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In the late 1960s, when I, a math major at the University of Winnipeg, started reading economics on my own, I came across a famous Canadian economist who, had he lived beyond the age of fifty-three, might have been Canada’s first recipient of the Nobel Prize in economics. His name was Harry Johnson.
Like the vast majority of economists, Johnson was a free-trader. He wrote a lot about that, pointing out, for instance, how protectionist Canada was in the 1950s and 1960s. That’s where I first learned about the 1965 US Canada Auto Pact, on which Johnson, like other free-traders, was positive. Although it carried some Canadian content requirements, it allowed free trade in cars and car parts between Canada and the United States. That one measure helped integrate the US and Canadian auto industries.
And then, when Canada, the United States, and Mexico signed on to the North American Free Trade Agreement (NAFTA) in 1994, that agreement integrated the auto industry even more. Auto parts and whole cars could move between the three countries duty-free. After becoming president in 2017, Donald Trump renegotiated NAFTA, and the new agreement was called the United States Mexico Canada (USMCA) agreement. It was a small step back and imposed new obstacles to free trade in automobiles. Fortunately, they were minor.
President Trump has said that tariffs are the most beautiful word in the dictionary. I beg to differ. But what is clear is that his new tariffs on Canada, announced in late August after trade talks broke down, are threatening to hurt what is now a beautifully integrated auto industry. The United States has moved to impose 50 percent tariffs on $20 billion worth of Canadian goods. Ottawa has announced plans to retaliate.
The beautiful auto industry
A March 1, 2025, article in the Wall Street Journal titled, “Track One Car Part’s Journey Through the US, Canada, and Mexico—Before Tariffs,” illustrated this point. Reporters Vipal Monga and Santiago Pérez tracked a few auto parts that, as they were completed, crossed borders a number of times. One example was pistons. Raw aluminum to manufacture a piston was shipped from Michigan to Ontario. The piston was cast and then sent to Michigan. Then it was sent to Mexico to be finished. Then it was sent to Wisconsin, where it was assembled with rods and rings, and then sent on to Michigan. The piston was put into an engine in Michigan and then sent to a vehicle assembly plant in Ontario. Many of the vehicles were then exported to the United States and Mexico. The number of border crossings: six.
The new tariffs won’t hurt the auto industry directly. Although the 50 percent tariff rate is in the nosebleed seats of the tariff arena, that 50 percent rate applies to only about US $20 billion of Canada’s approximately $400 billion of annual exports.
The problem is that Trump has shown himself to be a volatile decision-maker who will change his mind from week to week. If you’re a manufacturer trying to decide whether to produce parts in Canada for the huge US auto market, what do you need? The opposite: some degree of certainty.
The beautifully integrated North American auto industry is likely to be a casualty of this latest rejection of relatively free trade. Justin Wolfers is an economist at the University of Michigan. The auto industry matters a lot to that state. Here’s how Wolfers recently put it:
Around a city like Detroit, a cluster of automotive specialists grew up that straddles the border and draws on American and Canadian ingenuity at once. The bet was that a cluster like that could beat any purely American or purely Canadian city on earth, and it did.
Now run a tariff wall through the middle of it. American factories can’t get the parts they need at the price they need, so they use costlier parts, or worse ones. Canadian factories lose their American customers. Both sides get weaker.
But take one super competitor and split it into two smaller ones, and the deeper loss isn’t that each half is smaller. It’s that neither half is competitive.
A long time to build, a short time to destroy
As I discussed in “The Benefits of Free Trade Are at Risk,” Defining Ideas, February 20, 2025, it took well over half a century, from the 1930s to about the middle of the last decade, for almost all of the major countries in the world, and many of the small ones, to move much closer to free trade. We didn’t get all the way, but we made large progress.
In discussing a 2011 article, I wrote:
Similarly, other countries’ governments reduced their tariff rates as a result of these rounds of negotiation. [Silvia] Nenci’s Figure 4 shows that the average world tariff rate peaked at about 22 percent in 1934 and then fell to a temporary postwar low of about 12 percent in the early 1950s. It then rose to about 17 percent in the mid-1950s. With various rounds of negotiations noted above, the average tariff rate fell to under 4 percent by 1999.
How did we do this? With multilateral negotiations among many countries. Doing that takes a fair amount of good will. For example, it’s unwise to make nasty statements about the people you’re negotiating with unless there’s some good strategic reason. Was there any good reason for Treasury Secretary Scott Bessent to say, when discussing Canadian government officials, that they were acting like a “little yippy dog.” How strategic was that?
While relatively free trade took decades to achieve, Trump is destroying it in a much shorter time. When he gets slapped down by the courts, he comes up with a new way of imposing tariffs. The courts are playing whack-a-mole, and the mole is much faster than the courts. This is not a partisan point; President Biden did the same thing with his attempts to cancel student debt.
What will happen on January 20, 2029, when Trump leaves the White House? Will we revert to the relatively free trade we had? There’s no assurance. I had hoped that when Joe Biden became president in 2021, he would reverse most or all of Trump’s tariffs. He didn’t. We may be living in a much more protectionist country than we Americans have gotten used to over the past few decades.
If I thought Trump would listen, I would beseech him to give up on his unjustified view that tariffs are beautiful. Instead, he should save an industry that really is beautiful.
David R. Henderson is a research fellow at the Hoover Institution and an emeritus professor of economics with the Naval Postgraduate School. He is the editor of The Concise Encyclopedia of Economics.