Hitting Chinese EVs with new tariffs raises fears of retaliation against Canada

Ottawa announces 30-day consultation on how to protect sector in which it has invested billions

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The federal government is set for a 30-day consultation on how to protect Canada’s electric-vehicle sector against what Deputy Prime Minister Chrystia Freeland calls “unfair” Chinese trade policies, but some are urging restraint on the most obvious policy tool — tariffs.

United States President Joe Biden in May announced sweeping tariffs on Chinese-made EVs and other products, leading to questions about whether Canada would follow suit.

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Ontario Premier Doug Ford has led a chorus of voices urging the federal government to also enact tariffs on Chinese-made EVs, saying it needs to protect the tens of billions of dollars in tax credits and other incentives it has offered to automakers to set up operations in Canada.

But some have said they see this as one area where Canada may not need to follow the U.S. in lockstep because of the potential damage a trade war with China would cause.

“Obviously, we need to protect our billions of dollars of investment in battery manufacturing and electric vehicles,” David Adams, president of the Global Automakers of Canada, said. “But we do not want to attract unnecessary attention from the Chinese because, you know, we’re not the U.S. We’re smaller and I think we run potentially a greater risk of retaliation.”

He said the federal government has to be careful about how China could retaliate against other parts of Canada’s economy.

China is Canada’s second-largest trade partner — behind only the U.S. — and accounts for 6.6 per cent of the country’s imports and 4.4 per cent of exports. But China’s economy is about nine times as large as Canada, with about $18 trillion in gross domestic product compared to $2.14 trillion here, according to the World Bank. As a result, trade disruptions could have a disproportionate effect on Canada.

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For example, geopolitical tensions with China escalated after Chinese tech giant Huawei Technologies Co. Ltd.’s chief financial officer Meng Wanzhou was arrested in Vancouver in 2018. Several months later, China revoked the licences of two Canadian canola seed exporters. Canada filed a World Trade Council dispute, but canola exports to China fell dramatically, reportedly causing more than $1 billion in losses.

Of course, Canada’s trade relationship with the U.S. far overshadows its relationship with China, accounting for 62 per cent of this country’s imports and 45.2 per cent of exports.

The U.S. has already announced 100 per cent tariffs on Chinese-made EVs in addition to numerous other tariffs on the EV supply chain. Proponents of tariffs argue Canada cannot afford to diverge too much from our largest trading partner.

“This isn’t about our relationship with China; it’s really about our relationship with the U.S.,” Vic Fedeli, Minister of Economic Development in Ontario, said. “We need to mirror the U.S. approach on tariffs because we have to be aligned.”

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He said both the federal government and provincial governments, particularly Ontario, have attracted automakers such as Germany’s Volkswagen AG, Japan’s Honda Motor Co. Ltd. and others to build out EV and battery manufacturing operations here by offering lucrative direct and indirect subsidies, such as production tax credits and subsidies.

Fedeli said China is using “cheap labour and dirty energy” and could soon “flood our markets” with cheap EVs. But he also acknowledged that China has used its economic heft in the past to retaliate against the Canadian economy.

“That’s why we say to the feds, ‘Be cautious,’” he said.

So far, Freeland has said she shares the view that Chinese EV manufacturers are benefiting from lower labour and environmental standards than would be required if they set up shop in Canada.

Freeland has also repeatedly said she believes China is engaging in “a deliberate national economic policy of creating oversupply because there is insufficient domestic demand” for its EVs.

“That is actually not playing by global trade rules and Canada will not stand for it,” she said at a press conference on Monday, announcing a 30-day consultation on this issue.

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But Freeland repeatedly declined to say whether tariffs are the appropriate policy tool, and said the government wants to consult with industry players and labour leaders before making any policy decisions.

Among other topics, the government is seeking information on whether to apply tariffs or whether to adjust federal incentives designed to encourage the purchase of EVs so Canada can meet federal goals of having 100 per cent of new vehicle sales be zero-emission vehicles by 2035.

Canada currently has six per cent tariffs on Chinese-made EVs.

Freeland recently said she would not allow Chinese manufacturers to use Canada as a backdoor to gain entrance to the U.S. market. But it was unclear what this meant.

Adams said there aren’t Chinese automakers with operations in Canada, although in recent months he has heard rumours that some Chinese automakers are looking to come here.

One Chinese automaker, BYD Auto Co. Ltd., has operated a bus assembly plant in Newmarket, Ont. for several years, but Adams said he considers that different from light-duty vehicles.

Jean Simard, chief executive of the Aluminum Association of Canada, said he is concerned about Chinese automakers building operations in Mexico — echoing others in the industry — in order to take advantage of that country’s free trade agreements with the U.S. and potentially bypass U.S. tariffs.

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“We have to get more transparency” from Mexico, he said.

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