03/25/2015 01:51 EDT | Updated 05/25/2015 05:59 EDT

Canada's auto trade deficit could widen

Canada last had a positive balance in automotive trade in 2006 and the outlook for reversing our trade deficit on vehicles and parts looks grim, according to a new study by the Automotive Policy Research Centre.

That's because Canada is losing out to Mexico on new automotive investment and has been building its deficit on vehicles and auto parts with the rest of the world, according to report author John Holmes.

- Canadian auto investment almost stagnant 

In 2014, Canada's trade deficit on automobiles and parts was $10.3 billion, according to the report titled Whatever Happened to Canada's Automotive Trade Surplus?

"There's two real drivers that have led to Canada from running a positive trade balance to being in a negative position," Holmes, a faculty member at Queen's University in Kingston, Ont., told CBC News.

"One driver is the loss of assembly capacity since 2000. That means fewer cars since 2000 are exported to the U.S."

"The other big driver is the significant increase in the imports of cars and parts from Mexico, parts from Korea and China, and cars from the EU," he added.

Until 2006, Canada's trade surplus with the U.S. in autos offset the deficit on imports from elsewhere, but Canada slid into deficit in 2006 and the gap has been growing ever since.

U.S. is key market

Holmes said free trade agreements with South Korea and the EU could lead to more imported cars and parts and deepen Canada's trade deficit on autos.

Most of Canada's auto trade (79.3 per cent) is across the U.S. border. Since the auto pact was established in 1965, Canada has assembled vehicles for the U.S. market, running a trade surplus in vehicles with its biggest trading partner.

That offsets a negative balance in auto parts, which often are made in the U.S. for vehicles assembled here. Canada still has a positive trade balance of $14.8 billion with the U.S., but it's shrinking because auto assembly has shrunk, Holmes said.

Governments backed away from the incentives game to win new business in the 1990s, he said. Canada's surplus on auto trade peaked in 1999 at $14.6 billion, at a time when Canadians made more than three million vehicles a year.

Canada has lost assembly capacity, such as the Ford plant in St. Thomas, Ont., in the period since 2000, especially from the big three automakers.

There's further uncertainty ahead unless GM commits to another model at its Oshawa plant after 2016, he said.

"If Oshawa was to go, that would carve out another chunk of assembly capacity," Holmes said.

Investment in Mexico

At the same time, there's been a rapid increase in imports of both vehicles and parts from Mexico as automotive investment poured into new plants in Mexico.

Canada may never be able to compete with Mexico on labour costs, but labour costs are only part of the equation in auto investment decisions, Holmes said. The Automotive Policy Research Centre, funded in part by the federal government, is studying various aspects of the auto industry with a view to advising government on ways to keep Canada's auto industry competitive.

Holmes said the key to reversing the trade slide is to retain and build assembly production in Canada.

"It's really important for Canada not only to try to hold onto the assembly capacity we currently have, but to increase assembly capacity to move back toward a trade surplus," he said.