Ottawa Slaps Tariffs on China: IPD Experts Weigh In

Top White House advisor meets with Canadian cabinet the day before it announced tariff hikes on Chinese EV and steel imports.

Aug 30, 2024

This week's edition of IPD's Canada-China Brief gives special attention to Ottawa’s move to impose tariffs on Chinese electric vehicles and steel, the immediate and future reaction of Beijing, and the Washington factor in Canada’s decision-making.

From Our Experts

On Ottawa’s tariff hike on Chinese EVs and steel:

Canada's knee-jerk reaction to impose 100% import duties on Chinese EVs and 25% tariffs on Chinese steel products, to match similar tariffs announced by the United States, is an inevitable result of Canada's economic integration with and dependence on the U.S. market, and almost nothing to do with international trade rules. While there is no doubt that China unfairly subsidizes EV production, the surtax is not based on the examination of evidence in this regard. Tariffs imposed by the EU on Chinese produced EVs vary from 9 to 36% percent, depending on the manufacturer. The 100% tariff announced by Canada is based on nothing more than the amount imposed by the U.S. and an understandable desire to protect Canada's EV manufacturing base within North America, given the substantial subsidies already committed for Canadian EV supply chain components and assembly.
While the coverage of the 25% surtax on Chinese steel products is subject to public consultation (numerous U.S. industries are pushing back on the announced decision in the U.S., seeking to gain exemptions), no such public input is apparently being sought on the EV tariffs. China will certainly challenge these measures in the WTO and retaliate against imports of Canadian products. Some Canadian industries, notably agrifood based industries in western Canada, will likely bear the brunt of this retaliation. This is a classic trade-off between consumer and industrial policy interests where, at least for the immediate future, industrial policy in the guise of protectionism will prevail. These measures are, sadly, a further blow to the credibility of the rules based order for international trade but in the world of realpolitik are not a surprise.

– Hugh Stephens, Advisor, Institute for Peace & Diplomacy

These measures are certainly informed by one aspect of China’s EV industry: its reliance on various government subsidies aimed at both consumers and producers, which provided significant support to China’s nascent EV sector starting roughly 15 years ago. However, many of these subsidies have been phased out, leading to a fiercely competitive market characterized by price wars, quality improvements, and industry consolidation. The current price war has contributed to a sharp rise in exports and growing criticism that the industry suffers from overcapacity. Canadians should be aware that the current dynamics we are witnessing—evidenced by the growing imports of Teslas from Shanghai—are the result of market pressures in China. Indeed, the recent price war was set in motion by Tesla, as Chinese policymakers welcomed the American automaker to force weaker players out of the market and to improve price and quality in the industry.
Moreover, it is difficult to make the case that Chinese EVs run on government cash and market distortions, as China-based producers, including Tesla, BYD, and Li Auto are, in fact, profitable. Indeed, the country's industry is simply further ahead of its North American counterpart in battery technology and boasts a far wider and faster charging network than anything that we have available in North America.
It is important to note that while there is indeed a great deal of overcapacity in China’s auto industry, this surplus primarily exists in the legacy internal combustion vehicle space, not in the EV sector. As consumers in China switch to electric vehicles far faster than anticipated and will soon buy more EVs than ICE cars, existing internal combustion capacity is being discounted and sold to willing buyers around the world.
As I have detailed in an op-ed recently, Canada should think strategically when imposing tariffs and premise them on foreign direct investment and technology transfer from Chinese automakers. A large tariff will neither improve the competitiveness of our industry nor improve our transition toward electric and hybrid vehicles. At worst, it will leave our auto industry further behind as countries in Europe, Southeast Asia, and even Mexico use tariffs to incentivize technology transfer and/or capital investment from Chinese battery makers. By contrast, Ottawa has not yet thought far beyond limiting the import of various Tesla models and preventing the eventual market entry of increasingly sophisticated and affordable Chinese EV brands. Worse still, it is difficult to see how we could meet our ambitious EV adaptation targets without affordable EVs and without battery technology in which China currently leads.
[China’s response] really depends on the country in question. In Europe, where tariffs range from 18 to 38 percent depending on the car model, retaliation is likely to be modest. In the U.S., amidst an ongoing trade war, significant changes are unlikely. Canada stands to lose the most, as China could target various Canadian products, potentially undermining the progress made by Minister Joly in stabilizing the Canada-China relationship.
However, the actions of Chinese automakers are even more critical. The Canadian market is primarily valuable as a gateway to North America. As companies like BYD expand operations in Mexico, and if a future U.S. administration bases tariffs on foreign direct investment and technology transfer, Canadian workers and consumers are likely suffer without seeing any direct benefits from greater industry protection.

