Canadian auto sector hopeful a U.S. trade deal will come with carve-outs

A Lexus NX300 is shown in the Visitor Centre following an announcement at the Toyota Motor Manufacturing Canada´s plant in Cambridge Ont., Monday, April 29, 2019. Statistics Canada says manufacturing sales fell in February as the auto sector faced a shortage of microchips that forced some assembly plants to ramp down production or shut down. THE CANADIAN PRESS/ Geoff Robins

Automotive industry leaders are hoping to see exemptions for vehicles compliant with the current trade deal as Canada and the U.S. continue discussions ahead of the upcoming tariff deadline.

Friday marks the deadline in Canada’s trade talks with the U.S., as U.S. President Donald Trump has threatened to impose 35 per cent tariffs on a wide variety of Canadian goods if the two countries don’t reach an agreement before then.

“I think everybody has seen that the Americans, in spite of the fact that they are fighting us for no reason at all, have shown a tendency to show value for USMCA compliance,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association.

He said roughly 50 per cent of the parts that go into vehicles made in Canada come from U.S. factories.

“I think there’s some hope here that we can somehow work a deal that works for both sides, but includes a USMCA exemption on vehicles. If it does, then that would be a sign of relief, but it is also beneficial to Americans,” he said.

The North American automobile industry is deeply integrated and vehicles imported into the United States that comply with the Canada-U.S.-Mexico Agreement on trade are still being hit with 25 per cent duties on their non-American components.

Given the current trade agreement, which was negotiated by the first Trump administration, auto industry leaders are hoping to see carve-outs.

David Adams, president and CEO of Global Automakers of Canada, said he ideally wants to see no tariffs on the industry. He highlighted that Canada previously negotiated a trade agreement with the U.S., and companies have since made significant investments based on that agreement.

As the industry holds out hope for carve-outs, tariffs are taking their toll.

General Motors reported last week that its profit declined 35 per cent in its second quarter as it took a US$1.1 billion hit from tariffs. In May, GM lowered its profit expectations for the year, bracing for an estimated tariff impact as high as US$5 billion in 2025.

Meanwhile, Stellantis, the company behind brands including Jeep, Chrysler and Fiat, said in its latest earnings release that tariffs cost the company 300 million euros during the first half of the year.

By and large, Volpe said companies have absorbed the impact of tariffs, which has resulted in lower sales volumes and higher costs.

“You can’t run those losses indefinitely. You’re going to have to make strategic decisions on what excess capacity you are going to fold inside the U.S., or you’re going to concede those sales,” he said.

 Adams said that companies are “making do,” but there are longer-term concerns.

“The challenge becomes how do you sustain the manufacturing base in Canada when, effectively, the manufacturing base here has been oriented around having duty-free exports of vehicles into the United States for the last 40-50 years,” he said.

TD economist Marc Ercolao said in a note on Tuesday that Canada’s automotive exports have fallen to late-2022 levels after tariffs took hold in April.

“Canadian automakers have since slashed production as they deal with trade challenges,” the report said.

If the two countries are not able to reach a deal, Volpe said the current tariff regime would continue to hurt the industry.

“It’s a slow bleed on the volume of vehicles made in Canada because they’re, for the most part, destined for the U.S. So we would definitely be in emergency planning on how to make that vehicle manufacturing production more geared to Canadian consumers and Canadian consumption,” he said.

However, he noted that Canada does not own the car companies, and the process would require billions of dollars in restructuring efforts and would be time-consuming.

Despite the uncertainty surrounding the deal negotiations, Volpe said he thinks there’s a chance a trade deal will be reached this week.

“I know for a fact that the right people are talking at an increased intensity around the clock,” he said.

In contrast to previous trade discussions between Canada and the U.S., Volpe said these discussions have been “very quiet.”

He said sometimes, governments and negotiating teams use “strategic leaks,” when required. However, this process has taken place behind closed doors, which Volpe said is likely the better way to negotiate with Trump at this time.

On the Canadian side of the negotiations, Adams said that it appears Prime Minister Mark Carney is trying to temper expectations about the prospects of getting a deal, especially one without any tariffs.

“Maybe a good strategy because anything above that relatively low bar, in my view, could be viewed as success.”

Canada-U.S. trade discussions are occurring after Trump recently announced a number of trade frameworks, notably with Japan and the European Union.

Matt Blunt, president of the American Automotive Policy Council, posted on social media last week, saying “any deal that charges a lower tariff for Japanese imports with virtually no U.S. content than the tariff imposed on North American-built vehicles with high U.S. content is a bad deal for U.S. industry and U.S. auto workers.”

Volpe said he is hopeful there is an understanding that there is “no comparing trading partners” and the Canadian and U.S. sectors are deeply integrated.

“The U.S. manufacturer of an assembly of vehicles doesn’t rely on European factories or Japanese parts factories, or raw material supply. They don’t buy Japanese steel and aluminum or European steel and aluminum,” he said.

“But all of that is true for Canada. Canadian capabilities are a force multiplier for the Americans. Also, our market is the number one export market for American-made vehicles.”

— With files from Ian Bickis in Toronto and The Associated Press

This report by The Canadian Press was first published July 31, 2025.

Daniel Johnson, The Canadian Press