President Donald Trump's announcement by Twitter last week that he was imposing a 5 percent tariff on all goods from Mexico starting June 10 set the auto industry back on its heels, pushed automotive stock market prices lower and triggered a new round of market worries.
The move, intended to nudge the Mexican government to get tougher on illegal immigrants streaming across the U.S. border, would affect billions of dollars worth of U.S. dealership-bound cars and trucks, in addition to a river of Mexican-made auto parts and materials. The U.S. imported nearly $60 billion in auto parts from Mexico last year.
Trump further vowed that the tariff would grow each month to 25 percent by Oct. 1.
In an analysis of the U.S. industry's exposure to the tariff, Deutsche Bank estimated that, if the penalty rises to the full 25 percent, General Motors would take a $6.3 billion hit before interest and taxes; Fiat Chrysler Automobiles' hit would be $4.8 billion; and Ford Motor Co.'s would be $3.3 billion.
Mexico-made vehicles account for about 15 percent of U.S. light-vehicle sales, or about 2.5 million vehicles annually, according to LMC Automotive.
The effect on BMW would be much smaller, but the timing is particularly acute. The German luxury maker is just launching a $1 billion assembly plant in San Luis Potosi, Mexico, to support U.S. sales. Production of the seventh-generation 3-series sedan began at the plant in April.
Juergen Pieper, head of automotive research at Bankhaus Metzler, told Bloomberg last week that he expects BMW to ramp up slower than originally planned now.
The auto industry can weather a short-term 5 percent tariff without much impact on sales, but if the tax increases to 25 percent, the effect could be substantial, warned Jeff Schuster, LMC's president for global forecasting.
"The proposed tariff could send OEMs scrambling trying to make short-term adjustments to sourcing, which would be difficult," Schuster said.
With U.S. new-vehicle demand softening, automakers have limited wiggle room to pass the tariff onto customers via price hikes.
"That means lower margins, less investment and r&d spending," said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research.
The tariff also could complicate passage of the United States-Mexico-Canada Agreement.
"If there's no USMCA and virtually no benefit from [the North American Free Trade Agreement], or a withdrawal, that could mean more of a move by business to other low-cost countries," Dziczek said. "I don't see how these tariffs incentivize a big move back to the U.S."
Some automakers are more exposed to the latest trade wrinkle. The Detroit 3 represent more than half of the volume coming from Mexico. Most impacted would be General Motors — the largest automaker in Mexico.
Nissan makes the most vehicles in Mexico among Japanese automakers. Exports from Mexico to the U.S. account for about one quarter of its U.S. vehicle sales.
The proposed tariff, which has been called for under the International Emergency Economic Powers Act, Dziczek said, could get pushback from the courts and Congress. "The act has never been used in this manner," she said. "So the legality will be tested."