It’s been almost 60 years since automobile manufacturing factored so heavily in North American politics. And back then, just like today, the subject that so deeply rankled citizens and politicians alike was tariffs and assembly plants. Only, back in the day, the tariffs were Canadian (on American cars) and our Prime Minister, Lester B. Pearson, was leading a Liberal Party that was — I swear to God — pro-business.
The resolution of that crisis, the famed Canada-U.S. Auto Pact, was a monumental success for both sides. Pearson, partly on the success of the Auto Pact, gained three seats in the November 1965 election despite having stepped, metaphorically speaking, on his Johnson with a disaster of a Canadian Pension Plan. The Americans, reluctant initially to acquiesce to Canada’s demands, saw their auto-related cross-border trade explode.
Whatever happened to win-win?
Fast-forward 59 years, 10 months, and 20 days, and the political bonhomie that saw Pearson and then-U.S. president Lyndon B. Johnson quickly come to an agreement seems like some quaint remembrance peddled by the hopelessly nostalgic. Today, tariffs are but the opening gambit in the war over the automobile. Making our automotive world even more chaotic, we have one (ex-)president looking to rescind an agreement (that would be the United States-Mexico-Canada Agreement, or USMCA) that he wrote; another (current) president whose signature accomplishment — the Inflation Reduction Act — does anything but; and, topping it all off, the world’s leading auto mogul looks like he’s trying to buy the U.S. election.
Oh, and there’s a Chinese invasion to fend off, not to mention some proposed American fiscal policy being bandied around the campaign trail that could really be the death of the Canadian auto industry. So, buckle up; whatever your view on automobiles, whichever side of the political divide you might reside on, the only thing that incites more political extremism — on both sides of the border — is immigration.
How Trump’s car-loan deductability is going to decimate Canada
As if President Biden’s Inflation Reduction Act (IRA) hasn’t wreaked enough havoc in Canada — the federal and provincial governments have had to spend an incredible $52.5 billion to match the U.S.’s battery manufacturing subsidies — one of Donald Trump’s more recent campaign promises might be worse. His latest attempt at wooing cash-strapped voters is a promise to make car loans tax-deductible. Well, tax-deductible if, and only if, that car is manufactured in America. Not in Mexico. Not in Canada. Only in the make-’em-great-again United States.
This will wreak an amount of havoc not yet seen in Canada’s automotive industry, dramatically reducing the saleability of Canadian-built cars south of the 49th. A Honda CR-V manufactured in Greensburg, Indiana, for instance, would see the interest on its loan eligible as a tax deduction; while the very same car produced in Alliston, Ontario would not. Ditto for a Toyota RAV4 built in Georgetown, Kentucky versus, of course, one built here in Woodstock, Ontario. Even cars only produced in Canada — like Lexus’ NX — would be vulnerable, the benefit of that tax-deductability more than enough to sway increasingly cash-strapped Americans out of “foreign” models and into a locally-built alternative.
What’s even worse news is that it’s tough to envisage an effective defence. Tariffs beget countervailing tariff, and even though, in the long run, nobody wins, at least both sides are punished. Even with the IRA, Canadian governments could take action. Whatever your view on subsidies and electric vehicles, Canadian governments were able to match the IRA’s subsidies — those $52.5 billion I mentioned earlier — which did attract battery manufacturers to our shores.
But how could a Canadian government counteract a tax rebate in America, and, more importantly, a direct-to-consumer deduction? A subsidy for production in Canada won’t cut the muster; Canadian consumers will feel cheated, and how could local American dealers explain the complication of built-in-Canada models having a lower sticker to compensate for the lack of deductability? I have long contended that Biden’s Inflation Reduction Act was the Canadian auto industry’s biggest challenge of the last 50 years. Credit Donald Trump with upping that threat with some off-the-cuff pontification. Maybe he really is a “stable genius.”
The Musk quid pro quo
For the last few months, the entire auto industry has been trying to answer one very perplexing question: why is Elon Musk shilling for Donald Trump, an avowed climate-denying hater of cars electric who leads a party that is, largely, EV-phobic?
Well, if Musk’s latest pronouncements are any indication, we might now have a clue what game is afoot. First, there was the promise that the Tesla CyberCab will be for sale next year despite the absence of regulatory approval, and the news the National Highway Traffic Safety Administration (NHTSA) is investigating the company’s Full Self Driving technology. Then there is, of course, the all-but-confirmed announcement that, in a Trump government, Musk will be appointed the “efficiency czar,” tasked with slicing and dicing the number of government workers much like he did the employee roster at Twitter.
