Auto Industry Braces for Potential Tariff Shock
The auto industry is on edge as potential tariff increases on imported vehicles loom, with implications that could significantly reshape the landscape for both European and American manufacturers.
S&P Global estimates that a 20 percent tariff on light vehicles imported from the European Union (EU) and the United Kingdom, coupled with a 25 percent tariff on imports from Mexico and Canada, could lead to a worst-case scenario of a 17 percent decrease in combined annual EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for automakers.
OEMs (Original Equipment Manufacturers) heavily reliant on European production, such as Volvo Cars and Jaguar Land Rover, are particularly vulnerable. General Motors (GM) and Stellantis could also face substantial risks due to their extensive assembly operations in Mexico and, to a lesser extent, Canada.
While the full impact of these tariffs remains uncertain, OEMs are expected to implement various strategies to navigate the potential cost increase. These measures, combined with stricter CO2 regulations in Europe starting in 2025 and intensified competition from companies in China and Europe, could lead to downgrades of car manufacturers’ credit ratings.
However, the potential impact on automakers’ profits is likely to be less severe than the maximum exposure estimated by S&P Global.
Cutting across tariffs will offer limited solace for the industry. Toyota Motor Corp. and Hyundai Motor Co. (Hyundai-Kia) are also seen as potential casualties, although the scale, scope, and timing of any tariffs remain unclear.
These potential tariffs are part of a broader overhaul of trade policies, including the Inflation Reduction Act and the Free Trade Agreement with Mexico and Canada, which is due for review in mid-2026.
Former President Trump announced his intention to impose a 25 percent tariff on imports from Canada and Mexico on November 25, 2024, a move with the potential to further disrupt the auto industry.
Automakers have been classified into three risk categories based on the potential impact of these tariffs. Those facing less than 10 percent risk include BMW, Ford Motor Co., Mercedes-Benz Group AG and Hyundai-Kia. Volkswagen AG and Toyota fall into the 10 percent to 20 percent risk zone, while GM, Stellantis NV, Volvo Car AB, and Jaguar Land Rover Automotive PLC face the highest risk, exceeding 20 percent.
The potential impact on credit ratings hinges on individual companies’ existing credit headroom and their success in mitigating risks. At present, the isolated impact of higher tariffs is unlikely to trigger credit downgrades, as automakers will likely implement countermeasures.
Toyota and Hyundai-Kia are projected to remain among the top importers of finished vehicles in the US through 2025, with import volumes anticipated to surpass 10 percent of their global sales.
While Stellantis’ exposure to European imports is relatively low, the company would still be vulnerable to tariffs on imports from Mexico and Canada.
In contrast, Volkswagen’s exposure mainly stems from its premium Audi and Porsche models, whereas BMW and Mercedes-Benz face relatively low tariff exposures.
Meanwhile, US-based automakers Ford and GM rely heavily on production facilities in Mexico, capitalizing on cheaper labor costs and favorable trade agreements. These tariffs could jeopardize around 17 percent of the EBITDA of affected European and US automakers.
Volvo Cars and JLR face the highest risk, potentially seeing their EBITDA eroded by more than 20 percent.
Conversely, the impact on the EBITDA of BMW and Mercedes would
How will potential tariffs on imported vehicles impact the profits of major automakers?
## Auto Industry Braces for Potential Tariff Shock
**Interviewer:** Welcome back to the show. Today we’re talking about a potential shakeup in the auto industry, with looming tariff increases on imported vehicles threatening to reshape the industry landscape. Joining us to discuss this is Alex Reed, a leading expert on global automotive markets. Thanks for being here.
**Alex Reed:** Thanks for having me.
**Interviewer:** So, These potential tariffs are causing quite a stir. Can you give us an overview of what’s at stake?
**Alex Reed:** Absolutely. The situation is definitely tense. The possibility of a 20 percent tariff on vehicles imported from the European Union and the UK, coupled with a 25 percent tariff on imports from Mexico and Canada, has sent shockwaves through the industry. S&P Global estimates this could lead to a worst-case scenario of a 17 percent drop in annual profits for automakers [ [1](https://www.usatoday.com/story/money/2024/11/29/automaker-profits-trump-tariffs/76665630007/)].
**Interviewer:** That’s a substantial number. Which automakers are likely to be hit hardest by these tariffs?
**Alex Reed:** Companies heavily reliant on European production are particularly vulnerable. Think Volvo Cars, Jaguar Land Rover – they could see a significant impact. Even giants like General Motors and Stellantis, with their large-scale assembly operations in Mexico, are facing considerable risks.
**Interviewer:**
So, what strategies are automakers looking at to cope with this potential cost increase?
**Alex Reed:** They are exploring various options. Some are considering shifting production to avoid the tariffs, others are looking into raising prices, and some are streamlining operations to cut costs. However, these measures come with their own challenges.
**Interviewer:** You mentioned the Inflation Reduction Act and the Free Trade Agreement with Mexico and Canada. How do these play into the current situation?
**Alex Reed:** These are part of a bigger picture of evolving trade policies. The Inflation Reduction Act includes incentives for domestic production, which could favor US automakers. Meanwhile, the Free Trade Agreement with Mexico and Canada is due for review in mid-2026, which could lead to further changes in trade dynamics.
**Interviewer:** It seems like the auto industry is facing a period of significant uncertainty. What are your predictions for the future?
**Alex Reed:** It’s a challenging environment for sure. The full impact of these tariffs is uncertain. However, given the industry’s resilience and the various strategies being employed, I expect we’ll see a complex but ultimately adaptable response to these challenges.
