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Despite campaign promises by Prime Minister Mark Carney that Canada can dodge U.S. tariffs with an “all in Canada” auto sector, a new C.D. Howe Institute report claims that the only realistic future for Canadian auto manufacturing is to make nice with the Americans.
“To maintain our manufacturing base, Canada must either exponentially expand its share of the domestic market or achieve healthy sales across the larger North American market,” reads the new report written by Stephen Beatty, the recently retired corporate secretary of Toyota Canada.
“That leads to the inevitable conclusion that Canada must cut a new deal with Washington.”
The highly integrated North American auto sector has been one of the industries most conspicuously impacted by a wave of import tariffs imposed by U.S. President Donald Trump. Just last week, General Motors laid off 750 workers at its Oshawa assembly plant, in what union leaders said was a direct consequence of U.S. tariffs.
Since April 3, the Trump administration has imposed 25 per cent tariffs on imported autos and auto parts, but with carveouts for parts covered by CUSMA, the North American free trade agreement negotiated in Trump’s first term. A 25 per cent tariff on Canadian steel and aluminum also remains in place.
In the first days of the federal election campaign, Carney proposed to get around U.S. trade barriers by building an “all-in-Canada auto manufacturing network.” As Liberal Party literature described it, “Canadian steel” would be assembled by “Canadian workers” into cars to be purchased by Canadians.
The problem is that Canadian auto manufacturing has become so specialized under free trade that much of the sector would cease to exist if it’s not able to work in tandem with auto manufacturers in Mexico and the United States.
Currently, just nine per cent of new cars purchased by Canadians are assembled in a Canadian factory. Meanwhile, Canada has become dominant in some auto parts categories — such as dyes and moulds — that would be decimated if denied access to the U.S. market.
“If you try to change the supply chain, something’s going to suffer. Quality could go down. Delivery could go down,” Peter Frise, director of the Centre for Automotive Research and Education at the University of Windsor, told National Post in March.
Beatty has previously written that “the self-sufficiency game has highly uncertain outcomes.” And in this latest report, he writes that Canadian auto manufacturing is “inextricably linked to suppliers and consumers south of the 49th parallel.”
As such, Beatty’s proposal is that Canada’s best hope is to rejig its trade policies to remain within the U.S. orbit, while respecting the Trump Administration’s wish to “restore and anchor production in North America.”
“Tariffs are like castle walls … in the simplest terms, Canada needs to aim to be on the inside of that tariff wall,” he wrote.
Beatty’s basic pitch is that any U.S. tariffs on Canadian cars should be countered with an equivalent Canadian surtax on imports of U.S. vehicles. With the twist being that manufacturers would be given exemptions from the tax “proportionate to their Canadian production.”
So, if a manufacturer builds 100 cars in Canada, they’re allowed duty-free import of 100 cars (or enough parts equivalent to equal 100 cars).
Then, Canada would push to negotiate a new Auto Pact wherein both the U.S. and Canada enshroud their respective auto sectors with tariffs of up to 25 per cent, but give exemptions to one another based on the formula of one duty-free import car for every car manufactured domestically.
Calling his plan the “New Auto Pact,” the idea is that both the United States and Canada would keep their existing auto sectors in a “self-balancing” formula while also meeting the U.S. goal of shutting out China.
“The strategy aligns with U.S. reshoring goals and addresses strategic risks from Chinese imports,” wrote Beatty.
All the while, the U.S. would retain access to the “critical mineral and battery supply chain base in Canada,” and avoid the massive increase in U.S. vehicle prices anticipated if the Trump administrations were to detonate the integrated North American auto sector altogether.
By some estimates, the average cost of a U.S. vehicle would go up by as much as $12,000 if the Americans were to stay the course with blunt tariffs against Mexico and Canada.
Writes Beatty, “Canada does not have many shots at such renegotiations, and the Canadian government needs to build as much leverage as it can during that window.”
