More Tariff Threats Aimed at Making Canada 51st State?More Tariff Threats Aimed at Making Canada 51st State?

President Donald Trump is threatening tariffs on steel and aluminum produced outside the U.S., giving automakers and suppliers a fresh tariff headache.

The new tariff threats would be duplicative with tariffs already threatened against Canada and Mexico, the two leading exporters of steel and aluminum to the U.S. The tariffs are meant to retaliate against Mexico, Canada and China for threatening retaliatory tariffs to Trump’s threatened 25% tariffs on all goods coming into the U.S. from Mexico and Canada and 10% on goods coming from China. Trump is delaying his decision on previously announced tariffs until the end of the month.

Canada is the largest foreign supplier of aluminum to the U.S., providing about 3.2 million tons of aluminum, or 40% of U.S. imports, according to the Unites States Geological Survey. Other significant exporters to the U.S. are China, Mexico, the United Arab Emirates, and South Korea.

Trump’s singling out of Canada may also be his way of pressuring the sovereign country to the north to join the U.S. as a 51^st state. Canadian Prime Minister Justin Trudeau has told Canadian officials that Trump’s intention to annex Canada is a “real thing.”

While the U.S. produces roughly 85% of domestic demand for steel, according to USGS, the auto industry consumes a good deal of specialized grades of steel not produced in the U.S. in sufficient quantities and which comes primarily from Canada and Mexico.

In 2023, U.S. steel production reached 80 million metric tons, according to the USGS.  U.S. steel consumption in 2023 was 98 million metric tons. The auto industry that year accounted for about 25% of total U.S. steel consumption, or around 24 million-25 million metric tons, according to a Congressional Research Service report.

Total domestic production of aluminum in 2023 slightly exceeded consumption, meaning in pure volume terms, the U.S. could supply its own aluminum needs. However, specific aluminum alloys used in automotive manufacturing, such as high-strength aluminum for body panels and lightweight components, are often imported from Canada, China and the United Arab Emirates, according to the U.S. Dept. of Commerce.

Recent tariffs ordered and then temporarily suspended by Trump on all imports from Canada and Mexico have drawn significant criticism from auto industry leaders, economists and trade experts. They argue that the tariffs will harm U.S. manufacturing, slow economic growth and lead to higher consumer prices.

A 25% tariff on Canada and Mexico “threatens to upend the very supply chains that have made U.S. manufacturing more competitive globally,” National Association of Manufacturers President and CEO Jay Timmons says. “The ripple effects will be severe, particularly for small and medium-sized manufacturers that lack the flexibility and capital to rapidly find alternative suppliers or absorb skyrocketing energy costs. These businesses – employing millions of American workers – will face significant disruptions.”

The U.S. automotive industry is integrated throughout North America due to the trade agreements that have been in place since the Clinton Admin. negotiated the North American Free Trade Agreement (NAFTA) in the 1990s, and the first Trump Admin. replaced it by negotiating the United States-Mexico-Canada Agreement (USMCA).

Levying tariffs on short notice would be a nightmare for automakers and parts suppliers because vehicle components from each country cross the border multiple times before being assembled into a final vehicle. And American-made parts go into finished products from Canada and Mexico.

Ford, Stellantis, Toyota and Honda assemble vehicles in Canada, as do several parts makers. Ford, General Motors, Toyota, Volkswagen, Nissan, Mazda, Mercedes-Benz and Stellantis all manufacture vehicles in Mexico.

“Such tariffs would have severe consequences for the U.S. vehicle supplier industry, jeopardizing American jobs, increasing costs for consumers and undermining the highly integrated North American supply chain that is critical to U.S. competitiveness,” says the Motor and Equipment Manufacturers Assn.

A survey of leading economists by the Initiative on Global Markets at the University of Chicago Booth School of Business showed a consensus that imposing new U.S. tariffs on steel and aluminum will “not improve Americans’ welfare.” Economists say the tariffs will lead to more harm than gains, as the price for steel increases, which will harm consumers and Americans working in manufacturing industries that use steel.

At issue is the hasty timing of Trump’s tariff threats, not giving manufacturers enough time to adjust supply chains or manufacturing to match policy.

Trump has repeatedly mischaracterized how tariffs work when speaking to reporters and political rallies, suggesting wrongly that foreign countries pay the tariffs into the U.S. Treasury. In fact, U.S. companies pay the tariffs and then pass on the higher costs to customers in the form of higher prices, thus contributing to inflation.

It would take years for companies to adjust their supply chains and manufacturing footprints to cope with new, sudden tariffs. There is no way to assess how long Trump’s tariffs would be in place, or how long Republicans will be in power, so making new capital investments is fraught.

Tariff-induced supply-chain changes take years to produce results. The 1981 Voluntary Export Restraint program lasted more than 10 years. During that time, Japanese manufacturers Toyota, Honda, Nissan and Subaru built significant capacity into the North American market. It didn’t happen overnight.