Why Tariffs Could Cost Far More Than We Might Think

There are many words that can describe all of the tariffs -- potential tariffs, retaliatory tariffs -- but one word in particular strikes fear in investors: Uncertainty. That word happens to be one of the most hated words on Wall Street, a word that can throw investors into a panic. Here's the kicker: We've mostly been calculating the tariffs simply based on the 25% slapped on imported vehicles.

Soon we'll have to add in the effects of a 25% tariff on key automotive parts that are imported. We just got one example involving General Motors (NYSE: GM) of another way tariffs could cause extreme disruption, but is it cause for concern just yet?

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Potential shutdowns

What we haven't heard much about recently, at least when it comes to tariff issues, is plant shutdowns. Generally speaking, when a plant has to shut down production for strikes, or any reason, it's bad news and can cost automakers a small fortune in lost revenues and profits.

It's a scenario that almost played out recently, all due to tariffs. A lawsuit was filed Monday when a Michigan supplier to General Motors sued a Tier 2 Chinese parts maker for refusing to ship product until the Michigan supplier agreed to pay tariff costs.

The Chinese parts supplier had previously agreed to split the tariff costs 50/50, until the tariffs jumped dramatically -- hence the litigation.

"Following President Donald Trump's imposition of tariffs on Chinese imports, Pangeo has refused to honor its agreement to split the tariffs 50-50 ...," Joseph Shannon, attorney at Bodman, wrote in the lawsuit, according to Automotive News. "Because of Pangeo's refusal to ship the Parts, JAC will soon shut down its production, and GM will be forced to follow."

The concern

The last part is what should concern investors, because a potential shutdown wasn't really on the radar when it came to tariff considerations. We would need much more information and details to estimate what a potential shutdown would cost General Motors, and it would be determined by what vehicles were bottlenecked by a shortage in parts. But just to put us in the right mindset, consider that the Union Auto Workers' six-week strike in 2023 cost the automaker roughly $1.1 billion.

While this lawsuit is an example, as it's headed toward settlement, it absolutely shows the ripple effect that can go from one end of the supply chain to the other really quickly and with potentially devastating effects. Furthermore, if investors thought this was a one-off speed bump to deal with, they might want to adjust their investing thesis slightly, because it could be just the beginning. "I think we'll see more cases filed, and I do believe this is probably the tip of the iceberg," said Daniel Rustmann, co-chair of the automotive law practice at Butzel, according to Automotive News. "The tariffs are so large and so difficult to address from China and everywhere else."

What it all means

To put it bluntly, these tariffs could cause an absolute mess across the automotive industry and its supply chain, and it's something to consider when thinking about investing in General Motors -- a company that otherwise is doing excellently by just about any metric. The good news is that GM CEO Mary Barra long ago stated that management was in the process of multiple playbooks to offset the effects of tariffs. And who knows, the uncertainty means that all the tariff drama could effectively end tomorrow in some intriguing scenario. The takeaway for investors is to focus on the core of the company and what it can control, and you'll likely end up well off long-term.

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Daniel Miller has positions in General Motors. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.