Car sales to fall 4.6% on tariff uncertainty, economic headwinds, TD says

Vehicles are shown at a Windsor car dealership on March 4, 2025. Photo by WINDSOR STAR - DAN JANISSE

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Car sales are expected to fall from their post-pandemic high in 2025 as Canada deals with economic headwinds and the prospect of living without a formalized trade deal with the United States.

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Sales could fall as much as 4.6 per cent to 1.9 million vehicles this year, according to a recent report by Toronto-Dominion Bank.

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“Looking to 2026, elevated trade uncertainty is likely to continue to weigh on the industry as the first review of the Canada-U.S.-Mexico Agreement (CUSMA) takes place,” TD said in the report. “The process promises to be extensive, with the U.S. likely to seek material revisions to be made within or as an accessory to the agreement.”

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Vehicle sales in 2025 climbed to about two million as easing interest rates helped spur pent-up demand, but monthly demand cooled after a strong start as Canadians purchased before U.S. tariffs took effect.

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Interest rates are likely to remain flat for most of the year, but with monthly payments hovering around $1,000, TD said affordability concerns and a drop in immigration levels will drag the market down.

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“The Canadian automotive industry managed to weather the storm of elevated trade tensions with the nation’s largest trading partner relatively well in 2025, but headwinds are growing as tariffs take greater effect,” the report said. “The need to diversify automotive trade away from its current outsized U.S. concentration will likely be necessary to ensure the long-run viability of the industry amid growing U.S. protectionism.”

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Vehicle production in Canada has also stalled. Production has declined in all three North American nations, but the 5.4 per cent drop in Canada was the largest.

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TD said Canadian vehicles effectively face a 15 per cent to 20 per cent tariff rate when exporting to the U.S. since only non-CUSMA-compliant exports face the full 25 per cent. But that’s still more than what other major vehicle exporters, such as South Korea, Japan and the European Union, face.

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To avoid the tariffs, some automakers — including General Motors Co. — have shifted some production to the U.S., which TD projects will result in another four per cent production decline among Canadian auto plants in 2026.

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“Further reductions in production are possible, but large-scale reorganization would be suboptimal on a cost and logistics basis to implement under existing tariff policies,” the report said.

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Of course, many of TD’s projections are dependent on the looming CUSMA review to come later this year.

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Formal renegotiations are scheduled for July 1, and U.S. President Donald Trump has privately mused about ending the deal entirely, according to Bloomberg News.

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“Losing CUSMA would have significant consequences for Canada and the North American auto industry, but the prospect of extended negotiations could also yield improved trade relations as well,” TD said.

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