– Anton Malkin, Associate Fellow, Institute for Peace & Diplomacy

The Canadian government’s newly imposed 100 percent tariff on Chinese EVs and other goods is intended to send a domestic signal that the Trudeau Liberals will do everything to protect Canadian jobs. Given the struggling poll numbers of the current government facing a federal election next year, this is a very “politically correct” measure for the critical electoral areas in the GTA and Quebec, which will more or less decide the outcome of the election. But it is far from clear just how effective these tariffs will translate into better economic outcomes for Canada. While some auto part jobs closely integrated with the U.S. counterparts may benefit, consumers will be deprived of cheaper and better quality electrical cars from China, thus leading to less spending on EVs, which in fact will hinder the transformation from fossil fuel vehicles to much greener choices for transportation.
Part of Ottawa’s decision is to follow the U.S. lead on treating China as a major rival and threat, although the Canadian government’s own Indo-Pacific Strategy has not gone that far. This decision is aimed at pleasing Washington which has been pressing Canada to support the U.S. containment strategy toward China. The Liberals, facing constant attacks from the Conservatives on the China front, also do not want to be seen as weak when it comes to dealing with Beijing.
China has responded, as predicted, angrily to Ottawa’s move, calling it protectionist and regressive in nature, in violation of WTO rules and politicizing trade. In the wider context of worsening Canada-China relations, Beijing is likely less inclined to be accommodating to Canada on a range of bilateral and international issues. We should not be surprised if some counter measures may be taken by the Chinese side in retaliation to these latest tariffs.

– Wenran Jiang, Advisor, Institute for Peace & Diplomacy; Founding Director, China Institute, University of Alberta

Top Story

Ottawa Slaps Higher Tariffs on Chinese EVs and Steel With More Coming

The Trudeau government announced on Monday that it was moving forward with hiking tariffs on Chinese electric vehicles to 100% as well as 25% on steel. The move came as a top White House advisor lobbied the Canadian cabinet on tariffs the day before enroute to Beijing to meet Chinese leaders.

D.C. makes last push — U.S. National Security Advisor Jake Sullivan stopped in Nova Scotia this week to make a surprise intervention on EVs in Trudeau’s cabinet retreat:

Sullivan stated that “Canada will make its own determinations, but the U.S. does believe that a united front, a co-ordinated approach on these issues benefits all of us,” telling press he shared that position “behind closed doors” but that “it’s not for the U.S. to try to dictate” it to Ottawa.
A major theme of the retreat was U.S.-Canada relations as Ottawa’s top diplomat in Washington Kirsten Hillman was joined by her predecessors David MacNaughton and Frank McKenna in briefing ministers to strategize the relationship months before the U.S. presidential election.
Sullivan claimed to have no requests, but said “it’s a mark of the seriousness with which we take staying on the same page with our Canadian counterparts at all levels,” including on “immense changes taking place underneath our feet, on technology, on the clean energy transition, on geopolitics.”
In Beijing, Sullivan defended his visit to Canada, stating that the Canadian cabinet “took independent action. It was not at my behest,” but acknowledged that he “did make the point… that we have concerns relative to EVs, both with respect to security issues and overcapacity issues.”
U.S. Trade Representative Katherine Tai released a statement praising Ottawa’s “strong action against the PRC’s state-directed, unfair, and anti-competitive non-market policies” and expressed looking forward to work with International Trade Minister Mary Ng “on the basis of our shared values as market democracies.”

