Tom MacDonald is a former director for automotive policy in the Department of Industry and former director general for Canada-U.S. trade relations at Global Affairs Canada. He was a member of Canada’s negotiating team for the North American free-trade agreement.
This essay is part of the Prosperity’s Path series. In a time of geopolitical instability and a shifting world order, the challenges facing Canada’s economy have only gotten more visible, numerous and intense. This series brings solutions.
Autos were at heart of the recent collapse of Canada-U.S. trade negotiations, and U.S. President Donald Trump’s threat to enact a 50-per-cent auto tariff in January makes it unlikely that we can maintain an integrated North American automotive market while he is around.
Mr. Trump has often proclaimed that Canada should not be producing any vehicles. On Sunday he posted on social media: “I don’t want Canadian cars, I don’t want Canadian parts, I don’t want Canadian anything.”
During the recent negotiations, U.S. Commerce Secretary Howard Lutnick tried to bring that closer to reality with one of his last-minute poison pills – excluding trucks from any U.S. tariff relief, knowing that they represent most of the production at General Motors Co.’s Oshawa, Ont., plant and that Ford Motor Co. is retooling its Oakville, Ont., facility to produce them.
The Canada-U.S. auto industry has been closely integrated since the 1965 auto pact, with huge benefits for both countries: lower consumer costs, better wages for workers, major productivity gains and higher profits for U.S.-based automakers. But Mr. Trump does not believe in win-win arrangements. He is happy to inflict economic losses on his own country as long as he thinks that he is inflicting greater losses on a trading partner.
Honda Motor Co. Ltd., which already suspended a Canadian project, said on Wednesday it would not build another North American plant without an extension of the United States-Mexico-Canada Agreement. And last Monday, shares of major Canadian auto parts companies fell as much as 9.7 per cent on the collapse of trade talks.
For Canada, the moment is dire. More than 125,000 people are directly employed in the country’s auto sector, and 427,000 jobs are indirectly linked. In 2024, the sector was responsible for $17-billion of economic activity. If the integrated North American auto market unravels, the fallout compounds and spreads across the wider economy.
How should Canada respond?
Perhaps previous experience should guide us. Before the 1965 auto pact (eventually superseded by free-trade deals), Canada’s auto tariff was up to 25 per cent. The auto pact granted the Detroit 3 (GM, Ford and Chrysler – now Stellantis NV) duty-free entry to the Canadian market for vehicles and parts, but with specific conditions. One was that, each year, they had to produce as many vehicles in Canada as they sold here. “Build ‘em where you sell ‘em,” the principle went.
Then, when Japanese companies began to capture a significant market share in the 1980s, we negotiated so-called “voluntary export restraints” to limit the sale of Japanese vehicles until those companies undertook to establish Canadian production facilities. “Build ‘em where you sell ‘em.”
Bearing that in mind, we should definitely mirror whatever auto tariffs Trump imposes, while tying any tariff relief for the Detroit 3 to their continued levels of Canadian production. But let’s also remember that this is a global industry. Matching Trump’s tariffs may only result in U.S. manufacturers shifting to their Mexican operations to supply the Canadian market.
Auto tariffs of 15% would erase profitability and spur industry’s decline, experts say
To prevent such trade diversion, and to keep our domestic auto manufacturing sector alive, Canada should enact a 25-per-cent global tariff on all vehicle imports.
Tariffs for the rest of the world, with relief tied to Canadian production, would induce Japanese manufacturers to maintain their so-far admirable commitment to Canada in order to ensure tariff relief. And companies not in Canada, such as Hyundai Motor Company, would be more inclined to invest here. Focusing on non-American automakers is key.
Under the auto pact, production surged in Canada. But since the 1980s, much has changed. The 1988 Canada-U.S. free-trade agreement, followed by NAFTA, put an end to the auto pact production safeguards and also saw the Detroit 3 shift production to Mexico. Canadian vehicle output peaked at roughly three million units in 1999, fifth in the world. In 2025, our output was down to 1.2 million and we were fifteenth.
The decline of the Detroit 3 in Canada has been particularly dramatic. By 2025, they represented only 24 per cent of Canadian vehicle production, with the other 76 per cent coming from Toyota and Honda. Since the trade war began, we have seen a further pullback by the Detroit 3. GM ceased its electric van production in Ingersoll, Ont., and suspended its third shift in Oshawa. Stellantis closed its Brampton, Ont., facility and shifted Jeep production to the U.S. despite receiving more than $200-million in Canadian government subsidies. Ford’s Oakville plant has sat idle since 2024, although it is being retooled in anticipation of the F-Series truck.
In the days of the auto pact, the Detroit 3 normally exceeded their one-to-one production-to-sales ratio requirement by a considerable margin. By 2025, however, the overall ratio in Canada was down to 0.6 vehicles produced for each one sold. And that is only because Toyota and Honda produce many more vehicles than they sell here. Production by each of the Detroit 3 sits far below sales. Hyundai has no production but sells more vehicles than Honda. So much for “Build ‘em where you sell ‘em”.
The industry is now at a crossroads. If Mr. Trump is determined to undermine the long-established North American integration, it will be bad news for both countries and particularly for the Detroit 3. But we can’t control the President’s erratic impulses. Nor should we believe that any trade agreement will do so, or that any post-Trump regime will quickly roll back the tariffs he puts in place. We should follow Prime Minister Mark Carney’s maxim of focusing on controlling what we can control, which includes the conditions for access to our own market.
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Canada’s vehicle market, the world’s eighth largest in 2025, remains buoyant and highly profitable. Our industry was built on leveraging access to that market in exchange for production. We moved away from that principle and lowered access barriers in a world order evolving toward freer trade governed by multilateral rules. But those days are gone and, as Mr. Carney said at Davos, this is probably not a temporary rupture. We need to adapt to the new world disorder.
The principle of “Build ‘em where you sell ‘em” has served us well in the past. It would serve us well again.
A move by Canada to enact a 25-per-cent global tariff on all autos would not be World Trade Organization-consistent (any more than our 100-per-cent tariff on Chinese vehicles). It would also run contrary to our bilateral and regional free-trade agreements. But desperate times require desperate measures. Mr. Trump has already bullied our main non-U.S. auto suppliers – the EU, Japan, Korea, Mexico – into accepting tariffs between 15 per cent and 25 per cent. Surely, they should provide a non-bullying ally like Canada a similar level of understanding and forbearance. If Mr. Carney’s middle-power solidarity has any validity, this is a place to test it.
There are those who argue we should simply be prepared to see our vehicle manufacturing industry disappear, as Australia did. That would truly be a shame for a country where the sector has had such a long tradition and contributed so much. But with Mr. Trump’s attacks, we will probably be headed in that direction if we merely respond with half-measures. It is time to be bold. Elbows up!
Prosperity’s Path
The harsh truth is that Canada must always accept some U.S. overreach
To dance and deal with the Donald: Why the long game wins the trade war
Fixing the broken dream of $10-a-day child care
