Decoding what automakers will pay, exactly, on vehicles and parts imported into the U.S. is this week’s hot new game.
Yesterday’s unveiling of the U.S. administration’s new tariffs was typically chaotic and confusing. The long list of countries and regions slapped with new “reciprocal tariffs” on all imported goods included tiny atolls and uninhabited islands. What it did not include was Canada or Mexico.
So what’s the upshot?
First, the threatened 25-percent auto tariffs did in fact take effect, as of midnight last night. And this morning, we’ve already seen a first result in the automotive sector, with Stellantis announcing a two-week pause of production at its plant in Windsor, Ontario.
We can expect others to make moves of their own, sooner or later. Recall that some automakers pro-actively moved inventories of parts to U.S. warehouses to avoid the auto tariffs, but those stocks will run out at some point.
An actual rate of 12-13 percent?
Second, Canada will have things relatively easy compared to European car manufacturing countries, because the 25-percent tariff now applied to those countries’ vehicles is a hard figure. Canadian vehicles imported into the U.S. will in contrast get a reduction in the tariff percentage – a credit, if you will - based on the number of U.S.-made parts they contain. Estimates floating about today are that globally, vehicles imported into the U.S. will be subject to about half of the top 25-percent rate.
Of course, the figure would vary considerably from one carmaker and one model to another. Some models could be only minimally affected, while others could see production stopped in its tracks.
Third, while the “credit” will undeniably provide a bit of relief to automakers producing vehicles and/or components in Canada, the tariffs that will be applied are going to hurt. Industry analysts point out that given an average profit margin of 6-7 percent on new vehicles, automakers cannot absorb even a 12-13-percent increase. Producing new vehicles would not make economic sense.
And of course, by and large, automakers won’t absorb the costs. Those will be passed onto U.S. consumers. And not just on vehicles produced in whole or in part in Canada. One source at an automaker told us that their company planned to spread out increased costs across their product range, thus including vehicles entirely Made in the USA.
We’ll see in the coming days and weeks how things develop in what is a very fluid situation. But it’s well-known that if there’s one thing business hates, it’s “fluid situations”.