Retaliate or not? Canada’s tough decision if US puts tariffs on autos

OTTAWA — Industry leaders say the federal Liberal government will face a complex decision – with deep economic consequences – if the US makes good on its threat to slap 25% tariffs on Canadian-made cars and trucks.

Ottawa recently retaliated against US President Donald Trump’s levies on Canadian steel and aluminum with reciprocal duties on American sales of the metals, as well as dozens of US-made consumer products.

However, if Canada’s auto sector does indeed become a Trump target, many fear any Canadian countermeasures would have a far greater impact on jobs and the economy in this country than the fallout from the steel and aluminum tariffs.

The chief economist of the Canadian Automobile Dealers Association is urging the federal government to resist retaliatory tariffs on autos, saying matching reprisals would put up to 30,000 jobs at risk in Canada’s retail sector.

The biggest threat for car dealerships, which employ more than 150,000 people in all corners of the country, would be retaliatory moves by Ottawa, Michael Hatch said.

“We understand, obviously, the pressure to respond in kind is intense, even though in a trade war the guns aren’t pointed at the enemy, they’re pointed at ourselves,” said Hatch, who will release a report July 6 that outlines impacts to the auto industry and the economy if the “catastrophic” tariffs are imposed on both sides of the frontier.

“The worst-case scenario is a tit-for-tat.”

The Trudeau government has signalled it’s prepared to quickly respond to any US auto tariffs with duties of its own. Foreign Affairs Minister Chrystia Freeland has said repeatedly that the federal strategy on tariffs is to neither back down nor escalate the dispute.

Ottawa could be forced to make that difficult call soon.

Many observers believe Trump will be in a position to make a decision as early as next month following the conclusion of a US Department of Commerce investigation into the possibility of introducing auto tariffs on national security grounds. It is the same argument Washington used to deploy its steel and aluminum duties.

Flavio Volpe, president of the Auto Parts Manufacturer’s Association, said even though the impact of retaliation would be devastating to the auto sector, Ottawa would have no choice but to take precisely the same measures against the US.

That’s the message he has been sending to Freeland and Prime Minister Justin Trudeau.

“Donald Trump is a classic, textbook bully – he’ll threaten based on his assessment of a size difference, hoping you’re going to back down before he’s got to throw a punch,” Volpe said.

“If you’re going to get punched by the bully, you have to stand – you can’t run.”

To avoid Trump’s auto tariffs, Volpe believes there are two possibilities. One is by making significant progress on the difficult renegotiation of the North American Free Trade Agreement; and the other involves successful court challenges by major automotive companies against the US duties.

Volpe said he knows big auto companies are giving the second option a serious look.

“Billion-dollar firms aren’t going to accept a tariff that puts them out of business without fighting,” he said.

Last year, Canadian auto sales hit a record of more than two million and the country produced an estimated 2.2 million cars and light trucks, according to DesRosiers Automotive Consultants.

A study published by CIBC Capital Markets this week predicted that U.S. tariffs at 25 per cent on all foreign auto sales in the United States would cut Canadian production by 400,000 vehicles per year. Such a levy aimed only at Canada would mean 900,000 fewer per year.

The report said, after also factoring in a 10% tariff on auto parts, that Canadian economic growth could lose as much as a full percentage point. Ontario would feel the brunt of any US auto tariffs.

Ottawa has rejected the premise that Canadian steel, aluminum and vehicles pose national security threats to the U.S.

Last week, Freeland suggested duties on the countries’ highly integrated auto industry would be far more disruptive for the two economies than the metals tariffs.

“That is an issue where it’s absolutely imperative that common sense should prevail,” she said shortly after announcing the final list of Canada’s countermeasures on steel, aluminum and consumer goods.

Freeland noted that the federal government released its preliminary list of counter-tariffs within hours of the Trump administration’s announcement it would impose steel and aluminum tariffs.

“Our approach since Day One of the NAFTA negotiations has been to hope for the best, but to prepare for the worst… We’re ready, really, for pretty much anything.”

Following a first face-to-face meeting July 5 in Toronto, Trudeau and Ontario’s newly elected premier, Doug Ford, both said they were aligned when it comes to dealing with the US on trade.