A C$7 billion (A$7.25 billion) commitment by one of the world’s largest automakers, Volkswagen (VOWG), to build a massive electric vehicle (EV) battery factory in St. Thomas, Ontario, not only marks a watershed pivot for the Canadian car industry, its lays down a marker to Trump administration that’s threatening sweeping tariffs on imports as leverage in trade negotiations.
As the largest EV plant of its kind in North America and possibly the world, the St. Thomas factory - through the Volkswagen subsidiary, PowerCo - is expected to be capable of producing batteries for up to one million electric vehicles annually.
To put the magnitude of the St Thomas factory into context, 20.7 million EV passenger cars and light-duty vehicles were sold globally in 2025.
Volkswagen could have chosen to expand in the U.S. - where it already has facilities - especially given the size of the American market and its wealthier consumer base.
Given that access to American consumers has historically been the prize that every major manufacturer wants to secure, why did Volkswagen snub the U.S. in favour of Canada and why now?
Much of the answer can be found by looking at what trade policy ends up doing when it’s menacingly out of touch with reality.
The bottom line is that Trump’s tariffs have backfired spectacularly due to the U.S. administration’s unstable policy environment, which only fuels companies' fear of the rules being pulled out from underneath them overnight.
It also reflects the dwindling credibility business leaders have in the U.S administration’s track record of following through on commitments in a rational way.
Policy uncertainty
Without putting too fine a point on it, Volkswagen’s decision to invest in Canada instead of the U.S. is a direct response to perceived policy and strategic uncertainty over the U.S as a reliable partner for long-term capital investment.
Given that Volkswagen’s project will take years to finish and decades to generate returns, the German automaker has clearly struggled with placing big bets on the U.S, fearing that it may upend the rules that initially make a major investment look viable.
Volkswagen’s plans for a massive facility in Ontario follow commitments by the Canadian government to allocate $3 billion from the Strategic Response Fund and up to $100 million from the Regional Tariff Response Initiative to help the auto industry adapt, grow and diversify to new markets.
By throwing out a lifeline to help the global auto industry adapt, Canada may soon be able to counter Trump’s recent statement, “we don’t need cars made in Canada”, by saying we may not need any more cars made in the U.S.
It’s also important to remember that Volkswagen isn’t alone in its plans to look beyond the U.S.
Early February saw the German economic affairs minister, Katherina Reiche, reiterate the willingness of Germany’s car industry to invest in Canada and is “in talks to extend its footprint” into this market.
Reiche did not elaborate on whether an expanded footprint means through PowerCo or another investment.
“I know that for Canada, to gain back production in manufacturing, jobs, especially the car industry, is of major importance,” Reiche said.
“That's why we started to talk to our car industries, the large OEMs and the Canadian government, on which investments could be made.”
Who's next?
The $64,000 question now remains that if the U.S. continues to threaten relentless new rounds of tariffs and add or remove exemptions based on political considerations – rather than economic logic – how many companies will follow Volkswagen and divert investments elsewhere.
Germany aside, South Korea and Canada have signed a memo of understanding to develop manufacturing north of the U.S. border for brands that are based there, namely Kia and Hyundai.
Much of the interest from Korea also focuses on EV battery development, including mineral extraction, processing and manufacturing.
“To support increased industrial growth, a forum will be established on Canada-Korea industrial collaboration for future mobility,” noted a statement from the federal government.
“To support increased industrial growth, a forum will be established on Canada-Korea industrial collaboration for future mobility… this includes the intention to co-operate on advancing a Korean automotive industrial footprint in Canada and advancing domestic electric vehicle (EV) manufacturing opportunities.”
Then there's China
Unsurprisingly, China isn’t too far behind, having recently announced a partnership aimed at driving new Chinese joint venture investment in Canada.
The Canadian government is understood to be in talks to establish a joint-venture EV plant with Chinese automakers for global exports.
“We believe that these great Canadian champions can partner with Chinese EV companies to make a Canadian-Chinese car to export it around the world,” said the Canadian Industry Minister Mélanie Joly.
Joly told the market that Canadian auto parts suppliers and manufacturers Magna International, Linamar, and Martinrea International — all of which have operations in China — could partner in a joint-venture assembly plant.
The Canadian supplier began producing XPeng‘s entry-level SUV G6 there last September and announced in January that it was expanding the partnership, adding another model to the two vehicles that had already been announced.
The minister revealed there are “active conversations” on how domestic firms might complement new Chinese investment, including with Ottawa-based software developer QNX, owned by BlackBerry.
In addition to meeting with German giant Volkswagen, Joly has also confirmed meetings with two of China’s largest automakers, BYD and Chery.
Meanwhile, the U.S. finalised a rule in the first weeks of 2025 — becoming effective March 17, 2025 — to prohibit the import and sale of connected vehicles with hardware and software linked to China or Russia.
