North America’s highly integrated supply chains across Canada, the U.S., and Mexico is facing significant headwinds
Toronto, Ontario—The North American automotive industry is facing significant headwinds because of imposed tariffs, according to Morningstar DBRS in analysis released Wednesday. Canada, the U.S., and Mexico aren’t necessarily competitors in the auto sector; instead, producers in each country specialize in different components to enhance productivity and lower costs.
As a consequence, North American auto manufacturing has highly integrated supply chains across Canada, the U.S., and Mexico, with parts and components crossing the border multiple times in the process of manufacturing a vehicle.
These parts and components cannot be easily substituted for U.S.-produced components, states the report, and if taxed at 25% each time a component crosses the border, this will significantly increase the cost of production, states Morningstar DBRS in analysis released Wednesday.
Additionally, the tariffs on aluminum and steel imports into the U.S. mean that any products that are manufactured using these inputs will likely become more expensive. To the extent that U.S. manufacturers can move away from Canadian and other non-U.S. aluminum and steel (that is, if U.S. smelters have additional production capacity to fill the void), then there should be a minimal price impact on the final goods that use these inputs.
However, Morningstar DBRS notes that to the extent that U.S.-based smelters cannot produce additional steel and aluminum to meet the extra demand (the more likely scenario, in the short to medium term), then much of the cost increases due to the tariffs will be passed on to consumers.
The Bottom Line
If tariffs lead to major and widespread disruptions across industries, and if businesses respond to reduced demand by reducing employee hours or outright layoffs, most consumer and corporate investments, including auto and equipment, will be negatively affected.
The tariffs will most likely boost used vehicle and equipment values, states the analysis. First, higher input prices will likely result in higher new vehicle and equipment prices, making the used market a more attractive option.
Second, to the extent that there are disruptions to manufacturing and supply chains, production of new vehicles and equipment is likely to slow, which will result in lower inventory, all else equal. The supply and demand dynamics will cause used vehicle prices to increase.
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