Tariffs, trade and Trump

The politics of trade could be disruptive for Canada’s auto industry

Recently during an interview in Chicago, former U.S. President, Donald Trump noted that “tariff” was his favourite word in the dictionary. 

Looking back at his presidency, his use of Section 301 tariffs — amongst others — to attempt to hammer economic and geopolitical adversaries into submission, flagrantly set the world on a course for a brewing trade war, while also setting up a dynamic where industrial and economic policies trump (pun intended) rules-based global trading policies. 

That is at least some of the foundation of the MAGA movement that appeals to a broad swath of Americans who believe that all that ails America is based on off-shoring manufacturing and too much immigration taking the jobs remaining away from Americans. That is, of course, an oversimplification, but you get my point. 

When President Joe Biden was elected there was hope that under a Democratic presidency there would be a return to normalcy and that much of the protectionist, “industrial-policy-trumps-trade policy” sentiment would be at least softened, if not reversed. 

But, as we all know that has not been the case and the Biden administration has been as protectionist and in some ways more protectionist, than the previous administration. For instance, while Trump imposed a 25 per cent tariff on Chinese EVs; Biden recently increased that tariff to 100 per cent. 

Closer to home, under the Canada U.S. Mexico Agreement (CUSMA) or the United States Mexico Canada Agreement (USMCA) as it is referred to in the United States, Canada and Mexico had launched a complaint against the U.S. for its interpretation of the core parts roll up provisions for the purpose of calculating the regional value content (RVC). 

In the automotive industry more than 85 per cent of the vehicles produced here are destined for the United States so our government will want to ensure that Canada is viewed as a solid, aligned trading partner as we head into the review of the CUSMA/USMCA in 2026.

All that to say that the American interpretation was going to require an even higher level of North American content in vehicles than what was negotiated by all three parties under the agreement. 

Even after failing to make their case that their interpretation was correct to an independent dispute settlement panel, the U.S. still has not backed down and altered its interpretation; undermining the credibility of the CUSMA and the certainty it was supposed to bring to business. 

Again, there was hope that with the change in administration, that the Biden administration would respect the decision of the panel and implement RVC provisions as negotiated. That did not happen, however, and the issue remains an outstanding irritant between Canada and the United States as we start gearing up for a required 2026 review of the CUSMA.

While I am writing this article before the U.S. election, regardless of who won on November 5th, we are not likely to see any significant change in the more protectionist, industrial policy orientation of the United States, which means that by extension, Canada will largely have to take its trade policy cues from the United States given that the U.S. is Canada’s largest market. 

In the automotive industry more than 85 per cent of the vehicles produced here are destined for the United States so our government will want to ensure that Canada is viewed as a solid, aligned trading partner as we head into the review of the CUSMA/USMCA in 2026 for which both presidential candidates have suggested will be a renegotiation of the agreement rather than a simple review. 

It will be important to ensure that Canada retains its preferential access to the U.S. market without additional restrictions and potentially even more stringent content requirements for access to the market. 

If there is likely to be only differences of nuance between a Republican or a Democrat victory in the election then what are the implications for the automotive industry beyond the CUSMA review? 

It is clear that China will continue to be the main focus of either President Harris or President Trump with respect to efforts to try and contain what is viewed to be an existential crisis for the North American automotive industry as a result of cheap, unfairly traded EVs from China. 

While the Chinese have spent the better part of two decades developing and growing their EV ecosystem and vehicle production — effectively achieving global dominance in many of the raw materials (lithium, graphite, cobalt, manganese etc.) necessary to produce batteries; the North American EV ecosystem and vehicle production is still in its infancy. 

Canada has worked hard against very challenging circumstances to attract about $50B in foreign direct investment in both battery and battery components production as well as EV production including the $15 Billion announced by Honda for four facilities and the $7 Billion announced by Volkswagen to build a battery plant in St. Thomas.

The U.S. created many of those challenging circumstances with the introduction of significant pieces of legislation like the Inflation Reduction Act, which provided billions of dollars in tax credits to lure EV and battery investment into the United States to grow the industry there. 

The risk to both countries, however, is that if the Chinese are allowed to export inexpensive EVs into the North American market unfettered, that all of these investments are put at risk as the industry in North America would not have the time it will need to build out and ramp up their battery and EV production to attempt to compete with them. 

This has been part of the rational for Canada following the U.S. and the EU in imposing tariffs on Chinese EVs. The level of those tariffs has been 100 per cent in Canada and the U.S. while the EU imposed tariffs at a level of around 38 per cent.

Tariffs have also been applied by the United States on not only the vehicles but the battery supply chain inputs as well essentially necessitating that Canada follow suit. 

Canada has worked hard against very challenging circumstances to attract about $50B in foreign direct investment in both battery and battery components production as well as EV production.

However, given the dominance of the Chinese in the global supply chain for these inputs, the battery and component plants currently being built in North America will require some of these Chinese sourced inputs until North American supplies can be developed. So we can’t really cut off our nose to spite our face.

While some would argue that tariffs on cheap Chinese EVs are counter-productive — especially if the goal is to get as many people as possible into EVs to reduce GHG emissions, this perspective needs to be balanced with desire to maintain, and ideally grow, the automotive industry in Canada that provides more than 125,000 Canadians with good paying jobs.

Regardless of who won the election in the U.S. and who wins the upcoming election in Canada, the one thing both countries need to do is get on with it — ideally through close collaboration — to build out our EV ecosystem from mines to processing to EV vehicle production, because unless we do so the industry really will be facing an existential crisis. Tariffs only buy us some time.

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