to employment stagnation in the domestic automotive sector. However, this approach presents challenges within today’s deeply integrated North American automotive production network.
The Integrated Reality
North America’s automotive industry functions almost as a single entity, with supply chains spanning the United States, Canada, and Mexico that operate as a unified ecosystem. This integration didn’t happen overnight; it evolved through a succession of trade agreements, starting with the 1965 Auto Pact between the US and Canada, expanding significantly with NAFTA in 1994, and further refining the relationship through USMCA in 2018.
The scale of this integration is exceptional. Approximately nine major automakers operate production plants across multiple USMCA countries. Nearly 3 million vehicles are imported annually to the US from Mexico and 1.1 million from Canada, representing significant portions of the US vehicle market. Out of approximately 16 million new vehicles sold annually in the US, imports account for around 7.68 million units, nearly half the market.
This integration has enabled the development of Just-in-Time manufacturing across borders, creating a basis for a competitive regional industry. Components routinely cross borders multiple times during production, with sophisticated logistics systems handling millions of border crossings between the US and Mexico annually.
Proponents of the tariffs argue they address an “extraordinary threat” to national security and the economy while incentivizing the reshoring of production. The administration’s March 26th Proclamation states that foreign automobile industries, bolstered by unfair subsidies and aggressive industrial policies, have expanded while U.S. production has stagnated. Only about half of vehicles sold in the United States are manufactured domestically, creating what the administration describes as a significant vulnerability to critical infrastructure and economic stability.
President Trump’s administration points to economic analyses suggesting potential benefits, referencing studies that claim a global tariff of 10% would grow the economy by $728 billion, create 2.8 million jobs, and increase real household incomes. The United Auto Workers union has welcomed the measures as a long overdue shift away from a harmful economic framework that has devastated the working class. While the automotive industry has raised concerns about disruption, the administration views tariffs as a proven tool for protecting national interests and ensuring America can sustain its industrial base.
Value Chains Don’t Follow Borders
Perhaps the most compelling evidence of integration, and the central contradiction of the new tariffs, is the distribution of value across borders. Research indicates that US-made content accounts for 38% of the total value-added of vehicles imported to the United States from Mexico. Moreover, 74% of the foreign value-added embedded in Mexican cars comes from the United States.
This integration means that tariffs on “Mexican” or “Canadian” vehicles actually tax significant American content. A car assembled in Mexico with engines from Michigan, electronics from Texas, and raw materials from both the US and Canada represents a genuinely North American product, not simply a “foreign import.”
The USMCA tried to address this reality by requiring that 40-45% of work on eligible vehicles must be done by workers earning at least $16 per hour, helping balance labor cost differences across the region. The new tariff proclamation acknowledges this integrated reality by creating an exception for vehicles qualifying for USMCA preferential treatment, allowing tariffs to apply only to the non-US content.
However, this exception comes with significant complications. Importers must document the amount of US content in each model, facing severe penalties for overstatements. If US Customs and Border Protection determines that declared US content is inaccurate, the 25% tariff applies to the full value of the automobile, not just for the specific shipment but retroactively and prospectively to all automobiles of the same model. This creates substantial compliance risks and administrative burdens that could disrupt even USMCA-compliant trade.
Anticipated Impacts
The consequences of these tariffs will ripple through the industry and directly impact American consumers. According to analysts, vehicle prices could rise 11-12% on average, translating to $3,000-$12,000 increases depending on the model and its supply chain integration. American car buyers, already facing average new vehicle prices of around $48,000, will encounter a significantly constrained market with higher costs and fewer choices.
This price shock would set off a series of market disruptions. Many buyers will likely shift to the used market, potentially driving up prices from their current $25,000 average. The tariff structure creates particular challenges for families seeking affordable vehicles, as mass-market models, including many produced by American manufacturers with integrated North American supply chains, would be affected.
Beyond price increases, consumers face reduced model availability. Manufacturers might discontinue affected models entirely rather than absorb tariff costs or relocate production. This is especially true given that relocating auto assembly to the US requires not just facility construction but also years of specialized workforce development and supplier network establishment, all with uncertainty about whether such relocated production would ultimately remain competitive.
The business impact varies significantly across manufacturers. Foreign brands like Jaguar Land Rover, Volvo, Mazda, and Volkswagen face the greatest exposure, with 80-100% of their US sales coming from imports. However, US automakers aren’t immune: General Motors has approximately 46% of its US sales from imports, Stellantis 45%, and Ford 21%. Analysts estimate Ford and GM could face a 10- 30% drop in earnings this year, even with adjustments to parts sourcing.
The disruption extends beyond US borders to Mexico, where the automotive industry represents 20% of manufacturing GDP and supports over 2 million jobs. Given the economic interconnection, impacts on Mexican production facilities would quickly ripple back to their American suppliers and partners, creating sequential effects throughout the continent-wide supply chain.
Popular models assembled in Mexico that would face significant price increases or potential discontinuation include the Ford Maverick, Bronco Sport, and Mustang Mach-E; Chevrolet Silverado and Equinox; Ram 1500 and 2500; Volkswagen Jetta, Taos, and Tiguan; Audi Q5; BMW 2-Series and 3-Series; and Honda Fit and HR-V.
