The number one topic of conversation in the auto sector these days is whether the threat of U.S. tariffs is serious, and how long they might last. Many people still believe the threats are just a form of short-term bargaining tool, and that tariffs, if any do manifest, will be short-lived. Eventually, goes the theory, the real U.S. agenda will be revealed, and Canada will find a way to make some concessions and keep the border open.
In early February, S&P Global pegged the chances the tariffs would only last one or two weeks as a 60% probability. A six-to-eight-week disruption was said to be a 30% probability, with a “tariff winter” where border issues settled in for the longer term only deemed to be a 10% possibility.
The problem with that analysis is that no matter the outcome, it probably doesn’t matter how long tariffs last. Let me explain.
After a short, 30-day reprieve, President Trump has said the 25% duty on Canadian imports will proceed on March 4 as originally announced (steel and aluminum and specific auto tariffs may also follow). Whether the U.S. applies these duties or not, these threats and the disruption they cause are with us for the foreseeable future. This has many Canadians longing for the good old days of the Biden administration. However, we must remember that, under Biden, the U.S. largely continued the trade and tariff policies implemented in the first Trump administration, and added additional Buy American requirements. The U.S. is increasingly hostile to trade, and that has big implications for Canada.
In an analysis of U.S. import trade, the Federal Reserve Bank of San Francisco found that only 34% of imports from Canada are intended for final consumption. The rest, like auto parts, are intermediate inputs to U.S. production. This trade pattern is fundamentally different from that of other countries or regions (including Mexico) where a clear majority of imports are for final consumption. No doubt this fact is well known to the Trump administration, and may be one reason for the Trump assertion Canada “stole” the American auto industry.
The Canadian auto industry exists to supply parts and vehicles to the U.S. Whether first encouraged to invest here as part of the Canada-U.S. Auto Pact; later, as a result of the voluntary export restraints applied against Japanese vehicles; or even more recently in response to Canada’s EV-investment incentives, everyone was promised those investments came with a guarantee of access to the U.S. Donald Trump has made it clear no such guarantee exists.
The moment investors begin to think the U.S. might arbitrarily tax or otherwise restrict Canadian products from entering the U.S., Canadian automotive investment is at risk. So it is hardly surprising, no matter what reasons they cite publicly, that Stellantis has delayed the reopening of its Brampton, Ontario factory. No company would begin or scale up production in an environment where it was impossible to predict the cost of their product. There is no reason to believe the Ford Oakville plant will reopen in the absence of market certainty, and GM’s recent announcement of a small layoff at the CAMI plant in Ingersoll may be the start of a larger trend.
So can we fix the Canada-US partnership once it has been broken? I suppose the U.S. Administration could have a sudden, collective epiphany. Maybe they will renounce their protectionist ways. But I am not holding my breath.
More likely, Canada and the U.S. have to get back to the negotiating table and amend or replace the USMCA in ways that are acceptable to both countries. It is unclear at this stage what Canada might have to give up or trade in order to defend the auto sector, so whether a deal could be struck or how long negotiations would take is unclear. There is a model, however, for what could happen if a deal can’t be reached.
In the 1980s, Australia was weary of having to constantly subsidize automotive investments. With a small domestic market and limited export opportunities, Australia’s industry had to be propped up with subsidies and a high tariff wall, exacting a cost on the economy and inflating vehicle prices for Australians. Under the 1984 Button Plan (named after an Australian senator, not the clothing fastener) Australia announced it would reduce external tariffs from 57% that year to 15% by the year 2000.
The government wanted to end production of small-volume models in Australia and was prepared to revoke other concessions to vehicle manufacturers if they didn’t fall in line. The objective of the plan was to reduce the Australian industry to no more than three vehicle manufacturers, with a limited number of high-volume models that could be sold in both the domestic and export markets. As it turned out, even a pared-down auto industry proved to be unsustainable, and the last factories were closed in 2017. In just over 30 years, Australian-made vehicles went from an 80% share of the market to zero. The government subsequently eliminated duties on imported cars.
This transition to open markets in Australia resulted in the elimination of a sector that employed over 70,000 people in the early 1980s. Frankly, it is hard to imagine any government in Canada being willing to take similar drastic measures. That said, many of the same forces are at play here.
Even if Canada slaps countervailing duties on American made cars, the majority of sales in Canada would continue to be duty-free, either as a result of being produced locally or imported under some other trade agreement. Consumers will respond to rising prices on U.S.-made vehicles or declining production in Canada by turning to vehicles from other countries. Once lost, it is difficult to regain a customer, even if the trade dispute is resolved.
So it is hardly surprising Stellantis delayed the reopening of its Brampton, Ontario factory—no company would begin or scale up production in an environment where it was impossible to predict the cost of their product
So what will the coming weeks look like if tariffs are imposed?
Certainly, politicians and senior officials at all levels of government will attempt to find ways to mitigate trade impacts while seeking a new, negotiated settlement with the U.S. Keeping one eye on the calendar, there may be some who hope the U.S. midterm elections in 2026 will reset Congress in a way that will constrain the administration’s ability to conduct these types of trade actions. But this will take time. Only unconditional surrender happens quickly.
So we are likely facing a period where industry and government will attempt to “muddle through.” Forget about attracting new players to Canada, the focus will be on sustaining current plants and investment. Companies manufacturing in Canada might be given duty waivers on imports from the United States that are proportionate to their Canadian production. Any additional duties collected on vehicle imports could be redirected to adjustment measures, such as EI top-ups to protect against short-term job losses. Regulatory policies that favour imported vehicles over domestically made products could be paused or eliminated (e.g. zero-emission-vehicle mandates and incentives). And so on.
With the industry’s major supply contracts priced in U.S. dollars, Canadian vehicles will cost more to produce, and the price of imports from other countries may also be impacted by foreign exchange fluctuations. So cost containment will be the order of the day.
Already, manufacturers have been attempting to accelerate shipments to slip them in before tariffs are applied. Vehicle storage lots have been identified on both sides of the border if it becomes necessary to ride out a short (one- or two-week) disruption. If this settles into a longer-term pattern, manufacturers might import vehicles in bond, where duties come due only when those vehicles are released for sale.
For companies that do incur additional tariff costs, various mitigation measures will be needed. This might cause new OEMs to sell directly through factory-owned stores (the Tesla model) to eliminate dealer margins from vehicle pricing. For brands already represented by Canadian dealer networks, we could see the traditional dealer model give way to one in which vehicle inventories are held by the manufacturer, and dealers become selling agents operating on a fixed commission. This would reduce dealer independence and fundamentally change the retail experience in Canada.
No matter what sales model prevails, neither manufacturers nor dealers will want to finance excess inventory, so expect greater variability in vehicle choice and delivery times going forward. Those impacts will differ by brand and model depending on each importer’s sourcing decisions. Brands may also decide to equip imported vehicles differently to lower their dutiable value, with software or accessories only added once they have cleared the border. For consumers and finance companies, variable tariff costs will wreak havoc on vehicle resale values and the lease or finance cost of acquiring a new vehicle.
The long and the short of this is that Donald Trump has set in motion forces that may have already broken the auto industry’s business model. At the very least, we can expect turmoil in the consumer marketplace, anxiety at dealerships and manufacturing plants, and intense dialog between industry and government over what the future may hold.
Stay tuned.
In a career that included managing the Canadian government’s legislative agenda; heading a national manufacturing association; and leading business strategy as a C-suite executive at one of Canada’s largest auto companies, Stephen Beatty has deep experience at the intersection of industry and government. He shares timely insights on his website beattyblog.ca