After the close on Wednesday Trump signed a 25% import tax on vehicles and parts in what appears to be a legitimate attempt at bringing manufacturing back to the U.S., and another bargaining chip for a new trade agreement.
With a truck load of noise following the announcement, we sifted through it all to give you a clear, no-nonsense view on where we stand today.
Impact: not good, but not catastrophic either
The 25% headline brings sticker shock, but the number in reality is much different. For finished vehicles, the tariff will only apply to the non-U.S. portion, which is often less than half.
Put another way, a weighted average tariff of sub-12.5% on the ~80% of Canadian vehicle production that goes south of the border.
Doug Ford later stated that he believes Canadian vehicles made with more than 50% U.S. content will be exempt from tariffs, after a conversation with Howard Lutnick. Should that prove true, the impact on finished vehicles would be even smaller.
On parts, nearly all coming from Canada into the U.S. are USMCA compliant, meaning they’ll likely avoid tariffs entirely until May, providing a window for further negotiations. Again, the tariffs would sit only on the share of non-U.S. content, mitigating impact to some degree in a tariff scenario.
All that said, duration will soon become the measuring stick for impact - with some insiders predicting it might not take long for the industry to grind to a halt.
I believe the tariffs, if fully implemented and not withdrawn, would cause the industry to shut down in a very short time.
Auto manufacturers face direct impact
It’s no surprise that auto manufacturers (LNR, MRE, MG, BOS, etc.) have sold off under Trump’s protectionist regime, with sentiment in the sector nearing pandemic lows.
Beyond cost pressures tariffs should hurt operational efficiency, as companies redefine what “business as usual” means for them.
So I believe if this is going to be disruptive, right, we’re going to see a lot of start-stops and moving up and down of volumes…
Between that and increased compliance costs, margins should remain under pressure, and auto manufacturers don’t have a lot of slack in their business model to work with as it is.
Revenue could get pulled forward in the near-term though, as U.S. importers look to front-run tariff impacts.
Second-order impacts could vary
Real estate names like Granite REIT (GRT-UN) with its ~25% exposure to Magna, and Automotive Properties REIT (APR-UN) with its exposure to auto retail locations, could see pressure from a protracted slowdown, as we highlighted in our REIT earnings recap.
The rails could also be impacted, though Canadian Pacific (CP) has a much higher share of total freight revenue linked to automotive compared to Canadian National (CNR).
NanoXplore (GRA) could be particularly exposed, as a supplier of graphene-enhanced exterior vehicle parts.
An unlikely winner from the tariffs could be Canadian Tire (CTC-A), whose parts and repair services segment could see increased demand from consumers delaying the purchase of new vehicles.
