U.S. auto tariffs could cut Canada's output by nearly 1 million cars, CIBC says

The number of cars made in Canada could fall by almost 900,000 units a year if the U.S. hits this country with a 25 per cent auto tariff, according to a recent report by CIBC.

Royce Mendes, senior economist at CIBC Capital Markets, is the latest analyst to sound the alarm over the impact that Canada's economy could see from the recent tariff threat from U.S. President Donald Trump.

"It wasn't that long ago when it was commonplace to question whether President Trump could make good on his promises. But, so far, he's generally found ways to stay true to his word, and that's exactly what's so concerning about auto tariffs," Mendes said in a note on Wednesday.

Trump and his administration have repeatedly threatened Canada with the possibility of imposing a 25 per cent tariff on cars imported from Canada, along with 10 per cent tariff on auto parts after deciding against exempting Canada from hefty tariffs on steel and aluminum since June.

The Canadian government has responded with tit-for-tat tariffs on those metals from the U.S., along with tariffs on a long list of other goods starting this month, which has intensified the trade war between the two neighbours. 

Mendes estimates that if the U.S. imposed a 25 per cent tariff on cars imported from Canada, then that would result in the country's auto production falling by 900,000 units a year. But, if a U.S. auto tariff was imposed on all imported cars, and not just those from Canada, then production in the country could fall by more than 400,000 cars a year.

Canada produces more than two million new vehicles a year, according to Statistics Canada. That suggests that car production in the country would fall by roughly half if only Canada was targeted with a U.S. auto tariff, according to CIBC.

"After also accounting for a 10 per cent U.S. tariff on [auto] parts, and the fact that reduced Canadian production would require fewer foreign inputs, we estimate the direct drag on GDP [gross domestic product] to be one per cent and 0.5 per cent respectively for each scenario," Mendes said.

"That doesn't take into account a resultant weaker Canadian dollar, which would work to soften the blow, but a hit to confidence could potentially seriously worsen the situation."

Job losses north of border

In terms of how many jobs would be affected by the fall in Canadian auto production, Mendes didn't specify the resulting number of job losses.

He did, however, add that there could be a ripple effect over time as people who lost jobs spend less and cause employment to decline in other industries.

Just last month, however, TD Bank warned that Trump's auto tariffs could cost Canada 160,000 jobs, especially if Canada retaliates.

Mendes said that while it's tempting to suggest that Canada could raise its own tariffs and force Canadians to buy cars made in the country, that is not a "feasible solution."

"Canada only produces a handful of models relative to the hundreds of choices to which consumers have become accustomed to," he said. "Unless you believe someone looking to buy a flashy drop-top convertible sports car would be satisfied leaving their local car dealership with the keys to a minivan, it isn't a feasible solution to the potential problem at hand."

He added that U.S. consumers were somewhat better prepared to deal with an import tariffs on cars, because U.S.-made cars accounted for almost 80 per cent of total cars sold in the country last year. In comparison, only about 10 per cent of cars made in Canada last year were bought by Canadians.

Meanwhile, Douglas Porter, chief economist at BMO Financial Group, said that there's no way one can put that fine a point on what will happen to auto production in Canada on the back of U.S. auto tariffs.

"Companies will ultimately decide whether to keep plants open or not, so production is going to move in big discrete chunks," he said.

Porter did, however, agree with Mendes that the tariffs could send Ontario, the heart of Canada's auto production, into or near a recession.

"Given the range of U.S. import volume changes resulting from the tariff, Canadian auto production could be cut by somewhere in the 600,000 to [the] one million unit range," Porter said. 

"Assuming a similar impact through the parts supply chain, this would directly carve roughly 0.3 to 0.6 percentage points from Canadian GDP, and could put at least 40,000 factory jobs at risk."