Honda and Toyota Operating Profits Could Come Under Significant Pressure if US Tariffs on Canadian Vehicles Rise to 50%
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Honda and Toyota Operating Profits Could Come Under Significant Pressure if US Tariffs on Canadian Vehicles Rise to 50%
Morgan Stanley notes that if the US raises tariffs on Canada-made vehicles and other products from 25% to 50% beginning in January 2027, Honda's and Toyota's operating profits could decline by approximately ¥100bn and ¥250bn, respectively. However, the news is completely contrary to reports of a tariff reduction five days earlier, and the final tariff rate still depends on negotiations.
- Media reports indicate that the US plans to raise tariffs on Canada-made passenger vehicles, light- and heavy-duty trucks, auto parts, and steel from 25% to 50%.
- The new tariff rate will reportedly take effect in January 2027, with automobiles covered by a new sector-specific tariff.
- Morgan Stanley estimates that Honda's operating profit could decline by approximately ¥100bn and Toyota's by approximately ¥250bn.
- Media reports on August 20 indicated that tariffs would be reduced from 25% to 15%, completely opposite to the direction reported on August 25.
- US-Canada negotiations could also affect US-Mexico talks, involving Toyota, Honda, Nissan, and Mazda, all of which operate plants in Mexico.
Report interpretation
Overview
This report discusses the impact on Japanese automakers of a potential substantial increase in US import tariffs on Canada-made vehicles. Morgan Stanley believes that if the reported 50% tariff rate is ultimately implemented, Honda's and Toyota's operating profits will face significant pressure, but conflicting recent reports indicate that the policy outcome remains highly uncertain.
Core views
On August 25, The Wall Street Journal and other media outlets reported that the US had announced an increase in tariffs on Canada-made vehicles and other products to 50%. Under the reported arrangement, beginning in January 2027, US tariffs on Canada-made passenger vehicles, heavy- and light-duty trucks, auto parts, and steel would rise from the current 25% to 50%. The report specifically distinguishes between two measures: the additional 50% tariff imposed on Canada on August 22 under Section 338 of the US Tariff Act did not cover automobiles, while the latest reports indicate that automobiles will be subject to a new sector-specific tariff. Morgan Stanley notes that the companies concerned have yet to issue formal statements, but if the reports are accurate, this change would negatively affect Honda and Toyota. Assuming tariffs rise from 25% to 50%, the report estimates that Honda's operating profit would decline by approximately ¥100bn and Toyota's by approximately ¥250bn, with the estimated impact on Toyota about 2.5 times that on Honda. The report uses the structure of US vehicle production, sales, and imports in 2025 as the backdrop for its exposure analysis and presents estimates of tariffs already paid by automakers in FY25 and FY26. The relevant exhibits originally assumed a 25% tariff on products exported from Canada and Mexico to the US, so the 50% scenario represents a significant upward shock relative to that baseline. The policy trajectory itself remains highly uncertain. Media reports on August 20 indicated that the US might reduce tariffs on Canada-made vehicles from 25% to 15%; just five days later, the latest reports instead indicated that the rate would rise to 50%, a completely opposite direction. Morgan Stanley therefore does not treat the latest news as a finalized policy outcome and emphasizes the need to await official confirmation of the tariff rate, as US-Canada negotiations could continue to fluctuate and alter the final arrangement. The report also extends the scope of the impact to subsequent negotiations between the US and Mexico. Toyota, Honda, Nissan, and Mazda all operate plants in Mexico, so the treatment of automotive tariffs emerging from US-Canada negotiations could influence the direction of related US-Mexico arrangements. At this stage, the report does not quantify the earnings impact under a Mexico scenario, instead identifying it as an important area to monitor in the next phase.
Analysis framework
The report first reviews the tariff rate, product scope, implementation timing, and legal basis described in the August 25 media reports, and then compares the latest news with the August 20 reports of a tariff reduction. The institution subsequently estimates the impact of a tariff increase to 50% on Honda's and Toyota's operating profits based on the automakers' US production, sales, and import exposure, as well as the FY25 and FY26 baseline estimates of tariffs paid at a 25% rate. Finally, it assesses the possibility that US-Canada negotiations could spill over into US-Mexico automotive trade arrangements.
Methodology notes
Tariff Policy Event-Driven Analysis
The report centers on the potential tariff adjustment event, breaking down its tariff rate, implementation date, covered products, and legal basis, and uses these factors to assess the impact on automakers' earnings and related trade negotiations.
