If the deal goes through, expect cars to get a lot more expensive.
All it took was a statement from president Trump to send car company stocks plummeting. The statement we speak of is one that outlines a 5% tariff the president wants to impose on all goods coming in from Mexico beginning on June 10th and increasing in increments of 5% each month until Trump is satisfied that Mexico has done its part to halt illegal immigration. The tariff hikes would stop in October after reaching a maximum of 25%.
Mexican President Andres Manuel Lopez Obrador has reached out to Trump calling for talks before the tariff is put in place. But if the talks fail and the US' new round of tariffs begin, they would put Trump's own USMCA trade deal in jeopardy and cause a massive upheaval in the auto industry, especially since many carmakers that sell vehicles in the US build those cars in Mexico. As Reuters reports, the threat of the tariffs alone was enough to put the industry's finances into question.
Carmakers around the globe, from the heavyweights like Volkswagen, General Motors, and Daimler to smaller manufacturers like Mazda, lost billions of dollars in combined market value during a stock sell-off spurred by fears of a "new front in the global trade war."
Mazda alone lost 6.3% of its value, Toyota lost almost 2%, and Fiat Chrysler's 5.3% drop erased much of the value it gained after the news it could be on the verge of merging with Renault. Trump tweeted that the tariffs could end up being a good thing, saying "In order not to pay Tariffs, if they start rising, companies will leave Mexico, which has taken 30% of our Auto Industry, and come back home to the USA," he wrote. But the analysts don't see it that way.
They estimate that the taxes on cars and car parts coming in from Mexico could cost automakers and suppliers $23 billion or more (about half of GM's market cap alone) when considering the cost of disrupting supply chains, moving factories, and training new workforces. That's an amount that "could cripple the industry," according to Deutsche Bank's Emmanuel Rosner.
So how will automakers respond? "Margins are so thin in the U.S. market right now that there's no way that any automaker is not going to pass on these tariffs to their customers," said Janet Lewis, an analyst at Macquarie Securities. That means that car buyers could potentially be stuck paying 25% extra for an automobile if it's imported from Mexico, or even for have to pony up more cash to buy US-built vehicles if they contain parts made in Mexico.
While we'll have to wait to hear more details about the tariff and see if Lopez Obrador can talk Trump out of it, what is obvious is that this is bad news if you're an auto manufacturer. Especially since this squeeze comes at a time where carmakers are already proposing mergers and cutting costs in order to survive the shift to electrification.