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[Tvt News]Why Trump’s tariffs on Mexico would materially hurt North America’s entire auto sector

Hundreds of auto parts suppliers could be pushed to raise prices if President Donald Trump follows through on his threat to place tariffs on Mexican imports to the United States, a plot twist analysts predict would have a material impact on the entire North American automotive sector given how intertwined supply chains are across the three countries.

Sixty-five Canadian auto parts makers that run 120 plants in Mexico would be directly affected if Trump slaps a 5 per cent tariff on any good from Mexico, rising to up to 25 per cent unless America’s southern neighbour stops asylum seekers from crossing the border.

These auto parts plants, where an estimated 44,000 workers make parts for vehicle assembly in both Mexico and the U.S., would in turn pass the costs on to their customers, raising costs in a mature industry that’s already grappling with single-digit profit margins, Automotive Parts Manufacturers’ Association president Flavio Volpe said in an interview.

“There are no borders,” said Volpe. “If it’s imposed, it may have a material impact.”

Just the threat of new tariffs beginning on Jun. 10 spooked auto industry investors. The stock prices of Canada’s two largest auto parts makers, Magna International Inc. and Linamar Corp., dipped nearly 2 per cent and 3 per cent on Friday. A Magna spokesperson said it would be premature to comment on the situation at this point.

The big three American automakers fared worse in trading. Share prices for Fiat Chrysler Automobiles and General Motors Co. dropped more than 4 per cent, while Ford Motor Co.’s shares fell nearly 3 per cent.

Jay Timmons, president and CEO of the U.S. National Association of Manufacturers, said that the immigration will not be resolved by blaming countries.

There are no borders

Flavio Volpe, Automotive Parts Manufacturers’ Association president

“Intertwining difficult trade, tariff and immigration issues creates a Molotov cocktail of policy, and America’s manufacturing workers should not be forced to suffer,” he said.

There appeared to be “no policy rhyme or reason” for the tariffs that Trump announced just as progress was being made on ratifying the new NAFTA, Volpe said. The auto industry had originally chafed at the renegotiated trade deal, but players from all three countries had accepted the final terms and were hoping for them to be cemented in the name of certainty.

Additional promise of a resolution came after the U.S. dropped tariffs on Canadian and Mexican steel an aluminum, leaving analysts questioning the president’s use of tariffs as a weapon in various trade wars.

“Really? A trade war with Mexico? Wasn’t that one of the things that we had just put to bed…” CIBC Economics’ Avery Shenfeld noted to clients Friday.

“What’s roiling markets is not that the White House is engaged on the trade file, it’s the non-transparent and capricious manner in which protectionist tools are being deployed.”

But a measured response from Mexican President Andres Manuel Lopez Obrador gave analysts hope that a tariff-free resolution could be found in the 10 days before Trump plans to implement the tariffs.

What’s roiling markets is not that the White House is engaged on the trade file, it’s the non-transparent and capricious manner in which protectionist tools are being deployed

CIBC Economics’ Avery Shenfeld

“It’s important for everybody in the auto sector with investment in Mexico, and that’s literally everybody, that the president of Mexico is the adult in the room,” Volpe said, adding the Canadian government should stay out of it.

Obrador had just sent the new agreement to the Mexican Senate for approval later this year.

On Friday, Lopez Obrador’s trade negotiator called Trump’s threat “most serious” but held back on harsh criticism. Jesus Seade said if the United States imposes new tariffs Mexico will have to respond forcefully but he wants to see how real the threat is.

Prime Minister Justin Trudeau also introduced ratification legislation in the House of Commons earlier this week.

The U.S. also submitted a draft statement of administrative action along with the final text of the USMCA to Congress, triggering a 30-day countdown until the administration can submit the final USMCA legislation to Congress.

International trade lawyer Mark Warner is optimistic Trump could make a U-turn in the next 10 days. The Mexicans have shown tremendous skill negotiating with Trump, Warner said, adding that increases the likelihood they’ll find a face-saving solution in the tight timeframe.

While placing tariffs on Mexico was an unexpected tactic, Warner said it’s not a surprise that Trump did something given his frustration at Democrat Speaker of the House Nancy Pelosi and her reluctance to put the USMCA to Congress to a vote.

“That frustration is building, he wants to get it done in the summer,” Warner said. “You never quite know what you’re going to get from Trump.”

An Oxford Economist analyst thinks the new tariffs would reduce U.S. GDP growth by at least 0.7 percentage points in 2020, taking this down to 1 per cent or below, and “will likely also push Mexico into a recession.”

With a file from The Canadian Press

• Email: ejackson@nationalpost.com | Twitter: theemilyjackson

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