Investing.com -- The U.S. auto industry faces a potential upheaval as President Trump proposes 25% tariffs on goods imported from Canada and Mexico, according to analysts at Bank of America (NYSE:BAC).
These tariffs, aimed at curbing the influx of illegal drugs and immigration, threaten to disrupt the supply chains of automakers such as Ford (NYSE:F) and General Motors (NYSE:GM), according to the bank.
They explain that imports from Mexico and Canada constitute a significant portion of the U.S. auto industry, with around 4 million light vehicles and $97 billion worth of parts crossing the borders annually.
Should the proposed tariffs materialize, BofA estimates an incremental $50 billion in costs for the sector. This would equate to an added $6,800 per imported vehicle and $2,300 per U.S.-produced vehicle, translating to a $3,300 increase per vehicle sold in the U.S.—a figure that rivals automakers' entire profit margins.
The bank believes Ford and GM, which produce 15-20% and 30-35% of their vehicles in Canada and Mexico, respectively, would be particularly hard-hit.
BofA notes that the gross impact on their earnings could mirror these percentages, as tariffs would make operations in these regions "largely unprofitable."
Without the ability to offset these costs through price increases, they state that the companies' production in Canada and Mexico would face severe challenges.
While BofA sees a lower-than-perceived likelihood of the tariffs being implemented, it acknowledges that the risk isn't negligible.
Analysts suggest that an eventual renegotiation of the USMCA agreement in 2026 could introduce more stringent rules of origin and higher tariffs on non-compliant goods.
However, they note that gradual implementation may provide automakers time to adjust their production strategies, potentially minimizing disruptions.