EU automakers caught up in Trump’s trade war

United States President Donald Trump launched a trade war against Canada and Mexico. But Germany’s Volkswagen is in line to feel a lot of that pain.

Last year, 44 percent of the German brand’s cars sold in the United States were produced in Mexico, according to car industry analysis firm JATO Dynamics. That’s a result of the highly integrated North American auto market under free trade agreements torn up by Trump.

Trump slapping a 25 percent tariff on goods made in Canada and Mexico spells further trouble for Germany’s automakers. They are already seeing their earnings in the key Chinese market shrivel due to slowing demand and rising competition from local rivals.

Trump’s move also offsets a Monday win for carmakers when European Commission President Ursula von der Leyen announced leniency on this year’s EU emission targets, which the industry said would have cost billions.

For years, German carmakers have used Mexico as a low-cost production hub. The country was “the perfect destination to produce cars” thanks to its trade deals with the U.S. — as well as with Latin America, Europe and the Middle East, said Felipe Munoz, an auto analyst at JATO.

Policymakers in the European Union, aware of Mexico’s vital role in the global automotive supply chain, attempted to shield carmakers from some of Trump’s threats by overhauling the bloc’s trade agreement with Mexico in January, giving European vehicle manufacturers favorable export rates into the country.

VW subsidiary Audi produces its Q5 SUV in Mexico for the U.S. and all other markets outside of China. The model was the brand’s top-selling car in 2023.

But Trump’s tariffs undercut that strategy.

“Having invested millions in a plant to manufacture the Q5 in Mexico, primarily for the U.S., just one decade ago, that facility all of a sudden looks like a white elephant investment,” said Matthias Schmidt, a European auto analyst.

Parent brand Volkswagen, meanwhile, also produces its most popular U.S. model in Mexico: the Tiguan SUV. More than 30,000 of the vehicles were sold in the U.S. in the final quarter of last year — a year-on-year increase of nearly 50 percent.

VW shares were down more than 4 percent on news of the Trump tariffs.

The fees are also threatening domestic consumption as prices rise in the U.S. in what analysts have dubbed the Trumpcession.

Over the course of one week, the Atlanta Fed’s GDP forecasting model went from predicting annualized growth for this quarter of 2.3 percent to now foreseeing a 2.8 percent shrinkage. Just one month ago, the model put growth for the quarter at close to 4 percent.