The automotive industry in North America is grappling with stringent regulations and looming tariffs as a result of the United States-Mexico-Canada Agreement (USMCA), negotiated under the Trump administration. While most vehicles produced in the region comply with the free trade requirements under USMCA, individual parts often fall short of these standards. As companies lobby to maintain tariff-free status for compliant parts and vehicles, the prospect of expanded levies poses significant challenges.
The USMCA agreement, which went into effect in 2020, mandates that 75% of vehicle content be sourced from the U.S., Canada, or Mexico. Furthermore, it requires that 40% of core parts and 70% of steel and aluminum be sourced regionally. Despite these requirements, compliance among motor vehicles and parts from Mexico has notably declined since the agreement's inception. Products that meet the USMCA standards currently escape a 25% North American tariff; however, expanded levies are set to take effect on April 2.
Automotive suppliers are bracing for bigger repercussions from these proposed tariffs than automakers themselves. According to industry insiders, tariffs could significantly impact the supply chain's profitability.
"The whole supply chain cannot swallow 25%," said Martin Fischer, highlighting the financial strain on suppliers.
While automotive manufacturers have adjusted to the USMCA requirements, notably fewer individual parts meet these stringent standards. Suppliers are caught in a precarious situation as they attempt to adapt to these changes while also facing potential tariff increases. The time and investment required to relocate production facilities further complicate this transition.
Building a new facility can take between 12 to 18 months, followed by an additional year or more for tooling and ramping up production. This lengthy process underscores the challenges suppliers face in meeting USMCA standards while avoiding tariffs.
"What I'd say is very difficult, is the whipsaw back and forth," remarked Collin Shaw, emphasizing the industry's struggle with fluctuating regulations and economic pressures.
Some companies, such as BMW, have found themselves non-compliant with USMCA due to their supply chain configurations. BMW's vehicles produced in Mexico rely on engines imported from Europe, rendering them unfit under current USMCA guidelines.
The compliance rate for motor vehicle parts imported from Mexico into the United States is projected at 63% for 2024. As companies attempt to align with USMCA standards while maintaining operational efficiency, they continue to urge the Trump administration to allow compliant parts and vehicles to remain tariff-free.
The broader industry sees this as a collective issue rather than one confined to individual companies.
"This is the industry issue. I believe very strongly that it cannot be addressed by any one constituent," stated Swamy Kotagiri, calling for a unified approach to address these challenges.
As April approaches, when expanded tariffs are set to take effect, automotive suppliers are keenly aware of the potential cost implications for consumers.
"Cars will get more expensive for consumers if tariffs continue for a long time. The industry cannot ship at losses and swallow 25%," Martin Fischer warned.