Restricting imports of Mexican vehicles will harm US manufacturers

President-elect Donald J. Trump has made a little-noticed vow to impose tariffs of 200 to 500 percent on auto and truck imports from Mexico and recently threatened again to impose tariffs of 25 percent on all imports from Mexico, cancelling out terms of the trade agreement he negotiated with Mexico and touted in his first term. A major concern of his trade advisers is Chinese investment and inputs in vehicles exported from Mexico to the United States.¹

But steep tariffs on vehicles would not only raise prices north of the border and shock the Mexican auto sector and its workers. They would also cost jobs in the United States. Because of the highly integrated value chains in the North American auto sector, a high share of US-origin parts are embedded in Mexico's motor vehicle exports. US suppliers of these parts could soon be caught in the cross fire of Trump's trade war.

Mexico has become a major exporter of motor vehicles to the United States, a trend enhanced by the US-Mexico-Canada (USMCA) trade accord signed in 2018 under Trump that took effect in his last year in office. Figure 1 shows how rapidly imports of autos and other vehicles from Mexico have grown over the last four years. The concern that "free riding" countries like China would benefit from preferential treatment under the original 1990s North American Free Trade Agreement (NAFTA) led to tighter rules of origin (ROOs) under the USMCA to stop third-country producers from taking advantage by exporting parts to Mexico that are assembled into vehicles shipped to the United States. The broader goal was to reshore auto manufacturing and investment back to the United States.

The USMCA is up for review in 2026, and Trump's team will be renegotiating its terms with special focus on the auto sector. The value chains that benefit US workers are in jeopardy.

In his campaign, Trump advocated a universal 10 or 20 percent tariff on all imported goods and even suggested a 25 percent tariff on all Mexican imports and 200 to 500 percent tariffs on Mexican vehicles. In late November, Trump threatened to impose a 25 percent tariff on all goods from Mexico unless its authorities stopped migrants and drugs from coming across the border. Mexico would suffer from these steps, since motor vehicles exports to the United States made up more than 15 percent of its total exports to the United States in 2023.² The composition of value added contained in Mexican vehicle exports by country of origin shows that US-manufactured inputs are deeply integrated with Mexican vehicle production (figure 2), representing close to 20 percent of total value added of Mexican exports in 2020. Chinese value added represented 9 percent of total value added embedded in these exports. In the same year, of the foreign value added in Mexican vehicle exports, the United States accounts for almost 40 percent. By comparison, while the Chinese value-added share has grown, it was still only 18 percent of foreign value added in 2020.

This picture is incomplete, however. The data in figure 2 show the value added embedded in Mexican exports of motor vehicles to all destinations. But looking only at vehicles sold to the United States (figure 3) reveals that the United States accounts for 74 percent of foreign inputs embedded in Mexican exports. It is likely that this figure is an underestimate of US-made content in Mexican vehicle exports, because it relies on customs data from 2014,³ before NAFTA was replaced by the USMCA, which tightened the minimum North American regional value content (RVC) ROO requirement from 60-62.5 percent to 75 percent. Calculating the implied US-originated share of the total value added of vehicles imported by the United States from Mexico results in around 38 percent (i.e., 74 percent of the 51 percent of foreign content in vehicles exported to all destinations;⁴ 74 percent from the left panel of figure 3). Analogously, less than 2 percent originates in China (3 percent of the 51 percent of foreign content in vehicles exported to all destinations).

It is uncertain how Trump intends to impose new restrictions on motor vehicle trade between the United States and Mexico, and whether his threats should be seen as a prelude to further negotiations. But any protectionist measures are bound to significantly impact US firms, given the US-made content embedded in Mexican exports to the United States. Economic research shows that tariffs are more costly to jobs for both trading partners when imports have a large share of domestic content.⁵ Moreover, tariffs on Mexican exports will trickle down the value chain, hurting US producers of inputs in the motor vehicle sector who use these parts as well as other producers based in the United States. The magnitude of the effects depends on how hard it is for importers and exporters to find substitutes for inputs subject to new tariffs.

To avoid these costs, the Trump administration should consider engaging in consultations with US industry and negotiations with Mexico before imposing new tariffs on imports of motor vehicles and other merchandise.

Notes

1. For the analysis presented, both internal combustion engine and electric vehicles are included.

2. Motor vehicle exports include exports of motor cars and other motor vehicles principally designed for the transport of persons and exports of motor vehicles for the transport of goods. When including parts and accessories for motor vehicles the share rises above 20 percent of Mexican exports to the United States.

3. See data appendix for more details on the underlying data.

4. The figure 51 percent is the average proportion of foreign content in Mexican vehicle exports to all destinations (figure 2) between 2015 and 2019, a fairly stable period. More details on calculation can be found in data appendix.

