New trucks crowd a parking lot at the GM assembly plant in Oshawa, Ont., in September, 2019. U.S. protectionism has brought visibility and urgency to the auto industry’s decades-long drift.CHRIS HELGREN/Reuters
Greig Mordue is an associate professor and the ArcelorMittal Dofasco Chair in Advanced Manufacturing Policy in the faculty of engineering at McMaster University.
Canada’s auto industry is struggling. The challenges presented by the current U.S. administration have only brought visibility and urgency to its decades-long drift.
Even so, it has not yet collapsed. The reason does not reside in the $50-billion-plus in tax credits and grants that Canada’s policy makers have poured into it over the past few years. Rather, Canada’s auto industry endures because of industrial policy measures it took decades prior. Now we must draw upon that playbook once more.
In the early 1960s, Canada’s auto industry was also under pressure. The economy was sputtering, car sales dropped and automotive employment cratered. Tariffs of 17.5 per cent on imported vehicles meant that almost every car sold in Canada was made here. Canadians had few options and paid more for the ones they had.
The government responded with a royal commission. Ultimately, the work of its chair, Vincent Bladen, led to the 1965 Canada-U.S. Auto Pact. It removed tariffs on vehicles and parts if automakers built one car in Canada for every one they sold here and performed value-added work equal to 60 per cent of sales. Failure to meet both conditions triggered an import tariff of 9.1 per cent.
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The Auto Pact neatly balanced incentives and penalties, leading to a three-fold increase in vehicle production within a decade. More importantly, it successfully tethered Canada’s automotive industry to the U.S., which in the 1960s was home to the world’s most successful automakers.
By the early 1980s, though, the landscape shifted. North America faced recession and the OPEC oil crises caused gasoline prices to soar. Vehicle sales plummeted and employment in the sector collapsed. Meanwhile, Japanese automakers flooded the market.
Canada initially chose punitive measures against the Japanese upstarts, including imposing port blockages and negotiating limits on Japanese auto exports. Eventually, these “sticks” were complemented by a collection of “carrots”: duty remission schemes and (by today’s standards) modest grants to encourage Japanese production in Canada.
By the mid 1980s, this approach ushered in Japanese assembly plants in Canada, including Honda and Toyota. Once again, Canada had linked its auto industry to the world’s most successful players.
Today, Toyota and Honda produce about 900,000 vehicles in Canada each year – around three-quarters of total national production. The Detroit Three account for about a quarter.
Canada established a practice of skillfully balancing incentives and restrictions to connect its automotive sector to the most successful, ascendent players.
Which brings us to 2025.
Today, Canada’s policy makers encounter new dynamics. The U.S. market is still proximate and large. However, the U.S. administration’s aggressively insular turn results in Canada’s assembly plants struggling to gain mandates for production.
On top of that, our policy makers are obliged to confront the reality that the world’s most dynamic automakers are no longer from the U.S. or Japan. They are in China. It is the global leader in electric vehicles (EVs) and new technologies. For example, my own research shows that over the past decade, China has generated automotive patents at five times the U.S. rate and 150 times Canada’s.
So far, Canada’s response to the decline of the U.S. and the ascendence of China has been limited to sticks: tariffs of 100 per cent on Chinese EVs and batteries, dutifully mirroring the U.S. approach. The effect: Canadian consumers have limited access to affordable EVs. It also means Canada’s 60-year practice of drafting its automotive manufacturing sector to the industry’s most successful, innovative actors is in jeopardy.
Canada still has choices; options that may be revealed through its current 60-day review of the Electric Vehicle Availability Standard (EVAS), which until last month mandated 100-per-cent zero-emission vehicle sales in Canada by 2035, and its commitment to review its 100-per-cent tariff on Chinese vehicles on the one-year anniversary of its enactment (this month).
With this, pressing questions emerge: Is a policy of supporting U.S. automakers that have almost abandoned Canadian production still defensible? Can Canada afford to ignore China, the world’s ascendent automaking power? Can Canada revive tactics from the 1960s and 1980s to sustain its industry? Should Canada simply wait for a possible U.S. policy shift in 2029 – and if it does, will there be an industry left to save?
Canada’s automotive industry is at a crossroads. If it delays doing anything until 2029, the window for a potential Chinese investment may close. Should the U.S. and China reach a trade agreement, Chinese automotive investment interests will shift to the U.S. and Canada will be bypassed.
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