Impact of Trump's Proposed Tariffs on European Auto Manufacturers

Donald Trump’s proposed tariffs on imports from Mexico could significantly impact European auto manufacturers, such as Volkswagen and Stellantis, potentially causing more harm than direct tariffs on European goods. Analysts and experts warn that these tariffs could disrupt the automotive supply chain and alter how companies manufacture vehicles.

Upon taking office, Trump indicated he would impose a 25% duty on imports from Canada and Mexico until they took stricter measures against drug trafficking and immigration issues. This approach raises concerns about violating the existing free-trade agreement between the three countries.

If these tariffs materialize, they could jeopardize the operations of global automakers in Mexico. Many companies established factories there to benefit from the lower labor costs and proximity to the United States, an important market for car sales.

In light of the tariffs, some automotive companies might consider expanding operations within the U.S. instead, moving production away from Mexico.

European luxury car brands without manufacturing presence in the U.S. or Mexico will be closely monitoring the situation, particularly if Trump resorts to imposing tariffs on European imports. Such measures would likely lead to increased prices for U.S. consumers of those vehicles.

Major European car manufacturers active in Mexico include Stellantis and Volkswagen, both of which saw their stock prices decline by 4.7% and 2%, respectively, following the tariff announcements.

Analysts at Bernstein noted that the uncertainties surrounding Trump’s tariff threats offer automakers and their suppliers very little time to adapt to potential supply chain shifts. They emphasized that the implications for U.S. automakers due to tariffs on Mexican and Canadian imports are substantial enough that these announcements may be more about negotiation than finality.

The automotive sector is already facing various challenges, such as a decrease in consumer demand, escalating manufacturing costs, delays in transitioning to electric vehicles, and intensified competition from Chinese brands like BYD.

Mexico is critical for the U.S. auto industry, with the country supplying nearly as many vehicles to the U.S. as Europe does, but delivering four times more in parts. Statistics show that 80% of cars exported from Mexico from January to July 2023 were destined for the U.S., totaling about 1.57 million vehicles.

For Stellantis, a leading global carmaker, even a slight increase in tariffs on Mexican imports could lead to pre-tax profit losses of approximately 160 million euros for every 1% duty imposed, potentially affecting long-term projections by about 1.4%.

Should tariffs be enacted, Stellantis has indicated a willingness to alter its future strategies in lower-cost locations like Mexico. The company operates two key assembly plants in Mexico: one in Saltillo producing Ram pickups and vans and another in Toluca for the Jeep Compass.

Currently, existing tariffs on products exported from Mexico to the U.S. range from 0% to 2.5%, depending on the components' origin.

According to analysts from Stifel, around 65% of the cars that Volkswagen sells in the U.S. would lose their competitive edge if new tariffs on imports from Mexico are imposed.

Volkswagen's Puebla factory is the largest in Mexico, producing approximately 350,000 cars for U.S. export in 2023, including popular models like the Jetta, Tiguan, and Taos. In fact, the import volumes from Mexico for Volkswagen U.S. are about ten times higher than those from Europe this year.

Both Volkswagen and Stellantis refrained from commenting on these issues.

Potential Mitigations and Future Scenarios

Automakers and suppliers are currently evaluating various scenarios while the outcome remains uncertain. Nick Klein, a vice president at global logistics firm OEC Group in Chicago, noted that Trump's history suggests he might use tariff threats as leverage, making it hard to predict his actual decisions.

Some companies are positioned to increase U.S. production, which could help mitigate the impact of any new tariffs. However, expanding production poses a financial challenge amid decreasing automotive demand.

Manufacturers such as Mercedes-Benz and BMW could ramp up production at their U.S. plants, but launching new models would necessitate considerable investments in equipment. Both companies already export a substantial number of vehicles from the U.S., making them eligible for tariff rebates under certain conditions.

In 2023, more than half of the 410,793 vehicles produced at BMW’s South Carolina plant were exported, and CEO Oliver Zipse mentioned that some could be redirected to local sales.

There has been a marked increase in U.S. protectionism since Trump’s presidency and continuing into Biden’s administration, and disturbances in the supply chain due to the COVID pandemic have prompted many suppliers to invest in U.S. manufacturing plants.

European automakers and suppliers have been significant players in U.S. investments, especially in states like South Carolina, which typically supports Trump's Republican Party. Since 2006, European investments have reached $12 billion, accounting for 58% of the total automotive investments in the state, compared to only $3.8 billion from U.S. companies.

Notably, about 40% of the leading suppliers in the state are German or French firms. Continental, with facilities in Mississippi, Ohio, South Carolina, and Illinois, emphasizes a principle of producing locally for the local market. The company's CFO, Olaf Schick, confirmed ongoing investment plans in the U.S. regardless of presidential changes.

Trump, Tariffs, Automotive