March 16, 2025
President Trump repeatedly suggests automakers avoid tariffs by moving production to American factories. However, as pointed out in a CNN article, the reality is far more complicated. Despite claims that shifting production to the US is a straightforward solution, automakers face significant challenges that make such a move anything but simple.
The Tariffs Dilemma for the Auto Industry
A wave of tariffs has already begun to affect the auto industry, with more on the horizon. A 25% duty on steel and aluminum imports recently went into effect, and levies on cars from Asia and Europe are set to follow in April. Additionally, import taxes on goods from Canada and Mexico, including cars and auto parts, have been announced, delayed, and are now expected to be implemented on April 2. These tariffs would add thousands of dollars to the cost of building and buying new cars, creating a ripple effect throughout the industry.
The Trump administration has urged automakers to avoid these tariffs by increasing production in the US. White House Press Secretary Karoline Leavitt recently stated that the ultimate goal is for automakers to shift production to the US, where they would pay no tariffs. However, the administration’s suggestion that this shift can be achieved quickly and without consequences is inaccurate.
The High Costs of Tariffs
Automakers are already feeling the strain of Trump’s tariff policies. Ford CEO Jim Farley described the situation as causing “a lot of cost and a lot of chaos.” Despite these pressures, automakers are not rushing to build new plants in the US, at least not for many years. One major reason is the lack of certainty surrounding trade policies. The on-again, off-again nature of tariff announcements makes it nearly impossible for companies to commit to costly long-term investments in new facilities.
General Motors CFO Paul Jacobson highlighted this uncertainty, noting that automakers need clarity before deciding where to allocate resources or move plants. “Those are questions that just don’t have an answer today,” he said. The unpredictability of trade policies makes it risky for companies to invest billions of dollars in new plants, only to have tariffs lifted shortly after.
Even without immediate impacts, the long-term costs are significant. Steel and aluminum prices have risen sharply, with American steel prices up 30% or more in the last two months and aluminum prices up about 15%. These increases will soon affect automakers, even if they source materials domestically, as suppliers pass on higher costs.
The Complexity of Shifting Production
Shifting production to the US is not as simple as it sounds. Switching a factory to produce a different model can shut down production for a year or more. Building a new factory from scratch takes years, and reopening a closed plant is no small feat. For example, Stellantis, the company behind brands like Jeep, Ram, Dodge, and Chrysler, agreed to reopen a shuttered plant in Belvidere, Illinois, as part of a deal to end a 2023 strike by the United Auto Workers. However, the plant won’t reopen until 2027.
Despite Trump’s claims that tariffs are necessary to “save” the US auto industry, American factories already produce most North American vehicles. Last year, US assembly plants built 10.2 million cars, compared to 4 million in Mexico and 1.3 million in Canada. Asian or European brands like Toyota, Honda, BMW, and Volkswagen build many cars in the US. These companies do so not because of tariffs, but because producing vehicles near where they’ll be sold is more cost-effective. US companies also build them in the other countries to be close to those markets.
The Risk of Losing Affordable Models
Some vehicles built in Mexico, such as the Jeep Compass and Ford Bronco Sport, are lower-priced models with thinner profit margins. Producing these vehicles in the US using higher-paid workers or continuing to build them in Mexico and paying a 25% tariff, could make them too expensive for consumers. Automakers might stop offering these models altogether, reducing options for car buyers and potentially costing American jobs. Even cars built in Mexico often contain American-made parts, so reducing production in Mexico could also hurt US suppliers.
The Myth of the All-American Car
According to the Anderson Economic Group, even if automakers open new factories or increase production in the US, tariffs would still raise the cost of “American” cars by $3,000 to $12,000 per vehicle. These costs would then be passed on to consumers, making cars less affordable and likely reducing demand. The result would be fewer cars produced and fewer jobs in the auto industry.
The North American auto market has long operated as a single entity, first under NAFTA and now under the USMCA trade deal. Automakers move parts freely across borders, sometimes seven times before final assembly. Mexico exports $82 Billion worth of auto parts to the US while Canada exports $19 Billion. US parts manufacturers, which employ more than twice as many workers as assembly plants, also ship $36 Billion in auto parts to Mexico and $28 Billion to Canada. Tariffs that disrupt this flow of parts could cost hundreds of thousands of American jobs.
No New Plants on the Horizon
Despite Trump’s claims that automakers plan to open new US plants, the reality is more nuanced. While some plants are under construction, they are partly funded by federal assistance from the Inflation Reduction Act, a green energy bill passed during the Biden administration. Honda, for example, recently decided to build the next generation of its Civic model in Indiana rather than Mexico, citing the threat of tariffs. However, Honda has had a plant in Indiana since 2008, and the decision to keep production there doesn’t represent a significant shift in strategy.
Automakers are cautious about long-term investments in new facilities, especially if tariffs disrupt the industry. Ford’s Jim Farley warned that a 25% tariff on Mexican and Canadian imports would “blow a hole in the US industry that we’ve never seen.”
Conclusion
While the Trump administration has framed tariffs as a way to boost US auto production, the reality is far more complex. Automakers face significant challenges, from rising material costs to the difficulty of shifting production. Tariffs could lead to higher car prices, fewer affordable models, and job losses across the industry. For now, automakers are treading carefully, unwilling to make major investments without more certainty about the future of trade policy. The auto industry’s tariff dilemma is far from resolved, and the road ahead is anything but smooth. Investors too should tread cautiously.