NAFTA renegotiations could cost Canadian automakers

OTTAWA, July 27, 2017 /CNW/ - Record new vehicle sales in the U.S. are supporting solid performance among Canadian automakers, but Canadian auto exports could be at risk under NAFTA renegotiations, according to The Conference Board of Canada's latest outlook for the industry.

"The current uncertainty in North American trade relations poses a risk to automakers' investment and production on Canadian soil. Potential changes in rules of origin for autos and parts could tap the breaks on Canadian auto exports and production," said Michael Burt, Director, Industrial Economic Trends, The Conference Board of Canada. "Our forecast assumes the existing trade regulations are maintained."

Highlights

• Potential changes in rules of origin for autos and parts could impact Canadian auto exports and production.
• Demand for Canadian vehicles is forecast to remain strong, with U.S. light vehicle sales averaging above 17 million units annually over the next five years.
• Automakers have recently committed more than $2 billion to upgrade their existing facilities in Canada.

Canadian automakers have benefited from a surge in demand for new vehicles among American consumers, which has propelled new vehicle sales south of the border to record levels for the last two years. Looking ahead, demand for Canadian vehicles is forecast to remain strong, with U.S. light vehicle sales averaging above 17 million units on an annual basis over the next five years. The strong demand has given Canadian automakers the incentive and the means to commit more than $2 billion in upgrades to machinery and equipment. When combined with the broader product mandates secured at the five major Canadian assemblers, these investments represent a commitment to an ongoing Canadian automotive industry.

Trade uncertainty is one of the greatest risks for Canada's motor vehicle manufacturing sector. Preliminary indications are that the U.S. will seek to adjust the current rules of origin for autos and parts in the upcoming North American Free Trade Agreement (NAFTA) renegotiations. Currently, light autos, engines, and transmissions must have 62.5 per cent North American content before they can be imported duty-free into Canada. These changes are likely to take one of two forms?an increase in the current levels of required North American content, or the imposition of U.S.-specific content requirements. If too restrictive, changes in the rules of origin embedded in NAFTA could reduce the attractiveness of the region for auto-related investment.

Rising industry costs, a strengthening Canadian dollar, and a temporary pullback in production volumes by GM will offset some of the tailwinds Canadian automakers are currently enjoying. Costs are expected to rise by 2.9 per cent annually over the next five years, driven by higher electricity and raw material prices, and labour costs. Industry employment is forecast to rise from 48,900 in 2016 to over 52,000 by 2021.

Industry pre-tax profits are expected to dip to $1.6 billion in 2017 before rebounding in 2018 as product mandates stabilize and assembly plants return to full operations.

The report, Canada's Motor Vehicle Manufacturing Industry: Industrial Outlook, is available from our e-Library.

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SOURCE Conference Board of Canada