United States President Donald Trump and Mark Carney agree on at least one thing: both think their country’s auto sector can survive American tariffs. But the Liberal Leader said Canada’s auto sector would need to be reimagined to achieve that.

“We can sustain an auto industry with the U.S. having tariffs with access to other markets,” he said during a March 27 press conference. “Provided we engage very deliberately in partnership — government, business, labour — to reimagine the auto sector.”

It’s an idea that’s gaining traction in policy circles as the U.S. seeks to undo the decades-long integration of the two countries’ auto sectors that was cemented by the 1965 auto pact.

The pact was not a free-trade agreement, but it created a duty-remission scheme that allowed U.S. automakers to offset tariffs in Canada by increasing the Canadian content in their vehicles. It came about because policymakers viewed Canada’s auto sector as too small to survive on its own, with domestic manufacturers unable to achieve the economies of scale necessary to be competitive.

Designed to ensure Canada’s auto sector survived, the pact led to a tight integration with the U.S. so that parts and vehicles could cross the border multiple times before being finished for the consumer market.

But Trump’s proposed tariffs threaten to upend the industry’s six-decade-old model. Around 85 per cent of the vehicles manufactured in Canada are exported to the U.S. and they would likely no longer be competitively priced if the tariffs are implemented.

Scheduled to take effect on Wednesday and start being collected on Thursday, the tariffs would apply a flat 25 per cent tax on all finished vehicles not manufactured in the U.S. But in a twist that would essentially reverse the two countries’ integrated auto sectors, the tariffs on the finished car would be reduced based on the value of any auto parts that were made in the U.S. There could be additional 25 per cent tariffs on auto parts made in Canada at an unspecified date.

That’s led some analysts to question whether there have been enough changes in technology, trade and the economy in the six decades since the auto pact was signed that Canada’s auto sector could survive on its own.

Their premise is that Canada has the capacity to make as many vehicles as its consumers purchase each year, which is around two million vehicles.

“There’s certainly a strong economic argument to be made that we actually don’t have net exports in vehicles to the U.S.,” Bentley Allan, a professor of political science at Johns Hopkins University and a principal at the Ottawa-based Transition Accelerator think tank, said. “It’s pretty much an even trade, so let’s just bring all those exports of auto parts and autos back over on this side of the border.”

The idea is that existing auto manufacturers in Canada would continue producing the models already being built or planned to be built here, which includes sedans, SUVs, sports cars, minivans and pickup trucks such as the Honda Civic and Toyota RAV4.

If Canada could produce a half-dozen models that account for the majority of vehicles purchased here, and imports from other countries account for the remainder, then it could work, Allan said.

But that would require radical change in the way the auto sector currently works since some auto parts reportedly cross the borders of Canada, Mexico or the U.S. as many as eight times during vehicle assembly. That’s partly why there were an estimated 2.5 million truck crossings in 2023 on the Ambassador Bridge, which separates Windsor, Ont., and Detroit — the two countries’ respective auto-sector capitals.

Trading treaties

The original North American Free Trade Agreement (NAFTA) eliminated nearly all tariffs on trade between Canada, Mexico and the U.S. This changed under the 2018 Canada-United-States-Mexico Agreement (CUSMA), which penalized automakers that do not meet minimum thresholds for how much work on a vehicle is carried out by workers earning a minimum hourly wage of US$16. It also added regional content requirements for how much of the vehicle must be built in North American plants.

In apparent violation of that agreement, Trump is now erecting 25 per cent tariffs on vehicles built in Canada, in addition to existing tariffs on steel and aluminum, and has proposed reciprocal tariffs that are expected to apply a flat rate to every country’s products and come into effect on Wednesday.

To survive those trade barriers, vehicles built in Canada will need to use as many domestic auto parts as possible, Carney said at his Mar. 27 press conference. By “backwards integrating” domestic steel and aluminum into auto production, the auto sector could start moving away from its U.S.-based export model, he said.

“We’re going to have to make some big changes, but we can make those big changes,” he said. “We do have options; we do have agency; we do have power.”

Building out the domestic auto supply chain could also attract investment in the domestic industry. In the meantime, Carney proposed creating a $2-billion Strategic Response Fund to aid the auto sector during this transformation.

There are, of course, risks and consequences to be considered. For example, auto exports sold into the U.S. bring U.S. dollars into the economy, which affects the value of the Canadian dollar.

Mexico is also a net exporter of auto parts to the U.S. and will be looking for other markets such as Canada for its products. But Canada will need to absorb the vehicles it currently exports, so that relationship may face some tension.

If the tariffs do bring Canada’s auto production to a halt, it would amount to i and two per cent in production volume for each week of closure, with losses growing over time, according to analysts at Oxford Economists.

The tariffs alone are likely to spur more than 2,000 layoffs and reduce auto exports in 2025 by six per cent or $550 million, they said in a note on Monday, and those figures double if Canada imposes parallel 25 per cent counter-tariffs on U.S. vehicles and auto parts.

