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U.S. tariffs on vehicles and auto parts would harm Ontario and key auto producing regions of the United States, but the greater danger is that they could spark an all-out trade war, Bank of Nova Scotia economists say.

The economists are optimistic that the worst-case scenario will be avoided and that negotiations on a new North American free trade agreement will end amicably next year, current tariffs on steel and aluminum will be temporary and the U.S. administration will stop short of imposing the threatened auto tariffs.

The U.S. government is studying tariffs on vehicles and parts to determine if they can be imposed under section 232 of the 1962 Trade Promotion Act, the same legislation used to place levies of 25 per cent and 10 per cent on Canadian steel and aluminum imports.

“The move against cars could tip the U.S. into a global trade war as its partners retaliate by imposing heavy duties on a wide range of U.S. goods,” a new analysis by the bank says.

Such an outcome would cause a recession in North America, which would in turn trigger interest-rate cuts by central banks.

That threat of a global trade war alone should cause the White House not to impose tariffs and lead to increased opposition from the U.S. Congress and industry, said Brett House, the bank’s deputy chief economist.

U.S. tariffs on autos and parts are seen widely by economists, trade analysts and auto industry officials as a negotiating ploy in the NAFTA negotiations.

Ohio trade lawyer Dan Ujczo, who is following the NAFTA talks closely, said he expects President Donald Trump to announce tariffs before the U.S. mid-term elections in November.

The possibility that such tariffs will be enacted appeared to grow last weekend after heated criticism of Canada by Mr. Trump after an acrimonious end to the G7 economic summit.

That rhetoric should “motivate U.S. political leaders and industry to take a stronger stand against further protectionism,” Mr. House said.

The bank’s base case scenario is that NAFTA talks conclude in the first half of 2019 and the chilling effect on investment until then has a small impact on GDP growth.

Citibank economists agreed that retaliation against the United States is likely if the Americans put up a tariff wall to protect the U.S. auto sector.

They suggested in a report issued Friday that the U.S. government is likely to launch section 232 investigations into shipbuilding, aerospace and semi-conductors, “as the U.S. strategy is based on the premise that economic security is also national security.”

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