Automakers Are Paying The Price For Not Knowing What’s Inside Their Cars

• Cars coming to the US from Canada and Mexico are being hit with high tariffs.
• A study found automakers paid an average of 19 percent on each one in July.
• The rate suggests imported vehicles contain mostly parts not made in the US.

Automakers building cars in Canada and Mexico are feeling the heat from new US trade rules. The pressure isn’t just political; it’s also financial. Fresh data suggests that many of those vehicles contain less US-made material than required to qualify for available tariff breaks, and it’s landing them with huge bills.

Passenger cars imported from Canada and Mexico were hit with an average tariff rate of 19 percent in July, according to figures from the US International Trade Commission analyzed by T.D. Cowen.

Why The Numbers Don’t Add Up

That’s under a system that recognizes many imports do use American components, so only applies a 25 percent a tariff on parts not manufactured inside the United States.

Related: Canada Retaliates Against Two Major US Automakers

The 19 percent figure reported by Auto News hints that automakers are struggling to prove that enough of their cars are actually made with American parts. It could be that there isn’t sufficient US content in the cars to achieve greater tariff reductions.

However, there’s also a possibility that carmakers simply can’t provide the paperwork necessary to secure those reductions because of ineffective parts tracking and record keeping.

“There are a lot of complexities in the automotive sector, in particular to track parts, vehicles, USMCA, and how the tariff rates apply,” Angela Gamalski, a partner at Honigman specializing in international trade compliance, told Auto News. “The guidance and direction is still being released.”

Counting the Content

To comply with US-Mexico-Canada Agreement (USMCA) rules there are certain base-line numbers every car has to deliver. At least 75 percent of every vehicle must originate from North America, and 70 percent of the steel and aluminum used in the vehicle’s construction must also come from the same region.

On top of that, 40 percent or more must be traceable to plants where workers earn a minimum of $16 per hour. Auto parts when sold purely as components, however, are tariff-exempt.

This means any car not meeting those fundamental ground rules is slapped with a 25 percent levy on the whole value of the vehicle, and this could potentially be distorting the overall picture by inflating the average tariff paid to 19 percent, making the cars that do have high US content look bad.

Carmakers such as GM, Ford, Stellantis and BMW who all build cars in North America but outside the US, could take a gamble and overestimate the volume of foreign content.

But the penalties are severe and involve a 25 percent tariff being imposed on the whole car – and every identical car brought into the US since April 3.

The Auto World