A new study from Scotiabank Economics is suggesting that North America’s automotive sector will be heading into a particularly volatile 2025.
This is something we’ve covered in the past, particularly as it pertains to some of the changes the Trump administration has suggested during the 2024 election. Scotiabank covered this at length, tapping into 2023 market data to benchmark for where the industry could be headed. It’s loaded with useful information and likely something you’d be interested in if you’re as obsessive about tracking the industry as we are.
However, we need to preface the study by noting that the premonitions of market analysts don’t always come to pass. Both the industry and those tracking it have made some exceptionally bad calls in recent years. The Scotiabank Economics report is likewise speculative, citing relevant data points in an effort to accurately predict the future. We should also take into consideration the fact that the study was conducted by a multinational financial institution with a vested interest in how the relevant markets perform.
That said, it makes some salient points and presents useful data points — starting with noting that vehicle production is up significantly since 2020 in every market that is not South America. While this has been framed in the media as the region failing to bounce back as quickly as other markets, South America arguably suffered the least in terms of industrial disruption from the global response to the pandemic.
Its production dip is not nearly as sharp as those witnessed in Asia, Europe, or North America. But South America’s rebound has likewise not been as prompt, suggesting that there are other factors at play. One of these is the influx of Chinese vehicles onto the market, some of which have suppressed the region’s already limited domestic production efforts.
By contrast, Europe and North America have done much better. But not as well as China and the rest of Asia, which have seen the steepest improvement in production volumes since the 2020 drop off.
Scotiabank is making the argument that North America may be facing headwinds going into 2025. The biggest factor is assumed to be forthcoming tariffs teased by the incoming Trump administration and how they may impact the present trade agreements made as part of the USMCA. This is important because automotive production (e.g. vehicle exports, vehicle exports, and parts supply) accounts for nearly a quarter of all trade between the United States, Mexico, and Canada. The report stresses the potential for trade volatility going into 2025.
From Scotiabank:
Yet integration is a double-edged sword. As supply and demand shocks are finally clearing, policy and trade-related shocks hang on the horizon. Given the sector’s scale and visibility, it is frequently at the forefront of trade discussions and tensions. Shifts in any one country or segment of the value chain tend to reverberate, for good or ill, through all three countries. This time is no different. The incoming US President has already threatened 25 [percent] tariffs on all Canadian and Mexican imports, and campaign threats have ranged from [10 to 500 percent]. Additional pledges include repealing/revoking environmental regulations and incentives, and highlighting specific tensions to discuss in the upcoming 2026 review of the United States-Canada-Mexico Agreement (USMCA, or NAFTA 2.0). There is enormous uncertainty as to whether these measures will be implemented, but even the issuance of threats alone is raising questions about impacts and the path forward, imposing new costs on sectors that have only recently seen high costs decline following a host of pandemic-related shocks.
Looking to policy shocks, tariffs will likely be a recurring theme. In real terms, US tariffs on Canadian and Mexican automotive imports would mean higher import taxes on US $55 [billion] of Canadian automotive sector imports, and US $125 [billion] of Mexican automotive sector imports (2023 figures). The exact impacts of each will depend on the tariff rate, scope of coverage across sectors, and how long a given tariff might be in place. For example, previous tariffs on Canadian steel and aluminum led to high volumes of temporary disruptions, but export levels to the US for both materials had fully rebounded within 2–3 years of tariffs being lifted, even when accounting for pandemic effects. It should be stressed that both broad-based and targeted tariffs may also prove damaging to US firms. Mexico and Canada are the export destinations for the majority of US automotive parts, leaving US players vulnerable to retaliatory tariffs.
Mexico’s growing relationship with China has been a point of contention for the incoming administration. Mexico imported US $114 [billion] from China in 2023, up from US $61 [billion] a decade ago, and Mexico’s trade deficit with the country is growing. Machinery, metals and transportation represent 75 [percent] of Mexican imports from China. Official US and Canadian concerns have centred around transshipment of Chinese goods through Mexico to gain preferential tariff access, Chinese companies setting up production facilities in Mexico for the same reasons, and the implications of these steps for securing legitimate and/or counterfeit certificates of origin.
USMCA was set to be reviewed in 2026, regardless of the above. However, Donald Trump has been highly critical of China setting up production in Mexico and has said he would not allow the Asian nation to utilize it as a vector to send vehicles into the United States. This could be argued as rational protectionism or a total affront to the notion of a competitive market. After all, modern vehicle prices have become largely incommensurate with the average incomes. Although Trump has previously said this would be addressed by deregulating the industry, localizing production, killing EV subsidies, and encouraging manufacturers to prioritize traditional automobiles, stressing the fundamentals and forcing competition.
