Signed in 1992, the North American Free Trade Agreement (“NAFTA”) created the world’s largest free trade zone. An agreement between Canada, Mexico, and the United States, NAFTA eliminated or reduced many of the barriers for cross-border trade and investment between the three countries.

NAFTA was eventually replaced by the United States-Mexico-Canada Agreement (“USMCA”) during the first Trump administration. And despite what many believe, the USMCA kept many of the provisions of NAFTA, but it did modernize the agreement for intellectual property. It also included incentives to boost U.S. automobile production.

Experts still disagree if NAFTA was good or bad for the U.S. I’ll let the scholars deal with that. Like you, I’m a lot more interested in how to profit from what’s going on.

Because, by now, I’m sure you’ve seen the news…

The Trump administration has placed 25% tariffs on imports from both Canada and Mexico. Though, as of yesterday, it appears certain items will be exempt until early April. Only time will tell if the full levies go into effect then.

And if that does happen, I want to ensure these tariffs don’t tax my portfolio more than they do Canada or Mexico. If you feel the same, read on.

One sector is at the center of it all. It employs two million Americans and pays $500 billion in annual compensation. It’s at the heart of tariff negotiations this week, and odds are you own one or more of these stocks. After reading today’s Wide Moat Daily, you’ll know what’s going on and what to do about it.

How We Got Here

The U.S. automotive industry has been a cultural, political, and economic force for over 100 years. The U.S. government even bailed out General Motors (GM) and Chrysler, now Stellantis (STLA), during the Great Recession to the tune of $85 billion (a lot was repaid later). During the heyday of the American auto industry in the 1940s and 1950s, tariffs protected the likes of General Motors and Ford from foreign competition.

Just like back then, the government today doesn’t treat all industries equally. As mentioned, the auto industry just received a 30-day pause from tariffs on imports from Mexico and Canada. A lot of people were caught off guard by this, but I wasn’t.

I’ll explain why many were panicking, and it starts with NAFTA.

 

The U.S. economy’s GDP, or total economic output, was $7.3 trillion when NAFTA went into effect in 1994. Now, it’s over $27 trillion, or nearly four times larger. But the number of manufacturing jobs, including motor vehicles, has declined over the same period.

Where did they go? A portion disappeared due to efficiency gains, like swapping humans for robotics. But when you comb through the data, the chief reason is crystal clear. Mexico made about one million cars a year when NAFTA began. Today, it exports about 3.5 million annually, making it the seventh-largest passenger vehicle manufacturer in the world.

The reason is straightforward. Labor, land, and other key input costs in Mexico are much cheaper compared to the United States. And considering the automotive industry is known for its thin margins, that’s a big incentive. NAFTA made this all possible because companies weren’t penalized for putting operations on the other side of the border.

But unlike other automotive giants like the U.S. and Germany, you don’t see any Mexican car brands in your city. As someone who lives in Mexico City part-time, I can confirm it’s not much different there. Most of what Mexico builds are vehicles for the U.S. “Big Three” – Ford, General Motors, and Chrysler – to sell back in the U.S. Mexico isn’t selling Mexican cars to the U.S. It’s selling American cars.

Ford’s Hermosillo Stamping and Assembly Plant in Sonora is one of Mexico’s largest facilities and makes the Ford Bronco Sport and Maverick models strictly for the American market. Many of the iconic Chevrolet Silverado and GMC Sierra trucks driving around your neighborhood aren’t built in Detroit or Kentucky. Instead, they are made in General Motor’s Silao plant in Guanajuato, Mexico.

Last year, General Motors built roughly 750,000 cars and trucks in Canada and Mexico. That’s more than one out of every four new GM vehicles on the road. Ford is similar with 7% of production in Canada and 17% in Mexico for 2024.

As high as those percentages seem, be glad you aren’t in charge of Stellantis. About 40% of the cars it sells in the U.S. are made in Canada or Mexico. Even worse is Volkswagen (VWAGY) with 43% of cars sold in the U.S. built south of the border.

But the Big Three are no longer the only players in town. They aren’t even the most valuable. 100% of Tesla’s (TSLA) cars that are sold in the U.S. are built domestically. Rivian (RIVN) and Lucid (LCID) are in the same category, though Lucid is opening a plant in Saudi Arabia. If that strikes you as strange, it may not after learning that Saudi Arabia’s Public Investment Fund owns about 63% of Lucid shares. If you were wondering why a lot of U.S. electric-vehicle (“EV”) manufacturers rallied when Trump won, his tariff policy is a big reason why.

