GM General Motors Company

By Mike Colias and Adrienne Roberts 

President Trump's threat to impose escalating tariffs on Mexican imports foists fresh bad news on the U.S. auto industry, which had pinned hopes on a tentative deal reached last year to preserve free trade between the countries.

For executives at Detroit's Big Three auto makers, the prospect of tariffs on Mexican imports has been the most worrisome of the trade threats leveled by Mr. Trump during his presidency. Mexico-built cars accounted for 17% of Detroit auto makers' overall U.S. sales in 2018, including some of the industry's biggest moneymakers, large pickup trucks.

The tariffs also would hit non-U.S. car companies and automotive suppliers. Overall, the U.S. imported $52.6 billion of vehicles and $59.4 billion in auto parts last year from Mexico, the highest totals of any country, according to Commerce Department data.

Mr. Trump on Thursday said the U.S. would implement a 5% tariff on all Mexican imports June 10 if the country doesn't take steps to stem the flow of migrants over the U.S.-Mexico border. That tariff would rise gradually to 25% by October.

The companies declined to comment Friday on Mr. Trump's threat. Automotive lobbying groups warned that tariffs on Mexican-built vehicles and parts would be passed on to buyers and dent car sales, potentially leading to job cuts in an industry already girding for a potential cyclical downturn.

"The auto sector -- and the 10 million jobs it supports -- relies upon the North American supply chain and cross border commerce to remain globally competitive," said the Alliance of Automobile Manufacturers, which represents about a dozen major auto makers including the Detroit car companies.

Lobbying groups also are concerned that imposing tariffs on Mexico could hurt the chances of congressional approval for revisions to the North American Free Trade Agreement. The auto industry supported a tentative deal struck last year among the U.S., Mexico and Canada that maintains tariff-free trade in the region while raising the amount of a car's content that must be sourced in North America to avoid tariffs.

Mr. Trump's Thursday evening tweet declaring his Mexico ultimatum sent automotive executives and lobbying teams scrambling. Some said they spent Friday morning on the phone with congressional staffs to hash over how the president's threat will play into Congress' deliberations over the Nafta revisions.

"Right now it feels like we're in uncharted territory," said a lobbyist for one auto maker.

General Motors Co. is among the most exposed to fresh tariffs on Mexican-produced cars. GM sold about 663,000 Mexico-built vehicles in the U.S. last year, or 22% of its domestic sales, according to an estimate from research firm LMC Automotive.

GM's lucrative Chevrolet Silverado and GMC Sierra pickup trucks -- which combined are its top-selling U.S. vehicles and biggest global profit generator -- would be hard hit. This year through April, Mexico accounted for about one-third of GM's production of the trucks, according to WardsAuto.com.

About 18% of Fiat Chrysler Automobiles NV's U.S. sales were imported from Mexico last year, including about a quarter of its profitable Ram pickup trucks. Ford Motor Co.'s Mexican imports accounted for about 10% of U.S. sales, according to LMC.

Tesla Inc. sources from Mexico about 25% of the content used in its top-selling Model 3 sedan, according to a research note Friday from RBC Capital. A spokeswoman for the electric-car maker didn't respond to a request for comment.

Even the initial 5% tariff, if enacted, could trim earnings by as much as 10% on an annualized basis for the most exposed auto companies, including GM, Fiat Chrysler and suppliers such as seat maker Lear Corp., Evercore ISI estimated in a research note Friday.

Auto stocks fell sharply in trading Friday, including drops of more than 4% in shares of GM and Fiat Chrysler.

Tariffs on auto parts from Mexico also would squeeze the industry. Both overseas and U.S. auto makers have established extensive supply chains in Mexico during the 25 years since the North American Free Trade Agreement took effect. Some parts cross the border multiple times before making their way into a finished automobile.

Some of the Detroit auto makers' U.S. vehicles are made with significant numbers of parts shipped in from Mexico, and tariffs would raise costs for those models. For example, the Cadillac Escalade, Chevy Suburban and GM's other large sport-utility vehicles are built in Texas, but nearly half of the parts used to assemble the SUVs come from Mexico, federal data show.

Kristin Dziczek, an economist at the Ann Arbor, Mich.-based Center for Automotive Research, said the interwoven nature of the automotive supply chains in the U.S. and Mexico would magnify any tariffs on Mexican imports. Some individual parts would face tariffs multiple times as they cross the border during the industry's lengthy production process, she said.

"These tariffs will have an almost immediate effect and will be fairly devastating," she said.

Foreign auto makers also have taken advantage of Nafta by opening new Mexican plants to supply their U.S. dealerships and would be hurt by fresh tariffs. For example, nearly half of Volkswagen AG's U.S. sales last year were imported from Mexico, according to LMC.

"We believe tariffs of this kind are a tax on the U.S. consumer and will result in higher prices and also threaten job growth," a Volkswagen spokesman said.

Those changes could raise costs for car companies by forcing them to rejigger their supply chains to comply with the new thresholds, analysts have said. Still, Mr. Trump had threatened to scrap Nafta altogether, a prospect that executives have said would be disastrous, forcing them to raise vehicle prices and putting billions of dollars in profits at risk.

Auto executives have complained that the mere prospect of future tariffs has stalled decisions on capital investments in factories as they wait to see how Mr. Trump's trade policies -- and potential retaliation from trading partners -- shake out.

Write to Mike Colias at Mike.Colias@wsj.com and Adrienne Roberts at Adrienne.Roberts@wsj.com

(END) Dow Jones Newswires

May 31, 2019 13:08 ET (17:08 GMT)

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