President Trump’s threat to impose new tariffs on Mexico may put further pressure on automotive supply chains, in the latest move by the administration to challenge a complex web of operations established in the decades after the North American Free Trade Agreement took effect.
Perhaps more than any other industry, U.S. carmakers have been at the center of Trump’s most significant trade actions and it's had a meaningful impact on the market performance of companies.
The Wall Street reaction to Trump's announcement on Thursday was swift, with most vehicle manufacturers and auto parts suppliers seeing their stocks sell off in in trading on Friday.
|GM||GENERAL MOTORS CO.||52.64||-0.64||-1.20%|
|F||FORD MOTOR CO.||20.39||-0.26||-1.26%|
|TM||TOYOTA MOTOR CORP.||197.70||-2.07||-1.04%|
For most of last year, car companies braced for whether the administration would seek to remove the U.S. from NAFTA.
Now, after receiving a brief reprieve once the White House lifted double-digit tariffs on steel and aluminum imports from Canada and Mexico, the sector continues to face added production costs and difficult decisions on the future of supply chains.
The White House issued the new duties – which would start at 5 percent in June and escalate to 25 percent in October – to force Mexico to help curb the crossing of undocumented individuals into the U.S. The move could face a legal challenge from business groups.
It also complicates the future of the United States-Mexico-Canada Agreement (USMCA), designed to replace NAFTA, driving even more uncertainty for carmakers who were counting on passage of the deal to firmly establish the future of the trading relationship between the three countries.
Unsurprisingly, the announcement drew immediate rebuke from the industry.
The sector "relies upon the North American supply chain and cross border commerce to remain globally competitive. This is especially true with auto parts which can cross the U.S. border multiple times before final assembly," David Schwietert, CEO of the Alliance of Automotive Manufacturers, said in a statement. "Any barrier to the flow of commerce across the U.S.-Mexico border will have a cascading effect."
|CPS||COOPER STANDARD HOLDINGS INC.||22.07||+0.50||+2.32%|
|SMP||STANDARD MOTOR PRODUCTS INC.||48.75||+1.28||+2.70%|
|AXL||AMERICAN AXLE & MANUFACTURING HOLDINGS INC.||8.19||+0.15||+1.87%|
The additional tariffs come at a critical time for the auto industry. With sales down and consumer preference shifting to sports utility vehicles and pickups, companies like Ford Motor Co. and General Motors are shuttering models and laying off thousands of workers.
As the firms move forward on their respective restructuring operations, the duties on Mexico are poised to impact the most critical supply chain operations for Ford, GM and Fiat Chrysler, the so-called “Big Three” Detroit carmakers.
Even foreign carmakers, which have begun opening manufacturing facilities in Mexico, are likely to take a financial hit.
After NAFTA was signed in 1993, the main domestic carmakers expanded their manufacturing process across Canada and Mexico in the subsequent decades. Now, the chains have evolved into a complex web where vehicles and parts are shipped between the three nations at various points of production.
It has led to a surge of auto shipments from Mexico. In 2018, for example, the U.S. imported over $85 billion in vehicles and auto parts, the highest all other trading partners.
GM sold 663,000 cars in the U.S. that were built and shipped from Mexico, or 22 percent of its total sales in the region, according to data from research firm LMC Automotive and cited by the Wall Street Journal. Among the most significant models produced in the country is the Chevy Silverado pickup truck, one of the firm’s best-selling vehicles in the U.S.
Fiat Chrysler imported roughly 18 percent of its vehicles sold in the U.S. from Mexico, while the country accounted for 10 percent of Ford’s domestic sales, according to the Journal.