Monday, June 24, 2024

Opinion: Joe Biden’s new China tariffs puts Canada in a bind on electric vehicles

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FILE – President Joe Biden drives a Cadillac Lyriq through the show room during a tour at the Detroit Auto Show, Sept. 14, 2022, in Detroit. (AP Photo/Evan Vucci, File)Evan Vucci/The Associated Press

Wolfgang Alschner is associate professor at the common law section of the University of Ottawa. He holds the Hyman Soloway Chair in Business and Trade Law

Earlier this week, the Biden Administration announced a sweeping set of new tariffs on Chinese imports. The tariffs target strategic sectors from steel and aluminum to green tech. Headline-grabbing among those were the 100-per-cent levies on Chinese electric vehicles. The tariffs are partly political posturing during an election year, as a prior 27.5-per-cent levy and an exclusion from national tax credits have largely kept Chinese EVs off U.S. roads. More important than the tariffs’ immediate impact, though, are the long-term strategic policy considerations underpinning them.

Policy makers in the West are concerned by the security implications of Chinese dominance in critical mineral supply chains, see unfair competition in its advanced battery and EV manufacturing fuelled by state subsidies, and observe with alarm the country’s growing export-oriented industrial overcapacity. Fear of a second “China shock” is spreading as Chinese EVs threaten to flood global markets. Coming at a time when Western countries have poured billions into building up their own cleantech industries, the new EV tariffs seek to protect investment in domestic manufacturing and to keep China out of nascent parallel supply chains in the sector.

What do these developments mean for Canada? Canada is perhaps uniquely exposed to Chinese EV overcapacity. With extremely low import tariffs on Chinese autos of around 6 per cent, and an increasingly closed-off U.S. market, Chinese EV exports may be diverted North. Lower-priced foreign EVs could, in turn, reduce the return on investment for the billions of Canadian taxpayers’ dollars that have been spent to convince an impressive list of foreign car and battery manufacturers from Volkswagen to Honda to set up shop in Canada.

But Canada may be a beneficiary of recent developments, too. At least in the short term, it can freeride on U.S. protectionism as well as Chinese subsidies. Companies setting up EV manufacturing here ultimately produce for the much bigger North American market. Manufacturers located in Canada benefit from U.S. protectionism that gears buyers to EVs made in the integrated supply chain that stretches from Mexico to Canada. Meanwhile, Canadians can take advantage of Beijing’s subsidies to import more affordable Chinese EVs, which would help Canada meet its ambitious climate change targets.

Alas, this period of bliss will not last. Sooner or later, Canada will have to ask itself whether it can, must and should follow the U.S.’s protectionist turn.

Consider first whether Canada could put in place similar duties on Chinese EVs. The U.S. tariffs are unilaterally imposed and arguably illegal under the law of the World Trade Organization. The U.S. has little to fear from the WTO, though. Since 2019 it has crippled the WTO’s dispute settlement by blocking appointments to its highest court. By contrast, Canada, alongside more than 50 other WTO members, including China, have created an interim arrangement to keep binding trade dispute settlement alive. Beyond naïve faith in multilateralism, it is in Canada’s interest, as a middle power reliant on international trade, to play by the rules. Any Canadian trade response should therefore strive to be WTO-conforming. Canada can follow the EU’s lead here. Committed to rules-based trade but sharing U.S. concerns over Chinese exports, the EU is conducting an anti-subsidy investigation into Chinese EV production and is widely expected to impose duties soon as a result.

But will Canada even have a choice? To protect the integrity of Fortress North America and to build autonomous regional supply chains, the U.S. may lean on Canada (and for that matter, Mexico) to mirror the U.S. protectionist policies toward China. The upcoming review over an extension of the United States-Mexico-Canada Agreement (USMCA) in 2026 may provide an opportunity for arm-twisting. If forced to choose between maintaining an autonomous trade policy and retaining access to the US market, Canada will be in a difficult spot.

So what should Canada do? Nuance is the order of the day. A dose of WTO-compliant protectionism targeted at subsidized Chinese EVs will eventually be necessary to align Canadian policy with that of the U.S. and the EU and to protect domestic manufacturing. By contrast, zealously purging supply chains from Chinese involvement, as seems to be the logic in recent Canadian foreign investment review decisions, would be a step too far. Even the U.S. allows tariff exclusions for Chinese machinery used in domestic manufacturing. Moreover, some Chinese-made EVs of Western brands appear to slip through U.S. tariffs, creating opportunities to integrate Chinese manufacturing prowess. In short, there is a path to square climate, trade and industrial policy goals. But it will take effort to find and follow it.

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