On first glance, one might think that a tax on imported automobiles would be an advantage to car companies with production in the US. But over the last four decades, the so-called Detroit Three US automakers — General Motors, Ford, and Stellantis North America — have moved production to Mexico, taking advantage of North American free trade agreements and lower labor costs. Included in the Mexican migration of production are also others selling into the US market, such as the biggest Japanese and South Korean carmakers.
But that outsourcing strategy makes much less economic sense today as car companies face 25% tariffs on their own production south and north of the border on both autos and parts. Yet, simply bringing production back home isn’t the obvious, simple fix, particularly regarding Mexico, for a variety of financial and operational reasons.
How tariffs are reshaping North American auto manufacturing
While tariffs are often levied to protect domestic manufacturing, the auto companies paying the biggest price will be American — or those with the biggest investments in US car production. A recent study by the Center for Automotive Research shows the current 25% tariffs will increase costs for automakers in the United States by $108 billion and $42 billion for the Detroit Three alone. That works out to an average of nearly $5,000 per vehicle for imported vehicle parts and about $8,600 on average for each car they bring back over the US borders.
For the Detroit Three, the average labor cost per vehicle made in the US is five times more than for those made in Mexico. That makes the Mexican production a much bigger competitive advantage for US automakers than for Japanese and South Korean car companies operating in the US. For Asian car companies, the labor cost per vehicle at their southern, non-union US factories — as well as at their Asian plants — is only three times higher than their Mexican production.
Our “Harbour Report” team analyzed labor costs per vehicle throughout North America to illustrate the very real competitive challenges various car companies producing and selling in the US face. For US automakers, Mexican production is $1,000 or more per vehicle less than comparable rates in the US across the board.
Relocating auto production back to the US isn’t simple
The highly competitive North American automotive industry and marketplace have been turned upside down by shifting tariff regulations and heightened trade tensions. As recently as June 5 2025, for instance, tariffs on imported steel and aluminum — key materials used in cars — doubled to 50%, adding a new wrinkle and showing how quickly the situation can change.
This lack of predictability and consistency further complicates the economic challenges faced by automakers. But it also makes consumers hesitate: 61% told Oliver Wyman Forum’s Global Consumer Survey that they will likely not buy a car at all or buy less expensive vehicles due to the tariffs. Already in May, the Bureau of Economic Analysis released data that showed consumer spending slowing in April on such items as cars, clothing, and appliances compared with the month before — at 0.2% growth versus 0.7%. The pullback will likely make manufacturers think twice about passing along too much of the tariff cost.
Meanwhile, we expect to see very different responses from the Detroit Three and Asian automakers operating in the US and Mexico. While several producers are making noises about bringing production back to the US, it will be interesting to see whether those promises pan out, given that the short-term economic argument for relocating production is not that compelling. That is especially true if the presumption is that trade negotiations may eventually eliminate the tariffs, as President Trump himself has suggested.
There is the higher labor cost per vehicle to contend with. Companies will probably move a portion of production from Mexico to the US for models they already make in the US, where they can add a new shift or schedule weekend work. But if the pullback would entail building new capacity, then the cost becomes a real obstacle, especially since car companies are already facing problems finding enough labor in the US and upskilling workers they have on payroll.
How carmakers are adapting production strategies under new tariffs
Carmakers in the US have pursued a flexible production strategy that allows them to shift volume temporarily between US and Mexican plants. For vehicles built in multiple countries, reshuffling production to increase US output is a feasible prospect. Adding shifts can be done quickly: General Motors recently announced it would transfer some production of the popular Chevrolet Silverado pickup truck to the US.
For Japanese and Korean automakers operating in the US, there is more justification for bringing back some production. First, both are looking for unfettered access to the lucrative US market. Second, from a labor cost per vehicle, they face a smaller difference between US and Mexican production. Recently, Honda said it would manufacture its next-generation Civic hybrid model in the US instead of Mexico or Japan, and there are also reports that Nissan is considering moving Sentra production from Mexico to its underutilized factory in Mississippi.
But the economics aren’t there to justify building greenfield plants, and even relocating production temporarily is also easier said than done, as it could take years due to factors such as platform commonality, space availability, retooling requirements, and workforce availability. For the short term, absorbing tariff impacts — although painful — may be a smarter investment.
