Trump's Mexican Tariffs Are Bad for U.S. Auto Industry

On May 30, President Donald Trump announced that on June 10 he will respond to immigration problems at the U.S. Mexican border by using the 1977 International Emergency Economic Powers Act to impose a 5% tariff on all goods imported from Mexico. This tariff will rise to 10% on July 1 and reach a maximum of 25% on Oct. 1 if Mexico does not take adequate, but unspecified, measures to stop illegal immigrants to the U.S.

For now, we are leaving our U.S. autos coverage fair value estimates in place because we think this tariff is horrible for the U.S. auto industry, and Trump will have major pushback from even Republican lawmakers. We think the move also jeopardizes congressional ratification of the Trump-led United States-Mexico-Canada Agreement to replace NAFTA, because why vote for it if there will be a 25% tariff on Mexican goods?

We stress the outcome of this new tariff battle is highly uncertain and could be resolved quickly if Mexico takes steps on border control to satisfy Trump. In the unlikely event a 25% tariff remained in place for a long time, we'd probably reduce our GM GM and Ford F fair value estimates for tariff overhang--an increase in our cost of equity uncertainty on each name would reduce GM into the high-$30s and Ford to about $10. We likely would not change midcycle operating margin assumptions because we doubt the tariffs would last beyond Trump's administration.

We dislike the tariffs because even vehicles made in the U.S., such as Ford's F-Series pickups or GM's fullsize SUVs, have Mexican parts content, 15% for the F-150 and 44% for the SUVs. The Center for Automotive Research estimates parts can cross NAFTA borders up to eight times during vehicle assembly, so the tariff costs would be large. We expect automakers will pass along 5% tariffs to consumers, but we think that becomes hard to do at levels above that point because tariff exposure is not equal across firms. U.S. automakers cannot quickly change production, so they would suffer greatly.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.