Calculating how the politics of trade will impact car dealers is an inexact science
The on-and-off trade war in North America has left the auto industry in a truly difficult position, where the unknown, insecurity and uncertainty are really the only things that can be expected and counted on.
From the people directly involved in the production of parts and vehicles to the auto dealership staff, everybody is trying to get an understanding of the economic effects these tariffs would generate if enacted and maintained.
This question in itself is particularly difficult to answer for Canadian automobile dealers as the geometry of these economic impacts is highly variable and dependent on the brand, the location and the current state of the business.
One approach that eases the comprehension of this messy situation, however, is to compartmentalize the timeline and compare, or underline the differences, between the short-term effects of these potential tariffs on dealership activities.
If indeed both the U.S. tariffs and Canadian retaliatory measures are activated in early March, the following economic impacts will be explained differently if observed a week, or a few months, or even a year, removed from the day they came into place.
In the short term, there obviously will be a constant trend: new vehicles arriving on dealership lots will have a higher price tag. As it has been explained multiple times in the media, a highly integrated North American automotive market means that production inputs, and outputs (i.e. finished products), can be transported freely across the territory to either benefit from each country’s comparative advantages and/or to meet the consumer demand of said nation.
The repetitive addition of a 25 per cent tariff on production inputs, and ultimately on the completed vehicle, will have a direct upward effect on the price of vehicles, thus exacerbating an already difficult price situation.
This is not only the fundamental idea behind preferential trade agreements, it is also something that was reinforced in the USMCA for the automotive industry where the new rules of origin and labour value content (LVC) incentivized non-North American companies to increase regional production capacities.
The repetitive addition of a 25 per cent tariff on production inputs, and ultimately on the completed vehicle, will have a direct upward effect on the price of vehicles, thus exacerbating an already difficult price situation.
In terms of customer service, automobile dealers will have to walk a difficult line with their customers where the intent, as usual, will be to provide them with the right product while helping them navigate all the friction that comes with the sustained rise in prices (for both new and used vehicles), potential inventory disruptions and bubbling political frustration.
This difficult retail ecosystem could materialize pretty quickly if the trade war situation isn’t solved rapidly, but some dealerships will be sheltered from it — for a limited period of time — as inventories have been building up in recent months.
This remains highly variable, but there’s a chance that some consumers decide to enter the market earlier than later to try to capture some of the aging inventory at a more digestible price.
The long-term outlook for the auto retail sector, while obviously being more speculative, is more worrisome as it would be the result of major structural changes to the automotive industry in North America.
While price increases generated by tariffs can be absorbed in the short term, it is much harder to do so when these price increases are provoked by the contraction of the production of cars and parts.
In other words, if these tariffs are maintained for a sustained period of time, many companies will have to make difficult decisions, and that includes vehicle manufacturers.
If an economic recession does indeed materialize, it is fair to assume that consumer demand will be neutralized and significantly diminished — thus reducing auto dealers’ revenues and threatening employment stability.
In fact, job stability and growth has been a staple of the auto retail sector in the last few years, with current employment levels being almost identical to pre-pandemic levels.
On top of that, contracted demand could still be hard to meet if overall production levels are diminished. Some companies might have to prioritize specific models, segments or general markets.
Similarly to the pandemic period, Canadian auto dealers could face heavily limited supply in both quantity and diversity, maintaining auto prices at a point that’s hard to access for already struggling consumers.
That particular dynamic is one of the main reasons why the auto retail sector has recently been extremely vocal about the need to repeal the current federal EV mandates.
In an environment where there are potentially fewer EVs being produced because of economic uncertainty and American political disengagement, it would be non-sensical to have a policy that pushes consumers, and the retailers, to artificially meet targets in this specific market.
If this trade war ensues and Canada enters a difficult economic period, it is essential for our federal and provincial governments to identify and eliminate any unnecessary barriers that are either limiting small businesses’ ability to be agile, or weakening consumers’ purchasing power.
Considering that the automotive dealers are at risk of facing enormous challenges in the long-run, we can expect our industry representatives to continue educating political leaders on the nuance, complexity and fragile ecosystem that defines this important sector of the Canadian economy.
