Policy Matters: What Does the U.S. Have to Do with Canada’s Manufacturing Sector?

Canada’s manufacturing sector is a foundational piece of our economy. It employs 1.7 million Canadians, represents more than 10% of our total GDP, and makes up over 68% of all physical goods sold to other countries. It’s also an integral component of the complex Canada-U.S. trade relationship, with exports equaling almost $30 billion per month.

Risks and Uncertainty for Canadian Manufacturing

The manufacturing sector has faced domestic challenges since the early 2000s — high tax and regulatory burdens, labour and skill shortages, sluggish productivity and low investment — but it’s also facing external threats. 

Because of the manufacturing sector’s role in our economic relationship with the U.S. — most of our imports and exports with the U.S. are intermediate inputs that are used by producers to make another product — the sector is often affected by changes in U.S. policies, regulations and tariffs.

We can’t know the exact priorities for the Trump Presidency, but we do know that if steps are not taken to strengthen Canada’s manufacturing sector, the next four years could have potentially serious implications across multiple industries.

Growing Protectionist Sentiment in the U.S.

Lately, there’s been growing bipartisan consensus in the U.S. on “Buy America” protectionist policies that are at odds with the goal of North American economic cooperation. In the lead up to the election, President Trump regularly declared his love for tariffs, saying he’d enact tariffs on U.S. imports of anywhere from 10% all the way up to 50%.

We can’t know which number he’ll land on, but even if it’s at the lower end of the spectrum, the economic impacts will be significant. In the Business Data Lab’s new report, Partners in Prosperity: Exploring the Significance of Canada-U.S. Trade, author Trevor Tombe projects that a 10% tariff would result in a 22% decline in Canadian energy and manufacturing exports and a nearly 1% reduction in labour productivity!

The 2026 CUSMA Review

The goal of the Canada-United States-Mexico Agreement (CUSMA) is North American economic cooperation. Since the agreement came into effect in 2020, there has been a 47% increase in North American trade, as well as an additional 4 million new jobs supported by this trade.

On July 1, 2026, the three participating countries will decide whether to extend CUSMA for a new 16-year term. If they choose not to, there will be a review every year until the Agreement terminates in 2036.

And though CUSMA was introduced and passed during President Trump’s first administration, that doesn’t mean the Agreement is safe. During the recent election campaign, President Trump stated that he intends to open up the trade deal with Canada and Mexico. 

As a trading nation, Canada’s economic success is linked to our relationships with the United States and Mexico, our first and third largest trade partners respectively. Even the promise of changes to CUSMA could result in investment uncertainty for manufacturers, driving Canadian manufacturing companies to establish operations in other countries with fewer import barriers and trade restrictions. The preservation of CUSMA will be essential if we want to uphold the free flow of goods between Canada and the U.S. and maintain the integrated nature of North America’s manufacturing operations and supply chains.

Read “Policy Matters: Why It’s Time to Care about CUSMA” for more about the Agreement and what it means to Canada.

Read our submission to Global Affairs Canada regarding the 2024 CUSMA Joint Review.

The Automotive Industry

Canada’s automotive industry is one of our largest manufacturing sectors, directly employing almost 120,000 people and contributing $12.5 billion in GDP. Motor vehicles and parts are the second most significant U.S. import for Canada.

The Inflation Reduction Act, enacted in 2022 by the Biden administration, has had repercussions on Canada’s automotive industry. In the Standing Committee on International Trade’s report, The United States’ Inflation Reduction Act of 2022: Trade Impact on Certain Canadian Sectors, the Committee compiled the testimonies of witnesses, with some expressing concern that the IRA is an act of trade protectionism and that it “seeks to ‘forc[e] the onshoring’ of certain automotive production capabilities to the United States from abroad at the expense of Canada and other countries.” 

It may have been a Biden-era Act, but Trump doesn’t seem to disagree about onshoring the U.S. automotive manufacturing industry. During his campaign, he announced a 100% tariff on cars made in Mexico to encourage U.S. based manufacturing in the auto industry. He’s also promised to remove electric vehicle mandates and shift production back to the U.S., focusing on bringing jobs to states like Pennsylvania and Georgia.

Trade in motor vehicles and parts is largely balanced between the U.S. and Canada. If a Trump Administration were to introduce more protectionist automotive industry policies, this balance could shift in the U.S.’s favour, reducing Canada’s market access and leading to increased production costs and complications. In turn, this would put pressure on our EV transition and reduce opportunities for Canadian companies to benefit from collaborative R&D initiatives with U.S. companies.

Manufacturing Sovereignty

With uncertainty and risks ahead for Canadian manufacturing, the best thing Canada can do is strengthen our manufacturing sector so that its fate and fortune aren’t determined by the choices of the U.S.’s current and future administrations.

Recommendations

• Diversify our export market destinations to the U.S. by exploring opportunities in Europe, the Indo-Pacific and other regions through targeted trade missions and agreements.
• Protect crucial supply chains by giving government the tools to compel binding arbitration.
• Introduce targeted investment tax credits to spur innovation and productivity in the manufacturing sector.
• Modernize Canada’s regulatory framework to increase investment, economic growth and jobs by fixing outdated and complex regulations that block innovation, increase costs and hinder our competitiveness.
• Mandate an economic lens for regulators to support economic growth and competitiveness.
• Expedite credential recognition to let qualified workers fully use their skills wherever they are needed across the country.
• Bolster regulatory harmonization between Canada and the U.S.

A coordinated industrial policy that includes the above recommendations would put Canadian manufacturers in the best possible position to innovate, grow and scale.