Shares of U.S., Asian and German automakers tumbled on Friday after President Donald Trump threatened to slap tariffs on imports from Mexico starting next month, potentially upending a decades-old business model of global manufacturers.
Railing against a surge of illegal immigrants across the southern U.S. border, Trump said he would hit all goods coming from Mexico with a 5 percent tariff, and would increase the duty each month until it reaches 25 percent on Oct. 1, unless Mexico takes immediate action.
The duties could hit a number of global companies -- including American, European and Asian companies -- with the auto industry looking particularly vulnerable. For years carmakers have built vehicles in Mexico, taking advantage of its cheap labor, trade deals and proximity to the United States, the world's largest auto market after China.
The move by the White House also looks also likely to backfire on U.S. consumers, driving up the prices of goods as varied as cars, refrigerators and television sets.
"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.
"The unknown factor is the impact on suppliers, as components can move back and forth between Mexico, the United States and Canada up to 20 times before they make their way into assembled cars."
Detroit reactions
However, other analysts said tough competition and slowing demand for vehicles would likely force manufacturers to eat much of the added cost. That in turn could force more cost-cutting by auto sector manufacturers.
"If these tariffs are enacted, everyone loses," Jessica Caldwell, executive director of industry analysis at Edmunds, said in a an e-mail. "Trump talks a lot about supporting the U.S. auto industry, but the Detroit automakers will be hurt the most by this. Profits from vehicles like the Silverado keep GM's lights on, and if you start to put that at risk, it could be disastrous considering they're already in cost-cutting mode.
"With the average price of a new car already at record highs, car shoppers will really feel the pinch if costs rise even a little higher. The good news for shoppers is that there's a glut of affordable off-lease used cars on dealer lots waiting for a new home, but that's not exactly good news for automakers."
Major trade groups that represent the Detroit 3 automakers and global automakers with U.S. operations criticized the proposed tariffs in statements Friday.
"Any barrier to the flow of commerce across the U.S.-Mexico border will have a cascading effect – harming U.S. consumers, threatening American jobs and investment," David Schwietert, interim head of the Alliance of Automobile Manufacturers said in a statement that called tariffs a tax on consumers.
Auto trade groups also expressed concern that a tariff war with Mexico would undermine efforts to win congressional approval for a new U.S., Canada and Mexico trade agreement negotiated by the Trump administration.
Some companies still hope Trump will reverse course, auto executives said.
The Motor & Equipment Manufacturers Association warned U.S. governors, members of Congress and the White House that the tariffs "will only serve as an additional tax on the American people by increasing the cost of goods and putting jobs and investment in the U.S. at risk. In short, this action will undermine U.S. economic stability."
The industry has taken a series of trade hits since Trump took office in January 2017.
"It isn’t just this one thing; it is the cumulative impact of trade policies that are challenging the industry right now," said John Bozzella, who heads an auto trade group representing major foreign automakers.
Automakers shipped 2.52 million vehicles to the United States from Mexico in 2018, accounting for about 14.6 percent of total U.S. car and light truck sales, according to IHS Markit, a consulting and market research firm.
Critical models imported from Mexico include GM’s Chevrolet Silverado and GMC Sierra and Fiat Chrysler’s Ram full-size pickups, the industry’s most profitable vehicles; Toyota Tacoma midsize trucks; and sedans including Nissan Motor Co.’s Versa and Sentra, Volkswagen’s Jetta and the Mazda3.
“Tariffs will mean higher price tags on cars for sales in U.S. and that will hit sales,” said Seiichi Miura, an analyst at Mitsubishi UFJ Morgan Stanley. “While the impact will differ for each carmaker, all of them have moved into Mexico.”
The latest blow in the trade disputes adds to a month that has trimmed 12 percent from the 24-member S&P Supercomposite Automobiles and Components Index, shaving about $20 billion in market value in May through Thursday. It was on track to be the worst month for the sector since December’s 14 percent slump, although Friday’s declines could push the group beyond that.
Citi analyst Itay Michaeli sees tariffs having a bigger impact on GM than on Ford, due to its higher production in Mexico on higher-margin vehicles. A 5 percent tariff could become a “several-hundred-million-dollar” hit to annual earnings for GM, he said. GM shares closed down 4.3 percent, Ford slipped 2.4 percent and Fiat Chrysler dropped 5.8 percent on Friday.
In the supply chain, Delphi Technologies was among the biggest losers, falling 7.2 percent. Aptiv slipped 6.7 percent. Adient and Goodyear Tire & Rubber dropped as well. Michaeli also named American Axle, Lear, Magna International and Visteon among suppliers with the biggest exposure to Mexico.
"Several suppliers have Mexico exposure exceeding 25 percent of revenue, while several are near/below 10 percent of revenue," analysts from Baird wrote in a report on Friday.
