Trump Tariffs 2.0: Complexities, Perils, and Opportunities

The nature of the globalized economy is incredibly interconnected and complex, especially as it relates to the automotive industry, which sources, manufactures, assembles, and sells its products in nearly every corner of the world. The massive industry concentration and ancillary businesses it generates mean Michigan is especially vulnerable when foreign or domestic trade barriers impede global supply chains. However, what Michigan’s industry leaders should keep in mind is that while some tariffs last, most do not. The industry’s health in Michigan should not depend on decisions made in Washington, D.C., Ottawa, Mexico City, or Beijing. Therefore, it is imperative that Michigan, from elected officials to corporations and citizens, understand and embrace the global trends at play and global forces developing.

Michigan must develop more competitive manufacturing processes, invest in innovation, and prepare people for the digital age from the manufacturing floor to the connected vehicle to the cloud. Given the organized governmental efforts that other states, regions, and countries are making to claim the industry position that we have for so long enjoyed, Michigan must also foster a level of cooperation between industry and state government that has too often been missing. In other words, new tariffs and the complexities they would bring represent both challenges and opportunities, necessitating dynamic strategies and greater cooperation so that Michigan can compete to win in the new global auto world order.

The increased costs associated with new tariffs could weaken American competitiveness due to new penalties on imports from Asia, Mexico, and Canada, supply chain disruptions, retaliatory tariffs in foreign markets, and delayed or reduced investment by companies trepidatious about impending trade policies. Specifically, the increased cost of doing business between the U.S. and Canada could be especially acute, even as the new Gordie Howe Bridge connecting Detroit and Windsor is set to open this year.

Of these, the issue of restructuring the current integrated supply chains employed throughout the industry looms as the greatest source of anxiety for companies right now. As the industry learned during the COVID-19 pandemic, rerouting supply chains creates a variety of inefficiencies and new costs, which typically are passed along to the consumer. The more inefficiencies and costs American brands incur, the less globally competitive they become.

The North American market is currently governed by the U.S.-Mexico-Canada Agreement (USMCA), a trade pact that sets minimal tariffs on imports and allows free movement of goods, encouraging cross-border production. So, under the status quo, components like engines, transmissions, and electronics may be made in Canada or Mexico, shipped to the U.S. for assembly, and then returned for further processing.

USMCA is scheduled to stand in effect until 2036, but under a provision of the original negotiation, insisted upon by negotiators from the first Trump Administration, a six-year review, or renegotiation, will occur in 2026. In the run-up to this, President-elect Donald Trump has signaled a willingness to place new, much steeper tariffs on goods from Canada and Mexico. Whether this is a sincere threat or a negotiating tactic is yet to be seen.

Two specific objectives for American negotiators will likely be new measures to jointly block Chinese companies from, directly or indirectly, entering the North American market and to promote critical mineral development related to EV manufacturing.

Significantly, per the U.S.’s USMCA implementing law, the U.S. Trade Representative (USTR) must initiate public consultations the year before the review. This means the industry will have the opportunity to make its voice heard regarding any potential changes to USMCA sometime this year.

The state’s short-term challenge is navigating the increased complexity potential tariffs might bring; the long-term opportunity and necessity lie in competing to win in the new automotive world order.

While tariffs will raise prices for consumers, the effects will not be immediately felt. Indeed, in the short term, the threat of higher vehicle prices related to new tariffs may compel consumers to accelerate purchases. What seems most evident regarding the short term is that very little is certain, and the industry will need to grapple with that uncertainty as new tariffs are deliberated. But MichAuto believes the long-term impact if significant new tariffs on goods from Asia, Mexico, and Canada are imposed is deadly apparent: higher prices, smaller margins, and disrupted supply chains.

MichAuto will continue to track and communicate updates on this topic to its investors and industry leaders.