Canada's Automotive Strategy: New Pact with China Under Strict Conditions

Canada faces a critical moment in its automotive industry. With U.S. tariffs pressuring manufacturers and the threat of operations relocating southward, Prime Minister Mark Carney’s government has made a bold decision: open Canada’s automotive market to Chinese manufacturers, but with guarantees to protect national interests. Last February, Carney met with Chinese President Xi Jinping in Beijing and announced a trade agreement that significantly eased tariffs on Chinese electric vehicles, allowing approximately 49,000 units to enter at a reduced tariff of 6 percent.

Why did Canada need to rethink its automotive policy?

Canada’s automotive industry is under unprecedented pressure. Last year, 1.9 million new vehicles were sold in the country, but the market share of U.S. factories has declined markedly since Trump launched his trade war. General Motors closed a plant in Ontario and threatened to cut operations at another, while Stellantis canceled plans to produce Jeep near Toronto, deciding to move that production to Illinois.

Currently, only five companies maintain assembly plants in Canada: GM, Stellantis, Ford Motor, Toyota, and Honda. Most of their production is destined for U.S. markets, making Canada vulnerable to Washington’s protectionist policies. Major manufacturers like Tesla, Nissan, and Kia do not even produce in Canada, fully supplying from factories in the U.S. and other countries.

Industry Minister Melanie Joly introduced a comprehensive strategy aimed at halting job losses and attracting new manufacturing investments. This policy not only addresses market access for existing producers but also includes mandates for electric vehicle sales and consumer incentives, creating a more favorable environment for automotive innovation in the country.

The Carney-Xi agreement: Opportunities and restrictions for the Canadian industry

The agreement reached between Canada and China marks a fundamental shift in Canada’s trade strategy. For the first time, Chinese companies like BYD and Chery will have the opportunity to assemble vehicles on Canadian soil, not just sell them as imports. However, this opening comes with significant safeguards designed to protect Canada’s technological sovereignty and industrial interests.

Restrictions include the requirement to use Canadian software in locally manufactured vehicles and the obligation to establish joint ventures with domestic partners. BlackBerry, the Canadian company specializing in automotive software, positions itself as a key player in this new regulatory framework. Joly met during her trip to Beijing with executives from BYD, Chery, and Canadian auto parts firm Magna International, laying the groundwork for future collaborations.

The government will review the agreement in three years to verify that Chinese companies meet their commitments of substantial investment in the Canadian automotive sector. Additionally, there is a phased requirement to fill an increasing quota with vehicles priced at C$35,000 or less (approximately USD 25,155), a stipulation that particularly benefits lower-cost Chinese manufacturers, improving accessibility for Canadian consumers.

Meanwhile, China committed to reducing tariffs on Canadian agricultural products and allowing Canadian citizens to travel visa-free, expanding the benefits of the agreement beyond the automotive sector.

Repositioning Canada in the global automotive market

Canada’s strategy responds to an uncomfortable reality: relying solely on the U.S. market is no longer viable. Before 2024, when Canada imposed a 100 percent tariff on Chinese-made electric vehicles, most imports came from Tesla. Now, with the new regulatory framework, that quota could diversify significantly.

Canada has a competitive advantage that many countries envy: free trade agreements with multiple regions, including Europe and Asia. A government official emphasized that in the long term, the real strategy to counter U.S. protectionism would be to link the markets of Canada, Europe, and Asia in a low-tariff environment. The agreement with China marks a crucial step in that direction, creating a trade bridge to alternative markets.

It is noteworthy that the Canadian government previously notified the U.S. Trade Representative, Jamieson Greer, about these negotiations. Trump responded favorably, stating he was not concerned about the deal: “That’s fine, that’s what we should be doing. If an agreement with China can be reached, it should be.” This tacit blessing reduces uncertainty around the upcoming review of the US-Mexico-Canada Agreement.

Canada’s vision is clear: to transform from a dependent producer into a strategic player in the global automotive industry. With the Carney-Xi agreement, the country opens a new frontier of industrial possibilities, maintaining safeguards to protect its technological sovereignty and workers. The next three years will be decisive in determining whether this bold move positions Canada as a 21st-century automotive innovation hub.