Trade wars
The duty on Mexico goods represents Trump’s latest expansion of his trade wars. It comes just days after he removed steel tariffs on Mexico that had caused retaliation against U.S. farm products.
It also marries two of his signature issues -- trade and immigration -- as he ramps up his campaign for re-election in 2020.
To impose the potential tariffs, Trump said he’s invoking authorities under the International Emergency Economic Powers Act, a tool that’s used to impose Treasury sanctions. Analysts and lawyers raised questions about the legality of using it in this context.
“This is a misuse of presidential tariff authority and counter to congressional intent," Sen. Chuck Grassley, R-Iowa, said in a statement. "I support nearly every one of President Trump’s immigration policies, but this is not one of them."
White House moves
The tariff move came the same day that Trump presented notice to Congress to pass his renegotiated version of the North American Free Trade Agreement, which has allowed tariff-free trade with Mexico and Canada since it came into effect in the 1990s.
Rufus Yerxa, president of the National Foreign Trade Council, a business group representing U.S. companies, said the move was a huge blow to the American economy and casts serious doubt on passage of the new trade deal. “There goes USMCA!” he said. “What trading partner is ever going to trust this administration to honor deals?”
The administration said Thursday’s plan to increase tariffs on its southern neighbor was not linked to Trump’s replacement of NAFTA, the United States-Mexico-Canada Agreement, which the White House is presenting as his No. 1 legislative agenda item.
Acting White House chief of staff Mick Mulvaney said on a call with reporters late Thursday that the potential tariffs aren’t part of a trade dispute but about the immigration problem. He added that if the White House finds enough cooperation from Mexico over the coming weeks, the tariffs will either not take effect or will be lifted swiftly.
Japan automakers
In Japan, shares in Toyota Motor Corp. fell 2 percent while Nissan Motor Co. dropped 5 percent and Honda Motor Co. nearly 4 percent. Mazda Motor Co. took a bigger hit, tumbling nearly 7 percent. All four operate vehicle assembly plants in Mexico, producing roughly one-third of the vehicles made there.
Shares in German automakers also extended losses in Frankfurt on Friday. BMW AG, Daimler AG and Volkswagen Group, which have plants in Mexico to take advantage of lower labor costs and U.S. trade deals with its southern neighbor, were down by as much as 2.9 percent in morning trading.
A spokesman for VW subsidiary Audi said the company was watching developments very closely but it was too early to speculate on outcomes.
Analyst Arndt Ellinghorst described German carmakers as particularly exposed, noting BMW's new plant at San Luis Potosi represented nearly 20 percent of its production for North America.
An auto industry source told Reuters the situation was puzzling in that the migration issues belonged on the political stage and came despite an update to NAFTA.
It also came as the EU and the United States are working to avoid an escalation in trade conflicts. Trump, citing national security concerns, has also explored U.S. tariffs on Asian and European light vehicles to rebalance what he sees as major trade deficits with Germany and Japan.
"The U.S. trade policy has taken a qualitatively different turn. Using tariffs as a tool for non-economic goals is something which brings a new quality to proceedings," Commerzbank strategist Ulrich Leuchtmann said.
If the U.S. imposes the tariffs, it will be violating NAFTA as well as World Trade Organization commitments, said Kenneth Smith Ramos, who was Mexico’s chief negotiator for the USMCA when it was negotiated with the U.S. and Canada last year.
“Under NAFTA you cannot increase tariffs unless there are trade remedy investigations or something that is allowed under the agreement,” he said. “So it would be a clear market access violation.”
Autos, nuclear reactors
Vehicles and parts were the biggest imports from Mexico to the United States, totalling $93.3 billion in 2018, followed by electric machines, nuclear reactors, minerals and oil, and optical equipment, according to U.S. government data.
In South Korea, Hyundai Motor Co. and affiliate Kia Motors Corp. shares fell 0.7 percent and 4.2 percent respectively. Hyundai Wia Corp., which supplies auto components to the duo, tumbled 6.2 percent.
"Although we have to wait and see whether the U.S. tariffs plan will be really implemented, this is negatively affecting investor sentiment," said Chang Moon-su, an analyst at Hyundai Motor Securities in Seoul.
Another South Korean manufacturer, LG Electronics Inc., said nearly all of its television sets made in Mexico are shipped to the United States, and about a third of its refrigerators.
"As the United States is a crucial market for us, we are closely monitoring this tariff issue," a company representative told Reuters.
Mexico reacts
Mexico's president said he would respond with "great prudence" to threats by Trump to slap tariffs on Mexican goods entering the United States, and called on Mexicans to unite to deal with the challenge.
Speaking at his regular news conference on Friday, President Andres Manuel Lopez Obrador said Foreign Minister Marcelo Ebrard would be in Washington to convince the U.S. government that Trump's measures were in neither country's interest.
