Tariff Turbulence: How Trump’s Mexico Tariffs Could Shift Gears in the U.S. Auto Market

Why Mexico Matters to American Automakers

The United States is the world’s largest car-importing country. It was by far the leading export destination for light vehicles made in Mexico, the world’s seventh-largest auto producer and fourth-largest vehicle exporter. Mexico’s auto plants are clustered in central Mexico in large complexes like Aguascalientes—which houses German, Japanese, and Korean automakers. Closer to the border, another cluster is in Nuevo León, where Hyundai-Kia is the largest producer, making mostly small sedans. Since 1986, Ford has operated in Sonora in northwestern Mexico where it produces compact SUVs such as the Bronco Sport and small pickup trucks such as the Maverick. (See figure 1.)

Figure 1. Mexico’s Auto Plants Exporting to the United States

In 2024, Mexico shipped about 2.8 million light vehicles to the United States, accounting for 80.2 percent of Mexico’s total light-vehicle exports. During that period, nearly half of Mexico’s car exports to the United States were produced by American automakers. Japanese brands made up about 32 percent, German brands slightly over 12 percent, and South Korean brands just above 6 percent. (See figure 2.)

Figure 2. About half of Mexican light-vehicles export to the United States are American brands

American Automakers Would Be Most Impacted by New Tariffs

The new tariffs on imports from Mexico will not hit all automakers equally. American giants like General Motors (GM) and Ford will feel the pinch more, considering the high-export intensity of their production in Mexico. In 2024, GM exported about 85 percent (some 712,000 vehicles) of its Mexican output to the U.S. market, while Ford exported 92 percent (358,000 vehicles) and Stellantis-Chrysler exported 77 percent (314,000 vehicles). Japanese automakers are unlikely to fare much better, with over half of all their Mexican production headed to the United States last year. Specifically, Nissan exported 53 percent of its Mexican-made vehicles to the United States (326,000 vehicles), Toyota 92 percent (228,000 vehicles), Honda 87 percent (211,000 vehicles), and Mazda 53 percent (113,000 vehicles). (See figure 3.)

Figure 3. Mexican Auto Production and Exports to the United States by Maker (thousands of units, 2024)

German automakers, however, could escape the worst of it. Their Mexican production is less dependent on the U.S. market compared with their American and Japanese peers. For example, Volkswagen exported 54 percent (287,000 vehicles) of its Mexican production to the United States last year, while BMW and Mercedes sent less than 40 percent (38,000 and 16,000 vehicles, respectively). (See figure 3.)

Hyundai-KIA, the only major South Korean automaker currently operating production plants in Mexico, could also face some challenges. Despite its smaller production volume compared to GM, Nissan, Volkswagen, Chrysler, and Ford, over 60 percent of Hyundai-KIA’s Mexican production was exported to the United States in 2024 (167,000 vehicles). (See figure 3.)

Altogether, American automakers produce more than 1,600,000 vehicles in Mexico, most of which are ultimately destined for the U.S. market. Vehicle production in Mexico has been expanding since bottoming out in 2021. GM and Ford have led the expansion into Mexico, increasing their local production by 75 percent and 52 percent respectively since 2021. By contrast, Stellantis-Chrysler has only increased its production by 5 percent over that same period.

Figure 4. Mexican Auto Production and By Home Country of Maker (millions of units, annual)

Japanese automakers have also increased their presence in Mexico. Nissan is the second-largest producer in Mexico, but a significant share of its production is compact cars and hatchbacks sold in the domestic market. Honda and Mazda produce primarily for the U.S. export market and are the only non-American producers to increase production by 50 percent or more since 2021.

The vehicles coming off Mexican assembly lines have among the highest margins in many makers’ lineups. At its plant near Mexico City, Ford produces the Mustang Mach-E, an electric crossover SUV that industry observers say is leading the company’s transition to the electric future. Similarly, in 2022, GM announced a $1 billion investment to modernize its Ramos Arizpe facility in northeastern Mexico to make electric vehicles and batteries.

Tariffs and the Difficulty of Reshoring Production Back to the United States

In the short run, President Donald Trump’s tariffs on Mexico and Canada are likely to prompt automakers to reevaluate their production strategies to mitigate the additional costs of tariffs. To the extent they can, they could boost production capacity at any of their U.S. plants that have spare capacity. The largest potential short-term production shifts will most likely come from GM plants in Oshawa, Canada, and Silao, Mexico, that produce Chevy and GMC-brand pickup trucks. GM plants in Roanoke, Indiana, and Flint, Michigan, already produce similar models and have spare capacity. (See figure 5.)   

