Canada’s auto industry needs a new deal—maybe Trump’s tariffs are a blessing in disguise
A week is a long time in the world of Donald Trump. We went from 25% tariffs on all goods from Canada; to a 30 day-reprieve; to a 25% tariff on steel and aluminum and a declaration of intent that the U.S. would impose reciprocal tariffs on all of its trading partners. Wait a few minutes and there will be another development. For Canada, that includes an accelerated renegotiation of the U.S.-Mexico-Canada Free Trade Agreement.
There is a way through this, but governments and industries need to be thinking hard about issues of supply, demand, and market intervention by quixotic (that’s a euphemism—you can supply your own adjective) politicians and develop an informed, strategic response.
The past week has demonstrated that the President has tactics the way a porcupine has quills, leaving the impression he is entirely transactional and operates with no long-term objectives or strategies. But it is possible to have both a longer-term goal and still be fixated on the here and now. In fact, this seems to be a characteristic of most modern politicians, although it may be reaching its apex with this President. I hope I am right, because therein lies the only pathway out of this Groundhog Day of tariff threats.
The first Trump presidency threatened to apply tariffs to Mexican imports using the International Emergency Economic Powers Act (IEEPA). He has made good on those threats (although with a current 30-day stay of execution) in his second term. Steel tariffs were applied against the world, including Canada, during Trump 1.0, and they have returned with his second term. In fact, the narrative that the world is taking advantage of America’s good nature and needs to be tariff-ed into compliance has been a remarkably consistent theme of the Make America Great Again (MAGA) movement.
The theory that tariffs can be used to encourage industry back to America in the medium term while boosting government revenue to fund tax cuts in the short term is controversial, and not without a legion of detractors. But, for many Americans, a policy that proposes to restore manufacturing jobs, get government spending in line, and regain respect for America seems like it deserves a chance. At least until this became a competition between the U.S. and Canada, many Canadians believed in a similar approach for this country. But then the rubber hit the road.
After a home, a car is the second largest purchase anyone will make in their lifetime. Unlike homes, which are built locally, Canadians have a world of choice in cars. Canadians select cars based on issues of personal utility, available budget, or even self-image. Where the vehicle is built is a secondary consideration. As a result, according to Ontario’s Trillium Network for Advanced Manufacturing, Canada is only the third-largest source of vehicles purchased by Canadians, with roughly half of all vehicles coming from the U.S., followed by Mexico at 15%.
Canada’s vehicle assembly footprint has shrunk in recent years. Although there was a COVID-19 effect that disrupted supply chains, there has been a broader erosion of Canadian industry. Mexico has actually grown its share of North American production, while U.S. manufacturing has proven remarkably stable. Because Canada doesn’t offer the biggest market or the cheapest labour in North America, free trade has caused automotive assembly investment to leak out of the country.
For Canadian vehicle production and sales to fall even as Statistics Canada estimates Canada’s population grew by more than 9% between 2020 and the end of 2024 is troubling. Well-paid, full-time manufacturing jobs are giving way to more precarious employment in the gig economy. Uber alone had over 140,000 drivers and delivery people using its platform in 2023. It is not surprising that Canadians worry about the drift of the economy.
The Canadian auto industry has limited export opportunities beyond North America. To maintain our manufacturing base, Canada must either exponentially expand our share of the domestic market; or achieve healthy sales across the larger North American market. That leads to the inevitable conclusion that Canada has to cut a new deal with Washington. Because the Trump plan is a throwback to a time when tariffs applied on most trade, Canada may also have to look to its past for a plan.
In the simplest terms, Canada needs to aim to be on the inside of that wall (and no, I do not mean as the 51st state). The original Canada-U.S. Auto Pact had a similar aim. Allow products made in either country to be sold in either market, subject to maintaining certain production-to-sales ratios. This process of linking import rights to domestic manufacturing prevented the type of production losses that Canada has experienced post-USMCA while still allowing the industry to rationalize production in ways that created longer production runs and kept vehicle prices low.
