Beginning from 3 April 2025, all vehicles assembled in Canada or Mexico entering into the United States are being subjected to a 25% tariff. Though President Trump has backed away from most of his “liberation day tariffs,” those that were imposed on the auto sector remain in place. The President’s ultimate goal is to bring manufacturing and jobs back to the United States. However, it probably won’t be easy to disentangle North America’s automotive supply chains. Moreover, decision to impose tariffs collides with decades of economic integration under NAFTA and its successor, the USMCA.
The Deep Integration of the North American Auto Industry
The auto industries of the United States, Canada, and Mexico are profoundly interconnected. Since the Auto Pact of 1965, and especially following the implementation of NAFTA in 1994, automakers and suppliers have optimized their operations across borders to reduce costs, increase specialization, and leverage regional strengths.
A single car assembled in Michigan or Ontario may contain components that have crossed the U.S.-Canada or U.S.-Mexico border multiple times during production. But how is that possible? Below we give a couple of examples to highlight the point;
Examples
It’s clear that North American’s automotive supply chains are seriously entangled. This intricate web of supply chains involves the United States, Canada, and Mexico, each playing a crucial role in the manufacturing process. But what do we mean by that? Here are a few examples illustrating the interconnectedness that exists in auto parts manufacturing:
1. Engine Blocks
- Canada: A Canadian foundry might specialize in casting raw engine blocks. They leverage Canada’s resources and skilled labor for this initial stage of production.
- United States: These raw blocks could then be shipped to the U.S. Midwest, where machining and assembly of internal components (pistons, crankshafts, etc.) take place. The U.S. has a strong history and expertise in engine manufacturing.
- Mexico: Finally, the completed engine might be sent to an assembly plant in Mexico, where it is installed into a vehicle destined for the North American or global market. Mexico has become a significant hub for vehicle assembly due to competitive labor costs and free trade agreements.
2. Wiring Harnesses:
- Mexico: Mexico has become a major global center for the production of wiring harnesses due to its skilled workforce and cost-competitiveness. These complex systems, containing hundreds of wires, connectors, and terminals, are often assembled in Mexican plants.
- United States: The individual electrical components (wires, connectors) used in the harnesses might be manufactured by specialized companies in the United States, leveraging advanced manufacturing technologies.
- Canada: Certain high-tech sensors or electronic control units that integrate with the wiring harnesses could be produced in Canada, benefiting from its research and development capabilities in electronics. The completed harnesses are then shipped to assembly plants across North America.
3. Interior Components (e.g., Seats):
- United States: A U.S. company might specialize in the design and engineering of automotive seating systems, including safety features and ergonomic designs.
- Canada: Canadian manufacturers could supply specialized materials like high-performance textiles or foams used in the seat construction.
- Mexico: The actual assembly of the seats, including cutting fabric, sewing covers, and assembling frames, is often done in Mexico due to its labor force and proximity to assembly plants. These finished seats are then shipped to vehicle assembly lines in all three countries.
4. Electronic Components (e.g., Sensors, Control Units):
- Canada: Canada has a growing strength in the development and manufacturing of advanced electronic components and software for vehicles, including sensors for driver-assistance systems.
- United States: The U.S. has a leading role in semiconductor design and manufacturing, which are crucial for many electronic control units in modern vehicles.
- Mexico: Final assembly of electronic modules or integration of circuit boards into housings might occur in Mexico before being shipped to vehicle manufacturers throughout North America.
How NAFTA and USMCA Wove the North American Auto Web
The intricate web of supply chains that drives the auto industry in North America didn’t emerge overnight; it’s a direct result of trade liberalization policies, primarily the North American Free Trade Agreement (NAFTA) and its successor, the United States-Mexico-Canada Agreement (USMCA).
Before NAFTA, which came into effect in 1994, the automotive sectors in the three countries operated more independently, often facing tariffs and other trade barriers. NAFTA dismantled these barriers, paving the way for a more integrated and efficient manufacturing landscape.
NAFTA: The Catalyst for Integration
NAFTA’s elimination of tariffs on automotive goods created a powerful incentive for automakers to optimize their production across the continent. Companies could strategically locate different stages of manufacturing in the country offering the most cost-effective or specialized environment.
