On March 4, tariffs of 25 percent are scheduled to be placed on imports coming into the United States from Canada and Mexico, our geographic neighbors and major trading partners. One industry that will face significant impacts from this is the American auto industry, composed of Ford Motor Company, General Motors, and Chrysler. Although Ford, GM, and Chrysler vehicles are assembled in the United States, they contain a significant amount of parts made in Canada and Mexico.
Foreign automakers with factories in the U.S. are also major consumers of Canadian- or Mexican-made parts. Some models of cars made in the United States have up to 75 percent of their parts made in Mexico! In total, approximately ⅓ of the value of domestic automobiles comes from Mexican parts and labor. Another surprising fact for most American consumers is that many car models, including domestic models, are actually made in Mexico and then imported across the border. Therefore, your Ford Bronco may not be “made in America,” and your Honda CR-V may actually be made in Mexico rather than in Japan.
Auto Supply Chain is a Major Industry in Canada and Mexico
Mexico is the fourth largest producer of automobile parts in the world, and is the largest foreign source of auto parts for the U.S. market. Because of this, the proposed 25 percent tariffs will have a significant economic impact on auto manufacturers here at home. Although Canada’s auto parts industry is not as large as Mexico’s, it is still a major source of parts for domestic automakers. Canada’s auto parts industry is growing and has largely recovered from its Covid-era slump in revenue. Like Mexico, Canada is also host to American and foreign auto factories and ships these assembled vehicles across the border.
The auto parts industries in Canada and Mexico have grown so large thanks to the effects of the North American Free Trade Agreement (NAFTA), which was created during the 1990s. This trade agreement reduced trade barriers like tariffs and instituted a free trade bloc in North America. While it gave consumers in all three countries easier access to imported goods from the other two members, critics blamed NAFTA for hurting workers by outsourcing their jobs to lower-cost countries – namely, Mexico. Both progressives and conservatives in the United States have criticized NAFTA for allowing the outsourcing of higher-paying American jobs to maquiladora factories south of the border.
Tariffs Could Reshore Auto Parts Manufacturing
Fortunately, there is a solid foundation for reshoring, or bringing back to within the United States, auto parts manufacturing. Despite the American auto industry’s reliance on imported parts, significant parts-making capacity exists within the U.S. The transition may also be eased by the fact that the growing electric vehicle (EV) market contains more domestically-sourced parts than traditional gas or diesel vehicles. Domestic automakers may be spurred to invest more in EV production by the tariffs, reducing reliance on imported gas and diesel vehicle parts from Canada and Mexico that way. Hopefully, the imposition of tariffs on car parts from Canada and Mexico will result in a major employment boost for workers in the American auto parts industry!
