Continued tariffs on a productive and well-integrated North American industry create a lose-lose scenario.
US-Mexico trade negotiations face new challenges as disagreements over tariffs on cars, steel, and aluminum impede efforts to reach an agreement ahead of the review of the United States-Mexico-Canada Agreement (USMCA).
According to a Wall Street Journal report from October 15, negotiations have slowed because US Commerce Secretary Howard Lutnick has opposed significantly reducing tariffs on Mexican vehicles and metals.
The two countries had reportedly been moving toward an agreement that would ease certain US tariffs in exchange for concessions from Mexico. However, disagreements over the proposed reductions have slowed considerably.
The USMCA greatly benefits the US auto sector and the wider $280 billion North American auto industry substantially. The main benefit is preferential market access. Another benefit is regional sourcing incentives whereby the principal regional value-content requirement (75 percent) encourages purchases from North American suppliers.
Another USMCA asset is support for higher-wage production. Labor-value-content requirements of 50–45 percent tied to an average wage of at least $16 an hour for qualifying activities encourage USMCA partner production and research. Finally, regional demand for materials is another benefit. Most notably, at least 70 percent of a producer’s steel and aluminum purchases by value must originate in North America.
That said, current tariffs harm US automakers in several important ways.
First, it taxes their own Mexican production. An American brand receives no exemption simply because its headquarters are in the United States. The US importer pays the duty and must absorb it, negotiate cost reductions, or pass some of it to buyers. For example, consider a $40,000 vehicle assembled in Michigan that contains $8,000 in Mexican components. A tariff on those components raises the manufacturer’s input cost even though final assembly occurs in the US and employs American workers.
Second, the tariffs compress margins or force auto companies to raise prices. Absorbing the tariff reduces earnings, while passing it through raises purchase prices or lease payments and could reduce sales. Lower-priced models have less room to absorb several thousand dollars of additional cost. In short, it can raise US assembly costs. (One should note, too, that American factories using nonqualifying covered Mexican parts face additional costs).
If tariffs reduce Mexican vehicle production, American companies supplying those factories can lose orders. The $35.8 billion in US parts exports to Mexico shows why a tariff aimed at Mexican assembly can also affect American manufacturing. It forces expensive production changes.
Moving a model requires tooling, supplier capacity, plant preparation, and validation. Automakers can increase US production over time, but the tariff bill arrives before they can complete those adjustments.
The financial burden is already visible. General Motors reported an approximately $3.1 billion bill in 2025. According to the Center for Automotive Research, a 25 percent tariff on vehicles and parts would add $107.8 billion in costs for US automakers.
General Motors, Ford, Stellantis, Tesla, and many foreign-branded manufacturers operate within deeply integrated North American production networks. Because vehicles and components can cross borders multiple times, an unrelieved 25 percent tariff can create a cascading cost effect rather than a one-time, easily contained charge. US parts manufacturers can lose export business when Mexican assembly plants reduce output, even if they don’t import finished automobiles themselves.
At present, US-Mexico trade relations are on hiatus. During the joint review in July, the United States declined to extend the USMCA, the NAFTA replacement, for 16 years because of growing trade deficits and a push for stricter trade terms.
This impasse leaves automakers with four choices: absorb the tariff and accept lower margins; raise vehicle prices and risk losing sales; replace the Mexico supplier, potentially at a higher underlying cost; or invest in new US capacity, which requires capital and several years of adjustment.
Except in clear national-security cases, tariffs are unjustified, irrational, and self-defeating impediments to global commerce. US-North American auto trade is a vivid and costly reminder.
About the Author: Jerry Haar
Jerry Haaris a business professor at Florida International University and a fellow at both the Baratta Center for Global Business Education at Georgetown University and New York University’s Development Research Institute. He is the co-author, with Ricardo Ernst and Santiago Gutierrez, of Winning in the New Global Business Landscape.
Region:North America
Topic:Trade
Tags:Automotive Industry, Canada, Mexico, Tariffs, United States, US-Mexico Relations, US-Mexico-Canada Agreement (USMCA)
