The tariffs announced by Donald Trump before his election covered a much broader spectrum of products since the then candidate threatened to introduce duties of 10 or even 20 additional percentage points on all American imports. Since taking office, Trump has explicitly targeted countries that are major sources of motor vehicles for the US market: Mexico and Canada, under threat of 25% duties, and the European Union, which could face tariffs 10 percentage points higher than before to sell to American consumers. Mexico and Canada alone exported 2.6 million passenger vehicles to the United States in 2023, or 21% of total market sales (the EU represents 6%).

Such levels of tariffs on cars, not even accounting for parts and components which can cross borders several times, would certainly have a major impact on the automotive sectors of the targeted countries. This hefty set of protectionist measures should also have an indirect impact on the automobile manufacturers operating in these countries. The automotive sector is characterized by high trade costs (on top of tariffs), which drives the organization of firms to be local or continental: manufacturers tend to invest in production units close to their consumer markets. In order to serve the American consumers, most firms rely at least in part on factories located in the United States or North America.

Volkswagen, for example, produces just 40% of its vehicles sold in the United States in Germany, while nearly two-thirds are made in North America. Its Chattanooga factory in the state of Tennessee, where the Passat, Atlas and ID4 are produced, provides it with access to American consumers without customs duties (before and after the potential implementation of Trump tariffs). The VW Puebla plant, the largest car assembly plant in Mexico, produces models like the Jetta, the Tiguan or the Taos. The implementation of duties on imports from Mexico would therefore directly affect sales of those models produced in the Puebla factory and could encourage Volkswagen to modify its sourcing decisions for the American market.

To study this type of reaction, we use a quantitative model of production and entry decisions by multinational companies in the global automobile sector. This model considers production and supply decisions for all models by each multinational firm and makes it possible to simulate how a change in tariff barriers would modify the expected sales and the sourcing decision of each car model sold by each firm in a given market in the medium run (in the longer run, companies are likely to close and open factories, which the model does not consider). Our simulations are based on the flows observed in 2023 for passenger cars (excluding minivans and pick-up trucks).

Unsurprisingly, the impact of Donald Trump's recent announcements (customs duties of 25% on Canada and Mexico and additional customs duties of 10 percentage points. for the EU, or 12.5% after adding the current MFN duties of 2.5% on imports of passenger vehicles by the United States) would be devastating for the Canadian and Mexican automobile industries. Those two countries would experience production drops of 71% and 57% respectively (Table 1).

Several European countries would also be affected, with Sweden and Italy bearing the highest cost (7% and 4% of output respectively). This is due to large sales of two Volvo and two Jeep SUVs produced in those two countries and sold in the US. Slovakia, Hungary and Germany would also experience a drop in their production, although more limited.

Meanwhile, American automobile production would increase by 26%. This increase, however, would come at the expense of consumers who would see prices increase. Note that the implementation of retaliatory tariffs by the countries targeted by the American measures would have little impact on the production of Mexico or Canada but would reduce the increase in production on American territory by 7 percentage points, to +19%.

 

Table 1 : Impact of Trump tariffs on car production, by country
 

Source : authors’ computation

The effects on manufacturers, because they manage complex networks of plants in many countries, can differ from the impact on their headquarter countries. The exposure of a firm to the ongoing trade conflict depends on its production facilities and on its ability to reallocate production meant for American consumers to factories not targeted by the new duties. Volkswagen, Stellantis, and to a lesser extent Honda, which today import more than a third of their passenger cars sold in the United States from Mexico or Canada, would be the most affected, with drops in sales of around 152,000 vehicles for Volkswagen and 90,000 for Stellantis (Table 2).

Within these firms, certain brands would be particularly affected. For example, Chrysler, whose passenger vehicles sold in the United States are entirely produced in Canada, would see its sales on the American market drop by nearly 50%. Interestingly, some firms would lose particularly large volumes from the implementation of retaliations. Ford, Stellantis and BMW are in that category. Not only do these firms export from the United States to targeted countries, but their imports of intermediate goods from their country of origin would also be affected by trade retaliations.

Some carmakers would however benefit from the tariffs imposed by the second Trump administration. Among American firms, General Motors and Tesla are predicted to see their production increase by 42,000 and 81,000 vehicles. Winners would also emerge among Asian firms – Hyundai, Subaru and Toyota – which produce largely in the United States or import from the rest of the world (Korea and Japan mostly) to serve American consumers.

Table 2 : Impact of Trump tariffs on car production, by firm
 

Source : authors’ computation

The results of our simulations confirm the expectation that the implementation of such high tariffs on imports from Canada and Mexico would have dramatic impacts on automobile production for those two countries. For the EU, the threat of additional duties would have a more limited impact on production. However, certain European manufacturers (Volkswagen and Stellantis in particular), which produce in Canada and Mexico, are particularly exposed to the ongoing trade conflict.

The measures that the American administration will actually put in place are quite uncertain and likely to evolve substantially, as these first weeks of Donald Trump's presidency show. Those simulations could therefore be labeled as Quantifying Trump 2.0 for cars: Version 1.0. We can update our evaluation as the target itself updates.