- Trade talks between the U.S. and Canada broke down late last week, and both sides have enacted heavy new tariffs on one another’s goods.
- The moves won’t change new car prices right away, and may not last, but they contribute to shifting conditions that have raised new car prices over the last 16 months.
Trade between the United States and Canada amounted to roughly $875 billion in 2025. The two long-peaceful neighbors trade nearly every commodity imaginable, from car parts to timber to electricity. Now, all of it is threatened.
Trade talks between the two broke down late Friday, triggering the possibility of a new trade war.
Reuters explains, “President Donald Trump on Aug. 24 sought to boost pressure on Canada, warning that U.S. tariffs on all cars, trucks, and automotive parts from America’s second-largest trading partner would be increased to 50% starting Jan. 1 after trade talks collapsed over the weekend.”
Canada has answered in kind. The AP reports, “Canada struck back at the United States on Tuesday with retaliatory tariffs on about $20 billion worth of American goods, including steel, dairy products, appliances and farm equipment, as the trade war between the once-friendly neighbors escalated sharply.”
The news returned the automotive market to chaos that had partly settled down after a chaotic 2025. But that time offers lessons to car shoppers.
Last year saw many dramatic threats and chess moves as the White House repeatedly enacted tariffs, courts softened them or struck them down, and trade partners negotiated softer deals.
It raised new car prices, but much more slowly than headlines had suggested. Car shoppers can likely relax about big price spikes this summer.
Why the Two Countries are So Interdependent
- Decades of free trade saw the U.S. and Canada intertwine their auto industries.
The U.S. and Canada share the world’s longest border and largely similar cultures and economies. Since the 1994 North American Free Trade Agreement and through several subsequent deals, their economies have grown deeply integrated.
That’s particularly true when it comes to cars — a sprawling North American automotive industry sees automakers send parts back and forth between the U.S., Canada, and Mexico, often several times during assembly.
A wiring harness made in one country may pass to another, where it’s built into a motor, then sent back across the border and installed in a seat, which is shipped back again and fitted into a car. Automakers developed these complex supply lines when trade through North America was nearly tariff-free.
The two countries have grown so intertwined that window stickers in the U.S. list the percentage of American and Canadian content in each car — identifying domestic parts alone hasn’t been worth the effort.
But Trump has a different theory of world economics than most of his predecessors. Since last April, he has repeatedly imposed new tariffs, even on America’s closest trade partners.
That pattern had largely settled by this summer, with a series of agreements placing 15% tariffs on cars and car parts from much of the world. Larger tariffs of up to 50% apply to steel and aluminum — the raw materials of many car parts — with lower exceptions for certain partner countries.
What’s At Stake This Time
- Higher tariffs on Canadian cars and parts could privilege cars imported from Japan, South Korea, and other countries.
Reuters reports that Canadian and American negotiators were near a deal that would have treated Canada much like those favored partners.
“The trade deal on the table would have cut the top-line tariff rate on Canadian cars and light-duty trucks from 25% to 15%, and the tariffs on aluminum and steel from 50% to 25%, but the deal collapsed on Aug. 21 over a number of points of contention, including whether the U.S. tariff relief would have applied to medium- or heavy-duty trucks.”
Without that deal, America’s big three automakers — Ford, General Motors, and Stellantis — face increase production costs. Strangely, that favors many foreign automakers that import cars from countries with 15% tariff agreements.
Why the Headlines Could Be Misleading
- There’s still time to negotiate.
- Courts have struck down many of Trump’s tariff moves, even leading to some refunds.
The two countries have traded dramatic threats in recent days, but reality is often softer than rhetoric.
Notably, Trump’s threat said tariffs would kick in on Jan. 1 — more than four months from now. A notice in the Federal Register this morning indicated that some may start sooner. Canada’s retaliation, it said, begins on Sep. 8.
That leaves plenty of time for negotiation. The pattern of Trump’s trade tactics has been sensational threats followed by milder realities.
Canada might even have an edge in those negotiations. Politico notes, “Americans are not nearly as gung-ho for a tariff standoff as their northern neighbors, who have been seething for months over Trump’s rhetoric against their country.”
Even once a tariff agreement is in place, it might as well be written in pencil. Many of Trump’s tariffs have also been struck down by courts. Fortune magazine notes that Ford, GM, and Stellantis all received refunds between $467 million and $1.3 billion in recent months after courts ruled prior tariffs unlawful.
Why it Affects Car Shoppers Slowly
- The car you buy today was likely imported months ago.
- During negotiations, the auto industry rarely raises prices.
Last year taught Americans what to expect when a trade war starts — theatrical headlines predicting major change, then much slower change in practice. That’s particularly true in the automotive industry.
That’s true largely because car dealers keep several months’ worth of inventory in stock. An old industry rule of thumb tells dealers to keep about 60 days’ worth of cars on the lot with another 15 days’ worth in transit. Many are regularly oversupplied.
So, the cars Americans buy today were, by and large, imported months ago. A change in production costs now won’t reach the sales lot until winter.
Even then, the window sticker may not bear the full weight of the tariffs. Through earlier rounds of tariff volatility, automakers and dealers have absorbed some of the cost of the governmental levies. Prices have risen as tariff agreements firmed up. But during topsy-turvy stages of negotiation, the automotive industry tends to cushion the consumer to keep prices competitive.
Long-Term Trends to Watch
- Tariffs have increased new car prices over time.
- Automakers are moving production across borders, and Canada is moving closer to China’s auto industry.
Still, tariffs have pushed up prices over time. A study from Kelley Blue Book’s parent company, Cox Automotive, a year into Trump’s tariff regime found that imported cars, this spring, were between $5,000 and $8,900 more expensive thanks to tariffs. Domestically built models were between $1,600 and $2,000 more expensive.
New tariffs on Canadian vehicles and parts may worsen that figure over time.
They might also, however, help consolidate the American auto industry south of the Canadian border.
Reuters reports, “Many automakers have announced or are considering plans to scale back Canadian auto production, and the trade standoff has led to a 22% reduction in Canadian imports of U.S. vehicles.”
Canada, meanwhile, could replace the U.S. with other trade partners. The country has been increasing its ties with the Chinese auto industry in recent years as its relationship with the U.S. has soured.
