One Canadian auto parts maker has put investments on hold. Another has been holding daily meetings of senior management for more than three months. A U.S. parts company has frozen capital spending and clamped down on purchases of raw materials.
These are just some of the actions rippling through the North American auto industry as executives contemplate a once-unthinkable scenario that is now looming closer – the imposition by Donald Trump’s administration of tariffs on vehicles and parts the United States imports from Canada and Mexico.
The threat of tariffs of 20 per cent or 25 per cent – it appears the actual levy will depend on which Trump tweet or off-hand comment applies at the moment of imposition – is part of his government’s negotiating position on a new North American free-trade agreement.
It’s a threat that is being taken seriously, since the tariffs could eliminate tens of thousands of the 120,000 Canadian jobs in vehicle and parts manufacturing – and could even cause a recession. Tariffs could be announced as soon as this fall before the U.S. midterm Congressional elections in November.
“Obviously this would not just impact the automotive industry,” said Linda Hasenfratz, chief executive officer of Linamar Corp., Canada’s second-largest parts company by revenue. “This would be a wide-scale market decline and recession … that could very well and likely very well would go beyond the borders of North America. Surely to goodness they don’t want to trigger such dire consequences.”
Ms. Hasenfratz said that her strategy is to try to convince the administration what a huge mistake imposing the tariffs would be. So she is lobbying members of Congress such as Mark Meadows, the Republican representative who holds district 11 in North Carolina, where Linamar has two plants.
However, she will not speak at a U.S. Commerce Department hearing on Thursday where groups representing automakers and parts companies will make presentations. Ontario Economic Development Minister Jim Wilson and Canada’s ambassador to the United States David MacNaughton will also be at the hearing.
“I think it’s important that the American administration hear from American voices,” she said. “I hope that more American companies are brave enough to speak up about what is happening.”
U.S. tariffs would affect about half the $35-billion worth of parts Canadian suppliers ship annually, said Flavio Volpe, president of the Automotive Parts Manufacturers Association of Canada. Added to that is the prospect that Canada could retaliate, as it did in the steel tariff battle, by slapping duties on U.S.-built vehicles and parts.
The key thing for Canadian parts makers to realize is that Mr. Trump’s threat to impose auto tariffs is real, said one senior Canadian parts industry executive whose company has been dealing with the steel tariffs that took effect June 1.
Executives at his company have been meeting daily to figure out how to cope with steel tariffs. They have been lobbying the federal government to make sure the steel that the company imports from offshore – and grades not available in Canada – receives an exemption from Canadian tariffs.
To the extent companies can, they will put expansions and capital spending on hold, said the executive, who spoke on condition of anonymity.
It would be possible to increase production of some parts in Canada and store them in the United States so they’re in the country before the tariffs are imposed. But there are only so many containers and only so much reusable packaging to go around, placing limits on how much stockpiling could take place.
Another Canadian parts maker was poised to pull the trigger on a new investment in Mexico in late 2016, but held off when Mr. Trump was elected. It is still delaying that investment and supplying automakers in Mexico from its existing operations there.
The uncertainty caused by the potential tariffs and the critical question of how the automotive rules in NAFTA will be changed have stifled investment in Canada and Mexico, said the chief executive officer of the company. The only safe haven for investment seems to be the United States, he said, but his company is putting off expanding in any of the three countries until the trade issues are settled.
The executives spoke on condition that they not be identified because some companies in the auto industry that have spoken publicly have been singled out for criticism by the U.S. administration.
“The tariff threats are having a huge impact on planning at both the vehicle and parts-assembly level, while the manufacturing contingencies range from extremely complex to nearly impossible, particularly as any solutions would take a considerable amount of time and money to implement,” Bill Rinna said in a report titled Planning for Chaos. Mr. Rinna is director of Americas vehicle forecasts for consulting firm LMC Automotive.
Mr. Rinna’s analysis shows a 25-per-cent tariff on imported vehicles wiping out thousands of jobs, cutting U.S. vehicle sales by two million units and “ultimately rearranging the manufacturing footprint in the region.” U.S. auto sales last year were 17.2 million.
Stockpiling Canadian and Mexican-made vehicles in the United States before the tariffs hit is one option for car companies, said one former CEO at a vehicle manufacturer.
The companies are likely to increase production in Canada and Mexico when they start assembling vehicles for the 2019 model year, the former executive said. He said he would try to put several months of inventory in place in the United States, but would have to negotiate with dealers and perhaps offer them extra financing.
“My guess is [companies] would inventory cars for 30 to 60 days, at which point they would be forced to shut down until the dispute was resolved, but by then we would have issued retaliatory tariffs and would be in a full scale trade war on our way to a major recession,” said Al Power, a former CEO of the Decoma division of Magna International Inc. and now chief operating officer of aerospace manufacturer Precision Castparts Corp.
Asia and Europe-based car companies will be able to ship more vehicles to Canada if the United States imposes tariffs on vehicles made on those continents because Canada is not in a tariff war with Europe, Japan or South Korea.