A new report suggests that if Canada can’t convince President Donald Trump to drop all auto tariffs, it should negotiate a new auto trade agreement with the U.S. and Mexico that would impose permanent import tariffs but grant automakers a break if they meet minimum local production requirements.
The strategy outlined in the report, released May 8 by the C.D. Howe Institute, draws inspiration from the 1965 Canada-U.S. Auto Pact.
The original pact — know officially as the Canada—United States Automotive Products Agreement — only covered production by the Detroit Three automakers. Volvo was eventually added. By 2001, the former North American Free Trade Agreement — now USMCA — superseded the Auto Pact, which was abolished that year after a World Trade Organization ruling declared it illegal.
Author Stephen Beatty, a former Toyota Canada executive, argued that in response to any U.S. tariffs, Canada should impose its own surtax on imports of U.S. light-duty vehicles.
But he said auto manufacturers currently assembling vehicles or manufacturing major components in Canada should be provided with a tax break proportionate to their Canadian production.
Read more: Live updates on tariff news and impacts
Interactive map: Auto manufacturing sites in Canada, the U.S. and Mexico
That move would be aimed at incentivizing the U.S. and Mexico to review the automotive provisions of the United States-Mexico-Canada (USMCA) free trade agreement once renegotiations of that deal begin. There, Beatty said Canada should propose permanently reinstating tariffs on automobile trade between the three countries and establishing a common external duty rate.
He argued the countries should each agree to waive their duties on a defined volume of vehicles imported from the other two by any company that maintains a manufacturing base in the importing country. For example, a manufacturer that produces 100 vehicles in Canada, the U.S., or Mexico would be entitled to import up to 100 vehicles in combination from the two other countries.
“Canada needs to use this window to build leverage and put a real plan on the table,” said Beatty in a press release.
“We can’t leave the future of an auto sector that supports good jobs on both sides of the border to the fate of another round of familiar but damaging tariffs.”
On April 3, a 25 per cent tariff by the U.S. on Canadian-built vehicles came into effect. Canada responded with its own 25 per cent tariff on vehicles imported from the U.S. that are non-compliant with the USMCA.
The sector did get some relief last week when U.S. Customs and Border Protection guidance said automobile parts compliant with the USMCA will not be hit by Trump’s tariffs.
While “plan A” for Prime Minister Mark Carney’s government should be to reach a new deal with the Trump administration that “preserves mostly tariff-free trade,” Beatty said Canada also needs a “plan B.”
He said there is a pressing need to counterbalance the incentive for companies to abandon their investments in Canada and move south due to the threat of U.S. tariffs.
