Written by Frode Skar, Finance Journalist.

Canada pivots away from the United States with a new auto industry strategy

Ottawa moves to shield carmakers from US tariffs and reshape supply chains

Canada has unveiled a new strategy for its auto industry, marking a clear economic and political shift away from the United States as American trade policy continues to pressure Canadian manufacturing. Prime Minister Mark Carney presented the plan on Thursday, positioning it as both a defensive response to US tariffs and a longer term effort to rebalance Canada’s industrial dependencies.

The measures are aimed at stabilizing domestic car production, protecting jobs and supporting the transition toward electric vehicles, while reducing exposure to a US market that has become increasingly unpredictable under President Donald Trump’s trade agenda.

Tariffs trigger a reassessment of dependence on the US

The policy shift follows the introduction last year of a 25 percent US tariff on Canadian made vehicles and auto parts. The move sent shockwaves through Canada’s auto sector, where roughly 90 percent of vehicle output is exported south of the border.

The impact was swift. Production was scaled back, investment plans were delayed and thousands of Canadian auto workers lost their jobs as major manufacturers reduced operations. The episode exposed the vulnerability created by decades of tightly integrated North American supply chains.

Trade agreement uncertainty adds pressure

Further uncertainty looms over the United States Canada Mexico Agreement, which is due for review this year. While the agreement was originally designed to eliminate tariffs across North America, Canadian officials now question whether that objective still aligns with US policy priorities.

Carney has warned that Canada must prepare for scenarios in which trade barriers persist or expand. This uncertainty has accelerated Ottawa’s push for a more autonomous industrial policy, particularly in strategically important sectors such as automotive manufacturing.

Financial incentives to anchor production in Canada

At the core of the new plan are financial incentives designed to encourage automakers to invest and produce in Canada despite higher cross border costs. A new tariff credit scheme will offer relief to companies that manufacture vehicles domestically, helping offset the burden of US duties.

The policy targets both North American and international manufacturers with existing or potential Canadian operations. The goal is to preserve production capacity, prevent further job losses and maintain Canada’s position within global automotive supply networks.

Turning toward Asia to diversify partnerships

Alongside domestic measures, Canada has stepped up efforts to diversify its international partnerships. Recent agreements with China and South Korea signal a deliberate move to reduce reliance on the US market.

Canada has agreed to ease tariffs on Chinese electric vehicles, reversing a position it adopted in coordination with Washington in 2024. A separate agreement with South Korea is intended to encourage Korean automakers to expand manufacturing in Canada. Both moves could weaken the competitive position of US firms but give Canada greater strategic flexibility.

Electric vehicle incentives return

A central pillar of the strategy is the reintroduction of consumer incentives for electric vehicle purchases. The government hopes the move will stimulate domestic demand, support manufacturers and accelerate the shift toward lower emission transport.

The decision stands in contrast to the United States, where federal EV subsidies were eliminated last year. Canada’s approach signals a more interventionist role for the state in guiding the automotive transition.

Tougher emissions standards without a sales mandate

While restoring EV incentives, Carney has scrapped a previous mandate that required automakers to meet specific electric vehicle sales targets. That policy, introduced in 2023, faced strong resistance from manufacturers who argued it imposed excessive costs.

Instead, Canada will tighten emissions standards for new vehicles, with a long term objective of electric vehicles accounting for 90 percent of new car sales by 2040. The government argues this approach focuses on outcomes while giving manufacturers more flexibility in how they comply.

Environmental backlash highlights policy trade offs

The removal of the EV sales mandate has drawn criticism from environmental groups, which argue the change weakens certainty and risks slowing the transition to zero emission vehicles.

Carney has defended the shift, stating that stricter emissions rules can deliver meaningful environmental progress without placing disproportionate strain on an industry already under pressure from trade disruptions.

A more independent industrial path

Taken together, the measures represent a significant recalibration of Canada’s industrial strategy. Ottawa is seeking to insulate a critical sector from external shocks, reduce overreliance on the United States and adapt to a more fragmented global trade environment.

The approach carries fiscal and political risks, but it also reflects a broader recognition that long standing assumptions about stable access to the US market no longer hold. For Canada’s auto industry, the plan marks a decisive step toward a more diversified and self directed future.