According to a new Moody’s report, the US imposing tariffs on imported vehicles and auto parts would be broadly credit negative for parts manufacturers that are part of a global supply chain. The report further pointed out that the financial impact to the auto industry stemming from the proposed tariffs — contemplated at up to 25% for imported vehicles and parts — will mainly depend on the extent to which auto parts suppliers’ operations are spread out through the world and their products imported back to the US.
“Following their US automaker customers’ expansion outside the US, the North American parts suppliers have extended and grown their relationships with non-US automakers, thereby allowing both their North American and European customers to be serviced and supplied locally,” observed Tim Harrod, a Moody’s Vice President. “As a result, any tariffs’ effect on North American parts makers that supply autos imported to the US from Europe would be modest, given North American auto parts suppliers’ lack of exposure to significant US import volumes from Europe.”
North American part suppliers may still face hurdles in other parts of the world — and in Mexico in particular — given the possibility of tariffs on all auto imports. Adding to the uncertainty are the ongoing negotiations regarding the North American Free Trade Agreement (NAFTA), the timing and outcome of which remains unclear. Part of the ambiguity lies in whether NAFTA regions would be excluded from a US import tax or if separate tariffs would be instituted, as well as whether the Mexican operations of North American parts suppliers that operate under Maquiladora Programs, whereby the goods are owned by the US parent, would also have to pay the same tariffs.
“While most auto parts suppliers have Mexican facilities in their manufacturing processes, the magnitude of the impact to profits for the auto parts manufacturers may be meaningfully affected by the degree to which a particular supplier operates in Mexico,” added Harrod.