The trade war and the automotive industry

The trade war and the automotive industry

José Carlos Díaz Silva[1], OBELA[2]

On 29 April 2025, the Bureau of Economic Activity published that in the first quarter of the year, the US economy contracted by 0.3% as a result of the new tariffs. On the same date, the White House decided to relax tariff measures on the auto industry. The problem is that trade flows and global auto production are not overwhelmingly American. The advantages of the T-MEC and imports from Asia, both more than three decades old, cannot be reversed in a couple of years. Total vehicle sales have been stagnant since 2019, at 16 million units. In this note, we will answer why it is impossible for Trump's measures to strengthen the automotive sector and the potentially severe repercussions for Latin America, especially Mexico. 

            Table 1 shows car sales and production in different countries in 2024 and their difference, which shows the domestic capacity to import vehicles. The largest markets are China and the US, with sales of 31 million (M) and 16 M units, respectively. There is an essential difference in production: in the Asian country, it amounts to the amount of its sales (31 M), while in the US, it is 54.8% lower. If the US seeks to reduce its car trade deficit, it would have to produce 30% more cars (5 M), a figure that exceeds the production capacity of Mexico (4.2 M) and Canada (1.3 M). In this context, the repatriation of investments proposed by Trump is complex. 

In 2024, 35.7% of US auto imports came from Mexico, followed by Korea (17.2%), Japan (15.6%) and Canada (12.8%). Thus, consumers purchased 48.5% of US imports within the T-MEC. The problem of the US trade deficit is the result of exporting its productive capacity to its southern neighbour, to lower wages and production costs, which benefits its companies. 

From 1999 to 2024, the landscape of vehicle production has undergone a significant transformation. A quarter of a century ago, the US accounted for 22% of global output; by 2024, this figure had dropped to 11.8% (see Graph 1). Canada observed a similar trend, where its share decreased from 5.1% to 1.5%. In contrast, China's share surged from 3.3% to 30.9%. Notably, Mexico's share increased from 2.9% to 4.5%. Over the past two decades, US production capacity has shifted to countries like China and Mexico. Between 2003 and 2020, these two nations attracted the most foreign automotive investment. Companies from the US made this move because it was more profitable to leverage wage and technological advantages. Trump's tariff policies cannot reverse this historical shift. 

The figures explain why Detroit's big three, GM, Ford and Stellantis, have repeatedly spoken out against the tariffs. On 16 April 2025, they published a report developed by the Centre for Automotive Research (CAR), estimating the impact of 25% tariffs. One conclusion is that there is not (and cannot be) a 100% US car today due to the complexity of globally fragmented supply chains. The 25% tariffs present a simplistic view of the problem and will increase the cost to all cars and those involved: producers, dealers and consumers.  

Subsequently, on 29 April, the automakers collectively penned a letter to President Trump, expressing their concerns and requesting a relaxation of the proposed tariffs for the industry. In response, the White House proposed to impose tariffs only on vehicle assembly, exempting the 25% tariff on auto parts from the T-MEC, and removing restrictions on steel and aluminium destined for the automotive industry. 

Until May 2025, car companies have not announced that they will invest more in the US to avoid tariffs. The expectation is that the negotiations will be sufficient to reverse the situation, which seems the most likely scenario. Since 2024, several manufacturers, such as GM, Stellantis and Volkswagen, have announced plans to invest in LA. Finally, although the US market is the second largest, it has not recovered to its pre-pandemic level, unlike Argentina, Brazil, Mexico or China, where car sales have grown. If the trade war persists, companies will likely look for new markets to supply the US market. The impact on the US economy will adversely affect investment and consumption levels, which will drag down growth and prices.