Another transformation in progress

The trade war arrives with the auto sector already in the midst of a major transformation: automakers are seeking to transition to producing battery electric vehicles instead of mainly internal combustion engine vehicles. Achieving the necessary economies of scale and building the required supply chains for this change is expected to be expensive and time-consuming, taking at least a decade.

The federal government as well as the Ontario and Quebec provincial governments have already committed as much as $52.4 billion to be distributed over the next half-decade or so in the form of tax credits, production subsidies and other support to automakers and battery companies that have agreed to invest $46 billion in an electric vehicle supply chain.

Allan said he initially thought the governments’ EV strategy cost too much money for the number of jobs it created, but changed his mind in the current context; with Trump pulling the U.S. back from the EV transition and talking about cancelling investments in the EV supply chain, it suddenly makes a lot more sense.

“We can’t start deleting things that are helping us diversify our trade at this moment,” he said, “especially not clean energy future opportunities.”

Based on a Transition Accelerator analysis, investments in Canada’s EV supply chain are already showing up in export tables. For example, Canadian battery exports to the U.S. were valued at $1.4 billion in 2024.

The analysis said EVs and EV parts exponentially grew over the past three years, a sign that the nascent industry is finding momentum, even though only a small number of EV supply chain projects have received government support or been built yet.

There is another factor lurking in the background: Canada’s current export-based model of auto manufacturing has led to a sector in decline, one that is shedding manufacturing capacity and running a trade deficit.

In 2024, auto production in Canada was just under 1.3 million vehicles, a 55 per cent decline from the peak of 2.9 million vehicles manufactured in the early 2000s, according to DesRosiers Automotive Consultants Inc., a research firm. By contrast, Canadians purchased almost 1.9 million vehicles in 2024.

Part of the reason for the trade deficit is that some auto plants in Canada are closed for retooling, but auto production here has been in decline for a decade and hit a nadir in 2021 at 1.1 million vehicles, according to DesRosiers.

“One of the things that we really have to seriously look at is this question of how you maintain some sort of proportionate representation in that sector of the economy,” Stephen Beatty, who retired as corporate counsel to Toyota Canada Inc. last year, said. “We’re not the cheapest place to make things, and we aren’t the biggest marketplace. As a result, there are these forces that pull automotive away from Canada.”

Beatty said that despite Trump offering multiple reasons for imposing his tariffs, including fentanyl trafficking and border security, he believes his real goal is to repatriate manufacturing to the U.S.

That would be a drastic departure from accepted policy that Trump embraced during his first term in office, when his administration signed CUSMA and envisioned all three countries working together to produce automobiles.

Even that free trade agreement marked a shift away from globalization and toward regionalization.

But Beatty pointed out that CUSMA ushered in a rules-of-origin model that encouraged companies to manufacture in North America and laid out how to determine where a vehicle is manufactured, given that it was likely assembled using parts manufactured in multiple countries.

The rules of origin, he said, were a departure from the auto pact’s “duty-remission” scheme, even if both were aimed at integrating North America’s auto market.

“If I look at what the U.S. administration is saying these days,” Beatty said, “it’s kind of a throwback to the type of trade thinking that was in place in the ’60s when you wanted to link import and export benefits, and there may be scope … to return to some elements of that in a negotiated deal.”

One factor at play is that China’s auto sector in 2024 produced more vehicles than any other country for the first time and, importantly for global trade, its exports have rapidly grown to six million vehicles in 2024 from one million vehicles in 2020, according to the U.S.-based Council on Foreign Relations.

That competitive threat to other countries has not gone unnoticed in either the U.S. or Canada, which both enacted 100 per cent tariffs on Chinese EVs in 2024. Nevertheless, there are lingering concerns and questions about how long such tariffs could persist and whether Chinese EV makers could set up factories in Mexico, essentially creating a backdoor to bring vehicles into the lucrative U.S. market.

How to preserve North American vehicle manufacturing is likely to generate more and more noise if tariffs cripple the domestic sector and China expands its reach.

“Cars have always been interesting because they are the apex of good in a manufacturing chain,” Allan said. “It’s an anchor for your broad-based manufacturing capabilities.”

Vehicles are complex combinations of bent steel and aluminum, rubber and plastic, but they increasingly contain semiconductors, software and even artificial intelligence programming — the components of a modern economy.

Tellingly, the intergovernmental economic forum known as the G7, which helps set global policy priorities amongst some of the world’s largest economy countries and which Canada joined in 1976, has never included a nation that lacked a vehicle manufacturing sector.

In Canada, vehicles rank as the country’s second-largest export, valued at $51 billion, so a collapse could send ripples through the economy at a time when the total impact of all the Trump tariffs — which include orders targeting all Canadian goods not compliant with CUSMA, steel and aluminum as well as a flat reciprocal tariff rate — could trigger an economic recession.

Against that backdrop, everyone from Ontario Premier Doug Ford to Carney is saying Canada needs to figure out a solution to control its economy.

“You cannot have the entire auto chain come to a crashing halt; that will send ripples through the economy,” Beatty said. “It has to continue and companies have to do their best to minimize the impacts and try to squeeze margins anywhere they can up and down the supply chain, but some of it will get passed on.”

• Email: gfriedman@postmedia.com

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