the Beatty Blog

– A pre-budget submission to the House of Commons Standing Committee on Finance (June 11, 2026)

by Stephen Beatty

Introduction

This year’s federal budget cycle coincides with the scheduled review of the USMCA/CUSMA free trade pact.  Given that automotive trade is a key issue for negotiators, the future of Canadian auto assembly will likely be decided by Q4 of this year.  If tariffs remain on Canadian vehicle exports to the US, either due to a revised trade deal or unresolved trade tensions, Canadian assemblers will face unsustainable costs. This could lead to downsizing or even the demise of the Canadian industry.  In such a scenario, Canada should use the funds set aside for industrial restructuring under the Strategic Response Fund and tap into the $570 million additional funding set aside for reskilling and transitioning workers to new industries.

However, there’s still a chance the CUSMA parties could reach a restructured trade agreement.  This agreement could include “Fortress North America” features, further integrating automotive manufacturing and sales across the North American region.  It would also address the strategic and competitive challenge posed by Chinese vehicle exports. In this case, Canada should use the funds mentioned above to support a national effort to develop competitive capabilities in powertrain and related energy systems, automotive internet-connected technology and services, and advanced manufacturing.

This is a critical decision at a pivotal moment for the industry.  Regardless of the outcome, Canada needs to act quickly and decisively to shape its automotive future.  Since the auto industry is Canada’s second-largest export sector, it deserves the same level of attention as Canada’s energy and defence sectors currently receive.

Four Pathways or Two?

In a recent paper titled “Steering Through Uncertainty: Four Future Paths for Canada’s Auto Industry,” published as part of RBC Thought Leadership’s Growth Project, the authors aimed to outline a course for Canada’s auto sector amidst escalating trade challenges.  Upon closer examination, these four paths essentially boil down to a binary choice: growth or decline.

Either way, Canada will require substantial financial and human resources investments to support the industry’s next phase.  Below are proposals to address either scenario.

1.) The Decline and Fall of Canadian Auto

Whether or not a new, more restrictive trade regime emerges from the CUSMA review, Canadian assembly plants can’t continue absorbing tariff costs.  Costs that are increasingly passed on to the market are contributing to an affordability crunch for North American consumers, impacting overall sales.  

It’s widely accepted that half of the parts in a Canadian vehicle are American and not subject to tariff, allowing Canadian vehicles to enter the US at 12.5% (effectively half of the 25% Section 232 duty rate). However, this varies by manufacturer and model, and the impact of US content on duty rates depends on the calculation method used.  Let’s use 12.5% for illustration.  A USMCA-qualifying vehicle imported to the US with a $30,000 value for duty would face an additional $3,750 in tariffs per car, totalling $3.8 billion for Canada’s 2025 volume of exports to the US.  This is an unnecessary cost that companies can avoid simply by sourcing a similar model from an American plant.  Since about 85% of Canadian auto production goes to US customers, continued tariffs under CUSMA will hurt Canadian competitiveness and eventually lead companies to shift production to the US.  Without unique, global product mandates and given Canada’s failure to stop vehicles containing significant Chinese content from entering the market, the industry has limited options both domestically and in foreign markets.  

On the domestic side, the Canadian market alone isn’t large enough to absorb the roughly 1.3 million vehicles produced here each year. For example, In 2025, Honda Canada assembled 400,000 vehicles, consisting of just two models: the Civic and the CR-V. By comparison, it achieved total Canadian sales of only 128,446 vehicles across its entire model lineup for both its Honda and Acura brands in 2025.

Without access to the US market, companies will inevitably have to scale back or close Canadian production.  Canadian governments are likely to conclude that subsidizing domestic auto production will be too costly in the longer term.  Similar to Australia, this might lead Canada to abandon local production in favour of broader market opening that prioritizes consumer choice and affordability over domestic manufacturing.  Strategically, Canada might trade access to its automotive market for reciprocal access to other countries for other Canadian goods and commodities.

While the RBC paper projects a potential sunset period extending to 2040 under certain scenarios, lessons from Australia are valuable.  From the 2015 signing of the China-Australia Free Trade Agreement to the closure of all Australian light-duty vehicle assembly by the end of 2017, an industry that had operated for approximately 70 years vanished.  While some Canadian supply chain relationships with US plants may persist, without addressing the trade-induced costs, Canadian plants are unlikely to attract the investment needed to support production of next-generation models. This suggests industry contraction would occur on a timescale closer to the Australia model than the RBC 2040 scenario.  Therefore, any transition measures must be implemented swiftly.

