Trump's tariffs risk decades of auto industry integration: RBC

Investing.com -- As auto stocks bounce back on Monday from a tariff-induced selloff last week, RBC (TSX:RY) outlines the potential impact from President Donald Trump's auto tariffs on an industry that relied on decades of cross-border integration. 

"These tariffs could have wide-ranging ramifications due to the multi-layered supply chain linkages of the North American auto sector," RBC analysts said in a note following the Trump administration's 25% announcement to impose tariffs on all cars not made in the United States.

Auto stocks including Ford Motor Company (NYSE:F), and General Motors Company (NYSE:GM) attempted to bounce back from a selloff last week, while Stellantis NV (BIT:STLAM) remained under pressure.

The 25% tariffs on imported automobiles and parts, which are set to go into effect Apr. 3, are expected to disrupt an industry that has relied on decades of cross-border integration.

The U.S.-Canada Auto Parts Pact of the 1960s and Mexico's exemption from tariffs in the 1980s paved the way for highly integrated supply chains, boosting specialization and production volumes across North America.

While the tariffs threaten to undo this deep integration that cut vehicle costs for consumers and provided the sector with global competitive muscle, there is a short-term silver  amid widely expected headwinds, the analysts said.

Higher Consumer Prices and Substitution Risks

The tariffs will likely drive up consumer prices for both new and used vehicles. RBC estimates that producers may face additional costs of $3,000 to $6,000 per vehicle depending on foreign content, much of which could be passed on to consumers. This price increase is expected to show up in CPI data for at least 12 months and could push buyers toward used vehicles as a cheaper alternative, further driving up prices in that segment.

"Autos and parts account for just under 7% of the headline CPI basket and 9% of the core basket, so any significant price increases for consumers will show up in the broader measures," the analysts said.

Potential for Layoffs Amid Weaker Demand

While the administration has promoted tariffs as a way to reshore jobs, RBC warns that weaker demand for new vehicles—due to higher prices—could lead to production cuts and layoffs in the sector. Middle- and lower-income consumers may hold onto their current vehicles longer or opt for used cars, while reciprocal tariffs could weaken demand for U.S. exports abroad.

Long-Term Challenges for Reshoring

RBC also raises concerns about the feasibility of reshoring production over the long term. Labor supply constraints, including an aging population, weaker immigration, and skills mismatches, could weigh heavily on efforts to bring more factories back to U.S. soil.