If Canada doesn’t get relief from U.S. President Donald Trump’s tariffs before the end of this year, the consequences could really start to hit — in the form of factory closures and other consequences we’ve mostly avoided so far.
That’s an assessment I’ve heard a lot, the past few weeks, in conversations with representatives of our automotive and other manufacturing industries.
And it’s one that I find deeply unsettling, especially when combined with other signals around the state of talks with the White House. Because it points toward both the need for a shift in our negotiating strategy, and the extreme challenge facing our trade negotiators in executing it.
Until now, the operating premise has been that when contending with Trump, no deal is better than a bad deal.
It’s served Canada well, in avoiding the plight of other countries that rushed to reach concessions-heavy agreements only to have the White House resume trade wars with them shortly thereafter. And it would continue to be the right approach if negotiations were just about the future of the Canada-U.S.-Mexico Agreement (CUSMA), which is in little danger of being torn up even if there’s no deal to renew it.
But the mounting need to use the negotiations to get out from under Trump’s sectoral tariffs — which he imposed last year on auto, steel, aluminum and forestry, via dubious national security provisions separate from CUSMA — makes that sort of patience harder.
There’s only so long, industry experts and insiders have been warning, that companies will continue to treat those costs as too temporary to affect long-term capital allocation. That applies most obviously to the auto sector, where temporary lay-offs could give way to some of Ontario’s assembly plants being permanently shuttered, but both steel mills and many manufacturing facilities that rely on steel products are imperiled as well.
The problem is that there’s still no evidence that a good deal is anywhere close to being on the table.
Every indication out of Washington has been that Trump is determined to keep tariffs on just about every trade partner, Canada included.
And both publicly and privately, Canadian officials have been trying to manage expectations along those lines. Last month, chief negotiator Janice Charette told an automotive-industry audience that the goal is to “reduce if not eliminate” the sectoral levies.
To avoid the worst outcomes, that reduction would seemingly have to be rather steep.
Take cars as an example. It’s difficult to know the exact tariff level on vehicles assembled in Ontario, because there are partial exemptions on Trump’s 25 per cent rate based on CUSMA-compliant components. But most around the industry put the effective rate at somewhere around 12 per cent.
Maybe that doesn’t sound too high, until you consider that — as Automotive Parts Manufacturers Association president Flavio Volpe is fond of pointing out — the profit margins on these cars (absent the tariffs) can be as low as five per cent.
In other words, making cars in Ontario is probably a money-losing proposition at the moment. And if the effective tariffs don’t get close to zero, if not quite all the way there, the profits would be too slim (at best) for shareholders to live with in the long run.
The really scary part is that Trump could look at that math and see reasons to dig in. His expressed goal has been to relocate manufacturing south of the border. That hasn’t happened much yet, partly because his policies have been seen as too volatile to shape long-term investments. Why let up just as people might be starting to take the tariffs more seriously?
Lest this all get too gloomy, neither Canadian negotiators nor the affected domestic industries seem to be panicking.
Trump is still hardly known for consistency, and he’s shown limited willingness to stick with policies disliked by U.S.-based companies. A lot of those companies hate the tariffs, because of the inefficiency for continentally integrated industries, and that could still have him looking for off-ramps.
There’s also some sense on our side of the border that, with brutal polling numbers and November midterms in which his Republicans stand to get smoked, Trump could be in the market for near-term wins. And there might be ones Canada could give him through the CUSMA talks at less cost to us than the tariffs continuing.
Volpe, who sits on Mark Carney’s Canada-U.S. advisory committee, has pointed to rules of origin as one potential example. Agreeing to Trump’s demand that cars made here include at least 50 per cent U.S. components could be relatively manageable, he suggests, if total North American content requirements were high enough to still ensure a good Canadian share.
There are plenty of other concessions, in some cases unrelated to the tariff-hit sectors, on what Trump’s negotiators have identified as irritants. That includes tech policy, government procurement rules, energy, and China policy. (History suggests that dairy supply management won’t be touched.)
But give too much on those, and we wind up at the bad deal — for our sovereignty, for our other industries, for our ability to stand up to Trump going forward — that we’ve been trying to avoid.
There’s no hard deadline for our negotiators to strike this difficult balance. But the clock will be ticking louder with each passing day.
