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Terence Corcoran: Any Canadian auto trade deal will be flawed

The only right choice for Canadians is not on the table

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It looks like another hardcore economic policy debate is shaping up around the future of Canada’s auto industry. Both the Conservatives and Liberals have laid out broad strategies to support and return Canadian auto production to at least previous levels. The objective looks like a fantasy in the context of Donald Trump’s own auto trade fantasy. Speaking at a Ford plant in Detroit, Trump said, “We don’t need cars made in Canada … we want to make them here.”

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The U.S. president is just one of multiple obstacles facing the Canadian auto industry as it heads into renegotiation of the Canada-United States-Mexico Agreement (CUSMA) on trade. Early talks are underway, although the U.S. trade representative said Canada is not keeping up with Mexico at the negotiation table.

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That Canada has been lagging in communicating with Washington had been rumoured for some time, perhaps a reflection that the Liberals have yet to nail down a clear strategy. Last month  Prime Minister Mark Carney laid out a somewhat contradictory path forward, signalling that Canada aimed to become less dependent on the United States — while at the same time saying he would prefer a single free North American auto market.

To help reduce dependence on the U.S. Carney will allow China to import 49,000 electric vehicles into Canada at a low 6.1 per cent tariff — a move that is guaranteed to complicate CUSMA auto trade negotiations. Adding to the uncertainty, Stella Li, executive vice-president with Chinese EV maker BYD, said her company is looking at buying up an existing Canadian carmaker to produce EVs in Canada. How would that fly with Trump? Another Chinese EV maker, Geely, is also looking at Canada.

Conservative Leader Pierre Poilievre on Sunday produced an outline of his party’s plan for an auto trade pact under CUSMA that would involve maintaining and even expanding the North American auto market via “secure tariff-free access to the U.S. market.” He called Carney’s flirtation with China a “dangerous illusion.”

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Unifor, which represents more than 40,000 Canadian autoworkers, declared Poilievre’s plan unacceptable and flawed. In a polite and collaborative tone, Unifor President Lana Payne said the union shares the objective laid out by Poilievre, which is that if companies want to sell autos in Canada, they must build autos in Canada. She raised several technical issues, but also made it clear that Carney’s plan is equally flawed.

Any Canadian auto deal is bound to be flawed. Major technical, economic and corporate complications are inevitable, even more so today. An international automobile production revolution is taking place in China and many other countries. In a global context, the Canadian auto industry is an insignificant player narrowly focused on auto industry protectionism.

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The overall fragile position of Canada’s industry was outlined in a recent BMO Economics report issued in response to the Liberal government’s latest auto trade plan. “Canada’s new auto strategy represents a meaningful recalibration,” said BMO, “but the forces reshaping the sector may be larger than domestic policy can handle.” The BMO report hints at a range of options, including less dependence on building and maintaining traditional assembly plants, with more focus on “building strength in adjacent segments” such as battery materials, advanced components, clean-tech manufacturing, and taking advantage of Canada’s low-carbon electricity.

The obvious alternative to protectionism — although not explicitly stated by BMO economists — is that Canada should consider abandoning auto manufacturing as a strategic trade objective and prepare to replace it with a more economically sound strategy that includes a declaration of free trade in automobiles.

Before national industrial strategists start screaming and hit the ceiling, consider the scale of the global auto industry and its location.

In a country with a population of 41.5 million on a planet that is home to more than eight billion people, Canada is a non-player in the global market. Canadians purchased about 1.9 million new vehicles last year compared with the 16 million bought by Americans and an annual global market of about 90 million.

It is also clear that the future of auto production lies in Asia, from China to India and elsewhere, fuelled by competitive labour and production capacity — and growing local markets. India produced 4.8 million vehicles last year, China 24 million, with national and export markets set expand.

In China, more than 350 million people (25 per cent of the population) own cars, compared with 26 million (67 per cent) in Canada. Car ownership in China is set to expand. The same is true for India, where today fewer than four per cent own cars.

Canada needs a major rethink of its auto industry with a new focus on free-trade principles, including David Ricardo’s 1817 theory of comparative advantage: International trade benefits all countries if they specialize in producing goods with the lowest opportunity costs in a free trade environment. As BMO suggests, Canada should be looking to focus on goods and services it can efficiently produce, including minerals.

That may mean giving up on auto making and allowing consumers access to lower-priced global production. The needle trade disappeared in Canada decades ago. Has anybody noticed a deterioration in access to cheap, high-quality clothing?

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