OTTAWA—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.
This is according to The Conference Board of Canada’s latest outlook for the motor vehicle manufacturing industry.
The report says Canadian automakers have benefited from a surge in demand for new vehicles among American consumers, which has propelled new vehicle sales in the U.S. to record levels for the last two years, and that this demand is expected to continue—with U.S. light vehicle sales averaging above 17 million units on an annual basis over the next five years.
The Conference Board asserts that this demand has motivated Canadian automakers to commit more than $2 billion in machinery and equipment upgrades.
However, trade uncertainty is one of the greatest risks for the Canadian auto manufacturing industry.
The report says 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 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.
The Conference Board says changes to these rules 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.
The report warns that if too restrictive, changes in the rules of origin embedded in NAFTA could reduce the attractiveness of the region for auto-related investment.
“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.
The Conference Board also warns that the current success Canadian automakers are enjoying may be slightly offset by rising industry costs, a strengthening Canadian dollar and a temporary pullback in production volumes by General Motors.
Industry pre-tax profits are expected to dip to $1.6 billion in 2017 before rebounding in 2018.
Costs are expected to rise by 2.9 per cent annually over the next five years as well, driven by higher electricity and raw material prices, and labour costs.
There is good news on the employment front, as jobs in the industry are forecast to rise from 48,900 in 2016 to over 52,000 by 2021.