Donald Trump tariff threatens Volkswagen’s $7B St. Thomas plans: Trade expert

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Southwestern Ontario may lose a $7-billion investment and the 3,000 jobs that come with it if Canadian industry is hit with a 25 per cent tariff from U.S. president-elect Donald Trump, one trade expert says.

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Volkswagen, now building an electric vehicle battery plant in St. Thomas, may be forced to reconsider the investment, and relocate to a U.S. site, rather than pay, said Andreas Schotter, an expert in international trade and a professor at Western University’s Ivey business school.

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That would be the most serious case in what may be a devastating blow to regional business, from manufacturing to the agri-food sector, building materials and pharmaceuticals, which all may see a drop in exports that hurts business.

“Twenty-five per cent is impossible to absorb. I’m worried about the St. Thomas plant. They may consider relocating because of tariffs,” Schotter said.

While the site has been cleared, construction has not begun on the plant, and U.S. sites were considered. It’s expected to open in St. Thomas in 2027.

The plant will make electric-vehicle batteries to be shipped to Volkswagen vehicle assembly plants in South Carolina and Tennessee, where electric vehicles are being made.

The battery makes up about 60  per cent of an EV vehicle cost, and a tariff is not sustainable, Schotter said. “I wouldn’t be surprised (if it moved). They have time.”

Volkswagen, however, said it would not discuss trade deals between nations and the possible impact.

“We don’t wish to speculate on any regulatory plans of the new U.S. administration that could have an impact on the framework conditions of the automotive industry,” said a VW spokesperson.

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Trump takes office Jan. 20 and pledged the tariffs will be one of his first acts as president.

Although the current U.S.-Mexico-Canada Agreement (USMCA) on trade expires in 2026, Trump may try to act sooner, said Schotter. It took effect in 2020 and ensured trade is largely tariff free between the countries.

The U.S. accounts for about 75 per cent of Canadian exports.

Schotter believes the tariff threat may be little more than a bargaining ploy by the U.S. administration to reopen the trade deal. While Canada fared well after the last round of bargaining after Trump was first elected in 2016, there may be a different tone this time.

“In contrast to the first time, he isn’t listening to seasoned civil servants who understand these complications and the negative effect on his own people. He doesn’t understand it,” Schotter said of Trump, adding he appears more “threatening and aggressive” now than in 2016.

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“It’s a reason to be concerned. I think we need to brace ourselves.”

Any tariff will hurt U.S. industry too, said Schotter. There is $3.6 billion in daily cross-border trade and nearly nine million U.S. jobs depend on the trading relationship, he said.

Those sectors include manufacturing, agriculture, energy, financial services, transportation, and retail sectors. More than 30 U.S. states count Canada as their main export market.

But smaller London industries also are vulnerable.

Attica Manufacturing on Invicta Court machines parts for industrial use, selling most of its product to U.S. manufacturers. It opened a second plant in Port Huron, Mich., to tap into the U.S. market. The tariff may mean it will have to shift its London production to Michigan, costing jobs here. That would also mean costly retooling of its U.S. plant. 

“I can’t absorb a 25 per cent increase in costs. I will not get the work; I will lose work,” said owner Andy Mavrokefalos. “They don’t have the margins to absorb it. They will have to source a domestic supplier.”

He employs about 80 people in his London plant, but a tariff will hurt all industry regardless of what is made, if it wants to sell into the U.S.

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“It will mean less work for my shop here,” he said. “That’s not good. It doesn’t bode well for anything on this side of the border. If we don’t get a trade deal, it will mean a lot of lost work.”

Trump stated on social media he will impose tariffs unless Canada and Mexico crack down on fentanyl and illegal migrants crossing into the U.S.

“I was surprised by that. I think there is a greater flow into Canada from the U.S.,” Schotter said of fentanyl, a highly addictive synthetic opioid.

ndebono@postmedia.com

THE 25% TARIFF IMPACT

Impact on Canadian Economy

• GDP contraction of more than 2.4%
• Decline in the value of the Canadian dollar.
• Inflation up 2.5% to 3.0% range.
• Industry will look more to U.S. suppliers.

Consumer impact

• Price increases on a broad range of goods
• Potential supply shortages
• Higher energy costs
• Reduced consumer choice

Most affected U.S. states

• Michigan: Automotive industry disruption
• Maine: Forest products and agriculture
• Washington: Cross-border services and technology
• North Dakota: Energy and agricultural trade
• New York: Financial services
• Montana: Agricultural and resource trade

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Long-term Implications

• Permanent changes in supply chain strategies
• Some permanent loss of market share to global competitors
• Restructuring of North American operations
• Reduced North American global competitiveness

EXPECTED SCENARIO

“Despite the rhetoric, broad tariffs are unlikely to materialize at either level. Instead, tariff threats are more likely to serve as leverage for USMCA renegotiation in 2026. Historical precedent suggests final implemented measures tend to be more targeted and limited in scope, but again, who knows what the Trump administration will be up to.”

Source: Andreas P.J. Schotter, professor at Ivey school of business at Western University and at the Vienna school of economics and business

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