These are distressing times for Canadians. Despite numerous meetings between the Canadian and U.S. (and Mexican) delegations over the past year, NAFTA negotiations reached another impasse on Friday, August 31. It is not surprising.
The Americans have negotiated in bad faith. Canada was excluded from the recent negotiations between the U.S. and Mexico. Rather than just negotiate the exchange of auto parts and minimum salaries for auto workers, the two parties reached an agreement on a much more extensive range of issues. Clearly the Americans sought to and succeeded in muscling the Mexicans into agreeing to a 2-way pact with them. The Mexicans were also not forthcoming in advising their Canadian counterparts of their intention to reach a multi-faceted two-party agreement with the Americans.
President Trump is threatening to apply a 25 percent tariff on auto parts manufactured in Canada if he doesn’t receive concessions on access to Canada’s dairy market, on a dispute settlement mechanism and an increase in the level of duty-free purchases. According to a John Holmes, a Queen’s University professor emeritus and research fellow at the Automotive Policy Research Centre (https://www.macleans.ca/economy/what-will-happen-if-trump-slaps-a-25-per-cent-tariff-on-canadian-made-cars/?utm_source=nl&utm_medium=em&utm_campaign=mme_weekly&utm_content=202508&utm_term=0&sfi=df0198bed6a37f0cdd34c52c77052eef ), the impact on Canada would be “disastrous.”
The oddity in applying these tariffs is that American consumers would be the first ones to feel the impact. According to industry analyst Dennis DesRosiers, president of DesRosiers Automotive Consultants, automakers would pay an extra $5,000-$7,000 for the vehicle they plan to sell. “Unless the auto companies chose to eat some of the extra costs, it would price most of those vehicles out of the marketplace,” DesRosiers says. “There’d be no choice for consumers.” Americans won’t be happy paying thousands extra for a Toyota RAV4 simply because it came from Canada—meaning the nearly 1.8 million vehicles Canada ships south of the border annually would have a much tougher time finding a home.
Mr. Holmes also mentions in the article that “many of those Canadian-made cars include parts that come from the U.S.—as part of a complex supply chain that’s developed over decades. Currently, Canadian companies ship $35 billion worth of auto parts each year, many of them to assembly plants in the U.S., and the parts trade flows in the opposite direction. If you’re going to cut off vehicle production in Canada, you’re indirectly reducing the demand for U.S.-made parts, Holmes adds.
Moreover, with no assembly plant ready in the U.S. to immediately boost production, DesRosiers says there will be a shortage in the overall supply of automobiles, meaning the price for all vehicles in America—and not just ones shipped from Canada—will inevitably start to creep higher and higher.” The net impact on Canada is projected to be a potential loss of 160,00 jobs, mostly in Ontario where the bulk of the auto manufacturing is done. Of course, there would be additional job losses in related industries (i.e. car dealerships). If the US applies its auto tariff exclusively on Canadian cars, this would reduce auto production by 900,000 units and reduce Ontario’s GDP by about one percent.
This begs the question of what Trump is trying to accomplish by threatening to take this harsh action. Canada has been a loyal US friend and ally for decades. The two countries share the largest unguarded border in the world. Canada is the largest single market for 35 US states. Millions of American jobs are based on manufacturing goods for the Canadian market. The Canadian negotiating team has signaled that it is prepared to compromise on the few remaining contentious issues.
For President Trump to state that the negotiations must be “totally on our terms” suggests that this is either a bluff or a tactic to bully Canada (as he has done with other countries). Whatever the rationale, I encourage Canada’s leadership team to display flexibility but stand their ground. No Canadian wants to see job losses in the auto, dairy or any other sector. On the other hand, no Canadian wants to see its leaders capitulate to a bully. Hopefully cooler heads will prevail and a new NAFTA agreement, that benefits all three countries, will come together in the next few days.
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