The dust is starting to settle from Donald Trump’s recent tariff announcements, so this might be a good time to look at the likely impacts on the Canadian automotive sector, both in terms of manufacturing and sales. Spoiler alert: I am actually quite optimistic for Canadian car-makers and consumers.
Let’s start with a quick recap. The U.S. has applied an overall 25% tariff on Canadian goods, but has exempted, for now, most USMCA-qualifying products, including vehicles. However, light-duty vehicles are subject to a new, separate 25% tariff that is applied to all countries. The rules governing this automotive tariff provide that the applied rate of duty can be reduced by the value of the U.S. parts content in the vehicle, if that U.S. content exceeds 20% (the 20% threshold effectively eliminates non-USMCA vehicles from obtaining a lower rate of duty). By subtracting the value of U.S. parts and components in the vehicle, you lower its total value, and effectively reduce the applied rate of U.S. duty.
Canada has responded with a 25% duty of its own (often referred to as either a “surtax” or a “counter-tariff”) on U.S.-assembled vehicles. In a mirror image to the U.S., Canada will allow importers to deduct the value of any Canadian and Mexican content, effectively lowering the rate of duty on U.S.-built vehicles. For USMCA-qualifying vehicles, importers may choose to deduct the full value of the U.S. content with detailed proof of origin; or take a streamlined approach and simply claim a 15% reduction.
As a result, the effective applied rate of duty on USMCA vehicles imported from the U.S. will be 21.25%, less any further adjustment for proven U.S. content above 15%. For vehicles assembled in the U.S. that do not meet the USMCA rules, the full 25% duty would apply.
As a result, the effective applied rate of duty on USMCA vehicles imported from the U.S. will be 21.25%, less any further adjustment for proven U.S. content above 15%. For vehicles assembled in the U.S. that do not meet the USMCA rules, the full 25% duty would apply.
While temporarily exempting USMCA-qualifying parts from tariffs, the U.S. does intend to apply duty to the non-U.S. content in parts. By contrast, Canada is not proposing to put duty on parts, and is in the process of establishing a duty-remission program for Canadian automakers. That program will allow companies that build cars in Canada to avoid paying the surtax on the U.S.-built vehicles they import to Canada.
So, what does all of that mean?
First of all, U.S. consumers will not be faced with a sudden 25% price increase on vehicles imported from Canada. As noted above, the dutiable value of cars imported to the U.S. can be reduced by the amount of U.S. content in the vehicle. So if, for example, 50% of the content in a Canadian-assembled vehicle is American, the vehicle’s value for duty would be reduced by half before applying the 25% tariff. That would leave the U.S. importer of the vehicle paying an effective duty rate of 12.5%. All Canadian-made vehicles incorporate U.S. content, so they will be less impacted by tariffs than imports from Europe, Japan, or Korea.
Similarly, if the U.S. goes ahead with tariffs on the non-U.S. content in all imported parts, Canadian parts-makers may also enjoy a comparative advantage against their European or Asian competitors. Canadian parts often incorporate some U.S. content, too, so that will also mean lower effective rates of duty. The final form of those rules is still being worked out, but the takeaway is that, for both parts and vehicles, Canadian manufacturing operations will be better positioned to continue to do business in the U.S. than their European or Asian competitors.
Just as importantly, there will be no change to the existing competitive balance between Canada and Mexico because we are both covered by the same rules. Canada’s overall competitive position has experienced a setback, but it might not be the disaster many Canadians fear.
onsider this: previously, Canadian-assembled vehicles held a 2.5% advantage over European- or Japanese-made vehicles, thanks to the 0% rate of duty under the USMCA versus the general tariff of 2.5% on vehicles from other countries. Korean vehicles were on par with Canadian vehicles because Korea and the U.S. also had a free-trade deal.
So, returning to the scenario where a Canadian-built vehicle has 50% U.S. content, Canada’s applied-duty-rate advantage under the Trump tariffs increases from 2.5% to 12.5% against European and Japanese competitors. Against Korean-made vehicles, that advantage rises from 0% to 12.5%. Of course, U.S. content in Canadian vehicles varies by model, but our comparative advantage against all but American-made vehicles should increase under Trump’s tariffs.
Canada’s decision to not follow the U.S. in applying tariffs on auto parts is also significant. Cars built in the U.S. will see increased costs because of tariffs on imported parts. Those additional costs will be baked in whether the vehicles are sold in the U.S. or exported to Canada. By contrast, since Prime Minister Carney decided to not apply tariffs on imported car parts used by vehicle assembly plants in Canada, Canadian-built cars could actually be cheaper than their American-built counterparts, which would help mitigate the tariff hit were they exported to the U.S.