Rather than employ the USMCA formula that allowed Mexico to carve off a larger share of North American production while also permitting Chinese imports to claim a 20% share of the Mexican market, Canada should be prepared to go into the next round of negotiations early, offering a compelling alternative.
Here’s the idea: Canada, the United States, and Mexico should agree to reintroduce tariffs on the trade in automobiles between the three countries and set a common, sufficiently high external duty rate (10%-25%) to discourage anyone from end-running USMCA rules. In turn, the countries should each agree to waive the duties on a certain volume of vehicles imported by any company that maintains a manufacturing base in their jurisdiction.
In this model, a manufacturer who, for example, produced 100 vehicles in Canada, the U.S., or Mexico might be entitled to import up to 100 vehicles in combination from the two other countries (or whatever ratio the countries agree to set). The formula could be based on production value rather than volume, but the mechanism remains the same. The existing USMCA rules of origin would continue to determine whether a vehicle had sufficient regional content to qualify for duty-free entry under the policy.
So let’s think this through. The new-car market accounts for almost 2,000,000 annual sales in Canada. According to the Trillium Network’s calculations, about half of those are imported from the U.S. In order for those vehicles to qualify for duty-free import to Canada, manufacturers (not just Ford and GM, but Toyota, Volkswagen, or any other company importing to Canada) would have to assemble a total of 1,000,000 vehicles in Canada. The Canadian vehicles could be sold domestically or exported. If exported, the mirror conditions would apply in Mexico and Canada. Only imports up to the level of domestic production would be permitted with duty-free access to the market.
The U.S. administration has called for fairness and the elimination of trade imbalances. It has sought to restore and anchor production in North America. And it wants to reinforce domestic supply chains. A reinvigorated North American auto industry, spread across the three countries, would attract foreign investment while creating a home-court advantage for companies that either grew up here or North-Americanized their businesses. Nothing could be more in the spirit of tariff reciprocity than a policy that is inherently self-balancing.
As a nod to both the past and the future, let’s call this new deal the Auto Pact. And before I hear from Volkswagen, the original Auto Pact included major powertrain components in the calculation of domestic production. Carried forward in the same spirit, that should extend to vehicle electrification and the manufacturing of major components such as batteries.
Here’s the idea: Canada, the United States, and Mexico should agree to reintroduce tariffs on the trade in automobiles between the three countries and set a common, sufficiently high external duty rate, but each waive the duties on a certain volume of vehicles imported by any company that maintains a manufacturing base in their jurisdiction
Since any duties paid on the cars they import would be directly returned to the same manufacturers producing vehicles here in Canada, the effect would be to provide continued duty-free trade for companies operating on both sides of the border.
And nothing about this model would require Canada, the U.S., or Mexico to tear up their free-trade agreements with other countries. Even with those agreements, North America is experiencing inward migration of vehicle assembly investment today, and this proposal would do nothing to dampen that trend. So, with continued access to global production and most vehicles produced in North America trading duty-free, consumers would be protected against any significant trade-induced price inflation.
Just as Canada and the U.S. do today, transshipment of Chinese or other goods deemed by any of the North American partners to be contrary to their strategic national interests would be prevented by regulations prohibiting investment or the importation of targeted technologies from countries of concern.
This is a simple, self-regulating policy that would nonetheless help to reinforce manufacturing in all three countries. World Trade Organization purists might not like it, but the U.S. has declared where it stands on the issue of the global trading system.
The Trump Administration already plans to use tariffs to manage its trade and foreign policy agenda. Knowing this, Canada needs to seize the initiative and bring forward a win-win plan so the Trump administration can demonstrate results to U.S. voters. That plan must preserve and enhance benefits for a sector of the Canadian economy that is inextricably linked to suppliers and consumers south of the 49th parallel. Before the details of the U.S. plan harden, Canada must show how we can partner to advantage in an updated and improved North American free-trade agreement.
And if that doesn’t work, we need to be clever and find ways to mitigate the worst effects of the American tariff strategy and ride out the next few years. But that is for another day.