POLITICO — 2025-01-20
Automotive Industry
European automakers may be forced to shift production from Mexico to the US, costing them time and money.
President-elect Donald Trump’s return to the White House on Monday, 20 January 2025, and his threatened trade wars against America’s neighbors could put a massive strain on European automakers caught in the crossfire.
Trump has pledged to slap a 25% tariff on all imports from Mexico and Canada to pressure the two countries — America's closest trade partners — to curb illegal immigration and stop cross-border fentanyl shipments.
Should Trump make good on his promises, European automakers will face yet another high-cost problem as they will be forced to shift production to the United States. The brands are already struggling with lower sales and declining revenue from China and potential fines in Europe should they fail to meet new emission targets this year.
“We believe the financial impact of the tariff alone will be manageable for most [European] automakers, but the tariffs add to what is an already challenging market environment for 2025,” said Lukas Paul, auto director at S&P Global Ratings.
A long-standing trade agreement among the US, Mexico and Canada created permeable borders that has integrated the North American auto industry. Many companies use Mexico as a low-cost production site thanks to its proximity to the US.
Close to 90% of vehicles produced in Mexico are exported, with three-quarters directed to the US, according to data from the US Department of Commerce.
During his last term, Trump set his sights on Mexico over concerns that Chinese automakers would use the country as a back door to sell their vehicles in the US. In response, he negotiated a new trade agreement, called the USMCA, that went into effect in July 2020 with updated rules of origin for cars.
Under the pact, 75% of a vehicle’s content has to be produced in North America, with core parts originating from the US, Canada or Mexico. The agreement is set for a review in mid-2026, but on the campaign trail, Trump indicated he would take action before then.
Carmakers most at risk
Today, Audi, BMW, Mercedes-Benz, Stellantis and Volkswagen all have operations in Mexico.
German automotive suppliers have more than 330 locations in the country, according to German car lobby VDA, with manufacturers hitting “a new production record” of 716,000 cars in 2023.
If the 25% tariff goes into effect, Audi — a subsidiary of Volkswagen — would be hard hit, said Matthias Schmidt, a European auto analyst. The brand has no US production sites, instead relying on its Mexico facilities, including for manufacturing the Q5 SUV, its top-selling US model.
Last year, 29% of Audis registered in the US were shipped from Mexico, according to Schmidt.
Premium carmakers BMW and Mercedes also have extensive manufacturing hubs in the US, making them more insulated from Trump's tariffs than their mass-market peers.
Volkswagen’s most popular model for American consumers is the Tiguan, an SUV that is entirely manufactured in Mexico. The German automaker sold over 30,000 of the vehicles in the final quarter of last year, a nearly 50% year-over-year increase.
S&P believes that French-Italian-American automaker Stellantis is the most exposed of Europe’s automakers as it makes several Jeep and RAM models in Mexico — all of which are mainstays on American roads.
“The worst-case impact of a 25% tariff on finished cars from Mexico could be up to 15% operating profit,” Paul said.
Even without the tariffs, Stellantis is under pressure in the US, struggling with overcapacity and a potential legal battle with striking workers.
A complicated supply chain
The tariffs will make European automakers’ Mexican factories largely redundant, forcing them to shift production to the US. That is theoretically feasible but the brands will “need time to adapt,” said Pedro Pacheco, an auto expert at consulting firm Gartner.
“They won’t be completely exposed … but it makes things harder,” he said, especially when coupled with the various headwinds already buffeting the sector.
Another big problem is that most parts come from Mexican factories. The country is the world's fourth-largest automotive parts producer, most of which are sent north to US assembly plants.
In an attempt to shield automakers from some of Trump’s threats, European Union policymakers on 17 January 2025 overhauled a trade agreement with Mexico that gives European car manufacturers favorable export rates into the country.
German car lobby VDA hailed the deal as an “important political signal, especially in times of increasing protectionism,” while citing the importance of the Mexican market to its members.
The agreement could help Volkswagen. Looking to reduce high domestic labor costs, VW announced in December that it will move production of its Golf model from Germany to Mexico beginning in 2027.
The bulk of those vehicles will be exported back to Europe, giving some insulation to VW but not completely protecting it from the impact of any US-Mexico trade war.