How exactly he plans to force the industry into doing this is another question. While automakers have become more subject to government regulation and global supply chains, they’ve simultaneously encouraged these things to happen via the outsourcing of labor and lobbying of legislation. Even the aggressive emission mandates being promoted by Western governments are broadly supported by the automotive sector’s biggest lobbying group. This hasn’t made the industry easier to navigate, and has effectively forced it to pivot to all-electric vehicles. But this has also come with juicy government subsidies and has worked to make the bar for energy exceptionally high. With the exception of Tesla and a handful of Chinese brands, legacy automakers haven’t encountered any serious competition in decades.
Speaking of which, Trump has suggested scaling back financial incentives for electric vehicles as a way to unburden taxpayers and force the industry to be more competitive. Despite the fact that EV subsidies were originally supposed to be temporary, they’ve stuck around and automakers have come to expect them. They’ll undoubtedly fight to keep them, as they’ve already invested hundreds of billions into pivoting toward all-electric vehicles. But they might be appeased by deregulation elsewhere.
Either way, we’re inclined to believe the report when it signals a period of uncertainty for the industry. While nobody seems eager to admit it, that’s been the status quo for the last several years and attempting to reduce EV subsidies while rejiggering trade relations is likely to exacerbate the issue.
Scotiabank obviously wants to see North America remaining codependent, which makes sense for a multinational bank based in Canada. But upending the preexisting trade relationships between the United States, Canada, and Mexico would indeed introduce some amount of uncertainty to the market. Still, the report totally glosses over the other issues impacting the automotive industry today — namely the fact that vehicle affordability is negatively impacting sales. Product mix is very obviously lopsided, with the industry selling too many vehicles that regular people either cannot afford anymore or weren’t interested in to begin with. That matter, which seems incredibly important, didn’t get any attention.
As things currently stand, the share of all-electric vehicles within North America is estimated to be about 7.2 percent. Plug-in hybrids are around 2.4 percent, while standard hybrids are 13.5 percent and combustion only vehicles sit at 76.9 percent. That means over 90 percent of all new vehicles sold are still completely dependent upon gasoline to function.
The study reads like a paper written eight years ago, prioritizing the transition toward electrification without exploring any of the possible ramifications of doing so. Automakers and analysts continue to keep EVs in a separate category, noting that their continued subsidization is a major driver of the market (including Scotiabank). While that’s important information to have, it neglects to address the fact that they’re still broadly unprofitable and have not reached the volume benchmarks outlined years earlier. Despite still improving in popularity, electric vehicles continue being propped up by government subsidies and it seems woefully irresponsible not to have an exit strategy.
But there are numerous angles to this as well. Despite the Biden administration’s so-called Inflation Reduction Act (IRA) almost assuredly exacerbating inflation through more government spending, it likewise prioritized the domestic assembly of EVs and their battery packs. One of the biggest criticisms of electrification is that it primarily advantaged the Chinese due to the fact that it had the market cornered in terms of battery production. The IRA was supposed to bring some of that inside the United States and help set the state to make the transition toward all-electric vehicles easier with the ability to retain American employment.
Strides have certainly been made. But the success of that program remains debatable. Many of the factories being established in its wake still have ties to China and the infrastructure programs designed to field charging stations haven’t made much tangible progress yet. Everything seems a little under baked and behind schedule. But that’s relatively commonplace for government programs in general. Some have argued it just needs more time as other bemoan it as a outright failure.
Scotiabank seems torn between practical solutions, the potential fallout of changing course, and the fact that it believes there is an ethical obligation to adhering to “climate ambitions.” It believes Canada will assume whatever the most stringent emissions policy the United States takes and seems concerned that the U.S. is about to walk back targets.
As much as I’d like to scoff at that, the point remains highly relevant. Product planning takes several years for automakers and we’ve had several administrations doing their utmost to encourage the industry to prioritize electrification. That’s exactly what automakers have done, even after the EV sector looked over-saturated. Changing course now, even if it results in a better product mix and more affordable vehicles down the line, will undoubtedly take time to bear any fruit. In the interim period, automakers are left wondering how to adapt to the coming changes and whether or not they’ll even have to.
After all, none of the above are certainties. Trump previously tried to roll back emission targets and found himself constantly battling California for control of federal emissions targets. EV subsidies remained in place and the resulting deregulation was modest at best. Even the USMCA was just a more domestically focused version of the trade laws it replaced. Scotiabank even suggested that an uptick in domestic competition could be good for the industry. But it still cautioned against any trade wars and believed further integration between the United States, Canada, and Mexico was the best path forward.
[Images: Michael Warwick/Shutterstock]
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