Of significant concern is the automotive supply chain’s heavy reliance on production facilities in smaller communities.  With limited manufacturing alternatives, the small-town character of the parts industry makes it challenging to replace jobs lost due to a shrinking auto sector. In this scenario, the budget should accelerate the deployment of the $3 billion allocated to the auto sector in the Strategic Response Fund, incorporating elements such as:

• Transitioning the auto parts industry to support national strategic projects and defence procurement;  
• Expanded support for trade diversification for auto suppliers, including products and markets; 
• Dedicated retraining and reemployment programs for technical and industrial workers, along with support for transition hubs in major manufacturing centres like Oshawa, Oakville, Cambridge, Woodstock, Windsor, and Alliston; 
• Short-term tax and tariff measures to help assembly plants compete during the transition, including enhanced duty remission programs and potential sales tax holidays on domestically-made vehicles with a clear sunset provision; and  
• Suspension or elimination of programs like the iZEV rebate that reward imports over domestically-made vehicles within the same sunset timeframe.

Canada’s current automotive trade vulnerability is further exacerbated by the rise of extreme competition from emerging Chinese players.  Chinese imports are entering the market through our recent bilateral trade agreement that this year will permit up to 49,000 Chinese electrified vehicles to enter Canada subject to tariffs and quotas.  However, Chinese exporters also enjoy almost unfettered access to Canada due to our trading relationships with Mexico.  

Before the imposition of US Section 232 tariffs on autos, a significant portion of Mexican trade with the US was conducted at most-favoured-nation (MFN) rates of duty.  This meant that Mexican-assembled parts and vehicles that didn’t meet the CUSMA rules of origin were shipped at the standard US MFN duty rate of 2.5%.  That same trade could also be conducted with Canada at a slightly higher 6.1% rate of duty. That doorway remains open.

While the precedent for MFN trade within North America was set by German and Japanese brands, Chinese manufacturers can now follow a clear formula: meet substantial transformation requirements in Mexico and avoid Canadian quotas that would otherwise apply to cars directly imported from China.  However, an even more favourable and duty free pathway for Chinese content to enter Canada exists due to provisions of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).  The automotive rules of origin under the CPTPP only require 45% regional value content to earn duty-free entry to Canada.

Parts and raw materials shipped from China for further processing and assembly in CPTPP member countries like Vietnam and Malaysia benefit from a roll-up mechanism.  This means that all the value of the finished good is deemed to be originating from the CPTPP.  As a result, vehicles assembled in Mexico with parts and materials either directly imported from China or rolled up through other CPTPP countries can obtain both quota and duty-free entry to Canada.  

Trade agreements shouldn’t facilitate back-door trade that wouldn’t be allowed through official channels.  Like the US and Europe, Canada must address this transshipment issue.  The urgency is growing as Europe and the CPTPP nations work to connect their major trading blocs.  This issue demands immediate attention from Canada, regardless of how automotive trade is ultimately resolved.

Before China trade ramps up, another policy response is urgently needed from Ottawa.  The rapid rise of internet-connected technology and services in the auto sector necessitates protecting Canada’s strategic interests, national infrastructure, and individual privacy rights.  Therefore, the Canadian Motor Vehicle Safety Standards Act should be amended to include new cybersecurity standards.  It should be illegal to sell or distribute hardware or software designed to bypass vehicle systems or access vehicle data without owner consent.  This amendment should also address data access by state-owned or controlled entities, similar to the ICTS regulations and recent US legislation.  Since Canadian vehicles share an open border with the US and rely on shared energy and road infrastructure, maintaining access will require Canada to address US concerns in this area, even if we don’t act independently.

2.) Renewal and Growth

As the RBC study suggests, the decline and eventual elimination of the Canadian auto industry isn’t inevitable and isn’t the only path forward.  In the context of the CUSMA review, there’s a potential pathway for rebuilding the industry and its North American market.

To address current government and industry stakeholder concerns, a policy framework could include the following features:

i.) Ongoing internal USMCA/CUSMA automotive tariffs set at or below the lowest US externally applied automotive duty rate. This would ensure that North American content won’t be disadvantaged compared to non-North American competition from the UK, Europe, Japan, Korea, or other countries with tariff agreements with the US;

ii.) A trilateral agreement requiring all automotive trade between the parties to adhere to CUSMA rules of origin, approximating an 80% RVC rule.  This might include a minimum US content requirement of 50% of the required regional content value of a good;

iii.) A trilateral agreement maintaining an external tariff rate no less than 10% higher than the CUSMA rate on all trade not subject to free trade agreements (in other words bilateral or multilateral trade agreements involving one or more CUSMA parties would still be permitted);

iv.) A preferred CUSMA duty-reduced or duty-free rate available for importers who maintain manufacturing in the CUSMA country of import.  This rate will have value or quantity requirements, as desired;

v.) An agreement authorizing CUSMA parties to adopt provisions similar to the European Industrial Accelerator Act, provided any preferences under the agreement are open to qualifying goods produced in a party to the agreement; and

vi.) An agreement to harmonize automotive regulatory practices across the three parties to eliminate non-tariff barriers to trade within the region.

