Canadian industry, particularly auto manufacturing, is facing a pressing need to reduce its reliance on the American market for exports. The current spat with the US is not a temporary issue, and Canada needs to find alternative markets for its automotive products.
The choices Canada faces from the Americans range from significant decimation to reduced profitability, making it essential to explore other options. Prime Minister Carney has expressed interest in increasing exports to the European Union, with plans to lay underwater cables to link Canada to the EU and potentially supply natural gas to reduce Europe’s reliance on Russia.
Exploring Alternative Markets
The European Union is the largest unified automotive market after China and the US, making it an attractive option for Canadian auto manufacturers. Canada’s low-carbon energy production could also give it an advantage, as products with iron, steel, or aluminum would not be subject to the EU’s Carbon Border Adjustment Mechanism (CBAM) tariff.
However, there are concerns about the feasibility of European automakers assembling cars in Canada. Companies like Mercedes, BMW, and Volkswagen are struggling with declining sales in China and their home markets, making expansion into smaller markets like Canada unlikely.
Another potential market for Canadian auto manufacturers is the United Kingdom, which has recently signed a trade pact with the Agreement for Trans-Pacific Partnership (CPTPP). This free-trade zone includes countries like Australia, New Zealand, and Japan, offering a combined market of over 600 million people with growing economies.
A Focus on Hybrids
Canada might be advised to focus its auto industry on hybrids, rather than trying to compete with China on electric vehicles (EVs). China’s lead in battery development is significant, and catching up would be challenging. In contrast, many CPTPP member countries have a strong market for hybrids, with Japan being a notable example.
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In Japan, almost 55% of cars sold are hybrids, compared to less than 2% for EVs. Toyota and Honda, which assemble cars in Canada, produce mostly hybrids, and there may be opportunities for Canada to supply critical minerals and rare-earth minerals to Japan in exchange for building batteries and electric motors in Canada.
Canada has an abundance of critical minerals like cobalt, nickel, and lithium, as well as clean, green electricity, making it an attractive partner for Japan. A deal could potentially involve Canada supplying these resources to Japan in exchange for investments in auto assembly and auto parts manufacturing.
The plan is for Toyota and Honda to increase their production of hybrid-powered vehicles in Canada, and a deal with Japan could provide a significant boost to the Canadian auto industry. With the right agreements in place, Canada could potentially export electrified vehicles to countries besides the US, providing a much-needed diversification of its export markets.
Japan needs Canada’s critical metals, and Canada needs to expand its input into auto assembly and auto parts manufacturing. A mutually beneficial agreement between the two countries could be reached, with Canada supplying advantageously-priced critical metals and rare-earth minerals in return for investments in the Canadian auto industry.
A potential agreement between Canada and Japan could have significant benefits for both countries. Japan’s need for critical metals, such as cobalt, nickel, and lithium, could be met by Canada’s abundant supply, while Canada could gain investments in auto assembly and auto parts manufacturing. This partnership could also lead to the export of electrified vehicles to countries other than the US, providing a much-needed diversification of Canada’s export markets.
Benefits of a Canada-Japan Partnership
The recent trade pact between the UK and the CPTPP could serve as a model for a potential agreement between Canada and Japan. The deal would need to address issues such as tariffs, trade barriers, and investment incentives to ensure a successful partnership.
