Canada’s auto trade surplus continues to hold up well, but Mexico is threatening its position as the largest trading partner with the U.S. Historically, Canada has been the largest auto parts exporter to the United States. However, Canada’s supremacy in the U.S. market will likely end this year, surpassed by exports from Mexico. Data from the U.S. Department of Commerce indicate that Canadian auto parts exports to the United States have declined to an annualized US$16.2 billion so far this year. However, shipments by Mexican suppliers to the United States have totalled an annualized US$17.2 billion. “Given the importance of the U.S. auto parts market, and a large labour cost disadvantage vis–vis Mexico, Canadian suppliers must continue to boost productivity and focus on value-added products to ensure success in both domestic and U.S. markets,” says Carlos Gomes, Scotiabank’s auto industry specialist. The Canadian surplus is averaging an annualized $20.5 billion in the year to September. This is the third highest level on record and roughly unchanged from a year earlier, according to the latest Canadian Auto Report released today by Scotia Economics. “This strong performance is remarkable and somewhat surprising, especially in light of a 15% decline in Canadian motor vehicle assemblies so far this year,” says Gomes. “Even in September, when automakers faced plant closings due to parts shortages from huge delays at border crossings, the auto industry posted an annualized surplus of $19.7 billion.” The resilience of the auto sector, which accounts for nearly 25% of Canada’s merchandise exports, has helped to lift Canada’s overall trade surplus to a record $68 billion so far this year. “The auto industry has been a key driver of economic activity, with shipments advancing at a double-digit pace from 1992 through early 2000, when automakers started to scale back production due to slowing vehicle sales in the United States,” says Gomes. “This represents a 40% premium to growth in overall manufacturing activity across Canada and the auto industry in the United States. This dynamic performance has boosted Canada’s auto surplus nearly sevenfold over the past decade, including a doubling since the mid- 1990s.” The Canada-U.S. auto trade surplus has averaged an annualized $28.3 billion so far this year, nearly double the average of the past decade. Since the early 1980s, Canada has consistently posted a rising trade surplus with the United States which is the destination for 98% of Canadian auto and parts exports. Most of the gains in Canada’s auto trade surplus reflect a 22% surge in vehicle assembly capacity since the mid-1990s, due to both a cost and productivity advantage over U.S. facilities. Canada’s parts producers have also gained share in North America over the past decade, and during the past two years have been successful in reducing the trade deficit on auto parts. Turning to overall market conditions, North American automakers have extended their “0%” programs in the United States until early next year. While no-interest financing will continue to boost showroom traffic, some of the “pop” in sales provided by these programs since late September may be starting to fade. In Canada, North American automakers initially resisted “0%” financing, but by early November also launched interest-free loans up to 48 months. Vehicle sales in Canada are now expected to strengthen through year-end, with full-year volumes likely to challenge last year’s record of 1.55 million units.