Sweeping tariffs on Mexican goods into the United States could make building a car in the and buying one in the US a lot more expensive.

Building of trucks or cars in all US factories is dependent on Mexican parts. This is the reason that the US auto industry was rattled by the announcement of the US president Donald Trump of imposing tariffs on Mexican imports of up to 25 per cent by October this year. Costs in the auto industry alone in the US could be raised by tens of billions of dollars because of the tariffs.

And the costs of the tariffs would probably be paid by American car buyers.

“We believe the tariffs on vehicles would undoubtedly be passed on to consumers,” wrote Emmanuel Rosner, auto analyst for Deutsche Bank. Rosner said that there would be an average increase of about $1,300 in the price of vehicles sold in the United States if the Trump administration goes ahead with its threat of 25 per cent tariffs on Mexican products. Rosner estimated that there can be a drop of as much as 18 per cent from the current demand for cars and potentially there would be a cut in auto production in the US of about 3 million vehicles a year because of the price hike due to the tariff.

If such a situation does eventually occur, the performance of the US auto industry would be the biggest blow of the industry since the Great Recession and could see the industry touching a near collapse that was viewed 10 years ago.

According to US government trade data, in 2018, $59.4 billion worth in parts from Mexico was imported by the US auto industry. In addition to competed cars, the imports included auto parts used in US auto manufacturing factories and those that are sold at the auto parts stores and repair shops.

And Mexico accounts for the largest foreign source of auto parts used by American companies for production in the US. According to an estimate from the Center for Automotive Research, a leading industry think tank, about 16 per cent of all auto parts used by US assembly plants come from Mexico.

It is also difficult for auto companies to find and procure parts form alternative suppliers in order to avoid the Mexico tariffs. Kristin Dziczek, vice president of industry, labor and economics at the center, said providing low-cost, labor-intensive components is the specialty of Mexican parts suppliers and it is not economically feasible to build such parts somewhere else.

For example, Mexican suppliers accounts for about 70 per cent of the wires that are used in cars and other vehicles to distribute power to all parts of a vehicle. Few if any wire harnesses are made in the United States. Countries south of Mexico account for the majority of the rest of the harnesses that enter US through Mexico.

“It’s one of the first pieces you install when you’re assembling a car,” Dziczek said in April when Trump was threatening to close the border with Mexico altogether. “You can’t build the whole car and slap the wire harness in later. This is a big critical part that shuts down the assembly line if you don’t have it.”

According to the US Commerce Department, in 2018, 2.7 million finished vehicles worth about $52 billion entered the US Mexico which is about a million more than the vehicles imported from Japan into the US – which is the second largest source of US auto imports.  The cost of completed vehicles and parts would have to pay an additional $28 billion a year because of a 25 tariff on all imports from Mexico.

(Adapted from CNN.com)

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