It’s no secret that, today, the automotive industries in the United States and Canada are highly linked. It’s the reason why there has been so much hysteria following the threat by President Trump to impose tariffs on Canada. But are tariffs really a new thing? In this article, we take a look at the history of trade tariffs between the US and Canada, with a particular focus on the auto industry.
What really are tariffs?
President Trump was recently quoted declaring that the word “tariff” was one “the most beautiful words in the dictionary.” You can listen to the President saying it in the above clip from YouTube. But what really are tariffs and what does Donald Trump hope to achieve by imposing them on Canada and on other countries?
Tariffs are essentially taxes imposed on goods that are manufactured in another country. In relation to the auto industry, when President Trump threatened to impose tariffs, he was talking about adding a significant cost to vehicles and components crossing the border.
Imagine a car part made in Canada and shipped to a US factory. Without tariffs, the cost is simply the manufacturing and shipping expenses. With a 25% tariff, for example, the US factory now pays 25% more for that part. This extra cost gets passed along the supply chain, potentially increasing the price of the final vehicle for American consumers.
Early Automotive Trade and Tariffs
Now we get to the question; are tariffs really something new or they have existed for a long time in one form or the other? What is the historical perspective on tariffs?
In the early 20th century, both the U.S. and Canada imposed tariffs on imported automobiles and parts to protect their industries. These protective measures led American automakers to establish plants in Canada, producing vehicles tailored to the Canadian market.
While this strategy minimized tariffs, it resulted in fragmented production and higher costs.
The Canada–United States Automotive Products Agreement (Auto Pact) of 1965
A pivotal moment in North American automotive history was the signing of the Auto Pact in 1965. This agreement aimed to eliminate tariffs on automobiles and automotive parts between the United States and Canada, fostering a more integrated and efficient industry. Key outcomes included:
- Specialization and Economies of Scale: Manufacturers could specialize production lines, reducing redundancy and lowering costs.
- Increased Trade: Vehicles and parts flowed more freely across the border, enhancing variety and availability for consumers.
- Economic Growth: The agreement spurred job creation and investment in the automotive sectors of both countries.
The Auto Pact effectively laid the groundwork for a unified North American automotive industry, with manufacturers optimizing operations on both sides of the border.
NAFTA and Further Integration
The North American Free Trade Agreement (NAFTA), implemented in 1994, expanded upon the principles of the Auto Pact by eliminating tariffs on a broader range of goods, including automobiles and parts, among the U.S., Canada, and Mexico. This trilateral agreement further integrated the automotive industry by:
- Diversifying Manufacturing: Manufacturers optimized production across all three countries, leveraging regional strengths.
- Complex Supply Chains: Components often crossed borders multiple times before final assembly, highlighting deep integration.
- Competitive Positioning: The integrated market enhanced North America’s competitiveness against other global automotive hubs.
Recent Tariff Developments and Implications
In recent years, shifts in trade policies have reintroduced tariffs, challenging the integrated nature of the North American automotive industry. For instance, in 2025, the U.S. imposed a 25% tariff on imports from Canada and Mexico, aiming to address trade imbalances and protect domestic industries. These measures have had significant implications:
- Increased Production Costs: Tariffs on imported parts raised expenses for manufacturers, potentially leading to higher consumer prices.
- Supply Chain Disruptions: The integrated supply chains faced challenges, as components subjected to tariffs disrupted the seamless flow of goods.
- Strategic Adjustments: Manufacturers considered relocating production or sourcing to mitigate tariff impacts, influencing investment decisions.
The Lasting Impact of Historical Tariffs: The ‘Chicken Tax’ Example
An illustrative case of how tariffs can have enduring effects is the 1960s “Chicken Tax.” In response to European tariffs on American poultry, the U.S. imposed a 25% tariff on light truck imports. This measure led to:
- Domestic Dominance: The tariff effectively excluded foreign competitors from the U.S. light truck market, allowing domestic manufacturers to dominate.
- Market Distortions: Consumers faced limited choices and potentially higher prices due to reduced competition.
- Long-Term Industry Shifts: The protective measure influenced vehicle design and marketing strategies, with manufacturers focusing on light trucks to capitalize on reduced competition.
