As global tariffs have affected a broad array of industries and goods, the automotive manufacturing sector has been given particular attention by the Trump Administration.
On Inauguration Day, January 20, 2025, President Trump signed the America First Trade Policy establishing the foundation of the Administration’s forthcoming trade policy. This policy is to be built as one that places “the American economy, the American worker, and our national security first.”
Tariffs on Canada & Mexico
Less than two weeks later, the White House issued executive orders implementing 25% tariffs on goods from Canada and Mexico. Recognizing the impact the executive orders had on the American automotive industry, amendments were issued to exempt goods satisfying the rules of origin under the U.S.-Mexico-Canada Agreement (USMCA). According to the fact sheet accompanying the amended orders, “While the situations at our Northern and Southern borders continue to require appropriate action from the Governments of Canada and Mexico, our American automotive industry, which provides American jobs, should not suffer significant disruption just because of the structure of its supply chain.”
In Canada, five global original equipment manufacturers, including Ford and General Motors, assemble over 1.4 million commercial vehicles every year in addition to 700 parts suppliers. The automotive sector is one of the largest exporters in Canada, second only to the oil and gas sector.1 Over the last several years, Canada has placed an emphasis on carbon neutrality, and Canadian subsidiaries of U.S. automakers have announced significant investments to produce electric vehicles and manufacture batteries within the country according to the International Trade Administration (ITA).
In Mexico, according to 2023 figures provided by the ITA, the Mexican auto parts sector exported an estimated $90.3 billion in goods while the country imported $37.9 billion from the U.S., making the Mexican auto parts export market the largest for the U.S. and the fourth largest in the world.
The Administration is claiming national security as its primary reason to reclaim the domestic industrial base in the U.S. which has seen a 40-plus-year trend of reduced manufacturing.
Targeted Tariffs on Autos & Auto Parts
On March 26, 2025, the White House released a proclamation, specifically targeting imports of automobiles and automobile parts, stating: “In recent years, American-owned automotive manufacturers have experienced numerous supply chain challenges, including material and parts input shortages, labor shortages and strikes, and electrical-component shortages. Meanwhile, foreign automotive industries, propelled by unfair subsidies and aggressive industrial policies, have grown substantially. Today, only about half of the vehicles sold in the United States are manufactured domestically, a decline that jeopardizes our domestic industrial base and national security.”
The proclamation imposed 25% tariffs on imported passenger vehicles (sedans, SUVs, crossovers, minivans, cargo vans) and light trucks beginning on April 3, 2025. Furthermore, a 25% tariff on automobile parts (engines, transmissions, powertrain parts, and electrical components) will come into effect on May 3, 2025, except for parts that qualify for preferential treatment under the USMCA. Once the Secretary of Commerce establishes a process to apply the tariffs to the non-U.S. content of automobile parts under the USMCA, the agency will publish notice in the Federal Register to apply the tariffs.
The tariffs do not apply to the extent of an automobile’s U.S. content and systems that are covered by the USMCA. Importers may submit documentation identifying the U.S. content. U.S. content includes parts “wholly obtained, produced entirely, or substantially transformed in the United States,” according to the proclamation.
Importers should be wary of the consequences of overstating the U.S. content, as determined by U.S. Customs and Border Protection (CBP), which are:
- The tariff will apply to the automobile’s full value, regardless of the actual U.S. content.
- The tariff will be applied retroactively from April 3, 2025, to the date of inaccurate overstatement.
- The tariff will be applied prospectively from the date of inaccurate overstatement to the date the importer corrects the overstatement, and it is verified by CBP, on the full value of all automobiles imported of the same model.
The proclamation is accompanied by Annex I, which details the specific automobile types and automobile parts by heading number within the Harmonized Tariff Schedule subject to the tariffs.
Estimated Impact on the Automotive Industry
S&P Global Mobility has estimated the likelihood of three different scenarios of how tariffs may impact the North American auto industry:2
- First, a 30% chance of a quick resolution. Per S&P: “During this stage, we expect to see some automaker production lost due to supply issues and border gridlock, as well as short-term OEM production halts. With a quick resolution, lost sales and production can be regained. Border gridlock could be a major factor, as customs processes will need time to adjust and improve efficiency.”
- Second, a 50% probability of an extended disruption. S&P writes: “OEMs are expected to conserve inventory, replenish ‘tariffed’ stock slowly and focus on protecting profitability by replenishing slowly, limiting incentives and discounts and aiming to keep pricing strong. Significant production disruptions or stoppages for high- and mid-exposure vehicles, along with OEMs optimizing non-tariffed inventory, will restrict supply.”
- Third, a 20% chance of a “tariff winter.” S&P explains: “Moving that production to the U.S. to avoid tariffs on the auto industry could raise labor costs for manufacturing, worsen a general labor shortage and leave automakers and suppliers with underutilized plants in Mexico or Canada. Although some re-sourcing would occur, higher manufacturing costs could reduce North American light-vehicle sales by 10% for several years, with declines projected at 10% in the U.S., 8% in Mexico, and 15% in Canada.”
Inventory Implications
For purposes of U.S. Generally Accepted Accounting Principles (GAAP), ASC 330-10-30 provides guidance on the initial measurement of inventory. The standards provide when figuring the cost basis of inventory, “the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location.” Import costs, including tariffs, should therefore be capitalized under GAAP unless the cost is not recoverable. As such, importers should analyze their flow of cost recognition, whether utilizing first-in first-out (FIFO), average, or last-in first-out (LIFO) methods. Potentially, the cost of tariffs could be more quickly recovered when using the LIFO method.
How We Can Help
Subscribe to our weekly publication “From the Hill” to stay up-to-date on the latest tariff information and contact a Forvis Mazars professional today to learn more about tariff implications on the automotive manufacturing sector. Here are some FORsights™ related to tariffs that you may find helpful:3
- Tariff Implications for the Manufacturing Sector
- How the Manufacturing Sector Can Combat Inflation & Tariffs
- Tariff Mitigation in an Evolving Landscape
- Tariffs Got You Down? Aligning Customs Valuations & Transfer Prices
- Tariff 101: Quick Q&A Guide
- Webinar: Tariff Fundamentals & Current Policy Updates From Washington
- Webinar: A Deeper Discussion on Tariffs & Policy Updates From Washington