With US President Donald Trump expanding his trade war by imposing a hefty 25% tariff on vehicles imported to the United States, including from Canada, economists are warning about significant damage to the economy.
The automotive industry plays a crucial role in Canada’s economy, representing 10% of manufacturing GDP and 21% of trade in manufactured goods. The knock-on effects of the damage to the auto sector could ripple through the economy, with a pronounced effect in Ontario.
The following are highlights from commentary on the auto tariffs, sourced from responses to Morningstar’s requests and analyst notes to clients.
Erik Johnson, senior economist at BMO Economics
“The North American auto sector is likely to face severe disruption if these tariffs remain in place for the foreseeable future. Production curtailments could begin soon after April 2 and furloughs and layoffs are likely to follow. Needless to say, it’s no longer going to be business as usual in the auto industry while these tariffs remain in place.
“The implications for Canada of these tariffs are stark. Automotive trade represents a much larger share of Canadian GDP and the majority of Canadian production is sent to the United States. The automotive supply chains have been integrated between the two countries since 1965 and Canadian assembly plants are sized to supply the North American market, so it’s not easy to rescale them to produce only for the domestic market. Canadians are also likely to face higher new vehicle prices under these tariffs as many popular models are made in the US and could be subject to retaliatory tariffs.
“Adding to the uncertainty for Canada is that, as part of the USMCA agreement, Canada signed a side letter with the US specifically exempting the Canadian industry from future 232 tariffs. In that additional agreement, up to 2.6 million passenger vehicles, an unlimited number of light trucks, and USD 32 billion worth of auto parts all on an annual basis would be exempt from tariffs. Those would more than cover current trade with the US, though it’s unclear what recourse Canada would have at its disposal to invoke the side-letter.
“Meantime, Canada’s response to this announcement is pending. We will hold off on making changes to our forecast until we get those specifics, but suffice it to say that Ontario would take the biggest hit from this round. Ontario has also yet to table a FY25/26 budget, and a weaker economic outlook under these tariffs would have a meaningful revenue impact.”
Stephen Brown, deputy chief North America economist at Capital Economics
“We have raised our assumption for the average US tariff rate that Canadian exporters will face, to a level that will likely push the economy into recession. The downturn should be only moderate if, as we expect, the government steps in with fiscal support.
“Nonetheless, tariffs will do permanent damage by reducing potential GDP. In average annual terms, we expect GDP growth to be 1.2% this year, 0.7% in 2026 and 1.4% in 2027. Despite retaliatory tariffs, the scrapping of the carbon tax reduces the risk of inflation rising above the Bank of Canada’s 1% to 3% target range on a sustained basis, leaving scope for the Bank to provide a bit more monetary support by cutting its policy rate to 2.0%.”
Tu Nguyen, economist at RSM Canada
“The 25% US tariff on imported vehicles from all countries would paralyze the Canadian auto manufacturing sector, as the US-Canada auto industry is completely integrated. A 25% tariff could lead to a complete shutdown of the US-Canada auto industry within a couple of weeks. Widespread layoffs are expected, mostly concentrated in cities with a heavy manufacturing focus such as Windsor, Kitchener-Waterloo, and Hamilton.
“Some auto parts are only produced in Canada and others only in the US. A car could cross the border up to eight times before being fully assembled, each time possibly being subject to tariffs. It is simply infeasible for businesses to keep operations running at this higher cost, thus some are shutting down until tariffs are removed or a more favorable arrangement is reached.
“As auto manufacturers pull back and prices of new cars go up, prices of used cars will also increase as households look to the used cars market instead of new cars.
“Looking further ahead, if these tariffs stay, there will be a knock-on effect on the broader economy due to layoffs, from restaurant dining to travels, leading to overall reduction in economic activity.”
Derek Holt, vice president and head of capital markets economics at Scotiabank
“America already heavily advantaged its auto sector even before Trump’s tariff assault. That makes it unlikely that governments elsewhere will accept US reasoning that tariffs are justified because only foreign governments play dirty pool with their auto sectors.
“For decades, Canada has watched as US states offered rich subsidies to auto companies to locate plants in their states. Canadian taxpayers have had to foot the bill for keeping up with some of this, lest the whole auto sector gravitate toward subsidized southern markets. Assuming that only the non-US value-added content of finished vehicle production is subject to the 25% tariff results in an average tariff rate on all Canadian exports rising to 3.2% and to 3.6% for just exports to the US.
“Among possible options the Canadian government could consider are to implement more of the remaining C$95 billion of retaliatory tariffs on the original C$155 billion list with C$60 billion presently tariffed at 25%. Cancel the F-35 and don’t spend one further dime on US military equipment in favor of European companies. Impose an import ban on Teslas and its parts. Tariff broader American autos. Ontario is likely to have more retaliatory announcements.
“You can’t win a trade war, but you can expedite its end by making the pain trade clearer in the other direction sooner and doing so can head off future trade wars.”
TD Economics’ team of economists, led by Beata Caranci, SVP and chief economist
“In Canada, the top selling vehicle model is the Ford F-series pickup truck, largely assembled at US factories. However, supply chain integration and the back-and-forth movement of parts needed for final production could imply a final price tag of up to C$5000 higher. This broadly holds true for all vehicles that rely on the North American supply chain.
“Ontario is most exposed, with bound auto shipments accounting for nearly 30% of its international exports and about 100K jobs directly tied to the sector. Quebec, Manitoba and Nova Scotia also ship a sizeable amount of motor vehicles and parts to the US. However, these products (tires in Nova Scotia, buses in Manitoba, large diesel trucks in Quebec) are seemingly exempt from the tariffs.
“Our March forecast update embedded an escalation of tariffs, resulting in an economic contraction in the second and third quarters of this year. Yesterday’s auto tariff announcement exceeded the expectation underpinning that forecast. And, the executive order did not indicate an easy ‘off ramp’ for countries by stating that tariffs ‘shall continue in effect, unless such actions are expressly reduced, modified, or terminated.‘”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
