Report calls for 'auto pact' tying duty-free vehicle imports to Canadian production

A new report suggests that if Canada can't convince President Donald Trump to drop all auto tariffs, it should negotiate a new auto trade agreement with the U.S. and Mexico that would impose permanent import tariffs but grant automakers a break if they meet minimum local production requirements.

The strategy outlined in the report, released Thursday by the C.D. Howe Institute, draws inspiration from the 1965 Canada-U.S. Auto Pact.

Author Stephen Beatty, a former Toyota Canada executive, argued that in response to any U.S. tariffs, Canada should impose its own surtax on imports of U.S. light-duty vehicles.

But he said auto manufacturers currently assembling vehicles or manufacturing major components in Canada should be provided with a tax break proportionate to their Canadian production.

That move would be aimed at incentivizing the U.S. and Mexico to review the automotive provisions of the Canada-U.S.-Mexico agreement once renegotiations of that deal begin.

There, Beatty said Canada should propose permanently reinstating tariffs on automobile trade between the three countries and establishing a common external duty rate.

He argued the countries should each agree to waive their duties on a defined volume of vehicles imported from the other two by any company that maintains a manufacturing base in the importing country.

Canada needs to build leverage, report author says

For example, a manufacturer that produces 100 vehicles in Canada, the U.S., or Mexico would be entitled to import up to 100 vehicles in combination from the two other countries.

"Canada needs to use this window to build leverage and put a real plan on the table," said Beatty in a press release.

"We can't leave the future of an auto sector that supports good jobs on both sides of the border to the fate of another round of familiar but damaging tariffs."

On April 3, a 25 per cent tariff by the U.S. on Canadian-built vehicles came into effect.

Canada responded with its own 25 per cent tariff on vehicles imported from the U.S. that are non-compliant with CUSMA.

The sector did get some relief last week when U.S. Customs and Border Protection guidance said automobile parts compliant with CUSMA will not be hit by Trump's tariffs.

While "plan A" for Prime Minister Mark Carney's government should be to reach a new deal with the Trump administration that "preserves mostly tariff-free trade," Beatty said Canada also needs a "plan B."

He said there is a pressing need to counterbalance the incentive for companies to abandon their investments in Canada and move south due to the threat of U.S. tariffs.

Canada's vehicle assembly footprint has shrunk in recent years -- a "troubling" development, Beatty noted, as Mexico has grown its share of North American production, while U.S. manufacturing has remained stable.

"Recent layoffs highlight the current fragility of Canada's auto sector," said Beatty.

"If we want to keep good jobs, maintain investments, and guard against the very real threat that this could all slip away, we need to rethink our strategy."

The proposal for a modernized auto pact would seek to appeal to the Trump administration's call for the elimination of trade imbalances and reinforced domestic supply chains, said Beatty.

"A reinvigorated North American auto industry, spread across the three countries, would attract foreign investment while creating a home-court advantage for companies that either grew up here or North Americanized their businesses," he said in the report.

"Nothing could be more in the spirit of tariff reciprocity than a policy that is inherently self-balancing."