In Tariff Talks, Cooler Heads Should Prevail

February 13, 2025

Michael Robinet

For my nearly 60-year lifetime, I have had the benefit of being part of a North American Automotive Industry that was, from a production perspective, completely rationalized and optimized. Given the unprecedented political events of the last couple of months, maybe we should all consider ourselves fortunate.

Strong competition and a free market allowed for components, systems and vehicles to be produced in the optimal location with an optimized supply chain, all structured to serve markets in the U.S., Canada and Mexico with some exports mixed in. Consumers, dealers, suppliers and vehicle manufacturers all benefit from this optimized structure.

Why the economics lesson? Please allow me to vent. The recent events (and possibly continued strife as of this publishing) of potential tariffs levied against both Canada and Mexico outline just how little some understand the basic constructs of automotive fixed operations. Despite our industry’s constant goal of seeking greater production flexibility and shortening development timelines, vehicle sourcing and supply chain decisions can take years to form due to complexity, aligning resources and the allocation of capital. For instance, how is a supplier of forgings is supposed react overnight to sourcing shifts? A long-term view to structural shifts within automotive is critical.

Let’s step back. In retrospect, we should all consider ourselves lucky that a group of economic and political visionaries in the last century had the courage to marry various economies for the betterment of all. From an automotive perspective, the presence of the U.S.-Canada Autopact of 1965, the US-Canada Free Trade Agreement of 1988, the 1994 version which added Mexico (called NAFTA) and the 2018 revision called USMCA all enabled vehicles to be manufactured efficiently.

When there are mandates to immediately shift long-held sourcing or face punitive tariffs, it underscores the need for all involved to take a long-term view under stable trade rules. There are several byproducts to a shifting trade and regulatory structure in which OEMs and suppliers alike are making long-term bets.

Shifting Trade Structures

OEMs (and in-turn suppliers) invest in new facilities or existing ones with more than a single cycle in mind. Cycles are defined as roughly five years. When a new plant is built, the expectation – for most facilities – is that they will be active for more than 30 years. Some plants in NA and Europe have been active for over a century. The system can’t uproot sourcing overnight to align with un-anticipated, overnight tariffs without a long-term trade structure. We are not a 40% margin industry. Capital needs stability.

Fluctuating Regulatory Legislation

Though there have been orders and initiatives to change the slope of light vehicle emissions legislation in the U.S. and Canada, OEMs need greater stability and a view of how to comply. Without this, OEMs will delay new platforms, extend current programs and rescope some investment. After the 24-month window, most OEMs in NA are war-rooming potential investment scenarios. In the past, having this much instability in the planning dynamic over the mid-term was unheard of. Another recipe for under-utilized capital is a certainty if they guess wrong.

In the end, automotive and other capital-focused industries require a long-term planning dynamic with gradual phase-ins if a new production ecosystem is desired. The last 60 years of unfettered market access and production efficiency underscore why North America needs to align to the long game in our competitive global market.