5. See De Gortari (2019) and Blanchard, Bown, and Johnson (2023).

Data Appendix

Source for input shares in Mexican auto exports to the United States

Data on foreign input shares in Mexican auto exports to the United States rely on data from De Gortari (2019) who uses Mexican firm-level import and export shipment microdata. The source for this data is a confidential government-owned database, thus the information is not readily available to the public.

The same study uses alternative methodologies to calculate US value added embedded in different imports of manufactures into the United States, utilizing input-output data from the World Input-Output database (WIOD), obtaining similar numbers as those shown in this blog post.

The latest release of the WIOD (2016) database only includes data from 2000 to 2014. Input-output tables usually reflect the structure of an economy. Structural changes are slow. It is important to note that input-output data are released infrequently, as they include detailed information on inputs and outputs per sector. The compilation process is even more complex for multi-country tables such as the WIOD that rely on national accounts, balance of payments statistics, and trade by product, and require some modelling.

Calculation for value-added content by origin in Mexican auto exports to the United States, billions of US dollars shown in figure 3

The chart in the right panel of figure 3 assumes constant shares of foreign content in vehicles exported by Mexico to the United States, shown in the left panel in the same figure.

Value-added content (in dollars) originating in the countries shown embedded in Mexican motor vehicle exports to the United States needs first the calculation of the share of foreign value added to be able to employ the numbers from the left panel, which are in terms of foreign value added.

First, to calculate the share of foreign value added in Mexican auto exports to all destinations \(S\_FVAAuto_{Mx,\ AllDest}\), the difference between Total Mexican exports of motor vehicles from the Organization for Economic Cooperation and Development's Trade in Value Added (OECD TiVA) \((VAExportsAuto_{Mx,AllOrigin,AllDest})\) and Mexican value added in Mexican exports of motor vehicles from TiVA \((VAExportsAuto_{Mx,Mx,AllDest})\) is obtained, and is then divided by the first term (Total Mexican exports of motor vehicles). To simplify, the time term is dropped from the equations for illustrative purposes, and the terms auto and motor vehicles are used interchangeably.

\[S\_FVAAuto_{Mx,\ AllDest} = \frac{VAExportsAuto_{Mx,AllOrigin,AllDest} - VAExportsAuto_{Mx,Mx,AllDest}}{VAExportsAuto_{Mx,AllOrigin,AllDest}}\]

The subscripts in the terms of the equation represent the origin country of the export, the origin of the value added (if applicable), and the destination country, correspondingly. For example, \(VAExportsAuto_{Mx,AllOrigin,AllDest}\) represents Mexican exports' value added from all countries (AllOrigin), and these exports are destined for all trade partners (AllDest).

To calculate the share of total value added from country j embedded in Mexican vehicle exports to the United States (note the third subscript), \(S\_FVAAuto_{Mx,\ AllDest}\) is multiplied by the share of foreign value added in Mexican auto exports that go to the United States.

\[S\_VAAuto_{Mx,\ j,US} = S\_FVAAuto_{Mx,\ AllDest} \times S\_FVAAuto_{Mx,\ j,US}\]

Note that \(S\_FVAAuto_{Mx,\ j,US}\) is fixed, based on the left panel of figure 3.

For example, the share of US content embedded in the value added of Mexican auto imports purchased by the United States:

\[S\_VAAuto_{Mx,\ US,US} = S\_FVAAuto_{Mx,\ AllDest} \times S\_FVAAuto_{Mx,\ US,US}\] \[S\_VAAuto_{Mx,\ US,US} = S\_FVAAuto_{Mx,\ AllDest} \times 74\%\]

To calculate the dollar value of total value added from country j in US imports of Mexican vehicles, the previously obtained value \(S\_VAAuto_{Mx,\ j,US}\) is multiplied by the US import value of vehicles from Mexico (\(MAuto_{Mx,US}\)) in dollars. This is what is shown in the right panel of figure 3.

\[Dollar\_VAAuto_{Mx,\ j,US} = S\_VAAuto_{Mx,\ j,US} \times MAuto_{Mx,US}\]

Since OECD TiVA data are available only through 2020, values for the share of foreign value added in Mexican auto exports to all destinations \(S\_FVAAuto_{Mx,\ AllDest}\) in 2021 through 2024 are equal to the average share between 2015 and 2019, a fairly stable period.

For example, for 2021:

\[S\_FVAAuto_{Mx,\ AllDest,2021} = \frac{1}{5}\sum_{t = 2015}^{2019}\left[\frac{VAExportsAuto_{Mx,AllOrigin,AllDest} - VAExportsAuto_{Mx,Mx,AllDest}}{VAExportsAuto_{Mx,AllOrigin,AllDest}}\right]_t\]

The same formula applies for values in 2022, 2023, and 2024.