Toyota and Honda face US tariff risk on Canadian cars

Toyota and Honda face the greatest exposure among major global carmakers to US President Donald Trump’s planned 50% tariff on Canadian vehicle imports, which analysts warn could force the Japanese groups to shut some assembly lines in Canada.

The tariff, scheduled to take effect on January 1, 2027, would double the present levy of 25%. A trade agreement could still avert the increase, but continued uncertainty is making production and investment planning increasingly difficult for manufacturers and suppliers.

Toyota and Honda together account for more than three-quarters of all cars produced in Canada. Their dependence on Canadian factories is also unusually high relative to their US sales.

Vehicles assembled in Canada represented nearly a quarter of Honda’s US sales last year and 17% of Toyota’s, according to Barclays analysts. Those were the highest proportions among major carmakers, placing the two groups at the centre of the potential disruption.

Both companies declined to comment.

Canadian plants supply critical US models

The United States is the largest market for Toyota and Honda and one where Chinese competitors such as BYD are effectively absent. That makes the market particularly valuable at a time when Japanese carmakers are losing ground to lower-cost Chinese electric vehicles in Southeast Asia, Europe and Latin America.

Toyota exports the RAV4 from Canada to the United States, while Honda ships the CR-V. Both models rank among the most popular sport utility vehicles in the US market.

Honda’s Canadian manufacturing operations in Alliston, Ontario, produce petrol and hybrid versions of the CR-V, as well as Civic models for Canada and other North American markets.

Canada’s automotive sector produces about 1.2 million cars a year. Official Canadian figures show that the industry directly employs more than 125,000 people and supports approximately 427,000 indirect jobs through areas including dealerships and aftermarket services.

Julie Boote, an automotive analyst at Pelham Smithers Associates in London, warned that tariffs of this scale could severely damage Canada’s car industry. She said Toyota and Honda would probably have to halt some production lines if the higher duties were implemented.

Tariffs reshape North American investment

Carmakers and component suppliers have spent decades constructing integrated production networks across the United States, Canada and Mexico, drawing on regional trade agreements and lower labour costs in Mexico.

Those economics are now being disrupted by higher tariffs and uncertainty over the future of North American trade rules.

US tariffs cost Toyota about 1.4 trillion yen, or US$8.8 billion, during its last financial year. The company has responded by increasing investment in US manufacturing and previously announced plans to spend as much as US$10 billion over five years on expanding its American operations.

That programme includes a US$3.6 billion expansion of Toyota’s San Antonio factory in Texas. The project will add a second assembly line, create more than 2,000 jobs and increase annual production capacity by about 150,000 vehicles.

Toyota also plans to transfer production of the Tacoma pick-up truck from its Baja California plant in Mexico to San Antonio over approximately four years. The new line is scheduled to begin operating in 2030.

Honda is under additional pressure because its carmaking business is losing money. A senior executive recently said the company might not proceed with an eighth North American assembly plant unless talks over the United States-Mexico-Canada Agreement were extended.

The United States declined on July 1 to renew the USMCA in its current form. The Office of the United States Trade Representative said the agreement remained in force while Washington continued negotiations with Canada and Mexico over proposed changes.

South Korea’s Hyundai has also said uncertainty surrounding the trade agreement was delaying its investment decisions, suggesting that the effects extend beyond Japanese manufacturers.

Rerouting Canadian output offers no easy solution

Should the 50% tariff take effect, Toyota and Honda could try to divert Canadian-built vehicles to other countries while replacing US supply with production from factories elsewhere.

Analysts said that would be difficult. Vehicles intended for the United States are often configured to meet specific American regulations and consumer preferences, while alternative factories may already be operating close to capacity.

Seiji Sugiura, a senior analyst at Tokai Tokyo Intelligence Laboratory, said such a reorganisation would represent a “major shift from the past”.

Moving production would also require changes across supplier networks, logistics systems and model allocations that were developed around tariff-free or preferential trade across North America.

Two Japanese automotive suppliers said they were unable to make firm plans while it remained uncertain whether Washington and Ottawa would reach an agreement before January.

“We’re trying not to overreact,” one supplier executive said.

Source: Reuters