Canadian and US negotiators are discussing a temporary agreement on automotive trade against an August 19th deadline imposed by the threat of looming, additional US tariffs on some Canadian exports.
A deal could include a step-down from a range of tariffs and related trade measures while still maintaining some tariffs on imports of Canadian made vehicles to the US.
On the surface a reasonable outcome, real dangers lurk in this approach: temporary undertakings usually become permanent features and remaining critical issues like revised rules of origin are only to be addressed later or ignored.
Past automotive trade negotiations with the US (Canada-US FTA – NAFTA – CUSMA) have consistently narrowed market access for Canadian auto manufacturers, resulting in lost production and jobs. We cannot afford to let this trend continue.
It is widely anticipated that the US will subsequently seek changes to the automotive rules of origin to include higher regional value content requirements, strengthened steel and aluminum provisions, mandatory minimum American content levels and constraints on Chinese technology.
In response, Canada should take steps to protect Canadian automotive production including pursuing recognition of the CUSMA 232 side letters, enforcement of existing CUSMA rulings and other measures outlined below.
Bottom line? The US should be placed on notice that this is simply a “truce” not an “agreement”. Nothing is final and none of our trade leverage should be set aside until a full agreement is reached. And before we go there, Canadians need full transparency as to the terms of any tentative agreement.
August 12, 2026: in response to reader comments, the text was updated to clarify: 1.) that “roll up” of value in core parts was at the heart of the dispute between the US and Canada and Mexico and 2.) that the scenario of applied tariffs on non-CUSMA qualifying cars that would see the US apply 27.5% duties vs 6.1% tariffs in Canada was based on the assumption that Canada would drop its counter tariffs as part of an interim trade deal.
Portents
Canadians will soon witness ominous portents in the firmament. On August 12 the skies will darken as the sun disappears in an eclipse. Over the following days stars will seem to fall from the sky as the Perseid meteor showers reach their peak. Finally, Earth’s shadow will slip across the face of the moon in a partial eclipse on August 27-28. Oh, and Donald Trump is threatening to impose 50% tariffs on a basket of Canadian exports on August 19.
Far from signalling an arriving Armageddon, Canadians can relax in the face of these celestial events. They are merely a sign that the universe is working in its usual fashion. The same is true for Trump tariffs. They reveal that Ottawa’s automotive counter tariffs and duty remission program are working and that the US is starting to feel the pain. Like the dark shadows in our skies, Canadians should simply shrug off the Trump threat.
Nonetheless, Canadian negotiators have engaged in an intense round of shuttle trade missions to Washington and an interim deal on automotive trade may be in the offing. Ottawa is rife with rumours that the US might agree to lower nominal tariffs on automotive imports in return for Canada dropping our retaliatory tariffs.
In practical terms, this rumoured deal would not restore duty free trade for Canadian vehicle assemblers but it could offer potential savings that might be attractive to Canadian exporters. The proposed settlement is being portrayed as a stop gap measure designed to lower tensions while punting other issues like revised rules of origin to a later, more comprehensive set of negotiations. In theory, the interim agreement wouldn’t bind our hands in those future talks.
What could an interim deal mean for automakers? If, for example, applied tariffs were reduced by 10 percentage points, it could yield savings in excess of $1billion per annum for Canada’s largest exporters. Meanwhile, the savings would be smaller for the Detroit Three automakers (Ford, GM and Stellantis) but it would also relieve them of any Canadian production obligations under the remission program, giving them full flexibility to import duty free from the US or downsize Canadian operations without fear of penalties. Finally, global automakers with American assembly plants (who were most impacted by Canada’s retaliatory tariffs) would once again be able to import vehicles duty free from the US. Arguably, this is a result that makes things better for everyone. But sometimes, better is simply not good enough.
The Anaconda Effect
First, let’s dispose of the nonsense argument that anything agreed to now is merely temporary and has no impact on our longer term trade commitments with the US. The reality is that every time that Canada cedes some ground in trade talks with the US we set a starting point for the next negotiations. A friend refers to this condition as the “Anaconda Effect”. Every time you relax your trade posture the snake tightens its grip.
That effect is nowhere more clearly in evidence than in the automotive sector. Each set of trade negotiations that followed the original Canada-US Auto Pact resulted in more restrictive rules of origin. This was effectively a ratcheting shut of free trade. In agreeing to these changes, we have trained the US to demand more while ignoring any inconvenient details of existing agreements.
Here are a couple of examples of the Anaconda Effect in action:
1.) Following the implementation of the CUSMA pact, it became apparent that Canada and Mexico did not share the US understanding of how regional content (the basis for qualifying for free trade) was to be calculated. The US insisted on its position (no roll up of non-qualifying content in an otherwise qualifying core part) and applied tariff treatment accordingly. Canada and Mexico took the US to a trade dispute panel and won a ruling against the US position. This was a clear win and demonstrated the free trade agreement working as it was designed. Except…worried that friction over this issue might lead the US to want to enter into a full renegotiation of the pact, Canada decided it was better to let sleeping dogs lie.