That doesn’t mean there aren’t new competitive challenges for Canadian-assembled vehicles. The Trump administration intends to incentivize the purchase of American-assembled vehicles through some form of tax deductibility of consumer finance payments. The details of that plan have yet to be worked out, but they would offer a significant incentive for Americans to buy American.
Speaking of missing details, the Canadian government has announced plans for a duty-remission program for Canadian vehicle manufacturers, but has not published the terms and conditions. At a minimum, we might expect that Canadian vehicle-makers might be able to be refunded any duties they pay on vehicles imported from the United States.
Canada’s applied-duty-rate advantage under the Trump tariffs increases from 2.5% to 12.5% against European and Japanese competitors; against Korean-made vehicles, it rises from 0% to 12.5%
Why impose duties on U.S.-made cars only to refund them later? By giving automakers who build cars in Canada access to duty-free imports, you are anchoring Canadian production. If production stays in Canada, manufacturers can import duty-free from the U.S. If Canadian production stops, the new counter-tariff applies. There is no impact on federal spending because the manufacturer just gets a waiver or refund of the new surcharge.
How do the numbers work out? More back-of-the-napkin math: Canadian plants produced about 1.3 million vehicles last year, with roughly 80% of Canadian production exported to the U.S. In any given year, about half of the vehicles sold in Canada are imported from the United States. Sales of new vehicles accounted for roughly 1.92 million units last year, according to Statistics Canada. So, if the normal ratios held in 2024, that would mean we imported around 960,000 vehicles from the U.S.; and exported just over a million vehicles in return. From a Canadian business perspective, manufacturers’ duty-remission savings on the Canadian side of the border would largely offset the additional cost of exporting vehicles to the United States.
By that logic, it seems jobs and investment in the automotive assembly sector are relatively secure. The tariff impact on parts companies will be partially mitigated through reduced duties on imported vehicles containing Canadian parts. In addition, the government has promised further funding to the sector which may be covered in whole or in part by any monies generated by the surcharge on U.S. parts and vehicles. So, there is reason for optimism that Canada will continue to have an auto-manufacturing sector on the other side of this dispute.
Only U.S.-made vehicles that are imported by companies that have no manufacturing footprint in Canada, or any U.S. vehicle that does not meet the USMCA rules of origin, will incur new costs because of the Canadian counter-tariffs.
Companies like Tesla that have no Canadian manufacturing base or can’t easily import from a third country (Tesla formerly supplied Canada with Chinese-made Models 3 and Y, until Canada put a surtax on Chinese EVs) would be hit by the new Canadian surtax. However, any company would retain the option of swapping vehicle imports to a non-U.S. source, taking advantage of lower duty rates under Canada’s other free-trade deals. So, for example, a German manufacturer might choose to supply Canada with vehicles made in Germany rather than the U.S. to avoid paying the surtax.
When you put this all together, very few models will be impacted by new tariffs. I also expect that companies will plan their model lineups and consumer incentives in a way that steers consumers away from those impacted models. And, rather than delivering a 25% increase on any individual model, automakers are likely to spread price increases across their lineup in a way that minimizes consumer sticker-shock.
There will be companies and models, dealerships and workers, at the edges of this trade dispute who will be hurt, but the damage will be more contained and manageable than most people initially feared.
Tariffs will introduce new variables into the market. The new-car market in Canada last year was still smaller than it was in 2018. So, while Canada’s population has surged in recent years, it seems the rapid increase in vehicle transaction prices has kept some Canadians out of the market.
There may be a silver lining in the tariff dark cloud. It is estimated that roughly 25% of Canadian used cars have traditionally been exported to the U.S. But since it is difficult to prove that used vehicles comply with USMCA rules of origin, tariff costs on those used-car exports will jump from 2.5% to 25% on cars and SUVs under the new automotive tariffs. Tariffs on used pickup trucks could reach 50%. As a result, fewer used vehicles will be exported.
A growing supply of used cars might allow more Canadians to get behind the wheel of new-to-them vehicles at more competitive prices. And in the new-car space, vehicles from European or Asian makers that are priced out of the U.S. market by tariffs might now find their way to Canada.
Who knows? When all is said and done, the only ones hurting from the recent U.S. tariff manoeuvres may be Americans, and you just might find a good deal if you keep a keen eye on the market and are prepared to act quickly.
Stephen Beatty: Dark clouds of auto tariffs have silver linings | driving. (n.d.). https://driving.ca/column/stephen-beatty-tariff-canada-automotive-trade-advantage-impact