Federal protectionist EV levies will likely debut this morning—we examine why we need them, and whether they’ll work
It’s an almost sure bet that Canada will today announce tariffs on Chinese electric vehicles. At 10:30 a.m. on June 24, Chrystia Freeland, the Deputy Prime Minister; and Mary Ng, Minister of Export Promotion, International Trade, and Economic Development, are set to make an announcement “on protecting Canadian auto workers.”
Considering the enormous sums Canadian governments have “invested” — recently cited by the Parliamentary Budget Office as $31.4 billion by the federal Liberals, and $21.1 billion more by the provinces — in enticing battery manufacturers to our shores, and the substantial tariffs imposed by both the European Union and the United States on Chinese-built electric vehicles, it’s virtually certain that today’s announcement will be some form of protectionist levy meant to safeguard all those jobs the government claims to have created over the last 24 months.
The big question, then, is why we need tariffs, what such tariffs might look like, and, whether they will, in fact, have their desired effect. Here’s Motor Mouth’s guess as to what these duties might look like.
Why we need tariffs
Much has been made of China’s cost advantage in producing electric vehicles. Besides the lower wages paid Chinese auto workers — Flavio Volpe, President of Canada’s Automotive Parts Manufacturers’ Association (APMA), recently noted that Canadian auto workers make more in a month than their Chinese equivalents do in a year — Chinese battery manufacturing techniques are far more efficient than ours. The net result is that some Chinese firms, notably CATL, can build a battery for US$66 per kilowatt-hour, estimates The Electric editor Steve Levine, or roughly half the current cost of production here in North American.
As significant an advantage as that might be, it’s not the greatest risk Chinese battery-powered vehicles pose to the West. The bigger issue — which the Deputy Prime Minister’s office only recently acknowledged — is the massive overcapacity that China now has in battery production.
Global News reported yesterday that while the Chinese market for electric vehicles has already grown to 25 million units, the country’s automakers are building enough batteries to power 40 million EVs. That’s an overcapacity of 15 million units that can’t find a home unless they are exported.
Worse yet, Motor Mouth estimates that by 2030 that overcapacity could reach as many as 40 million units. That’s roughly double the annual consumption of all automobiles in Canada and the United States combined. As any armchair economist knows, exaggerated supply reduces demand, which is why the price war in the Chinese auto market is so bloody and the profit margins so low. In other words, it’s not just that Chinese automakers want to export EVs; they need to. Hence the existential threat to legacy automakers the world over.
What the European and Americans are doing
Our friends to the south were the first to act on the threat posed by cheap Chinese electrics. First came the Inflation Reduction Act, which dramatically subsidized the production of batteries — as well as the sourcing of raw materials — in North America. More recently, President Biden has hiked tariffs on Chinese-built EVs to 102.5 per cent; passed laws preventing products from being imported into the U.S.A. that are built using forced labour (BMW inadvertently got caught up by this regulation); and is looking into the security concerns caused by Chinese “smart cars” collecting data from American drivers.
Even the circumvention of all these rules — say, by building a manufacturing facility in Mexico, as Chinese automaker BYD is proposing — will almost assuredly be thwarted by U.S. policy naming China a “foreign entity of concern.” As moats protecting auto workers go, America’s is both deep and wide.
The E.U. has taken a more nuanced approach, most notably because a lot of European automakers — that should be read “German” — are quite dependent on the Chinese luxury market for their wares. A few automaker CEOs — again, that should be read “mostly German” — have actually been lobbying against the imposition of tariffs.
Nonetheless, the commissars have proposed tariffs, albeit at a much-reduced levels compared with the U.S.A. — they range to up to 38.1%, depending on how much the automaker in question “cooperated” with the E.U.’s investigation into the subsidization they received from the Chinese government.
A few things to note here: First, the European levies may seem substantial, but they may not be enough to stem the flow of Chinese EVs into the E.U. Citi Group recently released analysis that suggests, even with the tariffs set to be imposed, Chinese automakers will make better margins in Europe than they do in their home market.
Secondly, unlike the U.S.A., the E.U.’s protectionism is based solely on economic factors — subsidization and overcapacity — rather than the security concerns that seem to so rankle the Americans. Thus, unlike in the United States, there’s nothing preventing Chinese automakers from building local plants to serve their European ambitions. According to some pundits, what this means is that the Chinese may now also be exporting their manufacturing overcapacity, rather than just their cars.
While the Chinese market for EVs has grown to 25 million units, the country’s automakers are building enough batteries to power 40 million EVs—it’s not just that they want to export EVs, they need to
Thirdly, there’s been a large and noticeable difference in how China has reacted to these two protectionist tactics. While the country’s automakers seemed to have completely abandoned any ambitions for America — the Chinese reaction to the American actions has been a muted “meh” — the dialogue with the E.U. has, in comparison, been very aggressive.
What may be going on behind the scenes
My first supposition is almost assuredly fact, namely that we’ve been having our own internal political battle, with Mary Ng, Minister of Export Promotion, International Trade, and Economic Development — probably bolstered by Francois-Philippe Champagne, the Minister of Innovation, Science, and Industry — arguing for tariffs to protect the billions recently invested in the Canadian auto industry, while former activist Steven Guilbeault, now Minister of Environment and Climate Change, who wants as many electric vehicles on the road as quickly possible, argues against them.
Wrapped up in that conundrum are the politics. The federal Liberals are tumbling in the polls, so they can hardly afford to be seen as not protecting Canadian jobs, especially the high-paying, middle-class jobs Prime Minister Trudeau has sworn to protect. Clouding that picture even more is that Conservative populist Pierre Poilievre will almost assuredly rescind — or at least moderate — the Liberals’ federal ZEV mandate.
And just so the Liberals don’t get any sleep at all, there’s the prospect — looking ever more likely — that Donald Trump will be the once and future president of those United States. The last thing any Canadian government wants is to be seen as a back door for the Chinese export of electric vehicles into the U.S.A.
The first thing we can expect is that the $5,000 consumer incentives offered by the feds will be removed for EVs built in China (including any Teslas built in Shanghai that may currently still qualify). We should also expect significant tariffs that, if they don’t fully match the American numbers, will be substantially higher than those being threatened by the E.U.
That Conservative Ontario Premier Doug Ford — who has been in complete lockstep with Prime Minister Trudeau’s EV-manufacturing ambitions, despite their other political differences — recently called on the imposition of such tariffs to match the ones President Biden invoked points to more aggressive, not timid, levies.
What remains uncertain — and this is the most speculative pronouncement here — is how Canada will treat Chinese transplants. On the one hand, the acceptance of Chinese manufacturing in Canada might be the compromise the pro-tariff faction made to get Minister Guilbeault on board. On the other, any concession to the Chinese is likely to send almost-president-elect Trump into a fury.
Deputy PM Freeland and Minister Ng are scheduled to hold a press conference at 10:30 a.m. today, during which we will, hopefully, get more clarity on Canada’s position. Motor Mouth will keep you posted on the developments.
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