Auto tariffs between the US and Canada remain a moving target, with market watchers bracing for potential disruption even as many analysts doubt the sustainability of steep levies.
The US is a net exporter of manufacturing goods to Canada, particularly autos. North American auto parts cross borders multiple times before assembly. Canada supplies between 8 and 9% and Mexico 20% of US vehicle consumption. Tariffs could raise car prices by $3,000, trigger retaliatory actions, and disrupt trade, harming all three economies, according to TD Economics.
“Our view remains that sustained auto tariffs on Mexico and Canada at a 25% level is unlikely,” UBS analysts wrote in a note this week.
“That does not mean they won’t be in place for a period of time.”
The US is Canada’s largest auto trade partner, making up 95.3% of exports and 57.7% of imports, while Mexico accounts for 2.5% of exports and 14.5% of imports, according to DesRosiers Automotive Consultants.
With the Trump administration’s April 2 deadline—dubbed “Liberation Day” by some in the industry—fast approaching, UBS analysts have outlined the possible fallout from a 25% tariff on auto imports from Canada and Mexico, offering a sobering look at the economic ripple effects.
Multiple scenarios, uncertain outcomes
UBS analysts see five possible scenarios, with varying degrees of impact on auto manufacturers and suppliers.
The worst-case scenario—a full 25% tariff without exemptions or price mitigation—would be a severe blow to the industry, potentially wiping out earnings for major automakers such as General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F). However, UBS considers this an unlikely outcome, as automakers and suppliers are expected to adjust pricing and costs.
A more plausible case assumes that companies can offset 50% of the tariff impact by raising prices. Even then, UBS estimates that suppliers would see a 15% hit to earnings before interest and taxes (EBIT), while Ford and GM could face a 56% decline. If tariffs also lead to a 5% drop in North American vehicle production, the impact deepens, with suppliers' EBIT falling by 41%.
For automakers, much depends on whether tariffs apply strictly to non-USMCA-compliant parts and vehicles, a scenario UBS believes could limit EBIT damage to 15%.
Who bears the cost?
Suppliers appear confident that they can pass costs onto automakers, raising prices more quickly than they did during the pandemic-era supply chain crunch.
“At a high level, the way to think about supplier impact is little direct tariff impact to EBIT (though some margin pressure) but an impact from the decrementals on lower production,” UBS analysts wrote.
That means the pressure will fall squarely on automakers to determine how much of the cost they can push onto consumers without stifling demand.
While the auto industry has successfully raised prices since the pandemic, UBS analysts warn that the current economic backdrop—marked by high interest rates and wavering consumer confidence—could make further hikes more challenging. The balance between price increases and demand destruction will be critical.
Are automakers undervalued?
Despite the uncertainty, UBS suggests that auto stocks may already reflect much of the potential downside. Investor sentiment is low, with companies trading near historical valuation troughs. If tariffs are enacted on April 2, stocks in the sector will likely take a hit, but some may be better positioned than others.
UBS highlights BorgWarner Inc (NYSE:BWA), Aptiv PLC (NYSE:APTV), and Visteon Corporation (NYSE:VC) as relatively inexpensive compared to historical averages, while Ford, Lear (LEA), and Magna International (TSX:MG) appear more expensive. Within automakers, the firm favors GM over Ford.
Navigating the uncertainty
The looming tariff decision adds another layer of complexity to an already challenging landscape for the auto sector. While UBS maintains that long-term 25% tariffs are unlikely, even temporary levies could disrupt production and pricing strategies.
“The space remains very tricky right now with a lot of uncertainty, so tread lightly,” UBS cautioned.
Investors, meanwhile, are left weighing whether current valuations reflect the worst-case scenario—or if further turbulence lies ahead.