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Why Trump's Mexico tariff moves will drive up the cost of spark plugs

Get ready to pay a lot more for those replacement parts for your car.

President Trump’s threat to impose higher tariffs on imports from Mexico is walloping the auto parts sector, which sources many products from America’s neighbor to the south.

Mexico is the world’s fifth-largest auto parts producer, and the U.S. International Trade Administration says Mexico exports some 90% of its auto parts to the U.S. In fact, Deutsche Bank calls it Mexico’s number one export to the U.S.

That explains why parts suppliers like Delphi (DLPH), Veoneer (VNE), Lear (LEA) and BorgWarner (BWA) saw steep sell-offs in early trading Friday. These new tariffs could significantly increase the amount parts companies have to charge U.S. retailers, which in turn is likely to trickle down to consumers.

Mechanic Chris Geropoulos works on car, Wednesday, July 5, 2017, at Ted's Auto Clinic in Chicago. (AP Photo/G-Jun Yam)

Liz Suzuki, who follows auto parts retailers at Bank of America, says stores like AutoZone (AZO), Advance Auto Parts (APO) and O’Reilly Automotive (ORLY) are “better positioned” than the general auto industry, but “there will be some negative impact.”

“This is a non-discretionary category. No one just wakes up one day and says ‘I want to buy a spark plug today.’ They need it for their car to get going,” Suzuki said on Yahoo Finance’s The First Trade. “When there are cost increases they’re generally able to pass on those costs to the consumer without that much pushback.”

Torsten Sløk/Deutsche Bank Securities

Suzuki says margins for auto parts retailers are upwards of 40%, so some of these companies may try to absorb the costs. In the end, though, consumers will likely foot a bill that will climb even higher if companies follow the president’s advice and try to only sell American-made parts.

There’s “probably a little bit of room” to eat into those margins, she says, but “if more product ends up getting sourced from the U.S., it’s just going to mean higher costs.”

Several business groups expressed concerns about the tariff, warning of harmful effects. “These proposed tariffs would have devastating consequences on manufacturers in America and on American consumers,” the National Association of Manufacturers said in a statement on Friday. The American Automotive Policy Council (AAPC) — a lobbying group representing automakers like Ford (F), General Motors (GM) and Fiat-Chrysler (FCA) — came out strongly against the threat of tariffs.

Read more:

The trade war has cost $5 trillion in stock market losses

Manufacturers warn on 'devastating consequences' of Mexico tariffs

Tariff Man goes berserk

Goldman: Here's what an escalating trade war means for stock prices

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