US–Canada tariffs threaten the car industry

Only a few days ago, the United States and Canada appeared to be centimetres - or inches - away from a trade agreement. They are now heading for another confrontation. US–Canada tariffs threaten to make the car industry one of the biggest casualties of this trade war.

The latest warning has come from Honda. The Japanese manufacturer says it may rethink plans for a new North American factory unless there is certainty surrounding the United States–Mexico–Canada Agreement (USMCA).

Honda is unlikely to be alone in reassessing its plans. After 30 years spent building a production network that treats Canada, the United States and Mexico almost as one industrial territory, manufacturers now face the prospect of tariffs dividing factories that rely on each other.

An agreement that was nearly complete

To understand how matters reached this point, it is necessary to go back just over a week. On 18 August, Donald Trump postponed the introduction of new tariffs on Canadian goods for three days in order to extend negotiations. He even said an agreement existed, with only the paperwork left to complete.

For the car industry, the proposed deal would have cut tariffs on cars and light commercial vehicles made in Canada from 25% to 15%. Reductions in steel and aluminium tariffs were also under discussion, while Ottawa was prepared to remove retaliatory measures and make further trade concessions. However, the arrangement collapsed on Friday, 21 August.

What caused the negotiations to break down?

The explanation varies depending on which side of the border is asked. Washington says Canada introduced fresh demands at the final stage, particularly a cut in tariffs on heavy lorries. Ottawa disputes this account: Mark Carney said the United States changed the terms of the agreement at the last minute, including the conditions applying to medium- and heavy-duty vehicles.

The disagreements extended beyond the automotive sector. There were also disputes over Canada’s freedom to conclude future trade agreements with other countries, as well as rules intended to safeguard Canadian culture and support French-language content.

That final issue now appears to have become less important. On 27 August, US trade representative Jamieson Greer said demands connected to the French language had never been a “red line”, which Ottawa viewed as a possible sign that relations could improve.

From 15% to the threat of 50%

With no deal in place, 50% tariffs on around $20 billion of Canadian goods took effect on 22 August. These charges do not directly cover vehicles already subject to sector-specific tariffs, but Ottawa responded with new tariffs on an equivalent value of US goods, due to take effect on 8 September.

Then came the threat that put the car industry on alert. Trump said that, from 1 January 2027, he intends to raise tariffs from 25% to 50% on cars, lorries and components made in Canada.

In other words, within days the industry moved from expecting a reduction to 15% to facing the prospect of a 50% tariff.

The United States could lose too

At first glance, Washington appears to hold all the advantages. The US economy is far larger, and more than 93% of cars built in Canada are destined for the United States. Canadian factories produced roughly 1.2 million vehicles in 2025.

However, the close integration of the two industries makes it difficult to damage one without affecting the other. According to Reuters-cited data, cars made in Canada accounted for only around 6% of US sales in 2025.

Yet this includes especially significant models, such as the Chevrolet Silverado and Ford F-Series Super Duty pick-ups. Toyota and Honda rely even more heavily on Canadian plants: together, they accounted for more than 75% of the cars produced in the country in 2025, many of which crossed the border to be sold in the United States.

There is also the issue of components. Many parts cross the border several times before a car is completed, meaning that a tariff on Canadian components also raises costs for factories located within the United States itself.

Consultancy Oxford Economics estimates that the current tariff escalation and Canada’s response could remove around 0.1 percentage points from US economic growth in 2027 and 0.3 percentage points from Canada’s. It also warns that Midwest states - Michigan, Ohio and Indiana - are particularly exposed because their automotive industries depend heavily on components made in Canada.

Honda and other investments are being put on hold

One of the less immediate effects of this trade-war escalation concerns the future of industry investment. Without knowing what trade rules will apply in the coming years, manufacturers are finding it increasingly difficult to decide where to commit billions in investment.

Honda has already issued a warning. The company is close to its North American production capacity limit and is considering building an eighth factory on the continent, expected to begin operating around 2030.

But Noriya Kaihara, Honda’s executive vice-president, explained that failing to reach an agreement to extend the USMCA could force the company to “change direction”. A decision on the new factory will have to be made within one to two years.

This is the outcome the industry fears most. As well as dealing with tariffs that raise costs and squeeze margins, manufacturers are no longer able to plan their own future because the rules are so volatile. The cost of uncertainty is high on several levels.