Chrysler Pacificas are loaded onto a transport truck at the Windsor Assembly Plant in Windsor, Ont., on March 6.Dax Melmer/The Globe and Mail
Christopher Worswick is chair of the economics department at Carleton University and a research fellow at the C.D. Howe Institute.
Among his many threats this week, U.S. President Donald Trump vowed to “permanently shut down” Canada’s automobile industry with tariffs on Canadian cars coming into the U.S.
Ottawa should threaten Mr. Trump with retaliatory tariffs on American automobiles and parts entering Canada. Canadian consumers have numerous high-quality alternatives from Asia, making it easy to avoid American-made vehicles. This prospect might give Mr. Trump pause.
But we need to think longer-term and bigger-picture. And for that we should look to our Australian friends.
Canada’s geographic situation might soon resemble Australia’s, if our largest trading partner can no longer be counted on. We’d be similarly isolated, thousands of kilometres away from the other major world economies, such as China and Europe. But Australia, despite its geographic remoteness that makes international trade difficult, has managed to thrive economically, boasting a GDP per capita that is at least as high as Canada’s.
Here’s how Australia accomplished that: Embracing free trade, Australia accepted that they were not competitive in automobile production. By 2017, their domestic industry for new vehicles had been phased out and they now import automobiles with either no tariffs or low ones. This allowed Australia to focus on their more competitive industries such as mining, finance, construction and health care.
Canada can learn from Australia’s experience. If the U.S. implements tariffs that make our auto sector no longer economically viable, Canada should let the auto sector wind down.
Even before this week’s threats, President Trump had twice threatened 25-per-cent tariffs on the Canadian auto sector only to pull back each time for 30-day pauses. It is difficult to see both nations maintaining an integrated automobile supply chain even if he once again pauses tariffs on the auto sector.
Moreover, the auto sector is hardly the powerhouse it once was, as another writer argues in these pages. The sector made only 1.38 million cars last year, fewer than the 1.86 million Canadians bought. The electric-vehicle battery plants Ottawa has championed are slated to receive $43.6-billion in incentives from the federal and provincial governments. And in the current climate, some of these plants might be cancelled or delayed.
If the Canadian auto sector is phased out, the disruption to the Canadian economy would be significant but manageable, given that the automobile industry represents around 0.89 per cent of the Canadian economy. The fraction of all employees in Canada in the auto sector is smaller at around 0.67 per cent. (That suggests the sector punches above its weight, though not significantly when put against, say, the energy sector, which represents 10.3 per cent of the economy with 1.5 per cent of the work force).
As with any industry, phasing out the auto sector will have a short-term effect on other sectors that rely on it. But in the medium term, these consequences would dissipate as the economy pivots toward new and growing industries, which would absorb many of the laid-off workers.
We should therefore keep that in mind when we consider any future government assistance for the auto sector. Before Canada commits even larger amounts of money, we must ask whether it is in the national interest – or if it keeps alive a less competitive industry at the expense of more competitive ones.
Industrial restructuring is an inherent feature of modern economies. While job losses will be painful for affected workers and their families, Canada’s Employment Insurance system provides support. Displaced workers could likely transition to industries such as construction, which we need because of the housing crisis, and where well-paid jobs exist and are difficult to fill.
Given the uncertainty of the Canada-U.S. relationship, the Canadian government should also consider major investments in the energy sector, where we have great comparative advantage, and domestic military production, which we need because of Mr. Trump’s rewriting of the world order. These expanding sectors would provide employment opportunities for displaced workers.
Canadians need to accept that the U.S. tariffs may make sectors such as automobile production no longer competitive and, as the Australians did, allow production to shift to other important and expanding industries.