Canada assembled 1.2 million vehicles in 2025 — a third fewer than it built before the Covid-19 pandemic and a decline that one of the country’s largest banks says represents a structural break.
In a report titled “Recharging Canada’s Auto Industry,” BMO warned that Canadian vehicle production has fallen 33% below pre-pandemic levels — even as domestic demand holds steady near 1.95 million units.
The bank cautioned that US tariffs risk making that gap permanent.
The new report echoes BMO Economist Robert Kavcic’s words, who — in January — had called for the possible “permanent damage” that the auto, aluminum and steel sectors could face due to the uncertainty around the trade policies.
As reported over the weekend, Ottawa scrambles to rebuild the industry around a new set of partners — most visibly through a deal that links a $20 billion submarine contract to demands for a Korean auto plant, while courting China and Germany on separate tracks.
The Production Gap
Canada’s 1.2 million units in 2025 represented a 7.8% decline from 2024 and a 33% drop from 2019 levels.
According to BMO, Mexico has surged to nearly 4 million units and its production line is still rising, while Canada’s has been in structural decline since before Covid-19.
The US held at 10.4 million units, down just 3.2% and only 2.3% below its pre-pandemic baseline.
Canada is the only North American producer still meaningfully below where it stood before the pandemic.
The cruelest detail is that the collapse in production is happening against a backdrop of stable demand.
BMO forecasts Canadian new vehicle sales at 1.95 million units in 2026 — flat from 2025 — rising to 2.05 million in 2027.
US sales are forecast at 16.0 million in 2026 and 16.6 million in 2027, suggesting North American demand is not the problem.
Johnson identifies two structural forces behind the production erosion: the collapse of tariff-free continental integration, and a sudden policy-induced reversal in the electric vehicle segment.
The EV Reversal
When Canada’s federal EV incentives lapsed in early 2025, the market responded immediately.
BMO’s chart of zero-emission vehicle sales shows Canada’s year-on-year growth rate swinging from +32% in January 2024 to a collapse of more than 50% by mid-2025 — the steepest drop in the dataset.
EV market share fell from nearly 15% in 2024 to approximately 9% in 2025, erasing more than 90,000 units of expected demand.
A comparable reversal unfolded in the United States after incentives ended in late September — EV sales surged ahead of the deadline and then fell 34% year-on-year in the fourth quarter.
The hybrid surge that followed is now structural, not temporary.
BMO data shows that in Canada, battery electric vehicles represented 13.5% of new vehicle registrations in 2025, while hybrid electrics reached 18.9% and plug-in hybrids 21.2% — meaning hybrids and PHEVs together account for more than 40% of the market.
In the US, hybrids have hit 21.8% and battery electrics 20.0%.
The centre of gravity of the electrification transition has shifted decisively toward partial electrification.
Average EV prices running US$8,000 above gasoline-powered vehicles exposed the underlying economics once incentive support was withdrawn.
The Tariff Wall
Overlaying the EV shift is what BMO describes as an even deeper macro force.
US aluminium prices have roughly doubled since 2023, reaching approximately US$4,000 per metric tonne by end-2025 — far above European and Japanese prices of around US$2,500–2,700.
As aluminium is critical to EV platform construction, the tariff-driven US price premium directly inflates the cost of Canadian EV manufacturing.
Cross-border vehicle exports that once faced near-zero friction now encounter effective tariff rates that peaked at around 8% on Canadian vehicles during 2025, according to BMO data on calculated duties.
For Mexico, those rates hit 22% before easing — but the damage to the integrated supply chain model has already been done regardless of where rates ultimately settle.
More than 90% of Canadian-made vehicles and 60% of Canadian auto parts are exported to the United States, according to the Canadian government.
Components in a finished North American vehicle may cross the Canada-US border seven or more times during production.
The average US tariff rate on Canadian products has risen from 0.1% to 5.8% over the past year, the Bank of Canada said in a January report.
General Motors cut positions at an Ontario plant in January and Stellantis redirected investment from its Brampton facility toward US production.
Last year, GM and Stellantis saw their remission quotas cut by 24.2% and 50% respectively after cancelling Canadian production plans.
US auto factories were running at 58% of capacity — their lowest in more than four years, according to Federal Reserve data — suggesting that reshoring, to the extent it is happening, is not filling idle American capacity either.
