02.19.2025
Response on U.S. Tariffs from Canadian Black Book
The impact of possible tariffs enforced by the United States is a topic that the Canadian Black Book team has discussed and played out through scenario-based examples since its announcement from President Donald Trump in January. Regarding the fields that serve vehicle valuations, we will take a piece-by-piece approach in assessing its impacts for each area of our automotive market.
Macroeconomic Impacts:
The threat of a tariff against Canadian-produced goods has been enough to lower many economic measures of health over the past month. The Canadian exchange rate, investment in Canada, and Consumer Confidence will likely contribute to lower economic growth in the coming year and result in higher unemployment. Estimates range from a 1-3% drop in GDP and an increase in the unemployment rate of up to 3%.
As this will impact the overall GDP potentially heading towards a technical recession; the Bank of Canada could look to continue lowering interest rates further than the 200bps it has dropped since June 2024. As the U.S. Federal Reserve has paused the lowering of its rates, the rate spread between Canada and the US has widened and acts as a further drag on the value of the Canadian dollar. If U.S. inflation rises in tandem with the introduction of counter-tariffs and overall impacts from the increased price of goods, then we could see the impacts decrease in the longer-term.
Any counter-tariffs implemented by the Canadian government could also negatively affect growth, and since they will cause prices to rise and push inflation above the Bank of Canada’s 2% target, this could force the Bank to increase rates.
As the previous two paragraphs present a reason for the Bank of Canada to both lower and raise interest rates; however, we see it being more likely that rates would decrease as most of the inflation being projected would not be caused by an increase in consumer spending.
New Vehicle Prices:
First sentiments around these impacts are centered around concerns that supply chains are anticipated to slow, reducing new car supply as well as parts supply (for both repair and vehicle assembly). With a backlog of border issues pending, many manufacturers have set up alternate operations to stockpile inventory of new vehicles and parts close to the U.S.-Canadian border to safeguard prices. What this ensures is price pressures for vehicles susceptible to tariffs will not receive an immediate impact, delaying the associated price changes at the retail level and mitigating risk short-term. For new vehicles, where price is already concerning, the tariffs will lead to an immediate rush on purchasing, something already observed through January sales volumes that were near record levels. We anticipate February to be strong as well, with the sales pace dropping off quickly if tariffs come March 1st.
With exposure to a tariff of as much as 25%, the impact on new vehicle prices has been estimated between $6,000 and $10,000 and would take effect as soon as current, on-ground inventories are depleted.
The repercussions of this sizeable market price change would bring on a multitude of possible scenarios. If there is an increase on incentives to offset prices, this would hurt longer-term vehicle retention should the changes sustain over time. Increasing Market Days’ Supply would present as another impact necessitating incentives. Stagnating supply would also affect vehicle production levels at manufacturer assembly plants. Increased production costs and lower sales volumes could spell plant closures for these facilities.
Used Vehicle Prices:
While we don’t have definitive answers to the tariff application on used vehicles, we can pose two scenarios that could arise both with and without tariffs.
With tariffs enforced, Used Wholesale values (especially on select segments) will experience downward price pressure because of significantly reduced U.S. buyers in Canadian auction lanes. As Canadians react to higher new vehicle prices and migrate towards used vehicles, the impact of tariffs will be offset in the used vehicle market. We can assume that higher vehicle retention will center around smaller sized vehicles that possess greater overall affordability. Luxury market vehicles as well as Full-size SUVs and Trucks will take the brunt of the impacts, like when affordability concerns were at their highest.
Alternatively, if they are not tariffed, there could be an even greater demand/strain on Canadian Auction inventory from U.S. buyers to acquire more cost-effective inventory, especially as new car prices south of the border will also be subject to increase. With the addition of consumer interest in used vehicles at a much higher capacity, value retention could see incremental increases and quickly diminishing inventory levels. While our market index will begin increasing, we likely won’t see valuations similar to the March 2022 peak of 165.0.
Conclusion:
This is an unprecedented change to the post-WWII economic order which was predicated on the free movement of goods across borders. For example, the automotive supply chains between Canada and the US have been largely tariff-free since the signing of the Auto Pact in January 1965. Since the signing of the North American Free Trade Agreement in 1992, tariff free trade in automotive products has been expanded to include Mexico.
While the situation remains incredibly fluid, we continue to monitor any new information very carefully. Canadian new and used car market volatility has been reliant on the outcomes first seen in the U.S., and with the mutual impact that the North American market will receive as a whole, we can adapt our strategies and assumptions based off of the faster generating data insights from the U.S. market and how they apply in Canada.
The over-arching theme from all of this highlights the support from many different directions for used vehicles – the external market supports values if tariffs don’t apply, and internal market supports them if they do. The real need for risk management is with new cars. Activities delaying the impact of tariffs are already being seen in the market.
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