Could 1965 Auto Pact point to 2025 trade war solution for Canada?

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With U.S. President Donald Trump fond of citing the era of high tariffs in the 1890s as the basis for his current disruptive trade policy, a retired senior auto executive argues Canada should do a similar reach into the past.

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The historic 1965 Auto Pact between Canada and the U.S. should serve as the foundation for a new trading agreement for the auto industry, says former Toyota Canada vice-president Stephen Beatty.

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The CUSMA free trade agreement in its current form isn’t working, particularly in anchoring assembly production in Canada, Beatty says in a paper released Thursday by the C.D. Howe Institute.

“We must go into these negotiations with an aspirational goal,” said Beatty, who retired last year after nearly 27 years with the world’s largest automaker.

“We have to avoid the Canadian position of just keeping the status quo,” he told the Star. “We’ve seen the plant closures of the past quarter century.

“We keep cranking up the regional volume content and that’s not addressing the issue of getting vehicles assembled in Canada, and the U.S. for that matter. Lose those assembly plants and the parts supply chain goes with them.”

Beatty said GM’s Oshawa complex alone once manufactured 900,000 vehicles annually, while the total produced last year in Canada by the Detroit 3 and Toyota and Honda combined was only 1.3 million units. He noted 70 per cent of those vehicles were made by the two Japanese companies.

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“Canada has not been getting its share of the pie,” said Beatty, who now serves as an independent consultant for the auto industry.

“Because of their move to focus on building only SUVs and pickup trucks, there’s only one good market for the Americans outside the U.S. — and that’s Canada.

“They don’t want to lose that. We have some cards to play here in negotiations.”

Beatty said history provides the basis for a trade arrangement (auto pact) that worked for Canada and the U.S. and that could be folded into any new version of CUSMA.

In simplified form, the auto pact dictated if a company wanted to sell in the Canadian market, it had to manufacture vehicles in that market. Beatty proposes the number of vehicles a company could sell tariff-free in a country would be determined by the number built in that country.

We have to give the Americans something they view as a win

As was the case under the auto pact, the plan would also require a higher tariff on all vehicles than the World Trade Organization’s current most-favoured-nation tariff of 2.5 per cent.

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“The tariff has to be high enough that the cost ensures adherence to CUSMA or any new agreement,” said Beatty, noting 10 per cent of Mexican vehicles and 20 per cent of parts currently shipped into the U.S. and Canada do so under the lower WTO tariff.

“Companies would get tariff remission on the quota of tariff-free vehicles they’d be allowed.”

Beatty argues such a plan would be much cheaper and more efficient than the complicated system in place now. He points to the Trump administration’s use of a version of the tariff remission concept in its new auto parts tariff strategy.

“That makes me optimistic because they are already using tariff remission,” Beatty said. “We know we have to give the Americans something they view as a win.

“This does because it would maintain their status as the dominant country, but it also anchors production. It balances the equation of producing and selling, which is what they want.”

Beatty added the trade certainty would also restore confidence and stability for companies to make investments in the regions that most make sense from an economic, quality and logistics perspective.

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He suggested Canada’s strength is in quality production, being cheaper in certain areas for companies and, most importantly, having world-class artificial intelligence and technology development research capabilities.

Canada’s push into engines and powertrains was a major factor in driving the Americans to the bargaining table to create the original auto pact, he said, and in the modern era AI, technology, batteries and the EV supply chain are important bargaining chips.

“Let’s do what we do well and at scale,” Beatty said. “The increasing electrification and software in cars give Canada tremendous potential opportunities.”

By creating a new auto pact that surrounds North America with aligned policies on tariffs, he added, regulatory practices on strategic issues like privacy and cybersecurity will provide incentives for foreign automakers to continue to increase their North American presence.

“We’re seeing an inflow of investment to North America already,” Beatty said. “Canada will get a piece of that pie.”

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Beatty said it’s inevitable that the Chinese will arrive in the North American market and any new form of CUSMA must account for that.

He suggests a combination of lower tariffs, protections against modern slavery and dumping, and regulations covering pricing, government subsidies, privacy and cybersecurity.

“It would cost a lot to get into the Canadian market under those circumstance,” Beatty said.

“The challenge is not to erect a wall to keep them out. Instead, over time, allow them to compete the same way as everyone else does.”

Beatty pointed out that the largest importer of vehicles built in China is actually General Motors.

“The Chinese-built vehicles entering North America are predominantly American companies importing them from China,” Beatty said.

“Chevrolet was the biggest importer of Chinese imports to the U.S. and Tesla was the biggest importer to Canada.”

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