Why it is unlikely that U.S. automakers will withdraw from Canada

Canada offers a significant market and unique tech expertise for U.S. automakers. The automotive industry is also deeply integrated between the two countries. Should we still be worried?

By: , /
January 11, 2017
A Chrysler auto worker is seen working on a partially assembled Chrysler minivan on the assembly line during the production launch of the new 2011 Dodge Grand Caravan's and Chrysler Town & Country minivans at the Windsor Assembly Plant in Windsor, Ontario January 18, 2011. REUTERS/Rebecca Cook

At the first press conference since Donald Trump’s election, the President-elect reiterated Wednesday his intent to discourage American manufacturers from doing business outside the United States.

When you want to move your plant to Mexico and some other place… It’s not going to happen that way anymore,” he said. “You’re going to pay a very large border tax.”

Such statements have been causing alarm in the automotive industry now for months. Back in the midst of the presidential campaign, Ford Motor Company’s announcement that it planned to move small car production to Mexico in 2018 attracted Trump’s attention. He threatened that, if elected president, he would implement a 35 percent tariff on Ford vehicles imported into the U.S. from Mexico.

Then last week, Ford announced that it was cancelling a new US$1.6 billion small car assembly plant in Mexico and would instead invest US$700 million and create 700 jobs in Flat Rock, Michigan; a move some interpreted as a triumph for Trump.

Earlier that day, the President-elect had taken to Twitter to castigate (erroneously) General Motors (GM) for importing compact cars from Mexico. Two days later, he directed his ire at Toyota’s decision to move Corolla production to a new plant in Mexico, tweeting: “NO WAY! Build plant in U.S. or pay big border tax” (ironically Trump tweeted the wrong location for the new Mexican plant and overlooked the fact that Corolla production was being moved from Ontario, not the U.S.!).

These attacks on automakers are consistent with Trump’s pledge to revive U.S. manufacturing by putting “America First.” They are also factually inaccurate, and reflect a lack of understanding regarding the realities of automotive manufacturing in North America.

But despite Trump’s lack of understanding, and although his current target is Mexico, his tweets and campaign promise to tear up NAFTA raise concerns about how Canada’s automotive industry will fare during his presidency.

For example, how secure is the CAN$1.6 billion in investment commitments made by GM, Ford and Fiat Chrysler Automobiles (FCA) during collective bargaining with Unifor in 2016 — investments seen as critical to the future of the industry in Canada? How worried should we be?

Over the last half-century, the production and marketing of vehicles became highly integrated between the U.S., Canada and Mexico. Today, under NAFTA, automotive supply chains crisscross the continent. Vehicles assembled in any one partner country contain parts produced in all three. Integration permits specialization, efficiencies and productivity gains.

As a result, of the 2.4 million vehicles assembled in Canada in 2015, over 85 percent were exported to the U.S. At the same time, nearly 900,000 vehicles assembled in the U.S. were imported for sale in Canada. Automakers concentrate the assembly of compact cars (on which profit margins are wafer thin) in Mexico while building larger, more profitable vehicles in the U.S. and Canada.  

Although Ford cancelled its new Mexican plant, it still intends to move some small car production to an existing plant in Mexico to create room in its Michigan plant for more profitable SUVs and pick-up trucks.  

"Vehicle sales in the U.S. and Canada are at record levels."

Canada’s automotive industry is concentrated in Ontario and closely integrated with production in Michigan, Ohio, Indiana and Illinois. Policymakers on both sides of the border recognize that the Great Lakes region, including Ontario, functions as an integrated automotive production network. With the recent signing of an automotive cooperation agreement between Michigan and Ontario and the massive concentration of automotive R&D and engineering activity around Detroit, Ontario’s integration into this region is deepening rather than diminishing. Any attempt to unwind this integration would be extremely disruptive and have negative consequences for several states which tipped the election in Trump’s favour.

There are also other reasons why erecting barriers to automotive trade and bullying automakers into moving vehicle production from Canada to the U.S. would be short-sighted for the Trump administration. First and foremost, vehicle sales in the U.S. and Canada are at record levels, and several models preferred by U.S. customers are produced exclusively in Canada, including the Ford Edge, Chrysler Pacifica, Chevrolet Equinox and Toyota RAV4. Increasing the price of these vehicles to American consumers by taxing vehicles imported from Canada would likely be unpopular. Furthermore, many automakers’ U.S. assembly plants are already at or near capacity. Constructing a new assembly plant takes several years. Thus, shifting production of any vehicle currently made exclusively in Canada to a newly constructed plant in the U.S. likely would not be complete before the next presidential election rolls around.

Second, Canada represents a significant market for GM, Ford and FCA products. How loyal would Canadian consumers continue to be if those companies reduced their Canadian manufacturing footprint?

Third, automakers throughout North America rely on Canadian-based suppliers which have unique expertise in several emerging automotive technologies, such as lightweight materials and vehicle software.

These realities are not lost on corporate executives, policymakers or politicians in the Great Lakes states. It is clearly to their advantage to lobby, educate and persuade the Trump administration of the folly of unwinding current levels of cross-border integration within the North American automotive industry — integration which has produced a highly efficient and productive industry.

In the near term, it is probable that automakers will be reticent to announce the construction of new plants outside of the U.S. However, for the reasons suggested above, we are more sanguine than some regarding how the Canadian automotive industry will fare during the Trump presidency.