Why Toyota’s new Canadian investment came for NAFTA but will (likely) stay for CETA


Toyota’s decision to build a luxury sports utility vehicle in southern Ontario places it at the nexus of Canada’s growing portfolio of free trade deals — a distinct advantage as tariff walls threaten trade globally, analysts say.

Toyota announced plans Monday to start building both a standard and hybrid version of the Lexus NX SUV at its Cambridge, Ont., plant starting in 2022. The plant will be the first outside Japan to produce the vehicle.

With roughly two thirds of the 90,000 Lexus NXs exported each year going to the United States, the decision is “first and foremost a vote of confidence in the Canada-U.S. trade relationship,” said Flavio Volpe, president at Automotive Parts Manufacturers Association (APMA).

“The North American Free Trade Agreement is definitely the key undercurrent here,” Volpe said. “If the trade environment was negative they would never have made these investments, but there are likely other considerations involved in this too.”

Indeed, Toyota typically ships the remaining 30,000 exported Lexus NXs to Europe. Building those vehicles in Canada would allow the firm to take advantage of the preferential market access enabled in the newly minted Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union, Volpe said.

“They shifted some production of the RAV 4 out of Canada to make room for the NX,” he said, referring to Toyota’s decision in March to move a portion of the popular RAV 4’s assembly to its Kentucky plant. “That suggests they may have made a calculation that they can ship NXs to Europe at a profit.”

Though Toyota has no plans to export to the European Union at this time “we are always evaluating our opportunities,” said Scott MacKenzie, senior national manager, external affairs, Toyota Motor Manufacturing Canada.

“Tariff-free access to the U.S. is a factor we definitely consider,” he added. “One competitive advantage we have — and have always had — relative to Japan is duty-free access into the U.S. market.”

Cambridge

Toyota Rav 4 vehicles in Cambridge, Ont.

Cole Burston/Bloomberg

Toyota’s announcement counters a wave of recent blows to the auto industry in Ontario. General Motors decided last November to shutter its Oshawa facility, while Chrysler announced plans last month to cut a shift at its Windsor assembly plant, leading to 1,500 job losses.

Toyota’s latest decision suggests more vitality remains in the sector than it might appear, said David Worts, executive director of the Japanese Automobile Manufacturers of Canada (JAMA).

“Trade liberalization is important to all automakers and it’s the foundation of the auto industry in Canada,” Worts said.

Producing in Canada will make it easier for Toyota to meet the auto requirements under the revised NAFTA — currently facing a range of challenges to ratification in the U.S. Congress. The deal raises the thresholds on regional automotive content — the amount of parts and raw materials in a vehicle that must come from American or Mexican sources — to 75 per cent from the current 62.5 per cent. It also requires 40 to 45 per cent of production to be done by NAFTA workers earning at least US$16 an hour.

Trade liberalization is important to all automakers and it’s the foundation of the auto industry in Canada

David Worts

Japanese automakers have gradually increased the proportion of parts they make in Canada, bringing them much closer to meeting those levels, Worts said. The firms now operate 64 auto parts and related plants in Canada, according to the organization.

“With this move they are looking not only to the market but to changes in the trade landscape,” Worts said. “The amount of localization that has happened in North America really puts them in a good position in terms of NAFTA.”

There are other advantages. Toyota negotiated a duty free agreement for the shipment of parts when they opened the Cambridge plant in the early 1980s, said leading automotive analyst Dennis DesRosiers. And the Cambridge plant is considered one of the best in the world.

“These things are a complicated algorithm and they look at a stunning number of details,” Desrosiers said.

Crucially, a Canadian production base also allows Toyota to dodge potential U.S. tariffs on Japanese autos. U.S. President Donald Trump has threatened to impose a 25 per cent levy on vehicles from the country if it doesn’t open its market to more U.S. beef and other products. Canada and Mexico both secured exemptions from those tariffs as part of the negotiations that led to the new NAFTA.

“That would be a real problem,” said Worts.

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