Proposed 20% auto tariffs on Canada to counter affect auto parts and equipment manufacturers in the US

Recently, President Trump has been repeatedly announcing his plan to punish Canada with auto tariffs. Trump said Canada was "ripping us off" and threatened a tariff on cars from Canada that "would be the ruination of the country."

Such attitude is expected to ignite the trade hostilities further which started this year with U.S. tariffs on imported aluminium and steel. However, the auto trade with Canada is not one sided when we consider where the car parts are coming from.

According to Washington Post, Canada exports more cars to the US than the cars shipped the other way. But the cars assembled in Canada are often made up of engines, bodies and parts imported from the United States. If we add up the trade in all automotive goods with Canada, the volume comes out to be equal.

Image Courtesy: Washington Post

Canada has been United States’ best major trade partner. It's the largest export market for U.S. goods and the largest exporter of aluminium and steel to the US. The U.S. exports 94 cents’ worth of goods to Canada for each dollar of imports. While it exports only 55 cents for each dollar of imports in case of metal.

While rich in natural resources which the country exports as raw material exports, Canada doesn’t necessarily make much of consumer goods and equipment and parts that are used to make many finished products and settle with imports.

Canada is the world’s third-largest producer of aluminium, thanks to its supplies of hydroelectric power and supplies 60% of total US aluminium import making it more exposed to the new U.S. 10 per cent tariff on aluminium.

Trump administration used “national security” as a basis for its steel and aluminium tariffs and offered the same justification for a 25 per cent tariff on auto imports from Canada. But it's the U.S. workers making machines and auto parts who could suffer the most in the blowback from an auto tariff on Canada. The US exported $79 billion worth of production equipment, including machines for farming, mining and manufacturing to Canada in 2017 with a trade surplus of $36 billion.

Border crisscrossing is very common in cars manufactured in the US and Canada and North American borders are almost transparent to the auto industry. An auto tariff would cost jobs, as well as add thousands to car prices, in both countries.

According to a study from Canadian think tank C.D. Howe Institute, a 25% auto tariff on Canada could lead to a loss of 60,000 jobs. But the study also found that the United States would lose twice as many jobs, more than 120,000. Direct auto sector jobs would get a boost while it will be offset by job losses in machinery, electronic and transport equipment sector.

To impose the 25% auto tariff on Canada, the U.S. Commerce Department must show the auto and parts imports to be threatening national security. Analysts consider it to be a negotiating tactic towards Canada before getting the NAFTA concessions end of this month. Auto and parts manufacturers in the US opposed the tariff.

“A car put together with American-made parts is not a national security threat,” Toyota spokesman Ed Lewis said.