Can We ‘Buy Canadian’ Our Way Out of This Trade War?
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A few weeks ago, reports emerged that Honda would shift some production away from its plant in Alliston, Ont., to the United States in response to the ongoing trade war launched by U.S. President Donald Trump. Honda denied that this rumour had emerged from its executives, but admitted that it consistently looks at the best way to produce vehicles efficiently and affordably, and that sometimes that means reorganizing where it produces certain vehicles.
And that left us with a question. If Honda currently produces the Civic and the CR-V in both Canada and the U.S., why not simply sell those vehicles where they’re built? Looking beyond the Japanese brand, why don’t other automakers simply sell their Canadian-made vehicles exclusively in Canada to avoid tariffs?
It’s not a ridiculous idea. After all, in 2024, Canada made 1.3 million vehicles, and Canadians bought around 1.9 million vehicles, according to data from DesRosiers Automotive Consultants Inc. While 600,000 vehicles is nothing to sniff at, if we were willing to limit the number of vehicles available to us, our production plants could support the majority of consumer demand. And yet, that’s not how it works right now.
In 2023, just nine per cent of the vehicles produced in Canada were sold here, whereas 88 per cent of them were sold in the United States (a few others went to China and Mexico), per the Trillium Network for Advanced Manufacturing. Meanwhile, around half of the vehicles sold in Canada (by value) were produced in America, and 15 per cent were assembled in Mexico.
How We Got Here
To understand how we got to this point, we have to look back to 1965 and a trade agreement signed between the U.S. and Canada that has been described as the “most successful trade policy” in the history of the automotive industry. Dubbed The Auto Pact, the deal came at a pivotal time for the Canadian automotive sector.
Although our country has a long history of building automobiles — Ford set up its first Canadian manufacturing plant in 1909 and General Motors followed soon thereafter — the industry was struggling as the country entered the 1960s. Up to that point, Canada’s best trading partners were the countries that formed the British Commonwealth, but the empire’s fading power and the fact that our auto plants were mostly producing big American-style cars were problems for our industry. Moreover, due to trade barriers between Canada and its neighbour to the south, Canucks had to pay around 50 per cent more than Americans for new vehicles and had fewer choices. The result was a $600 million automotive trade deficit and a struggling industry.
In 1960, Ottawa opened a royal commission on the problem and decided that a trade deal was necessary to make Canadian-made vehicles more affordable, according to a history of the pact published by TVO. Fortunately for us, the U.S. and its automakers also wanted to open the border a bit to make vehicle production cheaper and more efficient. The result wasn’t exactly free trade, but the countries agreed to exempt certain auto parts and vehicles from tariffs, and gave American automakers duty advantages based on how much Canadian content was in a given vehicle.
The Auto Pact was signed into law in 1965, and its impacts were significant. As soon as it came into effect, parts plants started opening here to support growing vehicle production, and to increase the proportion of Canadian-made content in those vehicles. Meanwhile, Canada went from having a $785 million automotive trade deficit with the U.S. in 1965 to a trade surplus in 1971. When the Auto Pact was signed, we controlled 7.1 per cent of the North American market. By 1971, we had 11.2 per cent of it. By 1975, we exported 849,000 vehicles to our neighbour, up from just 48,000 in 1965.
Although Washington felt from the beginning that we got the best of them in the trade agreement — President Lyndon Johnson reportedly told a Canadian diplomat that Canada “screwed us on the Auto Pact” — the deal was celebrated by American automakers, with GM CEO Roger Smith calling it “assuredly the most successful trade policy in the history of our industry” in 1985.
Freer trade with the U.S. meant that supply lines could straddle both sides of the border and later trade deals, like the North American Free Trade Agreement (NAFTA), extended the benefits to Mexico. These deals also eventually offered trade advantages to automakers from other parts of the world, like Toyota and Honda, which wanted access to the enormous American consumer base. However, in signing the deal, we intertwined our fate with that of the United States.
The Disadvantages of Being Forced to Buy Canadian
Around 60 years of cross-border collaboration have made this trade war particularly damaging to the automotive industry. In a recent op-ed for the Toronto Star, Flavio Volpe, the president of the Automotive Parts Manufacturers’ Association, wrote that 50 per cent of the parts in Canadian-made vehicles come from U.S. factories and 55 per cent of the raw materials used in cars assembled here come from America. Indeed, our automotive sectors are so intertwined that parts frequently move over the border multiple times before ending up in a completed car.
