Christopher Worswick is a professor of economics at Carleton University and a fellow of the Global Labor Organization.
This essay is part of the Prosperity’s Path series. In a time of geopolitical instability and a shifting world order, the challenges facing Canada’s economy have only gotten more visible, numerous and intense. This series brings solutions.
Prime Minister Mark Carney was caught on a hot mic speaking with U.S. President Donald Trump on June 16 justifying Chinese EV imports. “Less than 3 per cent of our market, 49,000 cars,” Mr. Carney said on the sidelines of the G7 meeting in France. “It’s a cap, we capped, a hard line … I thought you’d actually like that.”
Mr. Trump does like it, Mr. Carney told reporters later.
The U.S. President may not like the second beat to that story, though. Ottawa’s Chinese EV deal, Mr. Carney said, creates the possibility “that this commercial relationship develops, and there’s Chinese investment” in the form of “material Canadian production.” Industry Minister Mélanie Joly met with four Chinese auto companies last week and pushed them to sub-contract production of auto parts to Canadian companies in an attempt to save domestic auto production.
Similarly, the MOU signed in January between Canada and South Korea aims to introduce a Korean auto production footprint inside Canada.
In the wake of the trade war, automakers have shifted production away from Canada, and Ottawa is desperate for a solution. So is the Unifor union, which is fighting for “stability for our employees” in talks that kicked off Monday with U.S. automakers.
But the sector’s problems predate recent U.S. tariffs. Going out of our way to prop up a declining industry is not the answer.
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Chinese-manufactured Chery EVs at a lot in Toronto. Industry Minister Mélanie Joly met with four Chinese auto companies, including Chery, in a bid to attract investment in Canada’s auto parts manufacturing sector.Carlos Osorio/Reuters
In the Chinese case especially, Canada would be forcing foreign automakers to build in Canada, when they would not otherwise do so, in order to ensure their ability to sell in the Canadian market. This would likely raise the prices faced by Canadian consumers for their automobiles since we would force production out of a lower cost labour market in China to a higher cost labour market in Canada.
Also, Canada’s history with industrial policy in support of expanding manufacturing is weak, as demonstrated by the costly and ultimately unsuccessful EV battery plant subsidies under former prime minister Justin Trudeau’s government.
Instead of propping it up, we should let the Canadian auto sector phase out, as Australia did with their auto sector, if the impending trade talks do not grant the industry relief. We should focus on pursuing our comparative advantage in other industries.
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The production line at Honda’s manufacturing plant in Alliston, Ont., in 2023. The country’s auto sector contributes only 0.73 per cent of Canadian GDP, a percentage that has fallen consistently since 2000.Cole Burston/The Canadian Press
Decades ago, the Australians realized that their market was too small and their wages too high to allow them to have an internationally competitive car industry without large government subsidies. They made the right decision, and so should we.
Mr. Trump has followed through on tariffs that are negatively affecting our economy. However, the decline in Canadian auto production is a long-term phenomenon and not just something that can be fixed easily.
Counterintuitively, it started with the introduction of the North American Free Trade Agreement in 1994. The agreement made it much easier to shift production to Mexico, where auto-sector wages remain a fraction of those in Canada. Over the next three decades, Canada’s share of North American vehicle production fell to roughly 10 per cent from the high teens. The Canada-Korea Free Trade Agreement in 2015, Comprehensive Economic and Trade Agreement in 2017 and Comprehensive and Progressive Agreement for Trans-Pacific Partnership in 2018, have further reduced tariffs on imports of automobiles into Canada from Korea, the European Union and Japan respectively.
Canadian governments signed these agreements no doubt expecting that the integration of the Canadian and American auto sectors – governed by NAFTA but which predated the agreement – would protect production in Canada. Also, the existence of free trade between Canada and the U.S., coupled with U.S. tariffs on automobiles from outside North America, was thought to help too. It was expected to induce non-North American auto producers to retain existing plants in Canada and invest in new ones, in order to have tariff-free access to the U.S. market.
This strategy worked reasonably well until Mr. Trump’s tariffs of 25 per cent on non-U.S. content.
Meanwhile, to offset the longstanding decline, there has been a remarkable shift of Canadian automobile production away from traditional American brands to Japanese brands in recent years. But this production is now at risk, too, because of the trade war. Japan’s ambassador to Canada, Kanji Yamanouchi, bluntly stated the unfortunate reality – access to the U.S. market under the U.S.-Mexico-Canada agreement is a “critical condition” for increased Japanese auto manufacturing investment in Canada.
Were these trade agreements mistakes? No, their net economic benefits extend across the Canadian economy and no doubt outweigh any negative effects on our auto sector which contributes only 0.73 per cent of Canadian GDP, a percentage that has fallen by roughly 50 per cent since 2000. But these agreements do suggest that Canadian governments have repeatedly committed to free trade – meaning that our auto sector can only survive on its own if it is internationally competitive.
The U.S. Trade Representative, Jamieson Greer, recently floated a possible solution to the current trade war suggesting that the three USMCA countries co-ordinate placing tariffs on external countries. However, what would this mean for all of these free trade agreements that Canada has signed? We would no doubt be forced to apply tariffs on many of the countries with which we currently have free trade, losing the economic benefits of these agreements and making it even harder to diversify.
The U.S. is no doubt afraid of competition from China and sees a common tariff wall as their best way to stop it. However, to defer to U.S. interests in this situation would be to the detriment of our own.
Direct auto manufacturing employment is only around 0.6 per cent of total Canadian employment. Even a complete collapse of the industry would be a significant, but manageable, hit to the economy. Indirectly, the industry employs more. But those workers can easily be funnelled into other sectors.
Canadian employer groups constantly complain that there are shortages of skilled workers. Planned expansions in home construction, energy, mining, infrastructure and military equipment production will only increase the demand for these skilled workers. It is hard to see why we should bail out the Canadian auto sector in order to retain the jobs of workers when these skilled workers could find work in other growing industries.
In public debates, the focus is often on retaining and expanding manufacturing jobs, but the benefits of free trade from lowering prices of consumer goods are often at least as important. Given the affordability challenges that many Canadians face, forcing Canadians to pay extra for Chinese EVs so as to protect jobs in a relatively small industry is questionable at best.
The federal government appears to be laser focused on not giving up auto jobs in Canada even if it means pleading with the Chinese companies to move production to Canada. However, if Canadian auto workers and firms are internationally competitive, then the Chinese, Korean, Japanese, European and even U.S. firms will want to produce automobiles here without government intervention.
If not, then Canadian consumers would greatly benefit from lower prices for imported automobiles. True free trade in automobiles – letting the sector fade away if it has to, letting the free market and capitalism run their natural course – would reduce the leverage that the two economic superpowers, the U.S. and China, have over Canada. This is also the policy that would maximize the prosperity of Canadians.
Prosperity’s Path