As these impacts materialize, the strategic responses developed by automakers and suppliers will reshape not just individual companies but the entire North American automotive landscape. Faced with these disruptive market realities, industry leaders must now make consequential decisions that will determine their competitive position for years to come.
Strategic Responses
Automakers now face difficult choices. They must decide whether to relocate production to the US, absorb the tariff costs, raise prices, or discontinue models. None of these options is simple or without consequences.
Relocating production presents the most significant challenge. Retooling factories to produce different models requires substantial capital investment and time, even for manufacturers with excess US capacity. For manufacturers without existing US facilities, the timeline stretches even further, typically 2-3 years minimum to build a new plant.
This timeline extends further when considering the workforce challenge. Modern vehicle manufacturing requires specialized technical skills that cannot be developed overnight. Even with facilities in place, manufacturers face a critical workforce development timeline of 3-5 years to reach full operational efficiency, a challenge compounded by broader labor market dynamics.
The National Association of Manufacturers reports that only 30% of Americans want to work in manufacturing, with many viewing these careers as fallback options rather than desirable paths. This perception persists despite 80% of Americans believing the country would benefit from a stronger manufacturing workforce. This disconnect has contributed to an estimated shortage of 2 million manufacturing workers and over 600,000 unfilled manufacturing positions as of May 2024.
Therefore, automakers relocating production must not only invest in physical facilities but also overcome deeply entrenched workforce perception challenges, all while facing significant uncertainty about whether the same policies would remain in place beyond this administration. The economics of relocated production also remain questionable, as the US cost structure may render some vehicle segments uncompetitive compared to global alternatives.
Supply chain disruptions will extend beyond final assembly. The 25% tariff on auto parts, scheduled to take effect by May 3, threatens to disrupt the Just-in-Time manufacturing system that has become central to industry efficiency. Many suppliers are already considering shifts from “Just-in-Time” to “Just-in-Case” inventory strategies, building buffer stocks to hedge against policy volatility.
This transformation would increase costs throughout the supply chain, reduce efficiency, and ultimately affect prices and availability. Companies throughout the sector must reevaluate their logistics networks, potentially developing redundant supply arrangements that provide insurance against policy volatility at the cost of reduced efficiency.
Beyond production and economic impacts, tariff uncertainty threatens the industry’s innovation ecosystem. Critical for future competitiveness, R&D investment typically requires stable policy environments to justify the significant capital allocation. With companies potentially facing substantial policy shifts that could dramatically reshape the industry, many companies will be forced to postpone investment decisions in advanced technologies and next-generation vehicle programs.
This disruption extends beyond manufacturing to impact the development centers where future technologies are designed. Rather than stimulating domestic innovation, industry experts warn that an uncompetitive U.S. environment could lead companies to focus their R&D in other markets. This potential innovation slowdown represents an opportunity cost that extends well beyond the immediate pricing and supply chain disruptions.
The Path Forward
The discrepancy between national tariff policy and continental industry integration presents North America with a defining choice. The region can continue with unilateral actions that fragment the integrated ecosystem, undermining three decades of competitive advantage. Or today’s tensions can be channeled into a transformative vision for the 2026 USMCA renegotiation.
These tariffs represent a fundamental shift in US trade policy with potential long-term consequences for North American integration and the reshaping of continental manufacturing ecosystems. This is not merely a temporary policy adjustment but potentially an inflection point that could alter the trajectory of regional economic relations for decades to come.
This moment calls for more than temporary solutions. It requires a reimagining of North American economic architecture that addresses legitimate concerns about rules of origin enforcement and circumvention while preserving the continental integration that has made the automotive sector globally competitive.
The USMCA renegotiation offers a critical opportunity to evolve beyond traditional trade frameworks toward a comprehensive continental industrial policy. Effective mechanisms could simultaneously strengthen supply chain integrity, enhance labor standards across all three nations, and create clear pathways for technological innovation.
What’s at stake extends far beyond the automotive sector. The current tariff situation represents more than a policy challenge; it’s a defining moment for North American economic architecture. While tariffs create immediate disruptions, they also reveal the fundamental need for institutional innovation.
The North American Industrial Coordination Council proposed in my forthcoming research represents precisely this kind of innovation: a permanent framework with specialized divisions to align industrial strategies, enhance supply chain resilience, coordinate technology development, and harmonize workforce approaches. Without such coordinated mechanisms, North America risks continuing policy volatility cycles that undermine the manufacturing ecosystem these policies aim to strengthen.
How the three partner countries respond to this moment, with fragmentation or strategic coordination, will determine whether North America remains a globally competitive manufacturing powerhouse for decades to come.
Editor’s Note: The above guest column was penned by Dr. Daniel Covarrubias, director of Texas A&M International University’s A.R. Sanchez, Jr. School of Business Texas Center for Economic and Enterprise Development. The column appears in the Rio Grande Guardian International News Service with the permission of the author. Covarrubias can be reached by email via: dcova@tamiu.edu
The post Covarrubias: Taxing Value Chains: Auto Tariffs in an Integrated North American Market appeared first on Rio Grande Guardian.
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