Canada\u2019s long-term role in the auto supply chain is increasingly tied to trade diversification and the pace of the EV transition, economists say \u2014 a structural shift that goes beyond the industry\u2019s expected slowdown in 2026.<\/p>\n
TD Economics expects new vehicle sales to fall 4.3 per cent this year and production to drop around four per cent as automakers shift output south of the border. BMO sees a deep break with the past. Together, their outlooks suggest the country\u2019s auto sector is entering what TD economist Andrew Foran termed \u201ca new normal\u201d in an industry outlook report published last week \u2014 smaller, more fragmented, and more dependent on policy choices at home and abroad.<\/p>\n
\u201cCanada can no longer rely on the traditional model of deeply integrated, tariff-free North American auto production,\u201d BMO economist Erik Johnson wrote in a recent note. \u201cThe re-emergence of a tariff barrier \u2014 especially one as steep as 25 per cent \u2014 undermines Canada\u2019s long-standing role as an export-oriented production hub.\u201d<\/p>\n
Since the early days of U.S. President Donald Trump\u2019s second term, the North American automotive industry has been disrupted by tariffs<\/a>, both real and threatened. Various U.S. policy changes<\/a> have also altered the trajectory of the EV market. An end to federal EV incentives in both Canada and the U.S. last year triggered a sharp reversal in sales<\/a>, a result that highlights \u201chow dependent EV sales are on upfront financial support,\u201d Johnson writes.<\/p>\n The challenge Canada\u2019s industry faces is structural, the economists say. Canada\u2019s production base was built around largely frictionless continental trade, with around 90 per cent of domestically produced vehicles exported to the U.S. in a typical year, Foran notes. To move the needle, Canada is trying to broaden its trade base beyond the U.S. \u2014 but each potential opening carries constraints.<\/p>\n \u201cCurrently, only about seven per cent of exported vehicles from Canada are shipped outside the CUSMA region,\u201d Foran wrote, \u201cso there is room to grow and diversify\u2026\u201d<\/p>\n But retooling the industry with global partners is likely to be challenging. The federal government has hinted at potential production interest from South Korean and German companies, though Foran notes these discussions are currently tied to Canada’s procurement of submarines \u2014 and \u201cnot currently substantiated.\u201d<\/p>\n Ottawa’s strategy also seeks to use \u201ctax credits and direct support to attract new EV manufacturers,\u201d Johnson notes, but he says Canada\u2019s market is simply too small to support a dedicated EV assembly plant without exports. The U.S. market \u2014 which buys about 1.5 million EVs annually versus Canada\u2019s under-200,000 tally \u2014 is \u201cindispensable,\u201d Johnson says, but tariffs \u201chave sharply undermined the viability of exporting from Canada.\u201d<\/p>\n That vulnerability is compounded by the economics of the EV transition. Exporting elsewhere would force Canadian manufacturers to compete on \u201cintense and increasingly price-driven\u201d terms \u2014 and doing so against established EV makers \u2014 \u201cposes immense challenges,\u201d Johnson says.<\/p>\n This friction extends even to potential lifelines. While the federal government hopes joint-venture investments with Chinese firms will follow its deal to allow a limited quota of imports<\/a>, Foran warns that U.S. “animosity” towards Chinese-linked technology creates a ceiling. If Chinese production does happen on Canadian soil, \u201cany quantity that isn\u2019t consumed domestically would need to be exported overseas.\u201d<\/p>\n In this environment, Johnson argues that growth will depend less on traditional assembly and more on “adjacent segments”\u2014 battery materials, advanced components, and leveraging Canada\u2019s “low-carbon electricity advantage.\u201d<\/p>\n Foran expects production to slide another four per cent in 2026, though he notes the sheer complexity of the integrated supply chain makes a full U.S. retreat \u201csuboptimal on a cost and logistics basis.\u201d Canadian counter-tariffs, which penalize production reductions, also raise the cost of shifting output entirely south of the border.<\/p>\n Still, the broader direction is clear. \u201cNevertheless, the need to diversify automotive trade away from its current outsized U.S. concentration will likely be necessary to ensure the long-run viability of the industry amid growing U.S. protectionism,\u201d Foran wrote.<\/p>\n John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf<\/a>.<\/p>\n Download the Yahoo Finance app, available for Apple<\/a> and Android<\/a>.<\/p>\n