So today, as we approach a substantial renegotiation of the automotive provisions of the deal, the US position has become the de facto standard applied to Canadian exports and the “new normal” going into the trade talks. Our failure to insist upon our rights led to lost ground and yet did nothing to head off pressure for further concessions.
2.) Under the first Trump administration, the US issued a side letter to CUSMA guaranteeing that if Section 232 tariffs (the ones currently applied to Canadian automotive exports) were ever to be implemented, Canadian exporters would be granted a tariff rate quota allowing up to 2.6 million Canadian-assembled vehicles to enter the US duty free each year. At no time since the imposition of 232 tariffs has Ottawa insisted that Washington honour its agreement. Canada has not lobbied Congressional leaders to force the President’s compliance with the side letters, nor has it found a way to have the legality of the 232 tariffs tested in the US courts. The only reason I have ever heard cited in Ottawa is that, since Trump was ignoring the terms of the main deal, there was really no point in trying to enforce the side letters.
History demonstrates that if you are not prepared to defend your rights, they vanish.
Pragmatism and Tariffs
But let’s be pragmatic. If we can get immediate tariff relief that will provide certain benefits to Canadian exporters shouldn’t we agree to take it? After all, we will still have the opportunity for further negotiations down the road.
Canadians need to understand that those later negotiations are the very reason an interim deal might be problematic. As described above, this interim deal would lock in a form of trade asymmetry where US products have largely unrestricted access to Canada while our exports continue to be taxed by the US. We would be signalling that we are prepared to accept less even as we give the US more than they are entitled to under our current trade agreements.
Even in the context of an interim agreement, Ottawa must insist upon its continued right to impose future tariff controls on US imports if US barriers remain. To do otherwise would simply lock in a cost disadvantage that must inevitably lead to the demise of the Canadian auto industry. And if we yield on autos today, which sector of our economy will be the next to come under American fire?
The End of MFN
There is a related but perhaps more esoteric issue at play here as well. The US, Europe and others are quickly abandoning the Most Favoured Nation (MFN) concept that was at the heart of multilateral trade under the WTO. Everything is now becoming a preferential trade deal with specific rules. But there is a fundamental difference between the trade deals negotiated by the Trump White House with countries like Japan and the UK and the one it is insisting upon with Canada.
Those countries are achieving reduced tariffs using the same general rule of origin that underpinned MFN — the doctrine of substantial transformation. Substantial transformation occurs when manufacturing changes inputs into a new good with a distinct name, character, or use under the Harmonized System of Tariffs thus establishing the country of origin of the good.
Substantial transformation is both simpler and more flexible than the detailed automotive rules of origin contained in the CUSMA/USMCA. With 75% of the value of a CUSMA-qualifying vehicle having to be sourced in North America alongside mandatory requirements for labour value, core parts and steel, CUSMA limits the sourcing flexibility of Canadian exporters.
Prior to the imposition of Tump’s 25% 232 tariffs on imported autos, the swing between CUSMA and US MFN tariffs on cars was just 2.5% (although pickup trucks were subject to a higher 25% tariff). In other words, a manufacturer could decide to qualify their goods for CUSMA under rigid CUSMA rules or pay 2.5% on vehicles meeting the substantial transformation test. Today, the Section 232 tariffs establish a new, nominal duty rate of 27.5%. By contrast, under the preferential trade deals the US signed with the EU, the UK and Japan, the applied rate of duty drops to 15%, or even just 10%, with no derogation of the substantial transformation standard.
This allows European and Asian manufacturers wide flexibility in the sourcing of key automotive raw materials, parts and technologies that Canadian plants are denied. A similar vehicle built in Canada would be subject to a full 27.5%. The only way to achieve tariff reductions for Canadian exports is to force them through the keyhole that CUSMA rules create.
Asymmetry and Economic Decline
Canada needs to be very careful how it proceeds from here. If we lose MFN status we will have entered into a very uncertain world with little control over our economic destiny. Accepting preferential rules without the option of an MFN track turns Canada into little more than an economic satellite of the US. To date, Canada has not pushed back or withdrawn MFN treatment for non-CUSMA qualifying vehicles from the US. So, in a scenario where Canada drops its counter tariffs, a non-qualifying vehicle entering Canada from the US would be subject to a 6.1% duty compared to 27.5% for a similar vehicle headed in the opposite direction — a baffling outcome.
But let’s get back to the proposed interim deal. Under its current 25% Section 232 tariffs, the US allows an importer of a CUSMA-qualifying, Canadian-made vehicle to reduce the value for duty payable in proportion to the amount of US content it incorporates. Conventional wisdom has it that roughly half of the content in Canadian cars comes from the US, so the effective rate of duty might be roughly 12.5%. Will a similar mechanism apply under the interim deal or will CUSMA-qualifying vehicles be granted a simple, across-the-board tariff? The answer to that question will have significant implications for Canadian vehicle manufacturers and their supply chains.
