by High Tariffs on Cars from Canada and Mexico
Automakers manufacturing cars in Canada and Mexico are facing serious financial consequences due to new US trade rules. Recent data indicates that many of these vehicles contain fewer US-made materials than required to qualify for tariff benefits, leading to significant costs.
Average Tariff Size
According to an analysis of US International Trade Commission data conducted by T.D. Cowen, in July, passenger cars imported from Canada and Mexico were subject to an average customs tariff of 19 percent. This occurs within a system that recognizes many imported goods use American components, thus applying only a 25-percent tariff on parts not made in the USA.
Compliance Challenges
The figure of 19 percent indicates that automakers are struggling to prove their cars are sufficiently made from American parts. The vehicles may lack enough US content to qualify for greater tariff benefits. Furthermore, there is a possibility that companies simply cannot provide the necessary documentation due to inefficient tracking and accounting of parts.
“There are many complexities in the automotive sector related to tracking parts, vehicles, USMCA, and the application of customs rates,” noted Angela Gamalsky, a partner at Honigman specializing in international trade. “Instructions and guidelines are still being published.”
USMCA Agreement Requirements
To comply with the rules of the United States-Mexico-Canada Agreement (USMCA), each automobile must meet certain baseline indicators. At least 75 percent of each vehicle must originate from North America, and 70 percent of the steel and aluminum used in production must also be from this region. Additionally, 40 percent or more must be traceable to factories where workers earn at least $16 per hour. However, auto parts sold as components are exempt from tariffs.
Consequences for Automakers
This means any car that does not meet these basic rules is subject to a 25-percent tariff on the entire cost of the vehicle, which can distort the overall picture, increasing the average tariff to 19 percent and creating a negative impression of cars with high American component content.
Risks and Penalties
Automakers such as GM, Ford, Stellantis, and BMW, which produce cars in North America but outside the US, might risk overstating the volume of foreign content. However, the penalties are severe and involve imposing a 25-percent tariff on the entire car and every identical vehicle imported into the US since April 3rd.
These changes in customs policy could have long-term consequences for global supply chains, forcing automakers to reconsider their localization strategies for production. Rising costs may affect final prices for consumers and also accelerate investments in American manufacturing capacity to ensure compliance with USMCA requirements and avoid additional financial burdens.
