Toronto, Ontario -- If trade tensions in North America remain unresolved through 2025, TD Economics forecasts OEMs will move production out of Canada and into the U.S.
"Absent clear guidance from the administration, uncertainty is likely to remain elevated through 2025 as negotiated trade deals continue to alter the composition of U.S. tariffs," writes TD economist Andrew Foran in the North American Auto Outlook 2025 report. "However, if the automotive tariffs are left in place for a prolonged period of time, we would expect to see a contraction in sales in the U.S. and Canada by year-end, with a gradual reorientation of production towards the U.S. over the coming years."
Over the past few months, the U.S. imposed 25 percent tariffs on imported automobiles and auto parts, with exemptions for vehicles and parts compliant with the USMCA, which covers over 97 percent of imports from Canada and Mexico. The U.S. also offers a phased offset to domestic manufacturers for parts tariffs, starting at 3.75 percent of the average vehicle retail price in the first year.
In response, Canada imposed retaliatory 25 percent tariffs on U.S. vehicles, applying only to content sourced outside Canada and Mexico, resulting in an effective rate of about 21 percent. It also introduced a quota-based tariff offset program for domestic manufacturer, which account for close to 60 percent of Canadian vehicle sales in 2024.
"Roughly half of vehicles sold in the U.S. are imported, while roughly half of the vehicles sold in Canada are imported from the U.S.," Foran writes. "The tariff offsets provided by both countries will help to partially mitigate the impact on the market, but headwinds are expected to remain pervasive for the foreseeable future."
While his picture of the future of Canada's auto manufacturing sector may be bleak, Foran acknowledges it is also blurry. "It would be unwise to speak with a high degree of confidence regarding the geographic distribution of North American auto production over the next few years. ... We, therefore, are confronted with a myriad of possible scenarios related to the duration, magnitude and composition of the tariffs."
He adds that there are two factors playing in Canada's favour. First, the expense of opening new production facilities. Second, the two-term limit placed on U.S. presidents.
"Building new production facilities is a far costlier endeavor, with operational timelines likely to coincide closely with the 2028 elections, whose outcome could negate the very trade policies that the automakers would be going to such great lengths to avoid. . . . Still, businesses can’t sit on their hands for four years, so companies are likely to gradually increase investments in the U.S. over the coming year if the current tariffs are left in place."
