Tax Insights: US tariffs on imports of automobiles and automobile parts from Canada

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In brief

What happened?

On April 2, 2025,¹ US President Donald Trump confirmed that the executive order² that he signed on March 26, 2025 will proceed. That executive order imposed a 25% tariff on imports from all countries, including Canada, of:

• automobiles, starting April 3, 2025 (12:01 am ET)
• certain automobile parts, starting on a date to be determined, but no later than May 3, 2025

However, for automobiles and automobile parts that qualify for preferential treatment under the Canada‑United States‑Mexico Agreement (CUSMA), the 25% tariff will apply only on the non‑US content portion of the automobile or part.  

The order is issued under section 232 of the US Trade Expansion Act of 1962 and cites reasons relating to “national security” concerns (i.e. the high volume of these imports and vulnerabilities in the global supply chain threaten the US domestic automotive industry).  

In response, Prime Minister Mark Carney announced on April 3, 2025 that Canada will impose a 25% surtax on:

• fully assembled vehicles imported from the United States that are not compliant with the CUSMA
• the non‑Canadian and non‑Mexican content of CUSMA‑compliant fully assembled vehicles imported from the United States

Why is it relevant?

The newly imposed US tariffs will substantially harm the Canadian automotive industry and force it to prepare for difficult challenges ahead. Tariffs are additional taxes that will put extra pressure on strained suppliers in the automotive sector by increasing costs, disrupting supply chains (as this sector is highly integrated across North America) and reducing profit margins. Costs will inevitably be passed on to consumers, compounding the financial strain they already face due to sustained inflationary pressures in recent years.

This is further aggravated because these tariffs are in addition to other recently imposed US tariffs³ on imports from Canada of:

• steel and aluminum products (also, under the Trade Expansion Act of 1962) that also affect the automobile manufacturing sector
• other goods that do not qualify as originating goods under the CUSMA (under the US International Emergency Economic Powers Act related to border security concerns)

Actions to consider

In the face of tariff volatility, the automotive sector must embrace financial resilience and be adaptable to thrive. Businesses should:

• initiate a comprehensive assessment of their tariff exposures using historical US, Canada and Mexico customs data to establish a clear operational baseline and precise tariff exposure analysis; this involves reviewing goods for eligibility and compliance under the CUSMA, with a keen focus on US content across automobile models and parts, and ensuring the proper documentation exists to support preferential treatment claims
• establish strategic "war rooms" and leverage scenario modelling analysis to develop and refine response strategies
• actively engage with policymakers, industry associations and government entities to help achieve shared industry goals

In detail

US tariffs on imports of automobiles and automotive parts

Key provisions in the March 26, 2025 executive order include:

• Tariff imposition – imposing a 25% tariff, starting:
  • April 3, 2025 (12:01 am ET), to imports of automobiles (i.e. passenger vehicles [sedans, sport utility vehicles, crossovers, minivans, cargo vans] and light trucks)
  • no later than May 3, 2025, to imports of certain automobile parts (e.g. engines and engine parts, transmissions, powertrain parts and electrical components)
• Preferential tariff treatment (automobiles) – allowing automobiles that qualify for preferential tariff treatment under the CUSMA to have the 25% tariff applied only to the non‑US content of the automobile. Relevant details follow:
  • Importers will be required to submit documentation that identifies the amount of US content in each model imported into the United States; “US content” refers to the value of the automobile attributable to parts wholly obtained, produced entirely, or substantially transformed in the United States. The non‑US content of the automobile will then be calculated by subtracting the value of the US content from the total value of the automobile.
  • If US Customs and Border Protection determines that the US content of an automobile is overstated, the 25% tariff will apply:
    • to the full value of the automobile, regardless of the automobile’s actual US content, and
    • retroactively (from April 3, 2025) until the date that the importer corrects the overstatement, to the full value of all automobiles of the same model imported by the same importer
• Preferential tariff treatment (automobile parts) – permitting automobile parts that qualify for preferential treatment under the CUSMA to not be subject to the 25% tariff until a process has been established to apply the tariff exclusively to the value of the non-US content of these automobile parts
• No drawback – providing that no drawback (refund) will be available with respect to these tariffs
• Monitoring and adjustments – monitoring by the US Secretary of Commerce who may recommend further actions, as well as establishing a process for including additional automobile parts that could be subject to the tariff

Canada’s response

On April 3, 2025, Prime Minister Mark Carney announced that Canada will impose a 25% surtax on:

• fully assembled vehicles imported from the United States that are not compliant with the CUSMA
• the non‑Canadian and non‑Mexican content of CUSMA-compliant fully assembled vehicles imported from the United States

The federal government intends to “develop a framework for auto producers that incentivizes production and investment in Canada.” Canada will not impose a surtax on automobile parts. The revenue from the surtax will be used to support Canadian auto workers and companies affected by these tariffs. The effective date of this surtax has not yet been announced.

