Tariffs on ‘Mexican cars’ are just taxes on American consumers

Mexico is arguably our most important trading partner for the automotive market, both for fully-assembled vehicles and, even more importantly, for parts to go into vehicles assembled in the U.S. 

Of new vehicles sold in the U.S. in 2018, 15 percent were assembled in Mexico. Japan is the second-largest partner at 10 percent.

{mosads}But what is uniquely challenging about a problem with the free flow of goods across the U.S.-Mexico border is how heavily American-based manufacturers depend on Mexico for final assembly.

There is no Mexican make sold in the U.S. The majority of vehicles assembled in Mexico come from American brands. 

In 2018, Mexico assembled 2.5 million vehicles that were sold in the U.S. Of those “Mexican vehicles” sold in the U.S., 57 percent were domestic makes. Two of these “domestic” makes — General Motors’ GMC brand and Fiat Chrysler’s Ram brand — see about 40 percent of their U.S. sales coming from vehicles actually assembled in Mexico.

In addition, 41 percent of the remaining vehicles assembled in Mexico and sold in the U.S. are from “foreign” makes with substantial manufacturing in the U.S. These brands are Volkswagen, Nissan, Toyota, Honda, Infiniti, Kia and Hyundai.

In fact, 15 percent of the total U.S. sales from these foreign makes come from vehicles assembled in Mexico.  Two-thirds of the Volkswagens sold in the U.S. last year were assembled in Mexico. 

Given proximity to U.S. operations and likely synergies, these vehicles otherwise considered American, Japanese, German and Korean likely have a larger percentage of content coming from the U.S. from their related factories based in the U.S.

Indeed, the Center for Automotive Research reports that vehicles imported to the United States from Mexico contain approximately 20 to 30 percent U.S. content.

By placing a new tariff on the flow of vehicles and parts between Mexico and the U.S., we are taxing American consumers on some of the most popular vehicles sold in the U.S., like the Chevrolet Silverado and Equinox, Ram trucks, GMC Sierra and Terrain, Jeep Compass and Dodge Journey.

Even without a new tariff, the threats to close the border are already leading to disruption and delay in the shipment of goods across the border. President Trump tweeted this weekend that the U.S. is “…focusing on Border Security, not Ports of Entry.”

….it’s powerful common sense Immigration Laws to stop illegals from coming through Mexico into the U.S., and removing them back to their country of origin. Until Mexico cleans up this ridiculous & massive migration, we will be focusing on Border Security, not Ports of Entry….

— Donald J. Trump (@realDonaldTrump) April 6, 2019

By disrupting the supply chains related to our most important trading partner, the Trump administration is ensuring that we see a decline in new vehicle sales.

Those declines will inevitably lead to job losses related to manufacturing, distribution, finance, sales and ancillary businesses as a result of the industry now having to contend with much lower volumes.

A tariff on “their cars” is really a tax on American consumers. That tax will raise the cost of that vehicles and will drastically diminish the number of vehicles sold. As the number of vehicles declines, American jobs will be lost that are directly related to the manufacturing and content in those supposedly “Mexican cars.”

If the administration sees the whole ballgame as only cars, it should be understood that disrupting the team from working together will cause the whole season to be cancelled.

These actions also ensure that the review and ratification of the new U.S.-Mexico-Canada Agreement, which should come before Congress later this month, could get contentious. 

The only thing potentially worse than disrupting trade with Mexico will be slapping Japan and Europe with a 25-percent tariff on vehicles and parts. That would be another 20 percent of lost retail sales, and that could happen by June. 

Jonathan Smoke is the chief economist at Cox Automotive. 

Note: Facts and figures come from Cox Automotive’s internal research.