New York (CNN) — President Donald Trump predicted that his newest auto tariffs will lead automakers to shift their car production, and their supply chains, to American factories. But it’s not that easy. Not by a long shot.
A wide variety of tariffs have either already hit, or are about to hit, the auto industry, potentially adding thousands of dollars to the cost to build and buy a new car. Duties of 25% on steel and aluminum imports are already in effect, raising the price of aluminum and steel, even when those metals are produced at US mills.
Trump announced fresh levies set to take effect April 3 on cars and auto parts from Asia and Europe, as well as those from Canada and Mexico.
The Canadian and Mexican tariffs will be the most damaging to most automakers, which depend on those neighboring countries not just for some of their production, but for a large share of the parts they use to assemble cars.
“If you build your car in the United States, there is no tariffs,” Trump told journalists at the Oval Office. But in fact, the executive order he was signing placed tariffs on more than half of the parts used to build cars at US plants.
“A lot of companies are going to be in great shape because they’ve already built their plants, but their plants are under utilized,” he said. “So they’ll be able to expand them inexpensively and quickly. Others will come into our country and build and they’re already looking for sites. We’re signing an executive order that is going to lead to tremendous growth in the automobile industry.”
Trump’s remarks suggest the shift can be accomplished quickly, and without downsides. But that’s far from the truth.
‘A lot of costs, and a lot of chaos’
While automakers are seeing “a lot of cost and a lot of chaos” from Trump’s tariff threats, as Ford CEO Jim Farley said at an investor conference last month, they’re still not going to build new plants. At least not immediately.
Part of that is because Trump’s on-again-off-again levies don’t provide the certainty that automakers need to invest billions of dollars in new plants.
“If they become permanent, then there’s a whole bunch of different things that you have to think about, in terms of where do you allocate plants, do you move plants, etc,” General Motors CFO Paul Jacobson told investors last month.
But he said the company has too many questions about the future of trade policy to make those kinds of decisions at this time.
“Those are questions that just don’t have an answer today,” he said. “Think about a world where we’re spending billions in capital, and then it ends. We can’t be whipsawing the business back and forth.”
Trump said these auto tariffs will be in place at least throughout his current term.
“This is permanent,” he said. “100%.”
But after seeing Canadian and Mexican tariffs announced and then put on hold a couple of times already this year, automakers aren’t really sure what’s next. And even if they believe the tariffs will be in place for as long as Trump is in office, they say there’s no way to quickly pivot to significantly limit the costs of the tariffs being passed onto car buyers.
The difficulty in shifting production
“There are not a lot of levers we can pull in the very short term,” said one auto industry executive, who spoke on background to CNN on Wednesday, in anticipation of Trump’s announcement. “We’re talking about a capital-intensive industry. We’re certainly thinking about what we would do in different scenarios.”
The automakers came up with their supply chains and geographic distribution of plants with the understanding that previous trade deals, including the United States Mexico Canada Agreement (USMCA) which was negotiated by Trump during his first term, allowed them to operate as if North America was essentially a single market.
They were moving parts back and forth across borders during the assembly process. Now they’re being told there is a costly penalty to doing that.
Asked if production could be moved back to the United States, as Trump has suggested will happen, the executive said there are many challenges with that approach.
“If you’ve ever done a home renovation, you know that anything is feasible if you put enough money behind it, right? But economically feasible is a different question,” said the executive. “It takes time, particularly since we are close to capacity in most facilities still coming out of the supply chain crunch. So you’re talking investing in new physical capacity in the US, which has a very long lead time.”
But even if the tariffs stay in place throughout Trump’s term, and they’re not part of a negotiating strategy to change the USMCA North American free trade agreement, automakers say it is difficult to build plants based on one administration’s tariff policy.
“It’s three years at best for brand new automotive capacity that could potentially span into a new administration, where the rules could change,” said the executive. “So just by the time that capacity was coming online, you might find that was no longer your optimal footprint.”
And automakers are still unsure which tariffs are permanent, and which are simply a “negotiating tactic,” former Ford CEO Mark Fields said in an interview with CNBC.
“Most boards are going to wait for the smoke to clear,” Fields said.
Even something as seemingly simple as switching a factory to make a different model can shut the plant down for a year or more. It also takes years for an automaker to go from announcing a new factory to the first car rolling off the assembly line. That’s even in the case when it’s a closed plant that is being reopened.
Stellantis, which makes cars in North America under the Jeep, Ram, Dodge and Chrysler brands, agreed to re-open a shuttered plant in Belvidere, Illinois, as part of a deal to end a 2023 strike by the United Auto Workers.
It pointed to those re-opening plans once again in January, soon after Trump took office, to assure him that it would increase American car production. But that plant won’t reopen until 2027.
No such thing as an all-American car
Even cars built at US plants are looking at thousands of dollars in tariffs on all the parts imported from Mexico, Canada and elsewhere, which make up a majority of the cost of assembling them. Anderson Economic Group, a Michigan-based think tank, estimates that those tariffs could raise costs by between $3,500 to $12,000 per vehicle.
But shifting that supply chain is nearly as difficult as building new plants, said the executive who spoke with CNN.
“These are questions we asked throughout the supply chain crisis, and it does take time and investment of funds to be able to … bring new suppliers on board,” said the executive. The parts produced at new US plants need to be validated to make sure they work as designed.
“So again, could it be done? Yes, but that is also not something you can just do by flipping a switch in the short term,” said the executive.
The tariffs could also raise the prices that suppliers charge for parts and for raw commodities — like steel, aluminum and copper — because domestic producers know that their foreign competitors can no longer sell as cheaply to US customers.
Although the steel and aluminum tariffs won’t raise automakers’ immediate costs thanks to their long-term contracts with suppliers, future costs will likely go up, even if they buy from American producers, since those suppliers will be able to raise prices.
Both General Motors and Ford have estimated that increased commodity costs following the imposition of Canadian steel and aluminum tariffs in 2018 cost them more than $1 billion each annually. American steel prices have already risen 30% or more in the last two months, according to Phil Gibbs, steel analyst for KeyBanc. Aluminum prices are up about 15%.
No new plants planned yet due to tariffs
Trump insists that automakers are already making plans to open new US auto plants.
“We’re going to have growth in the auto industry like nobody’s ever seen — plants are opening up all over the place,” he said in his recent address to Congress.
“A lot of companies are going to be in great shape because they’ve already built their plants, but their plants are under utilized,” he said Wednesday. “So they’ll be able to expand them inexpensively and quickly. But others will come into our country and build and they’re already looking for sites. There’s tremendous action.”
“We’re already setting records for new plants,” he said. “The tally, just within a period of a few weeks is very large. I think our automobile business will flourish like it’s never done before.”
One plant that Trump heralded during his recent address to Congress, as well as in remarks Wednesday, is a new Honda plant in Indiana, which he said will be among the biggest anywhere. He said on Wednesday that Honda had started construction, but Honda confirmed hours later that it had not announced any such plans.
Most auto and parts plants now under construction are partly funded with federal assistance from the Inflation Reduction Act, the green energy bill passed during the Biden administration. They plan to build electric vehicles and the batteries needed to power them. But Trump has said he wants to see that government program rolled back.
What’s clear is that automakers would have significantly less cash to build any new facilities should tariffs upend the industry.
“Let’s be real honest: Long term, a 25% tariff across the Mexico and Canada borders would blow a hole in the US industry that we’ve never seen,” Ford’s Farley said in his recent comments to investors.
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