What Trump's proposed auto tariff could mean for Canada

As with many of the trade actions announced by the Trump administration, the possible effects of his proposed Section 232 investigation of vehicle imports are both menacing and unclear.

To understand how it might affect Canada, one first has to know how the Trump administration intends to define an "imported car."

Clearly, a Japanese car made in Japan, or a German car made in Germany, would fit the bill. But what about a Cadillac XTS assembled by General Motors in Oshawa using mostly U.S. parts?

Although the exact breakdown of vehicles by NAFTA country of origin is a closely-guarded commercial secret, it's safe to say there's a lot more U.S. content than Canadian content in cars and trucks assembled in Canada. An average ratio might be about seven-to-one.

But the words Trump used the day his administration announced this latest Section 232 investigation (calling Canada and Mexico "spoiled," for example) strongly suggest he had NAFTA imports in mind, as well as cars and trucks from other continents.

The threat may be an attempt to frighten Washington's NAFTA partners into agreeing to a deal that's worse than they might otherwise accept.

Even if NAFTA collapsed tomorrow, tariffs on Canadian and Mexican cars would only rise to the WTO-approved rate of 2.5 per cent — and it might still make economic sense to keep making the cars where they're made now.

After all, Ford has decided it's cheaper to make its next-generation Fusion in China and just pay the tariff, rather than producing it tariff-free in the NAFTA zone.

But under Section 232, which allows Washington to cite "national security" to justify erecting tariff walls against imports, Canada and Mexico could face auto tariffs of 25 per cent. That amount is likely high enough to change carmakers' calculations about Canada.

They could respond by moving production to the U.S., avoiding all tariffs. Or they could respond by building new plants in Asia, hoping to absorb the tariff by moving production to a low-cost environment.

Commerce Secretary Wilbur Ross, announcing the Section 232 probe on Thursday, said it would look at whether imports "are weakening our internal economy and may impair the national security."

But the U.S. auto industry Donald Trump says he is acting to protect came out quickly against the proposals.

No support from industry

Through its industry association, the Auto Alliance, American carmakers issued a warning: "This investigation under Section 232 is a process that has rarely been used and traditionally has not focused on finished products. We are confident that vehicle imports do not pose a national security risk to the U.S.

"Last year, 13 domestic and international automakers manufactured nearly 12 million vehicles in the U.S. The auto sector remains the leading exporter of manufactured goods in our country. During the last 25 years, 15 new manufacturing plants have been launched in the U.S. — resulting in the creation of an additional 50,000 direct and 350,000 indirect auto jobs throughout America — and new plants are on the way."

Indeed, the U.S. car industry is enjoying a burst of investment that's hardly consistent with the gloomy picture painted by Ross, who argued that there are 22 per cent fewer jobs in auto manufacturing now than in 1990. He failed to mention, of course, that automation has greatly reduced the number of workers it takes to build a car.

Canada has also seen a decline in auto manufacturing jobs since joining NAFTA in 1994.

Parts in, cars out

The vehicles leaving Canadian car plants for sale in the U.S. typically contain around 70 to 75 per cent NAFTA-zone content. Of that, by far the greatest share is American.

In fact, so many U.S. car components enter this country for assembly that Canada runs a trade deficit of $13 billion with the U.S. in this category alone — an amount equivalent to Canada's entire manufactured goods surplus with the U.S. in 2016.

But the parts deficit is more than offset by a surplus in shipping back finished cars.

In the auto sector, the standard is to have a dedicated production line for each car or truck model in a particular plant. It would be difficult, for example, to greatly reduce Canadian participation in the making of a Ford Flex without seeing Ford move the entire production line to a U.S. plant.

This appears to be the result Trump is seeking. He's already celebrated as a great victory the decision by Fiat Chrysler to move production of one truck line from Mexico back to the U.S.

"Economic security is military security," said Ross, explaining his unusually broad definition of a national security threat.

"This investigation will consider whether the decline of domestic automobile and automotive parts production threatens to weaken the internal economy of the United States," reads the Commerce Department's statement.

The Trump administration's discovery of this obscure section of a 1962 law allows it to skip an essential step in most trade complaints: proving the other side did something wrong. All the administration has to do is prove national security is weakened.

Mexico is the most exposed

But recent rounds of NAFTA talks have strongly suggested that Mexico may be more of a target than Canada. The American side has been more flexible on content rules that could affect Mexico and Canada equally, and instead has focused on hourly wages — which is really just about Mexico.

U.S. Trade Representative Robert Lighthizer wants rules that establish a minimum amount of every NAFTA-produced car that must be made by workers earning at least $15 an hour. That's far more than most Mexican plants pay.

It is also true that car production has been moving from both the U.S. and Canada to Mexico.

As far as Canada goes, there was indeed a great auto sector imbalance with the U.S. — way back in the mid-1990s. Back then, Canadian plants produced two cars for every car sold in Canada. But the number of vehicles made in Canada has fallen by about a quarter since 2000 and today barely outstrips the number sold here.

So forcing Mexico to pay higher wages is a goal both the Canadian government and unions can get behind.

Prime Minister Justin Trudeau was embarrassed during a trip to Mexico last October when GM announced it was considering shifting production of the Chevrolet Equinox from Ingersoll, Ontario to a Mexican plant.

It already had moved production of the GMC Terrain out of Canada earlier in the year.

"This decision reeks of corporate greed," Unifor's national president Jerry Dias said at the time. "It is not based on sales. It is an another example of how good jobs are being shifted out of Canada for cheaper labour in Mexico."