With valuable input from Lucien Chaffa
The automotive industry sits high on the list of Canadian and US industries with shared cross-border supply chains. Detroit’s storied history in automotive manufacturing was forged thanks in part to crucial supplier linkages in Southern Ontario, not too far away from the international border between the two countries. This duty-free trade facilitates the seamless movement of intermediaries, such as chassis, engines, transmissions, and electronics, across this border, in varying degrees of completion as vehicles are assembled in Canada and the US for global sale. The clustering of the automotive industry has had a positive impact on the local economy of this region, creating jobs and driving trade growth. This highlight seeks to assess Canada’s integration within the North American automotive supply chain and determine if its position has evolved in this equation.
As official trade data lacks specific information on the end use of a product, choosing a key component with minimal non-manufacturing applications is crucial for the accurate evaluation of cross-border integration. Transmission systems, being specialized components with relatively few global suppliers, are indispensable in the assembly of vehicles equipped with any propulsion system. Therefore, their imports can be reasonably attributed to the manufacturing of new vehicles and for the assembly of transmission systems, with potential exportation for use in vehicle assembly in the US. This assumption is substantiated by running a regression using Canadian vehicle production data, which reveals that imports account for approximately 60% of the increase in vehicle production, corroborating the hypothesis.
Automotive manufacturing in Canada emerged from protectionist measures and later efforts to eliminate tariffs with the US resulted in the industry’s integration into US automotive supply chain. Analyzing Canada’s vehicle transmission imports data, the level of imports has remained relatively stable since the $3 billion CAD threshold was reached after NAFTA came into effect in the mid-90s. The only two significant drops in imports occurred during the 2008 financial crisis and the COVID-19 pandemic, both of which led to a decline in vehicle manufacturing. The origin of transmission imports has undergone a slight diversification, with US origin transmissions accounting for approximately 90% until 2008, and comprising around three-fourths of the imports in recent years. This shift may be attributed to changes in the production dynamics of American Original Equipment Manufacturers (OEMs) compared to Japanese OEMs.
Looking at more detailed product-level data reveals that out of the $2.8 billion CAD worth of vehicle transmission imports in 2022, approximately 70% of these imports consisted of gearboxes, while the remaining 30% comprised their respective parts. Discounting for parts used in transmission system repairs, a considerable portion of these imports would also be further transformed or assembled into gearboxes. Furthermore, the destination of these imports indicates a concentration in Ontario, where 93% of Canadian transmission imports were ultimately destined for. Given that the majority of Canada’s automotive industry is situated in Southern Ontario, these imports further corroborate the end use of vehicle transmissions in manufacturing. The leading importers of gearboxes include Stellantis, Ford, General Motors, and Honda, all of which are OEMs with vehicle assembly facilities in the region. Additionally, Linamar/Ariss Manufacturing, a manufacturer of vehicle transmissions, is listed as a major importer of gearbox parts.
By deconstructing the origin of US vehicle transmission imports, Canada’s relative significance in this portion of cross-border supply chains can be understood. Notably, imports have surged by sixfold since their $2 billion level in the early 1990s. This surge indicates a substantial increase in the trade of intermediate goods, particularly those of higher complexity within the US automotive supply chain. This insight sheds light on the evolving sourcing patterns of the industry in the US that has produced 10.6 million vehicles in 2023, a decline of about 15% compared to 2000. Furthermore, it is striking that approximately a third of all transmission imports now originate from Mexico, demonstrating a strong integration of Mexico into the automotive supply chain. In contrast, imports from Canada have remained below the $1 billion mark since the late 1990s, indicating a stagnant level of activity of OEMs with cross-border operations and the declining relative competitiveness of Canadian exports in the supply chain.
The automotive industry in the US exhibits a distinct regionalization, with a cluster centered around Michigan in the Great Lakes and another in the Southern US. While most Southern states rely heavily on imports from outside North America, Mexico holds a significant market share in this cluster. Conversely, Canada’s imports primarily target the Great Lakes region, with Michigan serving as the largest market for both Canadian and Mexican imports. This suggests that a significant portion of Canadian trade involves OEMs with operations on both sides of the border. While Canadian origin imports constitute a small portion of the market in other Great Lakes states, there are virtually no trade flows to the Southern cluster.
To conclude, this analysis reveals that Canada’s integration into the North American automotive supply chain has remained largely stagnant since the early 2000s. This decline is evident in the halving of Canadian vehicle production numbers from approximately 1.5 million units in 2023 to the 2000 levels, while Mexico’s production has doubled to 4 million units during the same period. While considering only one key component might have introduced distortions, the unavailability of sufficiently detailed product-level trade data for non-manufacturing uses necessitates this approach. Moreover, not all traded components require specialized knowledge, making alternative suppliers easier to find.
The impending shift towards electric propulsion will significantly alter the supplier dynamics of the North American automotive industry, overshadowing the effects of vehicle production moving southward to Mexico. China’s dominance in electric vehicle manufacturing and control of the EV battery supply chain is already reshaping the competitive landscape of established Japanese and European OEMs. With fewer moving parts and a greater reliance on critical minerals, new supply chain arrangements are being drawn, with new plants being established in Ontario and Quebec. The historical accumulation of this industry’s knowledge and experience operating in the Great Lakes region could be a factor in the installation of new manufacturing capacity beyond the availability of raw materials, competitively priced energy, and subsidies.