No sooner have Canadian original equipment manufacturers (OEMs) and suppliers recovered from pandemic-related supply chain disruptions than they now face a new wave of challenges. With the sector shifting toward full electrification, companies are confronting slowing global enthusiasm for the electric vehicle (EV) transition. Changes to production schedules are negatively impacting the short-term outlook for Canadian manufacturing and, consequently, exports.
Still, long-term EV adoption remains on track. As detailed in our recent Sectors in focus report, substantial investments in the North American EV supply chain will eventually help bring more affordable options to market, providing a much-needed boost to Canadian exports at the same time. Of greater concern are the near-term implications of U.S. President-elect Donald Trump’s announced intentions to impose a 25% tariff on all products from Canada and Mexico. The prospect of higher tariffs has increased uncertainties across the Canadian automotive sector, which relies on the U.S. for 93% of its exports. While there are still many unknowns and conflicting interests on both sides of the border, history might offer some clues as to how things may play out.
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In his first term in office, the president-elect also mused over a 25% tariff on all imported autos, including Canadian autos. However, the threatened tariff remained just that. That said, in June 2018, tariffs on steel and aluminum were extended to the European Union, Mexico and Canada. These tariffs hit Canadian steel and aluminum exports to the U.S. and negatively impacted the sector. In response, Canada retaliated by imposing dollar-for-dollar tariffs on U.S. steel, aluminum and multiple consumer goods, which led to the removal of the tariffs in 2019.
CUSMA review: Tariffs and EV policy
In 2020, under the terms of the newly negotiated Canada-United States-Mexico Agreement (CUSMA), rules of origin requirements for motor vehicles and parts were tightened. For example, the 62.5% North American content requirement for passenger vehicle and light truck exports under the predecessor North American Free Trade Agreement (NAFTA) rose to 75% under CUSMA. In addition, CUSMA incorporated some new requirements. According to the agreement, 70% of vehicle producers’ steel and aluminum purchases must come from within North America. Additionally, a prescribed share of vehicle production must be allocated to North American manufacturing facilities paying employees an average of $US16 per hour.
In fact, CUSMA reflected a commitment to advancing further integration of the North American automotive sector, with stricter rules of origin providing more incentive to increase investment, regional content and jobs within the bloc. And the data reflect this. Half of the content of vehicles produced in Canada, and 35% of the content of vehicles produced in Mexico, come from the U.S., with vehicle parts crossing the Canada-U.S. border up to eight times before ending up in a finished product.
Deeper regional integration of the sector may continue to be the focus of the upcoming CUSMA review in 2026, with the prospect of potential tariffs being used to force certain concessions. However, with the president-elect’s recently announced intentions to impose a set of new tariffs and the possibility of reduced EV policy support via the Inflation Reduction Act (IRA), the stakes are even higher this time around. Nevertheless, as key automotive sector stakeholders have insisted, calmer heads will prevail when it comes to the North American automotive supply chain, given mutual dependencies and the benefits provided by an open trade environment for all parties involved.
The bottom line
Although there will undoubtedly be bumps in the road ahead for the sector, given global EV market dynamics and the potential impacts of the Trump administration’s policies, Canadian automotive exporters can take some comfort in the consistent U.S. demand for their products. Despite evolving market conditions, the U.S. has maintained its share of Canadian automotive exports over the last decade.
The success of the North American automotive sector has hinged on its deeply integrated nature, which will likely be a key consideration in any new policies currently being contemplated. Despite near-term volatility, the longer-term outlook for Canadian automotive exports remains strong, supported by persistent U.S. vehicle demand and the ongoing evolution of the global EV transition.
This week, special thanks to Karicia Quiroz, an economist in our Economics department.
As always, at EDC Economics, we value your feedback. If you have ideas for topics that you’d like us to explore, please email us at economics@edc.ca and we’ll do our best to cover them.