This surtax is in addition to a previously announced retaliatory 25% Canadian surtax, effective March 4, 2025 on $30 billion worth of US‑origin goods, and effective March 13, 2025 on an additional $29.8 billion worth of US‑origin goods. A remission of Canadian surtax may be available for eligible goods.

The takeaway

Companies in the automotive sector must focus on building financial robustness and flexibility to survive and succeed in this volatile tariff landscape. Leadership teams should act now by:

• rapidly establishing a true operational tariff exposure baseline – Automotive businesses should immediately focus on creating a comprehensive operational baseline by leveraging historical trade data and ensuring origin compliance with the CUSMA (if applicable). This involves a thorough review of products to assess tariff exposures and US content requirements. Proper documentation must be gathered to support claims for preferential treatment, because there will be extra scrutiny due to the current trade conditions. A deep, fact-based, rapid tariff exposure analysis that considers both historical data and future projections will be crucial for leadership teams to gain a clear understanding of the challenges ahead and effectively strategize their responses.
  
  Leveraging PwC's proprietary Tariff Impact Assessment and Origin Compliance tools can facilitate a rapid, fact‑based understanding of tariff exposures. PwC’s Origin Compliance tool can help businesses that engage in cross-border trade improve global trade management with a customizable platform that streamlines origin calculations, supplier solicitations, trade compliance and procurement planning. It easily identifies the amount of US-origin content in goods imported into the United States, as the tool reviews the bill of materials, which is required to determine if the goods qualify for the CUSMA.

• creating “war rooms” and leveraging scenario analysis to frame mitigation plans – Organizations must quickly establish strategic "war rooms" to enable rapid decision‑making and foster collaboration among cross‑functional teams. These teams should focus on short‑term actions, such as exploring remissions, optimizing transfer pricing and leveraging available government incentives. Simultaneously, it is essential to outline medium- to long‑term strategies to prepare for ongoing trade challenges.
  
  Applying a robust strategic decision‑making framework, enhanced by scenario modelling, allows organizations to simulate potential outcomes and refine their strategies. This approach facilitates a smooth transition from tactical responses to sustainable investments supported by data‑driven analysis. Clear plans will significantly reduce the volatility associated with reacting to each new development. This preparedness will empower teams to focus on the most impactful issues at the right moments.

• engaging with associations and government stakeholders – Active engagement with industry associations and government stakeholders is essential to ensure that your organization’s unique situation is understood and considered in trade discussions. By collaborating with associations, your voice will be amplified, enabling you to influence the trade environment while aligning your advocacy efforts with broader industry goals. By implementing these key actions, automotive companies can enhance their resilience and readiness to effectively deal with current and future trade challenges.

PwC can help your business navigate this current tariff situation. We can host an executive briefing session with your team to share the latest tariff insights (including insights from our participation in the Automotive Tariff Taskforce) to help bolster your organization’s response readiness. For more on how we can support your business, see our:

• Tariffs and Trade Policy Resource Centre for extensive information to help your business assess and manage these tariffs
• Tariff relief: Unlocking government support for Canadian federal and provincial/territorial tariff-related support programs
• Tax Insights “US tariffs and Canadian countermeasures: How will it affect Canadian businesses?” for strategies that can help Canadian businesses adapt to these and any potential new tariffs

^{1. On April 2, 2025, President Trump also signed an executive order that will impose a baseline reciprocal tariff at a rate of 10%, starting April 5, 2025 (12:01 am ET) on most imports from all countries (except from Canada and Mexico). For more information, see our upcoming Tax Insights "US imposes reciprocal tariffs on its trading partners: How will it affect Canadian businesses?.”} 

^{2. Executive order “Adjusting Imports of Automobiles and Automobile Parts into the United States” (March 26, 2025).}

^{3. For more information, see our Tax Insights at www.pwc.com/ca/taxinsights:
 - “US imposes tariffs on steel and aluminum imports from Canada” (March 14, 2025 update)
 - “US tariffs and Canadian countermeasures: How will it affect Canadian businesses” (March 7, 2025 update)}