Good morning. Canada’s auto industry is in trouble, caught between the rock of U.S. tariffs and the hard place of cheap Chinese electric vehicles. We look at ways to rescue this vital sector, and why the federal government will need to think big. That’s in focus today along with a report about military modelling for a hypothetical (hypothetical!) U.S. invasion of Canada.
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In the news
Taxes: The CRA has reversed its long-held position that mutual fund trailing commissions are exempt from sales taxes
Tech: Toronto legal AI software startup Alexi accuses B.C. tech giant Clio of trying to drive it out of business
Trade: Nova Scotia responds to provinces accusing it of undermining Canada in the softwood lumber dispute with the United States
How Canada’s auto sector can survive its terrible, no-good, very bad year.Photo illustration by the Globe and Mail/iStockPhoto / Getty Images
In focus
Can history help our auto industry survive?
Hi, I’m Ethan Lou, opinion editor with the Report on Business. I relaunched the Prosperity’s Path series late last year. With a shifting world order, the challenges facing Canada’s economy have only gotten more visible, numerous and intense. This series brings solutions.
In the latest instalment, we talk about cars.
The argument is laid out by Andrei Sulzenko, a former head of the automotive directorate in the federal Industry Department and a principal negotiator of the 1988 Canada-U.S. free-trade agreement.
Sulzenko’s diagnosis begins with the basics: decades of frictionless trade between Canada, Mexico and the United States, which began with the 1965 Auto Pact, allowed for efficiency.
We had, for example, one auto plant making 150,000 cars for North America, using parts from across the continent, instead of one plant in each country making some fraction of the total, using parts sourced mainly domestically.
But the United States is now imposing steep duties on foreign vehicles and parts, effectively undoing that integration. This, Sulzenko argues, will cause Canada’s auto industry to become uncompetitive. That will harm Canada’s broader economic prospects. This is an industry that employs more than 125,000 people directly and 427,000 indirectly.
This is exacerbated by a threat from the East. Last week, Prime Minister Mark Carney struck the grand bargain with Beijing, lowering tariffs on electric vehicles in exchange for lower tariffs on Canadian canola.
Sulzenko argues that Canada’s best hope may lie in resurrecting an idea from ages past, from the 1965 Auto Pact.
Back then it was Canada that believed it needed the protectionism of tariffs. The Auto Pact lifted them. And to ensure that Canada did not lose investment and jobs, the companies had to maintain minimum domestic production levels roughly equivalent to vehicle sales. For example, a company that sold 100,000 cars in Canada needed to maintain 100,000 cars’ worth of production levels in the country – though not necessarily for those 100,000 cars specifically.
Sulzenko says we should now offer that same deal to the United States. President Donald Trump wants every car sold in the United States to be made in the United States. But does it have to be the very same cars? What if we can persuade him to accept a different sort of requirement, that for every car sold in the U.S. there must be one car’s worth of auto production in the U.S.?
That way, jobs are maintained, while auto companies are still able to spread production across North America and produce more efficiently, at scale, and grow, creating even more jobs. According to Sulzenko, it was the best of both worlds back in 1965, and it can be the best of both worlds again.
My colleague Steve Chase reported on the weekend that Canada does appear to be looking to that period for guidance: It would give preferential market access to foreign automakers that build vehicles in Canada. But the plan tries to confine automakers’ production to Canada, which is inefficient. It does not offer benefits to the United States to try to preserve the integrated auto sector.
Remember: Canada does not compete with the U.S. in cars. We make cars together. North American integration is what makes the sector strong. Sulzenko says that while we may not be able to go back to what once was, we can still have a second-best option.
Charted
Unsettled by current events?
The world is marinating in a sea of alarming news (see next item), which makes the markets appear to be unusually risky. Investors seeking a little stability might think about adopting the Canadian Stable Dividend portfolio. You can see in this chart above how far the high- and low-yield portfolios fell from their former highs during downturns.
Quoted
You know if you come after Canada, you are going to have the world coming after you, even more than Greenland. People do care about what happens to Canada, unlike Venezuela. You could actually see German ships and British planes in Canada to reinforce the country’s sovereignty.
— Retired Major-General David Fraser
Two senior government officials say the Canadian Armed Forces has modelled a hypothetical U.S. military invasion of Canada, for what is believed to be the first time in a century. (Just remember, a model is theoretical. It is not a plan, which is actionable.)
The Globe and Mail is not identifying the officials, who were not authorized to publicly discuss the military’s thinking on this matter. But retired Major-General David Fraser, who commanded Canadian troops in Afghanistan alongside the U.S., said it’s unthinkable that Canadian planners have had to draw up a U.S. invasion scenario.
Up next
More files we’re following
From the bank: Consumers continue to feel the weight of high prices and economic uncertainty, while business sentiment is also subdued.
From the critics: Ontario Premier Doug Ford says he only received a few hours’ notice about Ottawa’s deal with China on EVs.
Yesterday: China reported it had hit its full-year GDP growth target of 5 per cent, shrugging off the U.S. trade war.
Tomorrow: Prime Minister Mark Carney speaks at Davos during the World Economic Forum. Earnings will include: DR Horton Inc., Fifth Third Bancorp, Interactive Brokers Group Inc., Netflix Inc., 3M Co., United Airlines Holdings, Inc.
Morning update
Global shares extended losses as mounting unease over U.S. President Donald Trump’s tariff threat over Greenland continued into a second session.
Wall Street futures slid to one-month lows as traders returned from holiday break, while TSX futures pointed lower after another record high close yesterday.
Overseas, the pan-European STOXX 600 was down 1.27 per cent in morning trading. Britain’s FTSE 100 fell 1.08 per cent, Germany’s DAX dropped 1.54 per cent and France’s CAC 40 gave back 1.29 per cent.
In Asia, Japan’s Nikkei closed 1.11 per cent lower, while Hong Kong’s Hang Seng slid 0.29 per cent.
The Canadian dollar traded at 72.32 U.S. cents.