Auto tariffs have been at the centre of the Canada-United States trade dispute.
After the countries failed to reach a trade deal last month, President Donald Trump threatened to double tariffs on Canadian vehicles and parts to 50 per cent on Jan. 1, 2027.
This potential escalation raises questions over the future of Canada’s auto industry and whether it will follow the path of Australia, which effectively lost its auto industry in 2013.
Jim Stanford, a McMaster University economist and long-time auto industry veteran, says the trade dispute poses a major threat.
“[The Trump administration] clearly throws a big pall of uncertainty over the viability of Canada’s auto sector,” he said.
“On the other hand, I would say we still got more going for us than the Australians did a decade ago or 15 years ago. And I wouldn’t for a minute think it’s inevitable that Canada’s auto industry will collapse the same way Australia’s did.”
A policy choice
In the 1970s, Australia ranked among the world’s 10 largest vehicle producers. Its automotive sector employed more than 100,000 people, making it the country’s largest manufacturing industry. And it produced roughly 475,000 vehicles a year — nearly as many vehicles as Australians bought.
But over decades, the industry shrivelled.
From the 1980s through to the 2000s, liberal and conservative governments reduced auto tariffs from a high of 57.5 per cent down to five per cent by 2010. International free trade agreements further reduced those tariffs.
“Imports surged after the unilateral trade liberalization, providing Australian consumers with more choice and lower prices,” said Stanford, who was the founding director of the Australian Centre for Future Work.
Australia’s three major auto producers — Ford, Toyota and Holden (GM’s Australian subsidiary) — faced stiff competition from Asian producers. High input costs and a strong dollar all played into the industry’s decline.
By 2013, these companies’ three plants assembled just 210,000 vehicles.
Models that were distinctive to the Australian market — such as the Holden Commodore and Ford Falcon — lost their appeal as buyers came to favour smaller, more fuel-efficient vehicles.
“The domestic industry’s share of domestic sales fell steadily,” said Stanford. “Exports increased, but not nearly enough to offset the decline in domestic sales of Australian-made vehicles.
“And so overall production levels declined, and a large and chronic automotive trade deficit emerged.”
In May 2013, Ford announced it would end Australian manufacturing by October 2016.
Later that year, the newly elected conservative government moved to cut A$500 million from the Automotive Transformation Scheme, which subsidized vehicle production, capital investment and research. It also ruled out additional support for Holden and Toyota.
By December 2013, Holden said it would also end local manufacturing by the end of 2017. Toyota made a similar announcement in February 2014.
A government productivity commission, convened to examine whether some industry assistance should continue, concluded A$30 billion in support between 1997 and 2012 had merely “forestalled, but not prevented” the industry’s contraction. The economy-wide costs of further support outweighed the benefits, it said.
But Andrew Beer, dean of Adelaide University’s School of Management, says the industry’s closure could have been avoided.
“The disappearance of Australia’s auto industry was a policy choice,” he said in an emailed statement.
“Toyota had no plans to close their plants and only did so reluctantly, once it became clear that the closure of the GM [Holden] and Ford plants meant the local supply chain would collapse.”
A softer landing
Once closure became certain, Australia’s governments and automakers focused on engineering a soft landing.
They committed about A$380 million worth of support to job transition centres, retraining and supplier diversification. Workers could receive such supports on company time, years before the final cars rolled off the line.
The result was a smoother transition than earlier forecasts had predicted. The government had estimated 27,500 job losses, while a 2019 review put the actual number closer to 14,000.
And 12 months after losing their jobs, about 84 per cent of former automaker employees and 79 per cent of supplier workers were employed.
Beer notes a strong economy in 2014 helped ease the transition.
“At that time the Australian economy was booming and workers found jobs — but not jobs as good as the ones they lost.”
The impact on supply chain companies was also not as bad as some had feared. Fewer than one-quarter of such companies closed. And some even diversified and grew, says Beer.
“Others prospered by diversifying into other, better-paying sectors,” Beer said, noting defence and mining as two standouts.
Since the final plant closures in 2017, Australia has not mass-produced autos for mainstream consumers. But a small automotive manufacturing sector remains, focused on heavy trucks, specialty vehicles and design and engineering work.
Not Australia yet
Canada’s auto sector today is in a stronger economic position today than Australia’s was in the 2010s, says Stanford.
According to Ottawa, Canada is the world’s 14th largest auto producer. It accounts for about 0.5 per cent of national GDP, and directly employs about 121,000 people (about 0.5 per cent of all Canadian workers).
Its plants serve a continent-wide market and anchor a sophisticated parts, engineering and research base that spans the border. Even under the existing tariffs, U.S. automakers still require Canadian vehicles, engines and components.
“You’ve still got 10 world-scale assembly plants, and you’ve still got tremendous engineering and technical expertise and a very sophisticated supply chain,” Stanford said.
But the trade war is undoubtedly taking a toll.
Since April 2025, the United States has imposed a 25-per-cent tariff on Canadian-assembled passenger vehicles and light trucks. For CUSMA-compliant vehicles, the tariff applies only to their non-U.S. content. A vehicle containing 50 per cent U.S. content therefore faces an effective tariff of about 12.5 per cent.
The U.S. tariff regime has caused major disruption across the industry. For example, Toyota has said its North American operations posted their first annual loss in 16 years.
During trade negotiations in August, there was talk of reducing the tariff on Canadian vehicles to 15 per cent — which would be an effective rate of about 7.5 per cent for vehicles containing 50 per cent U.S. content.
With profit margins in the high single digits, this rate could have still rendered vehicles with significant Canadian content unprofitable.
When asked what lessons Canada could draw from Australia’s experience, Beer wrote: “[P]lan for closure and begin supporting existing businesses to diversify NOW.”
While Stanford is less pessimistic, he agrees that diversification is an important strategy.
“Diversify your capabilities and your markets,” he said. “While at the same time [fight] like hell to preserve Canada’s share of the core automotive sector.”
Some Canadian automakers and parts suppliers have already been following this playbook.
GM has agreed to seek new work for its idle electric van plant in Ingersoll, Ont., and to consider it first for any Canadian Armed Forces contracts awarded to the automaker.
Guelph-based auto parts manufacturer Linamar is also exploring defence production. In August, it said it had signed a memorandum of understanding with an international defence contractor and was holding discussions with others.
Stanford says his optimism about the industry’s future is ultimately grounded in some key facts.
One is Ottawa’s strong support for the auto industry.
“Canada is today different than Australia was in 2013,” he said. “We’ve got a government that’s very actively committed to industrial policy and has stated its determination to keep auto here. And that’s night and day difference from under the Tony Abbott government.”
A spokesperson for Innovation, Science and Economic Development Canada reinforced this point, noting in an email that Ottawa is focused on protecting jobs, attracting investment and positioning Canada as a “global leader in next generation vehicle manufacturing.”
More importantly for Stanford, though, is that the American auto industry itself is not seeking to re-shore all auto production.
“Perhaps the most important thing that gives me a bit of confidence is the industry itself knows that this [trade dispute] isn’t going to last,” he said.
“The auto industry knows this makes no sense for the U.S. auto industry. Trump’s rhetoric is ‘We’re going to capture the auto industry from other countries and bring it to America.’
“But the leadership of America’s auto industry knows that’s not how it works.”
