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US President Donald Trump addressed the implications of the United States-Mexico-Canada Agreement (USMCA) during an event at Dana Incorporated, an automotive supplier, in Warren, Michigan on January 30, 2020.
DETROIT — President Trump’s announcement regarding proposed tariffs on goods imported from Mexico and Canada has raised concerns that automotive suppliers will bear the brunt of these costs more than the automakers themselves. The potential issues for suppliers could, in turn, create broader disruptions within the industry.
While most vehicles manufactured in North America comply with USMCA guidelines, a significantly lower proportion of individual parts meet the necessary standards defined in the trade agreement negotiated under the Trump administration in 2020. Data from federal trade reporting indicates these stringent requirements pose challenges for suppliers.
Compliance with the USMCA is crucial for both automakers and suppliers, as products meeting the trade agreement’s standards are currently exempt from a 25% tariff until the levies are implemented on April 2. In response, companies are actively lobbying for ongoing tariff-free status for parts and vehicles that fulfill the USMCA criteria.
The existing tariff challenges come as the automotive supply chain continues to recover from the impacts of COVID-19, all while facing high interest rates, labor shortages, and diminishing profit margins. Unlike automakers, there are far more suppliers, many producing only a limited range of parts that can lead to production upheaval if higher costs force closures.
Shares of several larger suppliers, including American Axle & Manufacturing Holdings, Magna International, and Adient, have fallen sharply this year, reflecting the uncertainty linked to the impending tariffs. In contrast, companies like Aptiv and Lear Corp. have seen their stock prices remain relatively stable.
“There’s clearly not the profitability in the supply chain to absorb the tariffs,” commented Collin Shaw, president of the MEMA Original Equipment Suppliers association. “Suppliers are more at risk, given that a smaller percentage of them are compliant with USMCA requirements.”
USMCA Standards
In 2024, roughly 63% of auto parts imported from Mexico into the U.S. met USMCA standards, compared to 92.1% of the vehicles themselves. For Canada, the figures were 74.6% for parts and 96.9% for vehicles, illustrating a marked disparity.
The compliance rates reflect trade data from the U.S. International Trade Commission, which is derived from the value of imported goods. A limited number of non-compliant goods that didn’t qualify for any trade programs like the USMCA might still have been imported without tariffs under specific conditions, such as sales to government entities or being in transit.
To be compliant with the USMCA, at least 75% of a vehicle’s content must originate from the U.S., Canada, or Mexico, with further stipulations requiring that 40% of core parts and 70% of steel and aluminum be sourced from within the region.
“If tariffs lead to industry shutdowns, there will undoubtedly be legal recourse,” warned Flavio Volpe of the Automotive Parts Manufacturers’ Association (APMA) in Canada. “A sense of anxiety permeates the industry.”
Shaw mentioned the inherent resilience of the supply chain but acknowledged its fragility during times of significant policy shifts. “What makes it challenging is the constant back and forth. While it’s feasible to adjust, it does require substantial time,” he stated.
Building and relocating manufacturing plants is a lengthy process, often taking years to complete. The permitting phase alone can take six to twelve months, followed by an additional year or more for construction, and then tooling and ramping up production could extend the timeline further.
Critical components for vehicles play a vital role in meeting compliance, yet major parts like engines and transmissions are often assembled locally, helping overall vehicle compliance. Conversely, components such as wire harnesses and batteries, usually manufactured elsewhere, do not contribute to the same degree of compliance.
For instance, BMW has disclosed that its vehicles assembled in Mexico do not conform to USMCA requirements, primarily because the engines used are sourced from Europe. Core components like engines tend to traverse borders less frequently than smaller parts.
“This agreement is intricate,” remarked Kristin Dziczek, an automotive policy advisor at the Federal Reserve Bank of Chicago, during a recent auto conference in Detroit. “There are varying categories of components and different thresholds for meeting USMCA sourcing requirements to achieve zero tariffs on trade within the U.S.”
Since the implementation of the USMCA, which replaced the North American Free Trade Agreement in 2020, compliance rates for both vehicles and parts sourced from Mexico have noticeably declined, indicating an escalation in tariffs. Duty-free vehicle shipments have dropped from 99.7% in 2019 to 92.1% in 2024, while parts compliance has decreased from around 75% to 62.5% over the same period.
Canada’s compliant vehicle parts have also seen a decline, sliding from 83.1% in 2019 to about 75% in 2024. Conversely, vehicle imports from Canada remain relatively stable, dropping slightly from 98.8% in 2019 to approximately 97% recently.
‘Industry Issue’
Auto suppliers have firmly stated that they cannot absorb the increased costs resulting from the 25% tariffs on USMCA non-compliant parts, in addition to existing levies on steel, aluminum, and other materials.
Swamy Kotagiri, CEO of Magna, a significant global automotive supplier, emphasized the disruptive nature of the proposed tariffs on the industry. “This is a collective industry challenge. It cannot solely be managed by one participant,” Kotagiri asserted. “Given the scale of the discussion, it is entirely unreasonable to expect suppliers to shoulder this burden.”
A recent MEMA survey of 139 suppliers revealed that most part manufacturers are feeling the effects of existing steel and aluminum tariffs, with 97% voicing concerns over potential financial hardships among smaller, “subtier” suppliers.
These smaller suppliers, which typically produce components that may seem minor, can lead to significant supply chain disruptions if they face production challenges. Their critical role was especially highlighted during the pandemic when global supply chains faced countless interruptions due to material shortages.
Executives from Forvia, a France-based auto supplier, noted that they and their automotive clients have been strategizing various contingency plans in anticipation of these tariffs.
“The entire supply chain cannot sustain a 25% increase,” stated Forvia CEO Martin Fischer during a recent media event. “If tariffs persist, it will inevitably drive up consumer prices for vehicles. The industry simply cannot operate at a loss while accommodating such increases.”
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