U.S. President Donald Trump’s threatened tariffs on Canadian goods would severely disrupt the Canadian automotive sector where trade is balanced, said a report out Tuesday from TD.
Trump has said he plans to impose 25 percent tariffs on Canadian and Mexican goods as soon as Saturday over what he calls concerns about the trade deficit, along with border issues, and also suggested that U.S. automakers should build their vehicles in Detroit.
The tariffs, and any retaliation from Canada and Mexico, would mean higher prices, and the upwards of US$50 billion it would cost to move production back to the U.S. would push prices higher still, said TD economist Andrew Foran in his report.
“Tariffs or other penalties on Canada and Mexico to gain a higher share of the automotive market would come with significant costs.”
The wider potential fallout from a trade war would likely limit how long it would last politically, but the auto sector is likely facing a prolonged period of trade uncertainty and potential trade disruptions, he said.
The Canadian sector could get hit, even though it has seen a declining share of the vehicles produced in North America over the past decade. Production has declined enough that when auto parts are included the automotive trade between Canada and the U.S. is fully balanced, meaning Canada imports as much in the auto sector from the U.S. as it exports there.
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The picture is in contrast to Mexico, which has been growing its share of production. The country accounted for 25 percent of vehicles built in North America last year, up from 10 percent in 2000, while Canada’s share has fallen by 8.4 percentage points over the period to now make up less than 10 percent.
Mexico’s rising production comes even as it buys a growing number of cheaper vehicles from China rather than from U.S. producers, further worsening its automotive trade balance with the U.S.
The country has a US$106 billion trade surplus in vehicles and parts with the U.S., along with a US$9.5 billion surplus with Canada, said Foran.
“The trend of Mexico continuing to gain a larger share of North American light vehicle production, while simultaneously shifting its procurement of vehicles away from the region is likely to be a point of contention in the upcoming USMCA review in 2026,” he said.
But free trade between the three countries has allowed economies of scale and cost savings that translate to lower prices for consumers, while trying to shift more production to the U.S. would have the opposite effect.
The upwards of US$50 billion cost of shifting seven million to eight million units in production back to the U.S. could be manageable, but would be widely felt, said Foran.
“The caveat is that these costs would likely be borne largely or in entirety by the private sector, meaning the higher costs would be passed on to American consumers.”
