Uncertainty, turbulence threaten North American auto industry in 2025, report warns

Uncertainty may well be the theme for the North American auto industry in 2025, Scotiabank Economics warns in a new report.

The financial institution says the continent's automotive sector is ending this year with plenty of it and there is more on the horizon.

Among the factors muddying the waters are U.S. President-elect Donald Trump's threat of a 25 percent tariff on all imports from Canada and Mexico, and the possibility he doesn't extend the U.S. Inflation Reduction Act (IRA); a review of the United States-Mexico-Canada Agreement (USMCA); a potential "drawn-out and retaliatory" trade war between the three nations; and "likely [U.S.] regulatory and incentive changes for fuel efficiency standards."

"There is enormous uncertainty as to whether these measures will be implemented, but even the issuance of threats alone is raising questions about impacts and the path forward, imposing new costs on sectors that have only recently seen high costs decline following a host of pandemic-related shocks," the Freeways and Free Trade: North American Automotive Markets Expect Shocks to Come reads in part.

The highly integrated North American auto industry accounts for 22 percent of trade under the USMCA, making it what Scotiabank calls "a valuable economic contributor and target in recent trade disputes."

The U.S. is the export destination for 91 percent of Canadian automotive and automotive parts exports. It's also the destination for 84 per cent of Mexican exports in the same categories, according to the U.S. Census Bureau.

"The economic benefits of this interconnection are evident for all three parties," the report reads.

But Scotiabank warns that integration is "a double-edged sword."

"Given the sector's scale and visibility, it is frequently at the forefront of trade discussions and tensions. Shifts in any one country or segment of the value chain tend to reverberate, for good or ill, through all three countries."

Scotiabank warns that Trump's tariffs would mean higher import taxes on US$55 billion of Canadian auto imports and $125 billion of Mexican auto imports. It would also mean retaliation by the two neighbors.

"Mexico and Canada are the export destinations for the majority of U.S. automotive parts, leaving U.S. players vulnerable to retaliatory tariffs."

A pullback in America's climate ambitions could also impact Canada's path forward, given the traditional alignment of regulations between the two countries.

Canada has historically aligned its fuel efficiency standards with the U.S. and has publicly said it will align with whichever fuel efficiency standards are most stringent (federal or state) in the U.S. moving forward.

Uncertainty over both could lead to revisions in current plans.

Additionally, shifts in American industrial policy could also have domestic effects in other countries. Canadian supports for electric-vehicle manufacturing have been positioned as a response to U.S. incentives contained in the IRA, putting into question the rationale for maintaining major spending into climate and clean energy manufacturing capacity moving forward.

But, the authors of the report, Senior Advisor, Climate and Socio-Economic Policy Research John McNally, and Economist John Fanjoy, say it's not all doom and gloom.

"Opportunities for greater competitiveness and investment are abundant in all three countries, but they may not be realized if trade wars are pursued," they write. "With novel investment opportunities in electric and battery supply chains that have emerged, it should be a period of "full steam ahead" for North American automotive."

Fewer tariffs and restrictions—and more cooperation—are needed, they say.

"Continued growth for North American producers is possible, and should remain the goal of all parties. Deeper, more integrated and forward-looking trade discussions can play a role in that, as well as in reducing supply chain risk, but only if leaders aiming to support the sector spend their time focused on growing the pie instead of obsessing over how to divide it. This will likely take concessions from all parties."