The Canadian automotive industry managed to weather the storm of elevated trade tensions with the nation’s largest trading partner relatively well in 2025, but headwinds are growing as tariffs take greater effect, according to a new report by TD Economist Andrew Foran.
“Sales notched a 6-year high last year, but are expected to retreat this year as economic growth remains subdued under the influence of tariffs. Production is also expected to decline in 2026, with shift reductions and idled plants weighing on output,” he said.
“New agreements with existing trading partners to shore up Canadian automotive production could yield dividends, but uncertainty related to the future of CUSMA may weigh on near-term developments. Nevertheless, the need to diversify automotive trade away from its current outsized U.S. concentration will likely be necessary to ensure the long-run viability of the industry amid growing U.S. protectionism.”
Looking at the annual sales total for 2025, you might assume that it was a normal year of stable growth, with vehicle sales of roughly 2 million units – the highest level since 2019, said the report.
“Breaking it down to the monthly frequency, the magnitude of volatility last year caused by trade policies is evident. Front-loading ahead of tariffs lasted through July, averaging roughly 2 million units in seasonally adjusted annualized rate terms. In the latter half of the year, this rate fell to roughly 1.9 million as demand cooled. Still, demand remained healthier than expected given the headwinds facing the industry and the broader economy,” said TD.
“Several reasons likely led to this robustness in sales. First, domestic consumption is affected by the tariffs imposed by the government of that country. In Canada’s case, this applies to the 25% tariffs imposed by the Canadian government on imports of motor vehicles coming from the U.S. If the vehicle is compliant with CUSMA, then the tariffs only apply to the content of the vehicle not sourced from Canada or Mexico. Given that roughly 50% of the vehicles purchased in Canada come from the U.S., this would have had a notable impact on domestic sales if the government did not provide additional exemptions for the automakers which produce in Canada. This includes General Motors, Ford, Stellantis, Toyota, and Honda, which have a cumulative market share of roughly 60%. These exemptions lightened the impact of the tariffs on Canadian consumption.”
The report said there was a modest reallocation of Canadian sourcing of motor vehicles, with Mexico seeing a modest increase in its share of Canadian imports (2-3 percentage-points), nearly equal in magnitude to the decrease in the share accounted for by the U.S.
“This reallocation served the purpose of shifting trade away from tariff-exposed regions. To a lesser extent, we have also seen higher imports from outside of the North American region, including Japan, South Korea, and Germany. As of November 2025, the share of Canadian motor vehicles sourced from within the CUSMA region was at a record low of roughly 65%,” it explained.
“This trend began a couple years ago in 2022, as imports from overseas – mostly Japan – increased. This was likely driven by the combination of the CPTPP reduction in auto tariffs, which reached 0% in 2022, and the higher domestic content requirements of CUSMA relative to NAFTA. Now in 2025, we have seen the CUSMA share of vehicle sales dip again as tariffs raise intraregional costs.
“Looking to 2026, a number of factors are likely to pose challenges for the Canadian sales outlook. First is the unlikelihood for further easing in financial conditions, as the Bank of Canada remains in neutral. With monthly payments continuing to hover around $1,000, affordability concerns are likely to remain a partial constraint on sales activity. The industry will also be contending with slowing population growth as the federal government seeks to course correct above average growth in recent years, which will reduce the size of the consumer market. “Cumulatively we expect these factors, in addition to lingering trade uncertainty and its impact on the economy, to lead to a 4.3% decline in sales this year.”
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