Introduction
US President Donald Trump is assessing a 25% tariff on all goods from Canada and Mexico. While this would impact all industries, S&P Global Mobility looks at the specific impact on vehicle assembly.
President Trump has said the tariff could be applied as soon as Feb 1, 2025, though this timeline seems unlikely. At time of writing, the latest intelligence suggests a more measured approach may still win out, though tariffs could be applied by spring 2025.
Regardless of timing, these blanket tariffs would have a massive impact on the auto industry. It is also likely that Canada and Mexico will reciprocate through an equal or ‘representative’ tariff. Though there is no indication of what that retaliation might look like at this time, we could see another degree of complexity if these countries imposed their own tariffs on automotive components imported from the US and used in Canadian or Mexican assembly.
From a trade perspective, the move is likely to bring early changes to the USMCA trade agreement — and make those changes more favorable to the US. The USMCA trade agreement is due for review in July 2026.
There are approximately 5.3m light vehicles built in Canada and Mexico, with about 70% of these destined for the US. Further, many US-built vehicles use Canadian or Mexican-sourced propulsion systems and component sets; those components would see a tariff as well, increasing costs for vehicles produced in the US. Virtually no OEM or supplier operating under the USMCA is immune.
Current situation
The current tariff-free structure stems from successive trade agreements starting in 1965 with Canada and including Mexico in 1994 with NAFTA, which evolved into USMCA in 2020. Free trade has created a streamlined production ecosystem among the three partners. Customers and the industry benefit from zero tariffs if specific North American value-add criteria are met. For decades, a largely stable environment has enabled a trading ecosystem to evolve.
In 2024, the US imported some 3.6m light vehicles from Canada and Mexico, representing 22% of all vehicles sold in the US. Mexico is currently the largest source of US light-vehicle imports, passing Japan, South Korea and all of Europe.
Vehicle production in Mexico and Canada has been a significant part of sourcing strategies for several automakers for decades. Ford and GM have been producing vehicles in Canada and Mexico for around 100 years, Volkswagen has been producing vehicles in Mexico since 1967 and Nissan since 1992. Toyota and Honda have also been producing vehicles in Canada since the mid-1980s, each opening plants in Mexico this century. Automakers and suppliers produce components throughout the region, with engines among the higher cost-impact items. Over the years, production in Canada has waned while production in Mexico has increased, though both are significant in the ecosystem. Regardless of automaker, in 2024, S&P Global Mobility estimates that about 54% of US light vehicle sales were produced in the US, 15% in Mexico and just under 7% from Canada.
The automakers with the longest history of vehicle production in Mexico also see that capacity more deeply integrated. Mexico is an attractive sourcing option for Detroit-based OEMs, as well as for Volkswagen. In 2024, about 23% of Stellantis sales were sourced from Mexico, while GM sourced 22% and Ford just under 15%. Beyond the D3, Nissan sources about 27% of its US sales from Mexico, Honda nearly 13%, and Toyota and Hyundai at 8% each. Volkswagen is the most exposed to tariff risk, with over 43% of its US sales sourced from Mexico.
Scenario
Here we presume the US introduces a 25% tariff on Canadian and Mexican value add, though timing is uncertain. All vehicles and components moving from Canada or Mexico to the US would face this tariff on value added outside the US. Canada and Mexico are likely to implement tariffs in response. In this scenario, tariffs apply only to the manufactured value of the component or vehicle added outside the US, not the final customer-facing MSRP.
A 25% duty on the average $25,000 landed cost of a vehicle from Mexico and Canada would add $6,250. Importers are likely to pass most, if not all, of this increase to consumers. With average vehicle prices near all-time highs, this additional tariff would put further strain on affordability. If components and parts are also subject to the 25% tariff, vehicles produced in the US with any components sourced from Canada or Mexico would also see costs rise by 25%. Given the free flow of components across borders, the tariff would impact most vehicles produced in the US as well.
Impact on automaker production
S&P Global Mobility sees automaker exposure in three broad levels. Vehicles produced in the US with US-sourced powertrains and propulsion systems (among the most expensive components) will have the least exposure, clearly. Vehicles built in the US will have another level of exposure; examples here include the Ford F-Series pick-ups and Mustang cars with engines from Canada, as well as the Mazda CX-50 which sources engines from Mexico. Vehicles at significant exposure risk are those built in Canada or Mexico, particularly high-volume products where automakers have little opportunity for re-sourcing. Among the vehicles in that category are full-size pick-up trucks from GM and Stellantis, as well as the Toyota RAV4.
Impact on suppliers
Supplier impact can also be significant, and this will increase vehicle prices to consumers in indirect, nontransparent ways. We could see automakers pull back production on tariffed vehicles; similar to the reaction to the semiconductor shortage and other Covid-related supply chain shortages, some automakers could slow production until sales are lost due to lack of product. Reducing production affects supplier sales and contracts.
OEMs may serve as the main support for tariff exposure since many smaller tier 1 and tier 2 suppliers lack the capital to cover ongoing tariffs without help from their customers. Some suppliers may invoke Force Majeure, refusing to supply parts if they are not quickly compensated for tariff costs. However, many OEM tier 1 supplier contracts likely follow ex-works or free carrier (FCA) incoterms, where parts are delivered to a local site and the OEM pays duties to export the supplier’s parts to the final assembly location. In that case, force majeure would not apply and automakers would need to pay the tariff. Consequently, the impact is more likely to affect smaller suppliers working with Tier 1s.
Summary
A tariff against Canada and Mexico could significantly disrupt the economics of the region, even if lower than the 25% being considered. Among the open questions will be how long the tariff might be in play; given the justification is related to immigration and stopping the flow of illegal drugs, what metrics will be in place for Canada and Mexico to meet to see the tariff lifted again? Our assumptions remain true whether the tariff is enacted on February 1 or later. It is also possible that the tariff is tabled and worked into a larger renegotiation of the USMCA free trade agreement. However, some level of tariff being deployed against Canada and Mexico seems to inch closer toward reality.
