How Canada could retaliate if tariff-like U.S. electric car policy goes ahead

A new U.S. government planthat would offertax credits for electric vehicles and batteries made by unionized labourin the United Statesputs Canada in adifficult position, according toboth Canadian environmentalists and trade experts.

Part of the "Build Back Better"planpassed by Congress at the end of last week, it gets a thumbs up from many battling climate change on both sides of the border.

Offering an effective $12,500 US subsidy if American residentsbuy an electric vehicle rather than one with atraditional engine, the move is considered a positive step toward coaxing gas-poweredvehicles and their emissions out of the market.

Like a high tariff

But there are cries from Canadian economic nationalists that if the subsidy only goes to American-made cars, as planned, it could simultaneously squeeze Canada out of the business of making EVs, resulting in an unfavourable effect on well-paying Canadian jobs.

It could also fracture North America's deeply integrated automotive supply chain, with repercussions in the U.S. as well.

"Any cars made in Canada would not get the subsidy and would be a lot more expensive.In a way, it would be like imposing a high tariff," explained Patrick Leblond, who teaches public and international affairs at the University of Ottawa.

It means thatif U.S. residents who make up the vast majority of North American vehicle buyerswere to buy an identical or similar car made in Canada, it would cost them thousands of dollars more.

ExistingCanadian plants making internal combustion vehicles might not be affected, but that would change as automakers plannew factories. And the Buy American policy could influence those plansnow.

"Obviously, the big carmakers would build their plants in the U.S. instead of in Canada," said Leblond.

And just like when Donald Trump slapped tariffs on Canadian steel, aluminum and forest products, some say Canada must examine how it can make some sort of counter-threat,perhaps even offering up a list of products made in the U.S., butnot in Canada, that would face tariffs here if the tax credit goes ahead.

"Sometimes,at least, the threatis a way to say, 'Hey, let's get our friends in the U.S. that depend on the Canadian economy to put pressure on Congressor the administrationto make this thing go away,'" said Leblond.

'Politically toxic'

As several of those I spoke to pointed out, offering a similar tax advantage for Canadian-madecars wouldnot have the same effect, due to our unequal market clout. And putting tariffs on American-builtEVswould simultaneously be bad for bothclimate change andCanadian auto-parts producers.

But one place Canadacould take action would be on the productionof key minerals needed to make EV batteries;Canadian mines, while currently undeveloped, could be a reliable and nearby non-Chinese source for the U.S. as demand for electrified transport ramps up.

Dan Ciuriak, a senior fellow at the Centre for InternationalGovernanceInnovation in Waterloo, Ont., compares the battery-mineral situation to the time when Trump banned the export of masks to Canada before realizing the fine pulp to make those masks actually came from Canada. That was the reason Trump backed off, he said.

But Ciuriak and others said there are also disadvantages to that kind of response. It could be "politically toxic," Ciuriak said, for a bilateralrelationship that is currentlylargely amicable.

Former U.S. ambassador to Canada says electric vehicle tax credit jeopardizes USMCA

3 years ago

Duration 13:05

Former U.S. ambassador to Canada Kelly Craft says President Biden's proposed tax credit for electric cars made in America jeopardizes the new USMCA trade agreement.

Overcoming a protectionist agenda isn't a problem easily solved.

"It is a big deal," said Valerie Hughes, a Canadian lawyer with yearsof trade experience, including a decadeat the World Trade Organization (WTO).While it depends on the final wording of the legislation, she said the EV tax credit is probably illegal under WTOrules and the Canada-U.S.-Mexico Agreement (CUSMA).

Hughes said she opposes the harsh trade retaliationthat was seen in the Trump era.

"We did itonce because that was really the world we were living in," said Hughes. "There was unilateral action that was contrary to the rules. The U.S. was doing it and we just didn't see a way out of it."

But this time, said Hughes, there are much friendlier options, including vested Canadian parties reaching outto their U.S. counterpartsat all levelswhether ingovernment, industry or labourto remind them that deeply integrated North American automobile production creates jobs and wealth on both sides of the border.

If necessary, Canada can always use the dispute-settling mechanisms of CUSMA, she said, calling themquite effective compared to the previous NAFTA dispute-settling process.

Mark Warner, a well-known Canadian trade lawyer, is skeptical of Ottawa's propositionthat Canada is being cheated by the plan. While thatmentality may get people riled up, he said, the best way to work with the U.S. is calm negotiation.

Warner points out thatthe EV legislation is all about U.S. politicsan attempt to show that green investment will help create goodAmerican jobs. There is still time to negotiate, since the bill has yet to pass through the Senate. It will be five years before the Buy American portions of the law go into effect.

Climate change knows no borders

On the other hand, even a law coming in five years can affectbusiness planningnow. And once in effect, it will be harder to change.

In addition toconvincing labour and business interests in the U.S. that continuing to work with Canada is in their own best interest, there isanother potential set of allies, said Dale Beugin, with the Canadian Institute for Climate Choices.

U.S. climate scientists andactivists, he said,know that greenhouse gases do not respect national boundaries.

"Climate change requires co-operation across countries, across bordersand you want to be enabling a low-carbon transition, not just in the U.S., but elsewhere as well," said Beugin.

Squabblesover tradewill just slow down the process.

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