Operating Profit Tariff Sensitivity Estimate
Against the backdrop of existing estimates assuming a 25% tariff on products exported from Canada and Mexico to the US, the report assesses the potential reduction in Honda's and Toyota's operating profits if the tariff rate on Canada-made vehicles rises to 50%.
Cross-Border Tariff Negotiation Linkages
Rather than treating a single media report as the final outcome, the report compares conflicting tariff reports over time and examines how US-Canada negotiations could affect automotive trade talks between the US and Mexico.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Honda Motor（7267.T）If the US tariff on Canada-made vehicles rises from 25% to 50%, the report estimates that its operating profit will decline by approximately ¥100bn.
- Weaknesses
- It has earnings exposure to higher US tariffs on Canada-made vehicles and also operates plants in Mexico.
- Comparison
- The estimated operating profit impact is lower than Toyota's approximately ¥250bn.
- Risks
- The 50% tariff rate has not yet been officially confirmed, and the outcomes of US-Canada and US-Mexico negotiations could alter the actual impact.
- Toyota Motor（7203.T）If the US tariff on Canada-made vehicles rises from 25% to 50%, the report estimates that its operating profit will decline by approximately ¥250bn.
- Weaknesses
- It has relatively high earnings exposure to higher US tariffs on Canada-made vehicles and also operates plants in Mexico.
- Comparison
- The estimated operating profit impact is approximately 2.5 times Honda's ¥100bn impact.
- Risks
- The 50% tariff rate has not yet been officially confirmed, and the outcomes of US-Canada and US-Mexico negotiations could alter the actual impact.
- Nissan Motor（7201.T）The report identifies it as a Japanese automaker for which spillover effects from US-Mexico negotiations should be monitored because it operates plants in Mexico.
- Weaknesses
- Its manufacturing footprint in Mexico exposes it to uncertainty surrounding US-Mexico automotive tariff negotiations.
- Comparison
- The report does not quantify its earnings impact.
- Risks
- The final arrangement resulting from negotiations between the US and Mexico remains unclear.
- Mazda Motor（7261.T）The report identifies it as a Japanese automaker for which spillover effects from US-Mexico negotiations should be monitored because it operates plants in Mexico.
- Weaknesses
- Its manufacturing footprint in Mexico exposes it to uncertainty surrounding US-Mexico automotive tariff negotiations.
- Comparison
- The report does not quantify its earnings impact.
- Risks
- The final arrangement resulting from negotiations between the US and Mexico remains unclear.
Key data
- Reported Tariff on Canada-made VehiclesIncrease from 25% to 50%According to reports on August 25, implementation is planned to begin in January 2027.
- Covered Product ScopePassenger vehicles, heavy- and light-duty trucks, auto parts, and steelAll are relevant products made in Canada and exported to the US.
- Impact on Honda's Operating ProfitDecrease of approximately ¥100bnMorgan Stanley's estimate assuming the tariff rises from 25% to 50%.
- Impact on Toyota's Operating ProfitDecrease of approximately ¥250bnMorgan Stanley's estimate assuming the tariff rises from 25% to 50%.
- Tariff Direction Reported by Media on August 20Decrease from 25% to 15%Completely opposite to the August 25 report of an increase to 50%.
- August 22 Section 338 MeasureAdditional 50% tariffThe report states that automobiles were not covered by this measure at the time, while the latest news concerns a new sector-specific automotive tariff.
- Tariff Assumption in FY25 and FY26 Exhibits25%Applied to products exported from Canada and Mexico to the US to illustrate the impact of tariffs already paid by automakers.
Impact & implications
If the reported 50% tariff rate is implemented, the cost of exporting Canada-made vehicles to the US would rise significantly relative to the 25% baseline, reducing Honda's and Toyota's operating profits through higher tariff expenses. Meanwhile, the treatment established through US-Canada negotiations could become an important reference point for US-Mexico talks, exposing Toyota, Honda, Nissan, and Mazda, which operate plants in Mexico, to further policy uncertainty.
Risks
- The reported 50% tariff rate has not yet been officially confirmed, and the companies concerned have not issued formal statements; the outcome of negotiations could still change.
- The August 20 and August 25 reports point in completely opposite directions, indicating significant uncertainty in the trajectory of tariff policy.
What to watch
- Monitor the official automotive tariff rate, implementation timing, and scope confirmed after the conclusion of US-Canada negotiations.
- Monitor how the outcome of US-Canada negotiations affects subsequent US-Mexico talks, particularly the impact on the Mexican plants of Toyota, Honda, Nissan, and Mazda.