Canada weighs 25% auto tariff deal to shield USMCA exports

Ottawa is weighing a proposal to accept reduced US auto tariffs in exchange for exempting the American content in Canadian-built vehicles, a concession that would keep the 25 percent levy off roughly half the value of each car shipped south.

"Canada isn't just a neighbour or a trading partner. For many states, it's their most important customer," said Beth Burke, chief executive officer of the Canadian American Business Council, which commissioned an Oxford Economics report on the two countries' integrated auto supply chains.

Under the plan, discussed by Canadian and American negotiators in Washington, the Section 232 tariff on USMCA-compliant vehicles would fall from 25 percent while the value of US content in Canadian-made cars stays excluded from the levy. A Canadian industry source said the sector could survive a tariff of 10 to 15 percent if US content were not subject to it, given that about half of a Canadian-built vehicle originates in the United States.

The talks carry a hard deadline: President Donald Trump has threatened 50 percent tariffs on a further US$20 billion of Canadian exports on Aug. 19 under Section 338 of the Smoot-Hawley Tariff Act of 1930. With components crossing the border as many as eight times before a vehicle is finished, the auto sector is the most politically sensitive thread in a negotiation that also covers steel, aluminum and forestry products.

The proposal would also maintain the exemption for American content, meaning a car with 50 percent US content would face the tariff on only half its value. Canadian officials have discussed an even deeper cut — applying the levy only to content originating outside North America, which would shrink the tariff to a very small amount, according to a Canadian industry source.

The US is demanding that Canada drop all retaliatory tariffs on the US auto sector as part of any deal. In separate talks with Mexico, Washington has pushed for a requirement that all vehicles exported to the US contain at least 50 percent American content.

The auto tariff is Washington's most powerful bargaining chip, and negotiators have held back on it while the contours of a steel and aluminum agreement have grown clearer, the Canadian industry source said. Still, the source expected autos to be part of a final pact, even if an agreement comes at the last minute.

One Canadian official was skeptical that such complicated issues could be resolved by Aug. 19, saying the more likely outcome is that Trump holds off on the next round of tariffs while talks continue. No deal on Section 232 tariffs would be possible without auto levies being part of it, the official said.

The last time Washington escalated tariffs on Canadian goods, bilateral trade in the affected sectors contracted sharply. The current 25 percent auto tariff, imposed last year under Section 232 of the Trade Expansion Act of 1962, has already weighed on cross-border vehicle shipments, with Canada-US auto trade falling by US$6.7 billion as pressure built.

Canada's chief negotiator, Janice Charette, has told US Trade Representative Jamieson Greer that if no deal is reached by Aug. 19 and the new tariffs take effect, Canada would retaliate and negotiations would halt. LeBlanc has met Greer three times in as many weeks, most recently for about an hour on Tuesday.

The US industry source said the Americans understand Canada's political pressures and are optimistic about a deal, but worry about the Carney government's ability to sell it to the Canadian public. The US also wants Canadian premiers to end their bans on American alcohol sales, a concession that would require the agreement of Ontario Premier Doug Ford, whose province hosts most of the country's auto industry.

This article is for informational purposes only and does not constitute investment advice.