OTTAWA, Canada (AFP) — Ottawa on Tuesday offered tariff relief to automakers on condition they maintain production in Canada, fearing US President Donald Trump’s policies could trigger a flight of the key manufacturing sector to the United States.

The announcement coincided with a report in a Japanese newspaper that Honda was considering moving assembly lines from Canada to its southern neighbour, which the company denied.

Under Ottawa’s plan, companies that continue to manufacture vehicles in Canada would be allowed to import a certain number of cars and trucks made in the United States tariff-free, the Government said.

Canada has imposed a 25 per cent tariff on vehicle imports from the United States, in retaliation against President Trump’s levies on autos and parts imported from Canada.

The Canadian tariffs applied to cars and light trucks that are not compliant with an existing North American free trade pact. Likewise, US auto tariffs provide some reprieve for compliance under the pact.

The tariff relief, Ottawa said in a statement, was contingent “on automakers continuing to produce vehicles in Canada and on completing planned investments”.

At an election campaign stop in Quebec province, Prime Minister Mark Carney accused Trump of “attacking our auto industry” and seeking to “pull apart the most integrated industrial manufacturing sector in the world”.

“This is one of the crown jewels of North American manufacturing,” he said, vowing to fight for jobs in a sector that is already starting to see layoffs and reduced shifts.

Earlier, the Nikkei newspaper reported that Honda was considering moving some of its car production from Canada and Mexico to the United States to avoid the US tariffs.

The Japanese automaker denied any such plan.

“We can confirm that our Canadian manufacturing facility in Alliston, Ontario, will operate at full capacity for the foreseeable future and no changes are being considered at this time,” it said in a statement.

Meanwhile, the national statistical agency on Tuesday reported that Inflation in Canada fell to 2.3 per cent in March, surprising analysts as the country’s economic outlook remained clouded by US tariffs.

Most economists expected average prices to rise slightly or remain unchanged from February, when they rose 2.6 per cent after hovering below 2.0 per cent the previous six months.

“Some volatile categories were at play, with travel tours plummeting by eight per cent after a surge in the prior month,” commented CIBC analyst Katherine Judge.

The easing prices, she said, will add pressure on the Bank of Canada to cut its key lending rate when its governors meet on Wednesday, “with the downside risks to growth from the trade war outweighing any upside to inflation from tariffs in our view”.

Desjardins analyst Tiago Figueiredo, however, said in a research note the central bank’s rate decision will be “a coin toss”.

Trump has threatened, withdrawn and imposed a dizzying array of tariffs on Canadian goods, and more levies are expected in coming months.

Canada has imposed retaliatory tariffs on a range of US goods in a trade war between the neighbours who had usually swapped billions of dollars in goods each day.

According to Statistics Canada, the March inflation slowdown was driven by lower prices for travel tours and gasoline “amid concerns of slowing global oil demand and slowing economic growth related to the threat of tariffs”.

Air transportation prices notably fell 12 per cent as Canadians took fewer trips to the United States.

The costs of cellular services amid promotions and computer equipment also fell, while rents and mortgage interest costs as well as car insurance premiums rose.

March was also the first full month since the end of a sales tax holiday, pushing up costs of some consumer goods and dining out.