What President Trump Hopes to Achieve with Tariffs
What does President Trump hope to achieve by imposing tariffs? The rationale behind his drive is clearly outlined in the YouTube video that we placed above;
Protecting American Jobs
Donald Trump argues that tariffs will encourage automakers to shift production back to the US, creating jobs for American workers. Remember we have already noted that the automotive industries in Canada and the US are highly linked. You can see what we mean in the table below;
| Category | Details |
|---|---|
| Trade Volume | Over $100 billion worth of vehicles and auto parts are traded annually between Canada and the U.S. |
| Cross-Border Components | Auto parts can cross the border 5-8 times before a vehicle is fully assembled. |
| Employment Impact | The North American auto industry supports over 1.5 million jobs in Canada and the U.S. |
| Major Automakers | Companies like Ford, GM, Stellantis, Toyota, and Honda operate plants in both countries. |
| Manufacturing Hubs | Canada’s Ontario and the U.S. Midwest (Michigan, Ohio, Indiana) are key production centers. |
| USMCA Agreement | Requires 75% of auto content to be North American-made to qualify for tariff-free trade. |
| Parts and Supply Chains | Canadian and U.S. plants depend on each other for engines, transmissions, steel, and electronics. |
| Vehicle Exports | Canada exports 85% of its vehicles to the U.S., making it a crucial market. |
| Regulatory Alignment | Both countries follow harmonized safety and environmental standards, reducing costs. |
| Economic Impact | The auto industry contributes over $80 billion to Canada’s GDP and over $500 billion to the U.S. economy |
So, in President Trump’s eyes, all that trade happening with Canada translates into a loss of jobs for people in the United States. The fact that so many cars are manufactured in Canada and then sold in the US means just that, doesn’t it? Well, that’s debatable, but it’s what President Trump believes.
Reducing the Trade Deficit
This is another point of contention for President Trump. He firmly believes that Canada is taking advantage of the U.S by selling it more goods than it is buying. Essentially, that’s what a trade deficit means; buying more from another country than you are selling to that country.
By making imports more expensive, Donald Trump aim to reduce the trade deficit, the difference between what the US imports and exports. The table below from 2023 statistics highlights that for the automotive industry, the US indeed does have a trade deficit with Canada.
| Trade Category | Value (USD) | Notes |
|---|---|---|
| Canadian Vehicle Exports to the U.S. | $47.43 billion | 93% of Canada’s total vehicle exports |
| Canadian Vehicle Imports from the U.S. | $15.5 billion | 50% of vehicles sold in Canada were imported from the U.S. |
| Canadian Automotive Parts Imports from the U.S. | $9.55 billion | 62% of Canada’s total automotive parts imports |
| Canadian Automotive Parts Exports to the U.S. | $10.5 billion | Significant portion of Canadian parts production exported to the U.S. |
| Total Automotive Trade Volume | $83.98 billion | Combined value of vehicles and parts traded between the two countries |
In any case, the automotive industry is but a little part of the trade story between Canada and the US. In reality, when you remove oil and gas sales, Canada is the one that actually has a deficit with the US in terms of general trade.
Gaining Leverage in Trade Negotiations
President Trump also appears to hope tariffs will be a bargaining chip to pressure Canada and other nations to renegotiate trade agreements perceived as unfavorable to the US. In essence, the goal is to use them as a tool to reshape the automotive trade landscape, favoring domestic production.
The Ripple Effect: Who Really Feels the Impact?
Now we have a historical perspective on tariffs, it’s time to look at their potential impact on various groups of people. It’s something that we have covered previously on this platform. Just to summarize;
- Consumers
- They are likely to face higher prices for new vehicles, both imported and domestically produced, due to increased component costs. Here is a brief post helping you understand tariffs.
- Consumers may see reduced choice in available car models.
- There is also potential for decreased resale value of vehicles.
- Manufacturers
- Increased production costs, potentially reducing profit margins. They will also need to make a decision on potentially absorbing some of the tariffs burden. Should they decide to do so, it will mean reduced profits.
- Face the need to restructure supply chains, which is costly and time-consuming. It has already been highlighted that there is a high level of integration in the North American auto industry. Disengaging will be rather difficult.
- May have to reconsider investment strategies in North American facilities. Protectionist policies will force companies to build plants only with domestic markets in mind. Again, that can be costly.
- Dealers
- They will have to deal with fluctuating vehicle prices, making it challenging to set sales targets.
- May see decreased sales due to higher prices, affecting revenue.
- Face increased difficulty managing inventory.
- Automotive Workers
- While the goal was to increase jobs, tariffs can disrupt existing production, potentially leading to job losses in some sectors.
- Increased production costs could also limit future job growth.
- The Broader Economy
- Tariffs can contribute to inflation, as increased costs are passed on to consumers.
- Trade disputes can create uncertainty, impacting investment and economic growth.
Essentially, tariffs create a cascade of effects, impacting every part of the automotive ecosystem. While aimed at reshaping trade, they carry the potential for significant economic disruption.
Tariffs are nothing new but the trend has always been to eliminate them
In this post, we provided a historical perspective on tariffs. It was noted that though they are nothing new, previous decades have seen measures being taken to eliminate them as a way of boosting trade ties between the US and Canada. While protective measures like early 20th-century tariffs and the 1960s “Chicken Tax” aimed to shield domestic industries, agreements such as the Auto Pact and NAFTA promoted integration and competitiveness.
The recent reintroduction of tariffs underscores the delicate balance policymakers must maintain to protect domestic interests without disrupting the integrated ecosystem that has developed over decades. As the industry faces new challenges, understanding this historical context is essential for navigating future trade policies and maintaining a robust North American automotive sector.