An import tax on goods crossing the Mexico-U.S. border would make American brand cars more expensive than some foreign brand cars, and it would take years before domestic factories could make American brand cars more cost-efficient.
President Donald Trump floated the idea of a 20% tax on goods imported from Mexico in order to pay for a wall along the border and eliminate Mexico’s cost advantage; a tax which he promises will bring jobs to the American people. The American people, however, will be forced to deal with pricier cars, and American brands – whose models are amongst the most Mexican-made in the world – will suffer the consequences.
“Raising the price of that Mexican content would raise the price of vehicles or cause that content to be sourced elsewhere,” said Kristin Dziczek, director for the Industry, Labor, and Economics Group at the Center for Automotive Research. “It’s better to have a near-shore production that has a chance of having some U.S. content in it versus a true far-shore import that has very little chance of having U.S. content.”
And no car is entirely made in America. In fact, the car with the highest domestic content is the German-made Mercedes Benz, at 80% according to the latest figures from the National Highway Traffic Safety Administration (NHTSA). There are currently six car models that are at least 75% American – a record low, according to Cars.com – and only one of the six is an American brand.
The numbers from the NHTSA include parts manufactured in Canada, due to the 1992 American Automobile Labeling Act, which lumps U.S. and Canada together with regards to the word “domestic.” The percent of the cars that is “American” would be lower than what the report shows in some cases.
The Ford model with the highest US/Canada content is 70% domestic and 15% Mexican, while the Ford model with the highest Mexican content is 68% Mexican. The value-added tax that President Trump has proposed would increase the manufacturer’s suggested retail price (MSRP) of these vehicles by $802 and $1,858, respectively.
The tariff debate comes at a time when orders from car manufacturing companies are on a steady incline. “Vehicles and auto parts [orders] remain strong,” said economist Russell Price, a senior economist at Ameriprise Financial Inc. “That’s certainly a good sign for consumer activity and their spending patterns.” But this outlook is contingent on the assumption that auto prices will remain relatively constant.
A tariff will increase the cost of a car for the consumer as they absorb some of the extra expense, though it is difficult to say how much. Cars will cost more to manufacture, and auto dealers would likely sell at a higher price in unison, since there’s little room for them to raise new car prices in increments.
“Today, when you look at the MSRP on a new vehicle, and you look at the margin of profit that a dealer could get, it’s rarely over $1,000,” said Elle Woods, the marketing director for five retail stores in California, including Acura, Mercedes-Benz, Honda, and Subaru. Profits are made off of used cars, and the sale of a new car is for the sake of building the relationship.
“Customers come to a dealership knowing two things,” says Ms. Woods. “They have a budget in mind, and they have an idea of exactly what features they want in the vehicle.”
Jibin Thomas has already started researching for a car he plans to buy next year. He has a budget, and is working through his list of features. “I’ll say that I’m willing to spend more on something that gives me everything that I’m looking for in terms of priorities,” he said. “That tax – if it went through – could really put a damper on my wish list, though.”
Research shows that, thanks to the Internet, a millennial will spend six to eight months doing their own personal research before they even come into the store. Retailers would find it difficult to price higher than the listed MSRP without losing customer trust.
President Trump’s long-term solution – in addition to seeking bilateral trade agreements – is to build factories in the U.S. to employ Americans. A new auto plant could cost anywhere between $1.5 billion and $2 billion dollars. “Once you build a plant you have to continue to invest in that plant: you have to update your paint shop, your body shop, your tooling, and bring in new equipment and new tech,” said Ms. Dziczek.
BMW CEO Harold Krueger accompanied German Chancellor Angela Merkel to her first meeting with President Trump, where the German executive stressed the number of American jobs the company’s plants bring to the country. The Trump administration’s “America First” policy threatens a global network that has contributed to the seven-year expansion of the American automotive industry’s job growth.
“One of the reasons we built the plant in Mexico is because it really is flexible: It has a trade agreement with many countries,” said Jim Lievois, the CFO for Mazda North American operations. Japanese carmakers, including Mazda, employed a total of 1,505,931 Americans, according to the Japan Automobile Manufacturers Association’s 2016-2017 contributions report.
A value-added import tax on the U.S.’s third largest importer would lead to a decline in auto sales, as price-sensitive consumers opt to buy used cars or rent. When prices go up and sales slow, dealerships have two options: set discount prices or lay off workers. Woods says that it would ultimately have to come down to finding a break-even between taking an even bigger loss on a vehicle and not paying wages to as many employees. “As a business, you have to do whatever’s necessary to keep your doors open to be able to employ even a few people.”