More recently, there have been details of his plans, Quartz.com reporting that Musk thinks his “Department of Government Efficiency” can chop a whopping US$2 trillion dollars from the U.S. federal budget. Most of that — if Twitter be any lesson — means that thousands, perhaps tens of thousands, of civil servants will be unceremoniously axed. An even more Machiavellian possibility — given Musk’s track record of firing those who disagree with him — is that, amongst those hundreds of thousands of government workers shown the door, some might well be the very NHTSA investigators whose approval Tesla will need before the CyberCab is allowed on the road.
Understand this: Musk has made no bones that the future of Tesla is completely autonomous automobiles, so sacrificing current electric-vehicles sales — Trump will almost assuredly cut consumer EV subsidies — is small price to pay to get rid of those resisting his precious robotaxi.
Why Trump is so mad
Discussing a trade pact is typically a sure road to boring readers. Unfortunately, it may also explain why once- and (possibly) future president Donald Trump gets so twisted up about the United States Mexico Canada Agreement (USMCA).
First off, here’s what’s at stake. The USMCA regulates everything about the cross-border production of automobiles. In a nutshell, it governs what percentage of the assembled car must be produced in Canada, Mexico, or the U.S. (75%, up from 62.5% under NAFTA); outlines the percentage of “core content” — engines, transmissions, and high-voltage batteries, as well as steering and suspension systems — that must be North American (the same 75%); and, in just one of the measures seemingly focused specifically on Mexico, sets a minimum wage of USD$16 for plant workers for a car to be USMCA-compliant. The important thing to remember is compliance with these rules allows a car produced in Canada or Mexico to enter the United States tariff-free.
By the U.S. government’s own determination, the USMCA has been a grand success for American automobile manufacturing. According to the U.S. International Trade Commission (ITC) for instance, the percentage of American automobile production destined specifically for U.S. consumption is up dramatically over the last few years. Ditto for how many cars American plants produce: America’s share of total North American production is way up since 2018, while Canada and Mexico’s slice of the pie is down almost 25%.
More importantly — because this was the entire point of Biden’s IRA — U.S. investment in USMCA-compliant assembly and parts manufacturing dwarves the monies being spent in Mexico, automakers investing some US$46.3 billion in the United States in 2022, but only US$0.3 billion in Mexico. So, what’s to complain about, right?
Trump’s latest attempt at wooing cash-strapped voters is a promise to make car loans tax-deductible, if the loan is for a car manufactured in America—this will wreak an amount of havoc not yet seen in Canada’s automotive industry
There is, unfortunately, one important number that paints a more problematic picture. According to the ITC, there’s been an increase — a huge increase — in the number of cars being imported into the U.S.A. that are “dutiable.” That’s government-speak for imports that don’t meet those USMCA regulations.
According to the ITA’s 2023 report on USMCA Automotive Rules of Origin: Economic Impacts and Operation, the non-compliant cars entering the U.S. in 2018 were worth but US$200 million. By 2022, that had skyrocketed to US$6.8 billion, the increase beginning as soon as the USMCA took effect. That’s an incredible 3,300% increase in the value of non-USMCA-compliant cars crossing the American border in just five years. By any measure, that is unacceptable. Even worse, it means that — and I can’t believe I am actually writing this — Donald Trump is right: the USMCA may need revision.
Those are the facts; now, here are the politics
Two things stand out in this revelation. The first is that, according to insiders who have direct knowledge of the problem, most, if not all, of the non-compliant cars entering the U.S. are from Mexico. “No one is talking about Canada,” said one person familiar with the negotiations preceding the USMCA’s upcoming 2026 review.
The other factor is that enforcement of the USMCA would seem to be toothless. There are no penalties built into the agreement for non-compliance; if you break the rules, all that happens is you’re penalized the common 2.5% tariff applicable to all imports. The bottom line is that it appears you can flout the 75% content rules, ignore similar requirements for core products (yes, like Chinese-made batteries), and pay your workers a pittance, and the worst that can happen is you’ll be slapped with a 2.5% tax.
It would also seem that, for an increasing number of Mexican companies, that’s chump change compared with the cost of compliance. (And, yes, if you’re wondering, this is why the proposed BYD electric-vehicle plant in Mexico was such a big deal, and why special tariffs would have been required to prevent their import in the United States.)
Which brings me to my final speculation. If Trump is indeed elected and does choose to re-negotiate the USMCA agreement, it might be better for Canada to go it alone. In recent talks, Canada’s negotiating team — led by then-assistant deputy minister of the Trade Policy and Negotiations branch for Global Affairs Canada, Steve Verheul — thought there would be strength in numbers. Partnering with Mexico would generate more concessions at the bargaining table.
If this information about non-compliance is true, and the American antipathy towards Mexico continues, it might well be time for Canada to consider a bilateral automotive trade agreement with the United States, rather than the current trilateral version that includes Mexico. A Canada-U.S. Auto Pact worked once: it could again.
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