US Trade Representative Jamieson Greer has recently told CBC that Canada should accept “some level of higher tariff” on its exports and acknowledged that “reshoring didn’t happen fast enough.”
Ottawa’s Response
The federal government’s new automotive strategy, announced February 5, attempts to stabilise and reposition the industry.
As Industry Minister Mélanie Joly put it, the goal is for Canada to “build the best cars in the world, for the world.”
The strategy scraps the EV mandate, introduces a new EV rebate programme, invests in charging infrastructure, offers clean-investment tax credits, and allows a limited number of Chinese EVs to enter Canada at a sharply reduced tariff.
BMO judges the shift away from the EV mandate toward a more flexible greenhouse gas standards-based approach as likely the strategy’s most effective element.
Major North American automakers have collectively written down more than US$50 billion in EV-related investments, making mandate compliance unrealistic in the near term.
According to BMO charts, with PHEVs and HEVs now accounting for more than 40% of Canadian new vehicle registrations, a mandate designed around sales of fully electric models was already disconnected from the market it was meant to shape.
But the bank identifies a central limitation the strategy does not resolve.
None of the sub-C$50,000 EV or plug-in hybrid models eligible for the new incentives are produced in Canada.
The four plug-in models assembled domestically sit far above that threshold.
Canada’s EV rebound, Johnson concludes, is primarily a consumer story — not a manufacturing story.
The China Gambit
On March 1, Canada began issuing import permits for Chinese EVs at the standard 6.1% most-favoured-nation tariff, ending a 100% surtax imposed just 17 months earlier.
The annual quota covers 49,000 vehicles in the 12 months to February 28, 2027, with the government indicating it could rise to 70,000 within five years.
When announcing the deal in Beijing on January 16, Prime Minister Mark Carney set out what Ottawa expects in return.
“It is expected that within three years, this agreement will drive considerable new Chinese joint-venture investment in Canada with trusted partners to protect and create new auto manufacturing careers for Canadian workers, and ensure a robust build-out of Canada’s EV supply chain,” the Prime Minister’s Office said.
On pricing, the government added that “in five years, more than 50% of these vehicles will be affordable EVs with an import price of less than $35,000.”
Both commitments are framed as expectations rather than contractual obligations. BYD is the furthest advanced among Chinese brands, having completed compliance work for potential Canadian exports. Chery has been seeking engineering and certification roles targeting Canada since January.
Nearly all other Chinese automakers remain absent from Canada’s vehicle import registry, as EV has reported.
Tesla has moved to fill the quota on its own terms, pulling US-made Model 3s from the Canadian market as it repositions supply.
Finance Minister François-Philippe Champagne has meanwhile launched consultations to tighten Canada’s automotive remission framework — a mechanism that allows carmakers to import a set of US-assembled vehicles tariff-free provided they maintain local production levels.
The Korean and German Bets
Ottawa has also tied a $20 billion submarine procurement contract to demands that South Korea commit to opening auto assembly plants in Canada, as EV reported over the weekend.
Joly signed a memorandum of understanding with Seoul on January 29 covering automotive manufacturing investment and travelled to Berlin to negotiate a parallel arrangement with Germany.
Korean brands sold 249,028 vehicles in Canada in 2025, representing 13% of the market.
Sun Xiaohong, secretary-general of the automotive branch of the China Chamber of Commerce for Import and Export of Machinery and Electronic Products, said China-Canada cooperation could eventually extend beyond vehicle exports to local production.
The Bottom Line
Ottawa’s new strategy represents a meaningful recalibration, Johnson writes, but the forces reshaping Canada’s auto sector may be larger than domestic policy can handle.
Unless US tariffs are eased or global competitive dynamics shift materially, Canadian auto production is unlikely to return to pre-2020 levels.
Any future growth will depend less on traditional assembly and more on battery materials, advanced components, clean-tech manufacturing and Canada’s low-carbon electricity advantage.
The aluminium price gap, the EV demand collapse, the production shortfall against Mexico — all three of BMO’s charts point to forces that pre-date the current tariff cycle and will outlast any single trade negotiation.
The USMCA review due July 1 will be the first major test of whether the trade framework underpinning even a diminished version of the old model can survive.
Canada’s expectations for a full renewal, two Canadian officials involved in the US trade discussions told the New York Times in February, are “very low.”
