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Morningstar | Toyota and Honda Seem Less Exposed Than American Automakers to Trump's Mexican Tariff

On May 30, President Donald Trump announced that on June 10 he will respond to immigration problems at the U.S. Mexican border by using the 1977 International Emergency Economic Powers Act to impose a 5% tariff on all goods imported from Mexico. This tariff will rise to 10% on July 1 and reach a maximum of 25% on Oct. 1 if Mexico does not take adequate, but unspecified, measures to stop illegal immigrants to the U.S. For now, we are leaving our Toyota and Honda fair value estimates in place because we think this tariff is horrible for the U.S. auto industry and Trump will have major pushback from even Republican lawmakers, so we don't expect it to last a long time. We think the move also jeopardizes congressional ratification of the Trump-led United States-Mexico-Canada Agreement to replace NAFTA because why vote for it if there will be a 25% tariff on Mexican goods? We stress the outcome of this new tariff battle is highly uncertain and could be resolved quickly if Mexico takes steps on border control to satisfy Trump.

We dislike the tariffs because even vehicles made in the U.S. such as Ford's F-Series pickups or GM's fullsize SUVs have Mexican parts content, 15% for the F-150 and 44% for the SUVs. The Center for Automotive Research estimates parts can cross NAFTA borders up to eight times during vehicle assembly so the tariff costs would be large. We expect automakers will pass along 5% tariffs to consumers but we think that becomes hard to do at levels above that point because tariff exposure is not equal across firms. Automakers cannot quickly change production and could suffer greatly if the tariffs go far above 5% and last a long time. Toyota and Honda use Canada more than Mexico and we calculate their Mexican production mixes were 9.5% and 11.7% of each firm's respective total North American production.

Pickups are the most critical tariff risk because they are the most profitable vehicles automakers produce. Toyota and Honda pickup tariff exposure is not severe like it is for GM and FCA because the Detroit Three dominate the fullsize pickup segment with 93% U.S. share last year. Toyota makes all its Tundra fullsize pickups in Texas, while Honda has no Mexican pickup production. Toyota is the midsize pickup leader with its Tacoma having 47% segment share last year by our math. For 2019 through April, we calculate 60% of Tacoma production came from Mexico with the rest from Texas. According to the U.S. National Highway Traffic and Safety Administration's American Automobile Labeling Act Report, the Tundra has 65% of its content from the U.S. and Canada and 15% from Japan. No Mexican content percentage is disclosed for Tundra or the Tacoma. Tacoma's U.S. and Canadian content is 60% while its Japanese content is 15%.

Honda does not make a fullsize pickup, but the Ridgeline midsize truck made in the U.S. has 75% U.S. and Canada content with no Mexican percentage disclosed. Honda in our opinion seems one of the best protected from this new tariff among automakers in our U.S. autos coverage because its Mexican production is limited to the Fit subcompact car and the HR-V subcompact crossover. Given Americans love light truck models, we are not bothered greatly by tariffs on the Fit but the HR-V would suffer. Some Americans may instead move up to the Honda CR-V which has 65% U.S. and Canadian content.

The other ramification of Trump's tariff policy is that he is using tariffs to impact immigration policy rather than economic policy. We suspect there will be many legal challenges by U.S. companies and the Mexican government to these tariffs, but resolving these disputes in court will take time. Trade policies matter drastically here, too, because the 25% tariffs from immigration conflict with NAFTA. If those 25% tariffs happen in October and if USMCA is not ratified and Trump withdraws from NAFTA, the so called "chicken tax" on pickups imported into the U.S. goes into effect. The chicken tax is a 25% tariff, so Toyota's Mexican-made pickups for sale in the U.S. would have a 50% tariff on them in a worst-case scenario. We hope Trump never reaches that point, but if he does, Toyota would in our view have no choice but to move all pickup production to the U.S., which would cost billions in tooling plants and impairments. Toyota is scheduled to open more Tacoma capacity in late 2019 with 100,000 additional units coming online for a new plant in Guanajuato, Mexico. For more of our thoughts on USMCA and the chicken tax, see our Jan. 7 report, "The U.S. Auto Industry Should Want USMCA to be Ratified."