This Fortress North America framework would ensure Canadian-assembled vehicles regain duty-free access to the US, provided they meet new, more stringent rules of origin and maintain minimum levels of US content.  Furthermore, by raising external duty rates and applying CUSMA rules of origin even to non-CUSMA qualifying trade between the parties, the agreement would eliminate situations where vehicles with foreign powertrain or other non-qualifying core components would benefit from lower duty rates.

While rebuilding the effect of the Canada-US Auto Pact on a North American scale, this approach cannot be considered a “set it and forget it” solution.  External trade barriers become a crutch for companies and countries, so it’s crucial for Canada to challenge the industry to continually improve its performance against regulated standards in areas like energy efficiency, environmental impact, and safety. The future competitiveness of the industry hinges on progress in powertrain technology, software and connectivity, and advanced manufacturing technology and practices.

To achieve this, any funds allocated through the Strategic Response Fund or other federal programs should mandate company investment in one or more of these areas. For example, instead of simply participating in the retooling of an assembly plant to produce a new model, federal funding should be conditional upon and include additional support for introducing new plant floor technology, research and development for next-generation powertrain, or the development of operating systems, infotainment, or connectivity services, including AI assistants, cybersecurity technology, or autonomous vehicle system components.

Identifying and prioritizing those projects is also crucial.  Currently, Canadian automotive policy decision-making is widely distributed, often resulting in a dissonance between trade, industrial, and environmental objectives.  For instance, the latest Canadian automotive policy announcement simultaneously supported domestic production and eased import restrictions on China.  It also included consumer incentives for electric vehicles, although none are currently Canadian-made. While each policy has a valid rationale, collectively they create a form of policy discord that needs to be addressed.

Given this context, designating a national auto strategy as a strategic national project is crucial.  Canada should adopt a lean-agile model from the auto industry, mandating a central agency like the Privy Council Office to act as a project manager (similar to the auto industry’s Obeya model of lean-agile management) to pull together government departments and agencies to collaboratively accelerate the strategy’s development.  The vision should be ambitious yet achievable, advancing diverse goals through a cohesive, complementary strategy. For instance, while Canadian plants don’t currently produce electric vehicles, they do produce electrified ones. Increasing their deployment in Canada’s on-road fleet can reduce emissions. This might, for example, lead to federal support for full-size pickup truck production in Canada while fostering parallel development and production of advanced powertrains at Canadian propulsion plants.  Similarly, hybrid vehicles assembled in Canada can create a pathway and sustainable market demand for battery material production and supply in Canada. However, global competition in these areas necessitates swift, determined action, linking automotive technology advances to other national strategic priorities.

Conclusion

Canadian automotive exporters and their supply chains depend on open access to the US market, a model established by the US and Canadian governments starting in the 1960s.  This model is now facing disruption due to the breakdown of the trade agreements that underpin it.  The resulting disruption has led to billions of dollars in additional costs for Canadian exporters, making Canadian manufacturing uncompetitive in the medium to long term.  

The automotive industry urgently needs a swift and decisive resolution to ensure fair competition between Canadian and American plants.  Simultaneously, both countries must remain vigilant about rising global competition, particularly the risk of transshipment through third countries with whom we have or are now pursuing additional free trade agreements.

The technologies and capabilities developed by the auto industry are valuable to other sectors.  Therefore, Canada should prioritize transitioning its supply chain to support our national defence-industrial, energy, or other strategic priorities, even if a Canada-US automotive free trade agreement isn’t restored soon. 

However, there’s hope for finding common ground on automotive trade among the CUSMA parties.  This is most likely to happen if, during the current CUSMA review, attention is given to crafting a “Fortress North America” strategy as outlined above. This would ensure market access, attract investment, and reduce tariff-related costs for manufacturers across all three CUSMA jurisdictions.  By applying CUSMA rules of origin to all North American automotive trade, this proposal would also address the growing transshipment issue.  However, Canada must prevent industry complacency and maintain market competitiveness despite potential tariffs.  To achieve this, further development of key vehicle and plant technologies (as outlined above) should be designated a national priority project, supported by a centralized, industry-style project development approach to set strategic goals and implement them effectively.