Figure 5. Potential Auto Production Shift to U.S. Plants in Response to Tariffs on Imports from Mexico and Canada

Toyota’s production of RAV4 SUVs in its Ontario-based facilities could shift to Georgetown, Kentucky, although the latter is currently focused on sedans and would have to retool. Similarly, Hyundai’s facilities in Monterrey, Mexico, produce similar crossover SUVs to their facilities in Montgomery, Alabama, and could shift some production after a tariff adjustment. Shifts in production from other manufacturers will likely take a considerable amount of time and new investment.

Major U.S. automakers expanding their domestic production facilities could face delays in meeting the demand for shifting production back home. Ford’s $5.6 billion mega EV campus in Stanton, Tennessee, set to begin production in 2025, is designed to build next-generation electric F-series pickup trucks and is not comparable to its existing production line in Mexico. GM has a plan to convert its existing Orion Assembly in Michigan to build electric pickup trucks starting in 2026, which would not boost the production of its current models either. After delays due to negotiations with the United Automobile Workers Union, Stellantis-Chrysler aims to reopen its factory in Belvidere, Illinois, and open a new plant in Detroit. However, production at the plant would not commence until 2027 at the earliest.

Moreover, the tight labor market, rising cost of construction, and potential construction delays mean that it could still be more profitable to produce in Mexico than in the United States despite the tariffs.

How Tariffs Could Alter Auto-Sector Investment in Mexico

The tariffs are likely to cause some automakers to reconsider their near-term planning for investment in Mexico. For example, automakers such as Mazda and Tesla have either paused or cast doubt on plans to expand investment in Mexico because of the Trump tariffs. Market strategists have considered Mexico an ideal place to expand into North American markets thanks to Mexico’s membership in the United States-Mexico-Canada Agreement (USMCA), negotiated by the Trump administration in 2020.

According to the USMCA, for a car to qualify for tariff-free trade or a favorable tariff rate, at least 75 percent of its parts must originate from either the United States, Mexico, or Canada. Under the Joe Biden administration, the Inflation Reduction Act of 2022 specified that to qualify for a $7,500 tax credit, clean-energy vehicles had to be produced in North America. Those two requirements, combined with the global trend for nearshoring manufacturing supply chains, solidified Mexico’s strategic position as the best location to access the U.S. market. The automotive industry in Mexico was expected—before the reelection of Trump—to attract investments totaling approximately $1.9 billion over the next two to three years.

How Chinese EV Makers Have Responded to Tariff Threats

Interestingly, automaker BYD has denied reports of halting its investment in Mexico due to the uncertainty associated with the Trump tariffs. The company announced that it will proceed with plans to build its first plant in Mexico to serve the local market rather than focusing on exports. However, after Trump won re-election in November 2024, Mexican President Claudia Sheinbaum said at a press conference addressing concerns about the upcoming 2026 review of USMCA that there are no concrete plans for a Chinese EV maker to set up a plant in Mexico. At present, Jianghuai Automotive is the only Chinese automaker with significant production facilities in Mexico, following a strategy of only pursuing domestic-market sales.

Although Chinese electric vehicles are still more expensive than gasoline models, their fuel cost is only 30 percent that of gasoline models, making them a cost-effective choice over time. Chinese EV makers like BYD and its partner companies are expanding to Mexico, not just to build factories for cars and auto parts but also to build BYD-compatible charging facilities in the country.

Similarly, days after Trump’s reelection, Toyota Motor confirmed its plans to invest an additional $1.45 billion to expand its existing plants in Baja California and Guanajuato to increase its production of Tacoma pickup trucks and its hybrid equivalent, which could create 1,600 new jobs.

President Trump’s threat of tariffs serves as a warning that automakers with significant sales to the United States need to diversify their market exposure. Meanwhile, automakers that do not have major exposure to the U.S. market—such as Chinese EV makers—will not be afraid of losing the market, as consumers could delay or downgrade purchases due to higher prices they will have to pay as a result of tariffs.

As EVs gradually expand their market shares around the world, U.S. tariffs on Mexican imports could inadvertently further elevate the comparative advantage of Chinese EV makers and manufacturers in the supply chains at the cost of American automakers. Major traditional American automakers have already encountered significant price pressure from low-cost but good-quality Chinese EVs. Chinese EV makers, such as BYD and NIO, are seeking to redefine luxury for the auto industry.