While every automaker has exposure to supply chains in Mexico and Canada, now you know the facts about which automakers are most at risk due to tariffs.

Now that we know which automakers are the most exposed, what are the implications? This is where it gets complicated, but I’ll break it down.

Separating Winners from Losers Isn’t Easy

Both major U.S. political parties are heavily influenced by the automotive industry. The bailouts of 2008 and 2009 removed any doubt about that. But some things have changed.

Unlike previous Republican candidates, Trump received meaningful support from the industry and even won the union vote in key areas.

If you listened to those speeches, you’ll know he focused on tariffs and reducing special tax incentives on EVs. These policies were key to his victories in more than one swing state, and he’s following through so far.

Let’s start with tariffs. Steep taxes on vehicles imported from Canada and Mexico hurt the Big Three big time, especially in the short term. Just as an example, Ford (F) reports net margins of around 3.7%. That means a $50,000 truck results in only $1,850 of profit for Ford. You can imagine how a 25% tariff would take a big bite out of that. And it’s actually worse than it sounds. Those taxes also apply to many of the parts that go into the vehicles. A single car could have layers and layers of tariffs priced into it.

The White House knows that, and it has paused tariffs on the auto industry.

Usually, traditional tariffs favor domestic manufacturers. That’s not really the case today, because the new administration is encouraging all automakers to build plants in the U.S. It’s true that old-school protectionist tariffs helped the Big Three through the 1950s.

That special treatment also left them wholly uncompetitive when the tariffs went away, and the Japanese showed up. With Trump’s proposals though, all automakers who build in the U.S. receive the same treatment. The tariffs, at least in theory, support American industry and workers rather than a handful of politically powerful car companies.

When it comes to reducing incentives around electric cars, there are important nuances every investor needs to know. Tesla buyers don’t qualify for the federal EV tax credit because they’ve sold so many cars. Canceling it doesn’t matter to them.

Rivian and Lucid buyers still qualify for the rebate, so they will be impacted. That’s especially the case because they aren’t doing well financially. Both companies are still reporting negative net income (profit) each quarter. Lucid burned through nearly $3 billion in cash last year to stay afloat. Rivian’s burn rate is even higher. Even a small drop in sales versus expectations could spell disaster for their already beaten-down stock prices.

EVs from Ford, General Motors, and Stellantis still qualify for the rebate. Ford and GM both sold around 100,000 EVs last year, representing 40% to 50% year-over-year growth for both companies. But these auto companies each sell over 2 million cars a year, so the impact of a tax credit for EVs seems minimal.

What Does It All Mean?

Right now, the tariff system hammers the Big Three and rewards companies like Toyota (TM) and Honda (HMC). These companies can and do build cars in Japan and sell them in the U.S. without any new penalty. That could change, but for now, it’s a big advantage.

The same applies to some German automakers. To be clear, these companies also build a ton of cars in Mexico. But no matter how you slice it, many Ford and GM models are about to become less competitive against some rivals. Adding another $5,000 to $10,000 tax on already expensive new cars will be painful. Don’t sign me up to explain that to voters in Michigan.

For that reason, the pause this week on the auto industry tariffs was no surprise to me. I think this preferential treatment will continue. But it could be a very bumpy road in the interim.

If you are worried, the Japanese automakers are well positioned, and the recent run-up in their stock prices tells me the market agrees. Since February 24, Toyota’s stock price has jumped 6%. It’s still cheap compared to historical averages. Honda’s has done even better. Stellantis, on the other hand, has declined over 9% over the same short period. Ford seems to have the lowest exposure to tariffs of the Big Three, and it also has the richest dividend at 7.8%. Its stock price has taken the tariff news better than most peers, and that makes sense based on our analysis.

If you like the U.S. EV companies, tariffs on the other automakers may give them a competitive advantage. But outside of Tesla, they would also be hurt by the end of EV tax credits proposed next year. Tesla seems to have an advantage here.

Remember, there is a lot more to consider with these companies than just tariffs. Make sure to do your due diligence. At Wide Moat Research, we’ve been sorting through everything from blue-chip dividend giants to small-cap growth stocks to find the best companies in this new and rapidly changing environment. We believe there are a few industries positioned for immense growth, so stay tuned to learn more.

Regards,

Stephen Hester
Chief Analyst, Wide Moat Research