U.S. Imposes 25% Auto Tariffs

U.S. Imposes 25% Auto Tariffs

• President Trump announced that on April 3rd, the U.S. will place 25% tariffs on all imported passenger cars and light trucks. However, imported vehicles from Canada and Mexico that are compliant with the USMCA will face the 25% tariff only on the value of content produced outside of the U.S.
• In addition to the tariffs on finished vehicles, certain automobile parts, including engines & engine parts, transmissions & powertrain parts, and electrical components, will also face 25% tariffs by no later than May 3rd. USMCA-compliant automobile parts will be exempted from this deadline, but are expected to be included at a later date, yet to be determined.
• The situation remains fluid. One Canadian media outlet reported that Commerce Secretary Lutnick indicated to Ontario’s premier, Doug Ford, that the deep integration of the auto sector was under consideration for a lesser tariff rate for Canada. 
• Note that these tariffs are in addition to the 25% tariffs on steel and aluminum that were announced earlier in March and are already impacting the automobile industry.
• The most impacted nations are Mexico, Canada, South Korea, Japan, and Germany. These nations have not yet announced retaliatory measures, with some citing patience until the broader April 2nd reciprocal tariffs are known. 

Brace for Impact

• Canadian motor vehicles and parts exports tally up to almost 15% of total southbound shipments, standing only behind energy products as Canada’s largest U.S. export. Around 1.1 million cars are exported to the U.S. every year, representing almost 7% of U.S. domestic auto consumption. The value of Canada’s automotive sector composition leans more towards finished products, though auto parts trade still accounts for a sizeable 4% of total Canadian trade with its American counterpart. 
• In Canada, the top selling vehicle model is the Ford F-series pickup truck, largely assembled at U.S. 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 $5000 higher. This broadly holds true for all vehicles that rely on the North American supply chain.
• Ontario is most exposed, with U.S. 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 U.S. 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.”
• We’ll have to wait for the ultimate determination come April 2nd, cited as “Liberation Day” by the U.S. administration. But at face value, this executive order creates downside risk to our GDP forecast for 2025 and greater upside to inflation.
• So far, Prime Minister Carney has not formalized a retaliatory response, no doubt waiting for that April 2nd timeline to see the overarching picture, along with many other countries. And, with the Federal election on April 28th, it’s also possible the retaliatory response will fall to the incoming government. 
• However, yesterday’s announcement will likely cause a double-down on Carney’s previous commitment that, if elected, the government would build an "all-in-Canada" manufacturing network at a cost of $2 billion.
• The constant onslaught of tariff announcements has left little question among Canadians that the country must re-orient its supply chain dependence and become more resilient to the shifting winds of U.S. policies. Political parties have largely shifted to advocating for a more intentional push towards industrial policy with end-to-end processes for the auto sector, resources, defense, IT, food security and other features deemed necessary for sovereignty. The auto tariff threat does not alter Canada’s competitive advantage with a highly skilled automotive workforce and existing production facilities.

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