- Mexico: With its lower labor costs, Mexico became a hub for labor-intensive manufacturing processes like wiring harnesses and assembly.
- United States: The U.S. maintained its strength in high-value manufacturing, research and development, and the production of complex components.
- Canada: Canada specialized in certain parts production and assembly, leveraging its skilled workforce and proximity to the U.S. market.
The cross-border flow of auto parts led to the development of sophisticated just-in-time (JIT) supply chains, where parts arrive at assembly plants precisely when needed, minimizing warehousing costs and maximizing efficiency.
USMCA: Refining and Reinforcing the Links
While NAFTA fostered deep integration, concerns arose over issues like wage disparities and the need for more regional content. The USMCA, which replaced NAFTA in 2020, aimed to address these concerns while largely maintaining the framework of free trade.
A key aspect of USMCA relevant to the automotive sector is its Rules of Origin. These rules specify the percentage of a vehicle’s value that must originate in North America to qualify for tariff-free treatment. The USMCA increased this threshold, encouraging even greater regional sourcing of parts and components.
This increased regional content requirement under USMCA further incentivizes manufacturers to deepen their supply chains within North America, solidifying the interconnectedness that NAFTA initiated. While the specific sourcing decisions of companies are complex and influenced by many factors, the trade agreement creates a strong pull towards regional integration.
Tariffs Threaten a Fragile Ecosystem
Imposing tariffs on Canadian and Mexican auto imports into the United States doesn’t just affect finished cars—it reverberates through the entire value chain, increasing costs at every step. We have already noted that some parts cross the border multiple times before being assembled on a finished car.
The ecosystem is fragile. It’s the reason why there has been so much consternation following the decision by President Trump to impose tariffs on Canada and Mexico. Add to that the fact that Canada has imposed it’s own 25% tariffs on auto imports from the U.S and you will see the challenges that lie ahead.
Cost Breakdown of a Typical North American Car
| Component | Typical Origin | Cross-Border Movements | % of Vehicle Cost |
|---|---|---|---|
| Engine | U.S./Canada | 2–3 | 20% |
| Transmission | Canada/Mexico | 3–4 | 15% |
| Electronics | Mexico/Asia | 1–2 | 10% |
| Interior Systems | U.S./Mexico | 2 | 10% |
| Final Assembly | Varies | — | 30% |
The above table illustrates how a tariff at just one link in the chain can increase total vehicle production costs by thousands of dollars. These costs are either passed on to consumers or absorbed by manufacturers—often with job losses as a result.
Why Realignment Isn’t So Easy
We noted at the beginning of this article that President Trump seeks to bring manufacturing back to the United States. However, doing so is not that easy. Neither is it the task of a single day. Here’s why:
- Infrastructure Investments: Automakers have invested billions of dollars in specialized plants. Shifting production would require massive new capital expenditures.
- Workforce Specialization: Canadian and Mexican plants aren’t just cheap—they’re good. Canada has expertise in high-tech components; Mexico excels in labor-intensive production. Replacing this workforce advantage isn’t trivial.
- Just-in-Time Logistics: The industry depends on fast, predictable shipping times. Redesigning supply chains could require months of delays in parts delivery and increased inventory costs.
How long will it take to reshore?
So, how long will it take to back automotive manufacturing to the U.S and at what cost? Below we look at just a few parts;
| Component | Time to Reshore | Cost Estimate |
|---|---|---|
| Transmission | 3–5 years | $500M+ |
| Wiring Harnesses | 2–3 years | $250M |
| Dashboard Modules | 1–2 years | $100M |
The Bigger Picture: Economic Fallout
If tariffs persist, the consequences could be sweeping:
- Job losses across North America, including in U.S. states where Canadian parts are integral to production.
- Slower innovation, as companies divert R&D budgets to manage trade barriers.
- Rising vehicle prices, potentially pricing out many middle-class consumers.
Unraveling the Knot is Costly
North America’s auto industry isn’t just interconnected—it’s interdependent. While protectionist measures like tariffs may seem like a quick fix, they risk destabilizing an ecosystem built over generations. If the goal is to strengthen U.S. manufacturing, policymakers must account for the reality that in today’s auto industry, what’s good for Canada and Mexico is often good for the U.S. too.