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Trade deal requires that Canada source 75% of vehicle parts domestically.

Canadian Dealers Wary of USMCA’s Effect on Prices

The chief economist for the Canadian Automobile Dealers Assn. tells Wards the increase in cost pressure should develop over the next two years, although it has yet to be witnessed by dealers.

OTTAWA – Canadian automobile dealers are looking out for a potential increase in the price of vehicles they sell on account of the U.S.-Mexico-Canada Agreement (USMCA), which took effect July 1.

This is likely to be fueled by the new deal insisting that Canadian (as well as American and Mexican) automakers may have to increase their USMCA-bloc sourcing to ensure 75% of a vehicle’s parts are made in a signatory country.

This is up from the previous 62.5% under the old North American Free Trade Agreement. USMCA also specifies that 40%-45% of auto content be made by workers earning at least $16 per hour.

Oumar Dicko, chief economist for the Canadian Automobile Dealers Assn., tells Wards the increase in cost pressure should develop over the next two years, although it has yet to be witnessed by dealers.

The most price-sensitive category in Canada is passenger cars, already losing market share to generally more expensive crossovers, SUVs and pickups.

With Canadian consumers often buying cars based primarily on price, they might hold off from buying a model if its price rose: “Passenger vehicles are already struggling, and this might make SUVs and pickup trucks take a bigger market share,” Dicko (below, left) predicts, with Canadian consumers less concerned about the cost of these larger models.

With light trucks already dominating 85% of the Canadian passenger market, Dicko says there is a risk that further depressed demand could push manufacturers to scale back vehicle production in Canada, stemming their local supply to dealers.

And with oil and gas prices set to stay low (and nothing within a Trump Admin.-negotiated USMCA deterring the trade in fossil fuels), operating costs are not pushing Canadian consumers away from SUVs and pickups, Dicko notes.

This pessimism has been backed up by research, with accounting network PwC suggesting the new USMCA rules will increase costs and hence prices to such an extent that reduced demand will depress Canadian sales and, in turn, production by about $1 billion (from $61.4 billion in pre-COVID-19 times).

PwC hopes smart practices and new technology by manufacturers – notably increased automation – will ease these price pressures over time, and so stimulate demand for dealers.

That said, Ross McKenzie, managing director at Ontario’s University of Waterloo Centre for Automotive Research (WatCAR) argues the anticipated shift of the Canadian market to electrified vehicles will cushion the impact of rising prices.

He predicts in the next two to three years, consumers may hold off from buying new combustion vehicles to take advantage of increasing availability of EVs and perhaps declining prices of these models, including their batteries: “Consumers will want to embrace the new powertrain – and they are anticipating paying a bit more for it,” he suggests. “The price sensitivity could be dissipated.”Oumar Dicko-Headshot.jpg

He adds that side letters within the USMCA that effectively prevent the U.S. from imposing Section 232 security-focused tariffs on Canadian auto exports will help dealers by providing additional stability, easing worries of potential overproduction of certain models if Washington reimposed such duties.

This would help dealers and their suppliers focus with confidence on matching supplies to the divergent regional markets within Canada, such as focusing pickups on Alberta and Saskatchewan, EVs in Quebec and British Columbia and smaller CUVs and SUVs in British Columbia and Ontario.

However, in the short term, McKenzie accepts that any USMCA-linked price increases do represent a “double hit, with the different origin rules being combined with the impact of a pandemic.”

For Canada, establishing battery plants may help its manufacturers comply with USMCA origin rules, aiding its supply of autos to U.S. dealers. A Center for Strategic and International Studies paper released in April 2019 stressed that “the battery pack can account for roughly 25% to 30% of a vehicle’s content value.”

Such local supplies could in theory help repair shops for EVs, although Dicko argues the benefit to aftermarket service providers within Canada of shorter supply chains for parts would be negligible.

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