Trump’s Tariff War on Canada: Impact on the Automotive Industry

Trump’s recent electoral campaign was based on one idea: America First. The goal was to maximize the revenue and the welfare of the American people.

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In the wake of this policy, Trump announced he would implement 25% additional tariffs on Canada and Mexico. The announcement came soon after he was sworn into office on January 20th. The justification for these tariffs was based on the claim that Canada and Mexico have not been doing enough to restrict the fentanyl flow into the US. 

So, the tariffs were made effective on February 1st for nearly all products but were paused just a couple of days later. Since then, this tariff game has been going on with a recent continuation on March 4th.

The potential damage to the automotive industry immediately came under the spotlight. This is because some major car manufacturers in America, like Ford and General Motors, have assembly plants in Canada, and these new tariffs make the process expensive.

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However, to understand why these tariffs threaten the automotive industry in the US and Canada, we need to learn the lifecycle of a vehicle manufactured for the American market.

Lifecycle of a Car Component 

For ease of understanding, let’s consider one engine component: pistons. Made primarily from aluminium, the piston is a crucial engine part. So, what process does it go through?

Let’s have a look.

• Extraction: Canada has rich resources in steel and aluminium, and the process starts with its extraction in Quebec. This raw material is then transported to manufacturing facilities all over Canada.
• Manufacturing: Manufacturing facilities use the raw material to create a piston following the accurate dimensions.
• Finishing: The manufactured parts are finished in the facilities in Detroit, Michigan. This is because of the Detroit industries’ expertise in this process and the cost-saving aspect.
• Assembly: The finished piston is then sent back to Canada, where it is fitted inside an engine. The engine is then transported back to America to be fitted inside the vehicle.

All of this movement is just for one part of the car. Imagine hundreds of other components for hundreds of cars. This shows how interconnected American and Canadian workers are when it comes to finishing just one vehicle. 

But why are these cars manufactured like this? We need to go back a few decades to get an answer.

The Auto Pact

 Before the 1960s, companies like GM and Ford operated plants in Canada and the United States. However, plants in each country made vehicles for the respective country.

But then came the wave of innovation as automatic technology became common and priorities shifted from Canadian cars. Canada lacked the resources and assembly line to keep up with the trend. If things kept going like that, Canada would soon have to import most of its cars.

People started to fear that it could spell doom for the domestic industry in Canada, and thus, Canada launched a tariff war against the US.

The goal was to make foreign cars expensive and promote local vehicles. Canada was a big market for the automotive industry, and it understandably agitated big companies.

This resulted in the Auto Pact of 1965. Under this pact, Canada would allow the free movement of parts between the two countries. However, all of the big manufacturers had to invest more in the Canadian industries to keep them competitive.

This process has been running like this ever since. So, years of investment and localized expertise mean that it becomes extremely difficult for manufacturers in the US to build their entire cars there.

The Consequences

Now that we understand the complicated flow of car parts, the question remains: How do these tariffs affect this process?

The benefit of free trade between the countries is that car manufacturers could just send a part to the nearest facility in the neighbouring country. They have the means of transport, and the product they receive, as a result, has better quality and is more cost-effective.

However, moving these parts between countries will become a lot more expensive as the Trump tariffs come into effect. In the case of a piston, it crosses the border 5 to 6 times, and with these new tariffs each time, they’ll have to pay the specified amount every single time.

Multiply this by hundreds of other engine parts and then hundreds of engines for hundreds of cars. See how it becomes problematic?

What’s to Come?

So what happens next? Will these tariffs persist, or will a relaxation be made in the future? Things remain uncertain. The unpredictability and boldness of this Trump administration make it hard to predict anything.

Could all this be just a threat? Maybe. This can be a wake-up call to car manufacturers in the US to break the decade-long cycle of investment in Canadian plants and invest in new plants inside the US instead. But that will take a long time.

In all of the recent uncertainty, one thing that is crystal clear is the strain between governments and the people of the US and Canada. So, will the Canadians still buy American-manufactured cars knowing the damage it did to their industry?

Or is there something else at play? Trump’s recent move to rename the “Gulf of Mexico” to “Gulf of America” speaks volumes about his worldview. His push to “purchase” Greenland and annex Canada as the 51st state of America could be the motivation behind these tariffs.

We find such incidents in history. The annexation of Puerto Rico and Hawaii is the most famous. In the late 1800s, these two territories were major sugar manufacturers, and high tariffs meant the sugar prices inside America were unbearably high.

The acquisition of these territories through different treaties meant that they came under US resolutions, and it made the tariffs go away, bringing down the prices of sugar. The recent tariffs can just be a version of these past incidents.

Conclusion 

The intentions behind these trade wars remain a mystery. While some laud Trump’s policies, some oppose them and label them as “dumb.”

Can the American Automotive industry survive without Canada? Will this tariff war leave a lasting scar on the US-Canadian relationship? Only time will tell.

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