OTTAWA — Tariffs on U.S. auto imports would severely restrict Canadian auto production and could cause a 1.5 per cent hit to Canada’s economy, a once-remote possibility that is increasingly likely as U.S. President Donald Trump makes good on trade threats, according to CIBC Capital Markets.
“If what we’ve seen thus far doesn’t constitute an all-out trade war in North America, hitting Canadian autos and parts with heavy U.S. tariffs, and the likely retaliatory response from Ottawa, would surely get us there,” wrote Avery Shenfeld, chief economist of CIBC Capital Markets in a note titled “A Sword of Damocles.”
A 25 per cent tariff on all vehicle imports would cause Canadian output to fall by 400,000 units per year, while a tariff solely on imports from Canada would restrict output by 900,000 units, CIBC analyst Royce Mendes estimated in a report. The drop would be comparable to that of the economic recession of 2008-09, when output fell by roughly one million units. Canada produced around 2.2 million cars last year, according to DesRosiers Automotive Consultants.
Mendes estimated the tariff would translate into a one per cent hit to Canadian GDP, which could go as high as 1.5 per cent if a separate 10 per cent tariff was also levelled against auto parts manufacturers.
The drop would be felt most acutely in Ontario, but could also spread into the broader economy, particularly if tariffs are introduced without warning.
“Such a shock would likely throw the province into a mild recession, and depending on the speed at which production tails off, risk one at the national level as well,” Mendes said.
It follows a report last month TD senior economist Brian DePratto, who estimated Ontario could suffer an economic hit as high as two per cent in the wake of tariffs on vehicles and auto parts. He estimated Canada would suffer a 0.5 per cent hit to GDP in 2019, ranging as high as 1.3 per cent.
Such a shock would likely throw the province into a mild recession, and depending on the speed at which production tails off, risk one at the national level as well
Royce Mendes, CIBC analyst
Threats of tariffs on auto producers was once seen as highly improbable due to the economic pain it would unleash on all parties involved. But it seems increasingly likely as trade tensions between the U.S. and China spill over into negotiations around the North America Free Trade Agreement and as the Trump administration shows increasing willingness to level tariffs on Canadian imports.
“It wasn’t that long ago when it was commonplace to question whether President Trump could make good on his promises,” Mendes said. “But, so far, he’s generally found ways to stay true to his word, and that’s exactly what’s so concerning about auto tariffs.”
In May, Trump called for a Department of Commerce investigation to determine the national security effects of the import of automobiles and automotive parts under Section 232 of the Trade Expansion Act of 1962, the same legislative move to impose steel and aluminum tariffs.
Washington placed tariffs of 25 per cent on steel and 10 per cent on aluminum on June 1, which Ottawa matched with its own list of tariffs one month later.
Canada produced 1.9 million vehicles in 2017, roughly equal to the number of vehicles sold in the country.
Still, Mendes said Canadian manufacturers would be unlikely to satisfy demand domestically if auto tariffs come into effect, due to the limited range of models that are manufactured in Canada.
“Unless you believe someone looking to buy a flashy drop-top convertible sports car would be satisfied leaving their local car dealership with the keys to a minivan, it isn’t a feasible solution to the potential problem at hand,” the CIBC report said.
In his report Wednesday, Mendes warned that some level of government support would be required in its base-case scenario, in which tariffs are threatened but delayed.
He also said Bank of Canada should take a “cautious approach” to future rate hikes.
A report last month by Moody’s Investor Services said noted everyone in the supply chain would feel the pinch from U.S. tariffs, including automakers, parts suppliers, dealers and retailers.
U.S. manufacturers have been among the companies calling on Washington for restraint. Moody’s said that GM would feel particularly acute pain amid tariffs, as 30 per cent of its U.S. sales unit requires imports from Canada or Mexico. Ford imports 20 per cent of sales from the two countries.
Auto parts makers would also be impacted. U.S.-made parts account for about 45 per cent of the vehicles assembled in Canada, Mendes said, suggesting any retrenchment from tariffs “would ripple across the border in the Great Lakes region.”
“There are quite literally carloads of reasons not to raise tariffs, but that might not mean much.”