The Same as CUSMA, Only Worse
If the deal continues to require increased sourcing of US content in order to lower duties on Canadian exports, not only will Canadian vehicle assembly plants continue to be threatened but there will be increased pressure on Canadian parts producers as well:
1.) With a variable rate of duty based on the US content in Canadian cars, a US made part will be worth more to a Canadian vehicle manufacturer than its Canadian equivalent. This is because incorporating the US part raises the US content calculation and will lower the effective rate of duty on the finished vehicle when it enters the US; and
2.) Because tariffs continue in this scenario (even if they are lowered from current levels) Canadian vehicle manufacturers will have to find ways to lower their costs of production just to offset the tariff expense and restore lost competitiveness with plants in the US.
In a nutshell, there will be an incentive for parts makers to move operations to the US in order to avoid margin compression. Meanwhile, Canadian assembly plants will have to do whatever they can to lower the dutiable amount of Canadian value-added in each car. What options are available to the Canadian plants? They may look for concessions from remaining local suppliers; push for greater labour productivity; and seek support from taxpayers in the form of various tax abatements, grants and contributions to offset tariff expenses. The interim deal will be a slow cancer eating away at the Canadian production base while US exports to Canada get off scot-free.
If there is any misunderstanding about what that means, consider what happened to Canadian auto production in the years following the implementation of CUSMA. Between 2019, the last year before CUSMA, and 2025, annual Canadian auto production dropped by roughly one-third, as US manufacturers pulled back from Canadian production. Given an interim deal that imposes tariffs on Canadian exports, removes any requirement for Canadian production and drops tariff sanctions on imports from the United States, it is hard to imagine this won’t hasten the further loss of Canadian manufacturing.
Canadian Demands
So, rather than an “interim deal” we should perhaps use language the US is more familiar with. Let’s call this a temporary truce. That would imply that we might return to active trade combat if the terms of a permanent treaty are unacceptable to us. It would also make clear that this agreement will not hold for long and certainly won’t withstand any additional US demands for concessions from Canada.
It is widely reported that the US will seek changes to the CUSMA automotive rules of origin as part of any permanent deal, raising regional content requirements from 75% to 80%, or more. It is also likely to demand that half of that value be sourced from the US. Also expected are demands for tighter rules for sourcing of steel and core parts and an insistence that Canada shut the door to vehicle imports from China. Combined, those proposals would limit production flexibility for Canadian manufacturers, drive parts and materials suppliers into the US and reduce choice for Canadian consumers. If that is what we will be asked to pay, what will the US give in return? If we give away all our trade leverage before the negotiations even begin, what can we really expect?
And let’s be clear: the primary leverage that Canada has in these talks is access to our market. We are the only significant export market for US made vehicles and cannot easily be replaced. If we shut the door, US plants will suffer and US brands will be weakened during a period of intense international competition from Europe, China and the rest of Asia.
So how should we play our hand? The threat of duty remission remains an effective tool to ensure companies maintain Canadian production. In the future it might evolve to include additional incentives tied to the import of Chinese vehicles and components for companies maintaining or increasing their Canadian footprint.
Meanwhile, Canada should:
1.) examine its options for testing the CUSMA side letter in the US courts;
2.) renew its demands that the US comply with the dispute resolution panel decision in the core parts case;
3.) pass a Canadian equivalent to the American Automotive Labelling Act so that Canadians can easily see where a car was built both online and in the showroom (important since we now know that NHTSA rules allow US-branded but Chinese-made cars to carry US VINs);
4.) seek an MFN equivalent to the preferential deals that the US struck with European and Asian countries;
and
5.) slow down the movement of non-CUSMA qualifying goods while we determine whether they include any content that is the product of forced labour. (Note: Since the US does not have clean hands when it comes to the use of forced labour they might find detailed inspections of US-branded goods deeply troubling).
Shining a Light on the “Deal”
To conclude, there is every reason to believe that Canada and the US are headed to an interim deal. If it happens, it will be heralded as a great breakthrough in both Washington and Ottawa. Industry supporters of the deal will be trotted out in the Canadian media to tout its benefits.
But we must remember that Canada’s industrial economy doesn’t belong to individual companies or even to the Canadian government, it belongs to all of us as Canadians. As the owners and stakeholders, we need to be able to carefully examine the terms of any deal; assess its impact; and decide on its merits for ourselves. To that end, the full details of any interim agreement should be released publicly and tabled in Parliament as soon as a deal is negotiated.
Canada’s trade negotiators may be feeling the squeeze but something this important should not take place in the shadows, eclipse or no eclipse.
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