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President Trump’s trade war risks raising the prices of new and used cars and putting America’s auto industry on its heels.
The Big Picture
Ah, the car. Gas fumes: the perfume of freedom for 16-year-olds everywhere. That time-honored tradition may become out of reach for many teenagers with President Trump’s newly proposed tariffs on Mexico and Canada. So much for the US-Mexico-Canada Agreement (USMCA) negotiated under Trump’s First Administration. Which was the amendment to the original North American Free Trade Agreement (NAFTA) signed under the Clinton administration.
For the record, Paul Krugman, Milton Friedman, Karl Marx, and Friedrich Hayek, each representing vastly different economic schools, agreed that tariffs are a bad idea.
The Independent Center’s polling is clear: independent voters rank affordability as their primary concern. This issue propelled President Trump to his second term. Be that as it may, we are about to see a lot of goods become less affordable, especially as Canada and Mexico implement retaliatory measures. We’ve already seen Canadian PM Justin Trudeau announce tariffs on some goods, with more to follow. At the same time, Ontario's Premier (like a governor) has doubled down on a provincial response, which could include an end to electricity exports to Michigan, New York, and Minnesota.
Mexican President Claudia Sheinbaum is still mulling over her response but has announced that details will be revealed soon. Meanwhile, Chinese President Xi Jinping announced a tit for tat response, vowing to “fight to the bitter end of any trade war.” Chinese tariffs will apply across the agriculture sector and will likely hit red states harder than blue states.
Zooming In
These tariffs pose threats to the American economy as a whole, but let's go back to cars for a moment. As the symphony of a carbureted V8 plays in the background, follow me on a deep dive into how this will affect the American auto industry. In short, Cox Automotive says it’s going to be bad, The Washington Post agrees, and the AP calls the auto industry “collateral damage” in the trade war.
The Wall Street Journal Editorial Board and Senator Gary Peters (D-MI) agree that Michigan, a state Trump won (according to AP/Fox News exit polling, independents swung his way 51-39), and the Big Three (Ford, GM, and Stellantis) will be hit hard by the Trump tariffs. It won’t be easy for foreign automakers like Volkswagen, BMW, Toyota, Hyundai, and Honda either. The trade war is even going to hit smaller domestic manufacturers like Tesla, Rivian, and Lucid.
The executive order applies a 25% tax to all Canadian products, except for energy products, which are taxed an additional 10%. Meanwhile, there is no break for Mexico; it’s 25% on everything. This means steel, aluminum, and nickel have all become 25% more expensive. Steel and aluminum are essential for all sorts of parts in a car. Nickel is a primary component of making stainless steel, but it’s also INCREDIBLY important for hybrid and EV batteries.
Speaking of nickel, we import a lot of it. According to the National Minerals Information Center, we imported 53% of the nickel used in 2023. Additionally, the International Trade Administration’s US Steel Import Monitor reports that in 2024, we imported 9,146,667 metric tons of steel from Canada and Mexico, amounting to a total value of $10,633,739,328. Furthermore, the ITA’s US Aluminum Import Monitor indicates that in 2024, we imported 3,234,544 metric tons for a total value of $9,835,988,947. For steel and aluminum, these tariffs cost American consumers an extra $5 billion.
Now, the more complex part. NAFTA and the successor USMCA have allowed for an incredibly complex and symbiotic relationship to develop between the three countries. This is a very good thing. As countries become more economically linked, the less likely there is for violent conflict. Additionally, this allows each country to benefit from comparative advantage.
This trade relationship has greatly benefited from the previous free trade approach, making it common for a single part to cross a border multiple times. Moreover, it’s not a small number of parts entering the US.
Some sobering stats from the Wall Street Journal: "Mexico exports some $136 billion of vehicles and parts to such auto-manufacturing states as Michigan ($53.8 billion), Texas ($26.9 billion), Tennessee ($8.1 billion), Ohio ($2.4 billion), South Carolina ($2.2 billion) and Alabama ($1.8 billion). Canada exports $50.4 billion in vehicles and parts, with large amounts going to Michigan ($22.1 billion) and Texas ($14.8 billion)."
That’s a lot of parts going to some pretty red states. For comparison, $136 billion is about the GDP of the Dominican Republic.
Let’s take a quick peek at a couple of those states, particularly Michigan and Tennessee, which receive the highest value of parts from Canada and Mexico. What do these two states have in common? Ford. Ford has made extensive investments over its 100+ year history in the Wolverine State. The corporate headquarters is located just outside of Detroit in Dearborn. Contrary to the Journey song, there is no “South Detroit,” but there is a Windsor, Ontario, Canada. Sixteen miles away from Dearborn in Windsor are both a Ford engine plant and the Ford Canada headquarters. It wouldn’t be unusual for Global staff to regularly visit the Canadian headquarters since it’s only a half-hour drive away.
Farther south in Tennessee lies an impressive economic development project called Blue Oval City. It’s been four years in the making on a 4,100-acre site, representing a substantial investment of time and capital—$5.6 billion, to be exact. This facility will serve as Ford’s hub for electric vehicle and battery production, as well as battery recycling. Remember the nickel mentioned earlier? More than half of the nickel entering the United States comes from Canada. Battery production just became more costly for Ford and will likely pose a significant challenge for Blue Oval City, which is set to open this year. That nickel price increase will also have a considerable impact on Tesla, Lucid, and Rivian.
Examining specific models, we see that the 2024 Ford F-150 Lightning is assembled in the United States, but only 24% of its parts come from the US and Canada. Everyone’s favorite fun-sized truck, the Ford Maverick, is assembled in Mexico, featuring a 20/55% ratio of US and Canada to Mexican parts. Looking for some classic American muscle? The Mustang boasts 60% US and Canadian parts and 17% Mexican. Plus, that six-speed transmission was also made in Mexico.
Fun fact: Every 2024 Tesla ranges from 15 to 25% Mexican parts.
Independent Lens
Why does all this matter to independent voters? Easy, independents care about affordability and these tariffs are making cars less affordable. The average new car costs a staggering $44,000, which as the WSJ notes is up 25% from 2019. Now with new tariffs in place, cars are going to go up in price not down. Some estimate a modest increase, like JP Morgan of around $3,125. Others are not nearly as modest with Kelly Blue Book quoting as high as $10,000.
With basic eggs hitting a national wholesale price more than $8 a dozen, who can afford a new car at these prices when the basics are out of control? Unfortunately, the used car market isn’t going to save our wallets. While new cars are up 25%, used cars have gone up 45%! The chickens laid during the Covid supply disruption are coming home to roost. Everything is becoming more expensive, independents are focused on affordability, and Congress just sits around phoning it in.
Footnote
Full disclosure: the author owns a Ford.
