From steel to engines to whole cars, tariffs are shifting the playing field for automakers. Our credit analysis suggests there are no winners in this war: consumers should expect higher sticker prices, companies lower earnings and investors more volatility.

As trade tensions build, automakers around the world are finding themselves in the cross hairs. US tariffs have already raised the costs of steel and other materials. Now the Trump administration is considering tariffs on imported cars and parts, which the president has suggested could be as high as 25%.

Increased trade barriers are likely to raise financing costs for companies and prices for consumers, with each new round of tariffs likely to push equities lower and the US dollar higher. As global central banks, led by the Federal Reserve, continue to drain the excess liquidity they spent the past decade pumping into the global system, trade-driven US-dollar strength may worsen market volatility and put more pressure on asset prices.

Disrupting the Global Supply Chain

In the automotive industry, tariffs matter because the auto supply chain is global. Parts are sourced from around the world and move across borders repeatedly, making tariffs a hindrance in both directions. For instance, a company that makes cars in a US factory still must import labor-intensive parts from Mexico, such as engine blocks and the wiring harnesses—a spaghetti-like mass of cables that runs throughout a vehicle.

After paying a US tariff on those parts, companies that then export the finished cars can be hit yet again by retaliatory tariffs by US trading partners. For instance, China recently responded to a raft of US tariffs on Chinese goods by raising its levy on US-made cars from 25% to 40% (while reducing tariffs on cars imported from elsewhere). That means automakers who export to China from the US would get hit coming and going.

Which Companies Would Tariffs Hurt? All of Them.

It’s still unclear which countries would be affected should US auto tariffs go into effect. Will the ongoing renegotiation of NAFTA include exemptions for Mexico and Canada? Will a temporary cease fire on new tariffs between the US and the European Union remove German companies from the discussion?

At this point, anything seems possible. But if the US were to apply tariffs universally, our analysis suggests that every one of the world’s major automakers would take a hit, including the US companies the tariff is ostensibly designed to help.

This is partly because NAFTA encouraged the auto industry to treat Canada, the US and Mexico as a single North American market. Imports—mostly from Mexico—account for about one-third of General Motors’ total US sales. Fiat Chrysler Automobiles makes all its minivans—a large part of its production—in Windsor, Ontario. In addition to importing whole vehicles, all domestically assembled vehicles contain significant foreign-made parts. We estimate that about 45% of the component parts for cars produced in the US come from abroad.

Even the US government doesn’t distinguish between US- and Canadian-made auto parts—it defines as “domestic” parts coming from either country. This tells us that nobody involved expected NAFTA to change—and it suggests that changes will be disruptive to business confidence, prices and economic growth.

For example, if Mexican and Canadian imports become subject to tariffs, we estimate that a 25% tariff on imported vehicles and parts would raise the cost of producing the average car by about $4,000 per car.

That estimate includes a roughly $7,500 increase for imported vehicles sold in the US and about a $2,200 increase for domestic ones. We’d expect this scenario to push up sticker prices—even for the most inexpensive domestic cars—and likely result in fewer cars sold. Lower sales volume and higher tariffs would combine to reduce automaker margins.

As the following display shows, every original equipment manufacturer would be negatively impacted. The impact would vary from company to company, depending on how much profitability comes from the US market and how dependent it is on imported vehicles. Companies on the lower-left side of the display are more vulnerable than are those on the upper right. Interestingly, whether an automaker hails from the US, Germany or Japan won’t make much difference.

US-based General Motors, for example, relies fairly heavily on imports and could see its margins squeezed. Japan’s Honda, on the other hand, would have a bit more cushion because its global business is less dependent on the US than is General Motors’ and more of its production is localized in the US.

Volkswagen—the world’s largest automaker—imports nearly 80% of the parts and cars it sells in the US but earns most of its money in other markets, which would temper its earnings hit somewhat. Companies that sell a lot of cars in the US market but make all of them elsewhere, such as Jaguar Land Rover, stand to lose the most.

Investors: Proceed with Caution

Even if Mexico and Canada are exempted, US tariffs could curtail global trade and economic growth. Sentiment surveys in the US and Europe show that businesses are nervous about US-European trade tension. If the growing uncertainty causes companies to delay capital investments, growth could suffer.

In the US, we would expect imports to be diverted to other markets and companies to consider building plants elsewhere. The two biggest US auto exporters—BMW and Mercedes-Benz-maker Daimler—aren’t even US companies. Both build luxury sport-utility vehicles in plants in South Carolina and Alabama, and ship them to China. But because the cars come from the US, they’re now subject to higher Chinese tariffs. We would expect these companies to accelerate plans to move production, either to Europe or to new plants in China.

We’ve already seen how this plan can work. Iconic US motorcycle-maker Harley-Davidson said earlier this year that it would invest in overseas facilities to avoid European Union tariffs imposed in response to US tariffs on steel and aluminum imports.

If the auto tariffs become law, some automakers could be vulnerable to ratings downgrades. That’s likely to hurt corporate bond prices in the sector and widen credit spreads—the extra yield these securities offer over comparable government debt.

It’s certainly possible that policymakers will crunch these numbers for themselves and conclude that imposing tariffs would be too damaging to consider. At this point, we expect cooler heads will, ultimately, prevail. But there are political calculations at play here, too, and that makes the outcome uncertain. So our advice for bond investors? Drive carefully.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.