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The imposition of U.S tariffs on Canadian-made vehicles and auto parts would blow apart the tightly integrated business model the North American auto sector has used for decades – putting tens of thousands of jobs at risk and striking a devastating blow to the industry.

The U.S. government is examining such tariffs, and fears that they will come to pass are rising in the wake of this weekend’s G7 Summit. President Donald Trump threatened again to impose duties on Canada’s auto sector after Prime Minister Justin Trudeau reiterated that new U.S. levies on Canadian steel and aluminum are unacceptable.

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Workers at the Oakville Ford plant load cars onto a truck for shipment on Friday, October 13, 2017.Glenn Lowson/Globe and Mail

The United States is considering an auto tariff of 25 per cent, which would match the new U.S. tariff on steel from a number of countries, including Canada. But the auto sector is far more important to the Canadian economy – and there is an open question as to whether Canada would retaliate with a levy of 25 per cent on vehicles imported from the United States.

Tariffs on autos and auto parts would represent a major escalation of the trade battle and “could be the death blow to the [Canadian] auto industry,” said Kristin Dziczek, vice-president of industry, labour and economics at the Center for Automotive Research, an industry think tank in Ann Arbor, Mich. “If your major market puts a 25-per-cent barrier up, it’s just not tenable.”

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Even if it’s not a death blow, the tariffs are sure to cause chaos: If a piston from Toronto or Guelph, Ont., is shipped to a U.S. engine plant then the engine is sent back to an assembly plant in Canada and the vehicle is transported back across the border, how many times is the tariff applied?

Prices of vehicles could soar.

About 130,000 Canadians are directly employed in vehicle assembly and auto-parts making, thousands more at auto dealerships across the country; and two-way trade accounts for $140-billion annually.

Mr. Trump could announce tariffs under the 1962 Trade Expansion Act as early as October, said Dan Ujczo, an Ohio trade lawyer.

At the heart of the issue is how the auto industry is structured in North America, which goes back to the 1965 Canada-U.S. auto pact, when the two governments agreed to free trade in vehicles and parts made in the two countries. That deal rationalized the industry so that vehicles no longer needed to be made in Canada solely for the Canadian market, which is about 10 per cent of the size of the U.S. market.

The industry was further rationalized on a continental basis through the North American free-trade agreement, which took effect in 1994. So now, vehicles and parts are made in each of the three countries for any or all of the Canadian, U.S. and Mexican markets and are shipped duty-free within the continent.

The result of that is that assembly plants in Canada supply mainly the U.S. market. It varies by manufacturer, but overall about 85 per cent of the 2.2 million vehicles made in Canada annually are shipped to the United States.

About $18-billion worth of parts made in Canada annually are shipped to U.S. assembly, engine or transmission plants.

About half the engine and transmission components made by Linamar Corp., Canada’s second-largest auto-parts company, are shipped to U.S. customers, chief executive Linda Hasenfratz said in an e-mail Monday.

Ms. Hasenfratz sounded an alarm about the impact of U.S. tariffs.

Consumers are hit with higher prices, which reduces demand and leads to significant job losses, she said.

“It is a downward spiral that has never resulted in prosperity. I agree trade should be fair; imposing massive cost onto industry and ultimately the consumer is not the way to get there.”

A tariff would be imposed at the factory level − or on average about $25,000 of the cost of a vehicle sold in the Canadian and U.S. markets − industry analyst Dennis DesRosiers said.

A 25-per-cent tariff would amount to $6,200 a vehicle on average, he noted.

As studies on steel tariffs have shown, Mr. Trump will be punishing his own voters. “It’s the American consumers that are going to have to pay this,” Mr. DesRosiers said.

But Canadian consumers would be affected if Canada responds with tariffs on U.S.-made vehicles. The manufacturers’ suggested retail price of the XLT version of the Ford F-150 pickup would rise to $37,649 from $31,449 if the $6,200 were added to the top line.

The F series is the best-selling vehicle in Canada and all versions of the truck are imported from U.S. assembly plants.

The best-selling cars in Canada

If the Canada-U.S. trade spat expanded to autos, consumers would no doubt feel the impact. Many of Canadians' favourite vehicles are assembled in the U.S. This table shows the top-selling vehicles in Canada over the first four months of the year, along with where those vehicles are assembled.

VehicleSalesFinal assembly locations
Ford F-Series42657Michigan; Missouri
Ram Pickup27068Michigan; Mexico
Honda Civic19873Alliston, Ont.; Indiana
Chevrolet Silverado18855Oshawa, Ont.; Indiana; Michigan; Mexico
GMC Sierra18177Oshawa, Ont.; Indiana; Michigan; Mexico
Honda CR-V17121Alliston, Ont.; Indiana; Ohio
Toyota RAV415963Woodstock, Ont.
Dodge Caravan14953Windsor, Ont.
Toyota Corolla14393Cambridge, Ont.; Mississippi
Nissan Rogue13917Tennessee

Source: DesRosiers Automotive Consultants; AutoForecastSolutions

Doug Porter, chief economist of Bank of Montreal, said there’s little doubt that all vehicle prices will rise in the U.S. market in the worst-case scenario and investment in the auto sector in Canada would be hit hard.

The potential impact on U.S. consumers could be what stays the hand of the Trump administration, Mr. Porter said.

“The threat of tariffs and the uncertainty it would create for producers may alone achieve what the administration is aiming for − to prompt more investment to flow back into the U.S.,” he said.

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