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With a 25% tariff on steel and aluminum on the horizon (schedule for March 12) and the potential reinstatement of a 25% tariff on imports from Canada and Mexico (March 4), automotive companies are facing significant impact to their bottom line if they don’t properly prepare.
What to know about potential new tariffs
- Steel and aluminum tariffs. The 25% tariff on steel and aluminum is scheduled to go into effect March 12. Without any country exemptions or exclusions going forward, this has the potential to significantly drive-up costs - especially as it pertains to downstream derivative products made of steel and aluminum used in overall vehicle production.
- Canada and Mexico tariffs. Given the investment from auto companies in Canada and Mexico over the last few years to increase their footprint and diversify their supply chain, the potential reinstatement of a 25% tariff on all imports from Canada and Mexico on March 4 could bring disruption to the border and increase costs for auto parts and finished vehicles.
- Reciprocal tariffs. A review of other countries' trade practices with the U.S. has been formally announced, which could lead to reciprocal tariffs. Some public policy discussions have indicated that reciprocal tariffs could be commodity-specific, with the automotive industry mentioned as one of the potential sectors impacted. At this point, it is only discussion and still under review. While awareness is important, shippers do not need to react immediately.
Actions to consider now
- Evaluate supply chain risks. While the tariffs above are not in effect yet, you can identify where your supply chain may be exposed to the potential tariffs, including impact on raw materials, components, and finished products. Understanding your exposure will help you mitigate risks.
- Diversify suppliers. Consider diversifying your supplier base to reduce reliance on imports from just one or two countries. Pivoting sourcing locations can come with a high cost of change due to capital, retooling and labor expense. So, many supply chains have limited ability to pivot sourcing locations in the short-medium term, but there is value in looking for alternative suppliers to better protect your supply chain long-term. You can also explore domestic sourcing options or importing steel and aluminum materials but melting and pouring them domestically.
- Adjust inventory. Since increasing inventory is typically not an option for automotive supply chains due to its just-in-time nature, collaborate with your logistics partner to think through other inventory strategies to consider helping you alleviate potential cost increases and provide a buffer while you adjust your supply chain.
- Leverage trade programs. Utilize trade programs such as Foreign Trade Zones (FTZ) to defer or eliminate tariffs on products that will be later exported. This can help reduce your overall duty costs and improve cash flow.
- Stay informed and plan ahead. As policy discussions are happening more publicly, it is important to distinguish between what is in effect and what is simply being discussed. Participate in industry webinars, read trade advisories, and consult with trade experts to stay in the know.
