Before 1965, Canadian automotive manufacturers were producing a wide variety of models for a limited market in an industry in which economies of scale are very important. Tariffs and a Canadian content requirement protected this high cost industry from being overwhelmed by the more efficient U.S. manufacturers.

The efficiency of Canadian firms was expected to improve under the Auto Pact with the U.S., which allowed duty free passage of new automotive equipment subject to certain conditions designed to protect the weaker Canadian industry. The Auto Pact was prevented by these Canadian safeguards from being a true free trade agreement (FTA), but it was an important step towards reducing the barriers to bilateral automotive trade.