May 31, 2019

Trump's Mexico tariffs could decimate the auto industry

Dion Rabouin, author of Markets

Photo: Win McNamee/Getty Images

Already having laid off the highest number of employees in nearly a decade and attempting to recover from a year in which declining global car sales likely reduced world GDP by 0.2%, the auto industry is facing a direct hit from President Trump's threatened tariffs on all goods from Mexico.

Why it matters: Mexico recently became the No. 1 trading partner with the U.S., and a significant percentage of that trade is completed by auto companies. Much of the "trade" is American auto companies exchanging parts, goods and services within entities they own, Deutsche Bank Securities chief economist Torsten Slok pointed out in a note to clients Thursday night.

  • "Trade with Mexico is basically all about the supply chain, which essentially is all about cars."

Driving the news: Trump said the U.S. would add 5% tariffs on all Mexican imports "until such time as illegal migrants coming through Mexico, and into our Country, STOP," in a tweet Thursday night.

  • The White House followed up saying that if the "crisis" at the border isn't resolved, tariffs on Mexican goods will rise by 5 percentage points each month, as high as 25% on Oct. 1.

"The auto industry was already facing trouble," as ratings agency Fitch's chief economist Brian Coulton and analyst Pawel Borowski wrote in a report released Tuesday.

  • "The risk of increased tariffs on global auto trade remains real and would be a significant drag on global GDP if it were to materialize."
  • "The global nature of auto production makes the sector particularly vulnerable to an increase in tariffs."

The big picture: In addition to hurting consumers and company bottom lines, the tariffs are likely to impact jobs.

  • The auto industry is in the midst of a "significant shift," outplacement firm Challenger, Gray & Christmas reported earlier this month, as automakers face changing consumer demands and the implementation of automation.
  • The industry announced 19,802 job cuts through April. That is 207% higher than announced through the same period last year.
  • The total announced cuts for the first four months of this year is the highest since 2009, when 101,036 cuts were announced in the auto sector through April.

American companies have fared particularly poorly, exemplified by Ford’s May 20 announcement that it would cut 10% of its salaried workforce. Six months earlier, General Motors announced the closure of five plants and 14,000 job cuts. Tesla announced over 3,000 job cuts in January.

Go deeper: The world can't afford a trade war right now

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