Confronting New Risks in Global Trade

Japanese automakers’ large-scale investments in Mexico are facing growing risks due to uncertainties in U.S. trade policy and the potential for increased tariffs. Over the past decade, Japanese companies have invested more than $18 billion in Mexico to establish a robust network for vehicle and component manufacturing.

Mexico’s automotive industry has largely relied on low labor costs and free trade with the U.S. to optimize production. However, threats of tariff hikes under Donald Trump’s administration have created a situation where automakers must reconsider their strategies and production networks.

Leading Japanese car manufacturers—Toyota, Mazda, Honda, and Nissan—have long utilized Mexico as a production hub for exporting vehicles to the U.S. and other markets. Particularly since Mexico signed the North American Free Trade Agreement (NAFTA) with the U.S. and Canada in 1992, companies expanded their manufacturing networks in the country.

The Impact of Potential U.S. Tariffs on Mexican Auto Exports

Currently, 82% of Japanese cars produced in Mexico are exported, primarily to the U.S., highlighting the critical role of U.S. trade policy in the sector’s stability. Nissan was the first Japanese automaker to establish a plant in Mexico back in the 1960s.

However, in early 2024, Trump announced a possible 25% tariff on all imported vehicles to encourage domestic production in the U.S. If implemented, this change would severely disrupt the business model of automakers operating in Mexico.

Now, car manufacturers are assessing how to navigate potential tariff hikes and whether relocating investments to Southeast Asia—such as Vietnam and India—is a viable alternative. Yasuyo Komura, president of the Japanese company Plasess, expressed concerns about the situation:

“It is extremely difficult to operate when we know that U.S. trade policy keeps changing. Planning business strategies has become almost impossible.”

How Japanese Automakers Are Adapting

In response to these challenges, Toyota has already begun adjusting its production lines to focus on products less reliant on the U.S. market. However, shifting large-scale investments is not easy—Mexico hosts major existing factories, and relocating production would come with significant costs.

Additionally, Mexico as a manufacturing hub faces growing domestic economic and security challenges, including rising crime rates and threats to factory security. This is particularly concerning in Guanajuato, a key region for Japanese manufacturers, where organized crime groups have been expanding their influence.

Japanese experts suggest that automakers must develop risk-mitigation strategies to prepare for potential tariff increases. One alternative is to shift investments toward Southeast Asian nations such as Vietnam and India, where production costs are lower and trade conditions with the U.S. are more flexible.

However, given the massive scale of existing investments in Mexico, automakers cannot rapidly exit the market. Instead, companies are working to maximize operational efficiency in their Mexican plants to minimize potential losses in case of unfavorable changes in U.S. trade policy.

Source: Based on FT.com materials