Every American car factory relies on Mexican parts to build its cars or trucks. That's why President Donald Trump's threat of imposing tariffs on Mexican imports of up to 25% in October rattles the US car industry. The tariffs can increase US spending by tens of billions of dollars in the automotive industry alone.
Car buyers would probably pay the cost of these charges.
"We believe that vehicle prices would undoubtedly be passed on to consumers, which will increase the price of cars sold in the United States by an average of about $ 1300," wrote Emmanuel Rosner, Deutsche Bank's auto analyst.
This price increase will damage the demand for cars, perhaps reducing car production in the US by as much as 3 million vehicles a year, down 1
8% from today's level, Rosner estimates.
If that happened, it would be the biggest battle against the American automotive industry since the big recession gave the industry a leap towards near collapse 10 years ago.
The industry imported $ 59.4 billion in parts from Mexico last year, according to US government trade data. It includes parts used in factories and those sold in malls and repair shops.
Mexico is without a doubt the largest foreign source of parts used by industry. About 16% of all auto parts used by US assembly products come from Mexico, according to an estimate from the Center for Automotive Research, a leading industry think tank.
Car dealers can't easily switch to other vendors for To avoid using parts from Mexico. Mexican parts suppliers specialize in delivering low-cost, labor-intensive components, which do not make economic sense to build elsewhere, says Kristin Dziczek, Vice President of Industry, Labor and Economy at the Center.
For example, 70% of the wiring, the collection of wires carrying power through a vehicle, comes from Mexico. Get if any wiring is made in the US. Much of the rest of the seals come to the American-Mexican border from land south of Mexico.
"It's one of the first pieces you install when assembling a car," she said in April when Trump threatened to close the Mexico border completely. Such a move would have closed the entire US car industry within a week, she estimated.
"You can't build the whole car and turn the wiring harness later. This is a big critical part that knocks down the assembly line if you don't."
Finished cars and trucks also enter the United States from Mexico – about 2.7 million cars were imported from Mexico last year, worth $ 52 billion, according to the US Commerce Department. There are almost a million more cars than what came from Japan, number 2 for auto import.
A 25% tariff on all imports from Mexico will add about $ 28 billion a year to the cost of finished cars and parts.
The American automotive industry is already struggling with increased costs due to the Trump administration's tariffs on steel and aluminum. Both General Motors ( GM ) and Ford ( F ) have estimated that rising commodity prices from these charges have increased their cost by more than $ 1 billion each.
The entire industry has been trying to cut costs to free up money for the expensive research and development challenge by developing the next generation of electric and self-propelled cars. That's why GM cited its plans to close four US factories this year.
This means that car manufacturers would probably not assume the cost of the charges. Instead, they would send them to consumers. It can hurt US auto sales cost extra jobs in the US. Last year, GM announced that a proposal to set tariffs on all cars and imports of auto parts from around the world would cause it and other automakers to cut US jobs.
Costs will rise even further if Mexico responds by impose tariffs by themselves on American goods. It would be a double blow to the American car industry, because Mexico is a big market for both cars and parts.
Mexico bought 140,600 cars from the United States last year, about 8% of all car exports, making it the fourth largest market behind Canada, China and Germany, according to the US Commerce Department. These cars cost $ 3.3 billion.
More importantly, US participants sent part of $ 32.5 billion to parts to Mexico, mostly to use in Mexican car factories.