These trade deals have allowed automakers to think continentally, instead of locally. For instance, instead of having one plant that produces all the vehicles destined for Canada, and another that produces vehicles for the U.S., automakers have been able to build one big plant that supplies the vehicles for both markets and takes advantage of the economies of scale that it creates. In the case of Honda, that means building Civic sedans in Ontario and hatchbacks in Indiana.
However, it is possible to reduce our dependence on U.S. trade a bit. For example, in addition to the Civic sedan, Honda also builds the CR-V here, and it suggested that it is always examining ways to shift production between its U.S. and Canadian plants to mitigate its financial exposure. Honda likely chose to build the Civic and CR-V here because they are its best-selling vehicles in this country. As a result, even before the trade war started, 69 per cent of the vehicles that left the Alliston plant were sold in Canada. Similarly, Toyota builds the RAV4 (one of the best-selling vehicles in Canada) in Woodstock, while GM produces the top-selling Chevrolet Silverado in Oshawa.
Stephen Beatty, the now-retired former vice president and corporate secretary of Toyota Canada, told AutoTrader over the phone that automakers are required to build high-volume vehicles in Canadian plants because of the high cost of labour and the high quality of our award-winning production plants. As a result, a Canadian plant needs to make a bare minimum of around 50,000 units per year in order to be profitable. Tariffs only increase the pressure to build popular vehicles here.
Why not produce multiple vehicles at the same plant? Honda and Toyota already do that, but it's not a silver bullet. Building more than one model in a single facility increases the cost of those vehicles because of the complication it adds to the production process — more models means more parts, more stuff to keep track of, and more complexity. As such, automakers have to think very carefully about what vehicles they add to their production line.
If automakers have to produce every vehicle they sell in Canada domestically, it might take us back to the pre-Auto Pact days. Relying on a few plants and the handful of vehicles they produce to satisfy the majority of our demand would severely limit consumers’ options. Meanwhile, trade barriers would make what few vehicles remain on the market more expensive to buy. Even if automakers could shuffle production such that it sold every vehicle it made here locally, the industry would be worse off because of it.
The Path Forward
In order to get out of this jam, the automotive industry may need to look backward while forging forward and reaching outward. Beatty argues that elements of the Auto Pact — such as providing automakers that produce vehicles here with trade advantages — may help encourage existing automakers to continue producing vehicles here. In order to stem the loss of production volume, though, we may have to consider new trading partners and extend that tariff exemption to Chinese automakers. Forging ahead, Beatty believes that electric vehicles (EVs) may help encourage automakers to continue building here.
Beatty argues that the fact that Tesla sold nearly 50,000 EVs in Canada in 2024 (mostly Model Ys and 3s) proves that there is sufficient demand for compelling EVs to support a plant, and that will only become more true if Canada’s plan to limit sales of new internal combustion engine vehicles continues. He adds that Chinese automakers are capable of building plants quickly and producing inexpensive EVs, and would have an incentive to build those vehicles here if they were offered a duty remission.
Beatty admits that might be a controversial viewpoint — and was quick to add that his loyalties don’t necessarily lie with Chinese automakers — but says that in a difficult situation, difficult decisions must be made.
We have to “build business relationships that allow us to get well-priced technologically competitive vehicles in the marketplace,” Beatty told us. “And if that happens to be U.S. and Japanese or European companies doing that, great. If, ultimately, it ends up having to be Chinese manufacturers that replace the Americans, well, so be it.”
The Importance of the Auto Industry
Unfortunately, protecting the auto industry will be important for the Canadian economy. Lana Payne, president of Unifor, the union that represents Canadians working for America’s big three automakers, argues that the current American administration is attempting to wage economic warfare against Canada and force automakers to move production out of this country and into the U.S.
While companies like Honda have claimed that they have no plans to stop producing vehicles in Canada, the truth is that our market is tiny in comparison to the U.S., which puts a lot of pressure on automakers to prioritize Americans. It will be important to find a way to keep our auto plants open, though.
As Bentley Allan, of the Ottawa-based Transition Accelerator think tank told the Financial Post, Canada’s automotive sector is very much a feather in its cap. Automobiles are Canada’s second-largest export by value. Moreover, the industry represents the apotheosis of a country’s (or, in this case, a continent’s) manufacturing capabilities. As a product, vehicles require high-quality metals, plastics, rubber, and, increasingly, semiconductors. Indeed, every country included in the G7 has boasted a vehicle manufacturing sector.
Whether it’s negotiating our way back into North American free trade, finding new allies, or something else entirely, it’s clear that Ottawa has a Herculean task ahead of it. Whether we choose it or not, isolation has a heavy cost and consumers are likely to feel it in their wallets.
