A managed-trade plan to protect Canada’s auto sector from U.S. tariffs and cheap EV imports
Canada’s auto industry faces higher costs from U.S. tariffs and lower-priced Chinese EVs. A modern Auto Pact-style managed trade deal with the U.S. could preserve jobs and competitiveness.
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By Torontoer Staff
Canada’s auto industry is under pressure from rising U.S. protectionism and a surge of lower-priced electric vehicles from China. The result is fragmentation of a North American supply chain that for decades relied on cross-border production and parts flows, and the prospect of higher costs and lost competitiveness.
Andrei Sulzenko, former head of the automotive directorate in the federal industry department and a principal negotiator of the Canada-U.S. Free Trade Agreement, argues that a managed-trade approach modelled on the 1965 Automotive Products Trade Agreement could be the least bad option for Canada and the United States.
What changed this year
The United States has moved toward bilateral tariff measures for vehicles and parts, disrupting the duty-free trading environment that supported integrated North American production. At the same time, recent announcements lowering tariffs on some Chinese electric vehicles increase competitive pressure on domestic manufacturing.
That combination risks turning one efficient, integrated production network into several smaller, less efficient national production footprints. For Canada the stakes are large: the sector contributed about $17-billion to the economy in 2024, and supports roughly 125,000 direct jobs and 427,000 indirect positions.
Lessons from the original Auto Pact
The 1965 Auto Pact removed tariffs between Canada and the U.S., allowing manufacturers to locate parts and assembly where it made the most financial sense and capture economies of scale. It required companies to maintain minimum domestic production roughly equivalent to sales in Canada, which preserved investment and jobs while enabling more efficient production.
Jobs were maintained, while auto companies were able to produce more efficiently, at scale, and grow, creating even more jobs.
Andrei Sulzenko
That model encouraged large bilateral flows in vehicles and parts, and over time requirements became redundant as production exceeded thresholds. NAFTA and its successor agreement then established broader duty-free trade across North America with additional rules on content.
A modern managed-trade alternative
Sulzenko proposes a revived Auto Pact-style regime that guarantees the political objective of production parity with market value, while retaining many efficiency benefits of cross-border manufacturing. Under the proposal, participating companies would need to generate domestic content in Canada equivalent to their Canadian sales, and U.S. operations would have mirror obligations.
If a company sold $500-million worth of vehicles in Canada, it would have to source $500-million in Canadian production and in-house parts procurement to qualify for duty-free imports. If it contributed only $400-million, it would pay duties on the $100-million shortfall. The marginal duty rate would be the key lever to incentivize compliance.
- Creates an incentive for non-Canadian manufacturers to invest in Canadian operations to qualify for duty-free trade.
- Preserves scale and cross-border sourcing, limiting the efficiency loss from full nationalisation of production.
- Offers a politically defensible talking point for U.S. officials seeking domestic production parity without erecting full trade walls.
Complications: Mexico and supply-chain reality
Including Mexico complicates the design. Mexico currently produces far more vehicles relative to domestic sales than Canada or the U.S., a mismatch that domestic-content metrics would help address because final assembly accounts for a minority of a vehicle’s value, roughly 20 per cent.
A three-way arrangement is not impossible and could reduce supply-chain disruption, but Canada’s immediate priority should be an agreement with the U.S. Mexico is important for North American manufacturing, but Canada’s industrial base is more directly tied to bilateral arrangements with its neighbour to the south.
Policy trade-offs and the near term
The global trading environment has narrowed policy choices. Full protectionism risks higher costs and reduced competitiveness, while unfettered exposure risks job losses and plant closures. Managed trade is a compromise that aims to preserve jobs and industrial capacity while limiting the worst efficiency losses from enforced national production.
The world of second best in which we find ourselves offers few choices beyond the default position of outright protectionism. Managed trade as outlined here may be the least bad option that serves both countries' needs.
Andrei Sulzenko
Ottawa has signalled interest in preferential market access for manufacturers producing in Canada, but current proposals risk confining production inefficiently to one country. A managed-trade pact with matched obligations for U.S. producers would be a more practical alternative to support investment and competitiveness.
What Ottawa should do next
Practical steps include pressing Washington for a bilateral managed-trade framework that uses domestic-content parity as the metric, negotiating appropriate marginal duty rates for non-compliance, and opening talks with multinational manufacturers about the incentives to invest in Canadian operations.
That approach would offer a middle path: it would provide a clear incentive structure to align production and sales values across the border, while retaining many of the efficiencies that made the original Auto Pact successful.
Canada’s auto sector is not just an industrial cluster; it is a major contributor to GDP and employment. Managing the shift in global trade and technology will require policy clarity and a willingness to revive and adapt proven tools for a new era.
auto industrytrade policymanufacturingCanadaeconomy
