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U.S. Import Tariffs: A Looming Threat for Auto Industry

• S&P Global warns that US import tariffs could cause carmakers to lose up to 17% of their annual profits.
• The tariffs could be more damaging for European car makers like Volkswagen and Stellantis and their suppliers.
• S&P's analysis presents a worst-case scenario where a 20% tariff on U.S. light vehicle imports from the EU and the UK, and a 25% tariff on imports from Mexico and Canada is imposed.
• The potential imposition of tariffs by the U.S. on imports from Europe, Mexico, and Canada could have significant impacts on the automotive industry and beyond.

The recent report by S&P Global has sent shockwaves through the automotive industry. It reveals that if the U.S. imposes import tariffs on Europe, Mexico, and Canada, European and American carmakers could lose up to 17% of their combined annual core profits. This warning is accompanied by the potential threat of credit downgrades. Premium automakers such as Volvo and Jaguar Land Rover, who primarily produce in Europe, and groups like General Motors and Stellantis, who assemble high volumes of cars in Mexico and Canada, are most exposed to the threat of higher tariffs.

The significance of this development was underscored by President-elect Donald Trump's announcement that he would impose a 25% duty on imports from Canada and Mexico until they clamped down on drugs and migrants crossing the border. This move appears to violate a free-trade deal between the three countries. Analysts and experts fear that these tariffs could be more damaging for European car makers like Volkswagen and Stellantis and their suppliers than any direct tariffs on EU goods.

S&P Global stated, We expect mitigating actions will make potentially higher tariffs manageable, but the combined effects of tariffs, tighter CO2 regulation in Europe from 2025, and earnings pressure from stronger competition in China and Europe could increase the risk of downgrades.

Impact on the Automotive Industry

In the context of these developments, it is important to note that starting in 2025, the EU will lower a cap on average emissions from new vehicle sales to 94 grams/km from 116 g/km. This regulation could further impact the profitability of car manufacturers.

S&P's analysis presents a worst-case scenario where a 20% tariff on U.S. light vehicle imports from the EU and the UK, and a 25% tariff on imports from Mexico and Canada is imposed. In this scenario, GM, Stellantis, Volvo, and Jaguar Land Rover could see more than 20% of their projected adjusted EBITDA at risk in 2025. The risk is between 10% and 20% for Volkswagen and Toyota, and below 10% for BMW, Ford, Mercedes-Benz, and Hyundai.

In response to Trump's tariff threats, President Biden expressed his hope that Trump would rethink the tariffs on Mexico and Canada. He stated, I think it's a counterproductive thing to do, and emphasized the importance of maintaining good relationships with the U.S.'s neighboring countries.

Broader Economic Implications

The potential impact of these tariffs extends beyond the automotive industry. For instance, the U.S. needs to import crude oil to meet its daily consumption needs, and Canada is its biggest foreign supplier, sending more than 4 million barrels daily, largely by pipeline. Scott Lauermann, spokesperson for API, a trade group representing the U.S. natural gas and oil industry, stated, Maintaining the free flow of energy products across our borders is critical for North American energy security and U.S. consumers.

The Canadian dollar and Mexican peso have already experienced a tumble in response to Trump's tariff threats. The U.S. dollar surged more than 1% to a four-and-a-half-year high against its Canadian counterpart and more than 2% against the Mexican peso. The greenback also rose to its highest since July 30 against China's yuan.

Historically, the imposition of tariffs has often led to trade wars, which can have far-reaching economic impacts. For instance, the U.S.-China trade war that began in 2018 led to increased prices for consumers and businesses, job losses in certain industries, and a slowdown in global trade. The current situation could potentially lead to similar outcomes if not managed carefully.