‘Extraordinary threat’ — By Monday, Deputy PM and Finance Minister Chrystia Freeland became the face of the tariff announcement, hinting at more on the way:

In a press release, her Department warned that “China’s intentional, state-directed policy of overcapacity and lack of rigorous labour and environmental standards threaten workers and businesses in the EV industry around the world… exceptional measures are required to address this extraordinary threat.”
With its justification in place, Ottawa said it would impose a 100% tariff on all Chinese-made EVs by October 1, a hike that would be in addition to the existing 6.1% surtax already applied to them and one that would be accompanied by a new 25% tariff on imported Chinese steel and aluminum that same month.
The announcement also launched a new round of public consultations “concerning other sectors critical to Canada’s future prosperity, including batteries and battery parts, semiconductors, solar products, and critical minerals” to “inform any further government action.”
It also stated that existing federal incentives for EV buyers would officially begin screening out eligibility for Chinese-made vehicles, and that all of the announced steps “may be extended for a further period of time and supplemented by additional measures.”
In an apparent pre-emptive response to accusations of violating WTO rules, International Trade Minster Mary Ng added her voice to the announcement by stating that “global trade rules are not always adequate to protect against the type of non-market behaviour we have witnessed from China in this sector.”

Beijing vows retaliation — Chinese officials keyed in on how the announcement pushed forward despite persistent discussions between both sides:

China’s Ministry of Commerce responded to the announcement through a press briefing, stating that the measures “ignore China’s repeated solemn representations, and persist despite opposition and dissuasion from multiple parties. China expresses strong dissatisfaction and firm opposition to this.”
Saying that Canada “openly violates WTO rules and blindly follows certain countries,” the spokeperson warned the move would “severely impact China-Canada economic and trade relations” and that “China will take all necessary measures” to protect its companies.
A spokesperson for the Chinese Embassy in Ottawa echoed that the tariffs were “in disregard of China’s repeated objections and démarches” and represented “typical trade protectionism and [a] politically-motivated decision, which violates the WTO rules and goes against Canada’s traditional image.“
In an interview with La Presse, Ambassador to Canada Wang Di responded that “China will obviously take firm and necessary measures to protect the rights and interests of Chinese companies” and declared that “this kind of behaviour will certainly be detrimental to the re-establishment of a pragmatic trade relationship.”

Industry celebrates — Unions as well as steel and auto sector groups in Canada have welcomed the announcement with open arms:

Brian Kingston, President of the Canadian Vehicle Manufacturers’ Association, stated that “given the highly integrated nature of the automotive industry across North America, alignment with the U.S. on the approach to China is fundamental to its continued success” and that “there is simply too much at stake” otherwise.
Electric Mobility Canada went further, advocating that further tariffs be imposed on Chinese-made non-electric cars as well, stating that “we want to make sure that we protect Canadian workers from unfair work, environmental and trade practices.”
Unifor National President Lana Payne argued that “a flood of low-cost EV imports from China would undermine everything being done to rebuild and grow a strong and truly national automotive sector… We will not allow Chinese automakers to undermine Canadian workers.”
Presidents Catherine Cobden of the Canadian Steel Producers Association and Jean Simard of the Aluminium Association of Canada jointly showered praise on “protecting fortress North America and refusing to be a point of entry for unfairly traded and high carbon steel and aluminium imports.”

Climate setbacks — Environmental groups have criticized the measures as insufficiently thought out and damaging for the domestic EV transition:

Joanna Kyriazis, Director of Public Affairs at Clean Energy Canada, stated that Ottawa “had an opportunity to take a balanced approach” but had “made a decision today that will result in fewer affordable electric vehicles for Canadians, less competition, and more climate pollution.”
Comparing the blanket tariffs with the EU’s ranging from 9% to 36% depending on vehicle model, Kyriazis warned of a “chilling effect on future EV sales [that] could drive up EV prices and slow adoption in the near-term,” noting Europeans can choose from 11 EV models under $45,000 versus just two in Canada.
Nate Wallace, Program Manager for Clean Transportation at Environmental Defence, suggested that the tariff hike “has been driven more by politics than by concerns for affordability or the environment” and was “not actually about leveling the playing field, it's about shutting out competition entirely.”
“We've so far been reliant on battery innovation happening in China to drive down EV battery prices and production costs across the entire sector. And now that we've shut that out, and we've shut out competitive pressures… Canada has no strategy to make an affordable EV available in Canada.”

Economically (un)sound? — Economists have identified a number of practical and fundamental issues that may haunt the tariff hike:

Kent Fellows, Professor at the University of Calgary’s School of Public Policy, argued that tariffs “generally fail to protect the workers that they’re trying to protect. And even if they do protect those jobs, it’s at a very high cost for the rest of the economy.”
Werner Antweiler, Chair of International Trade Policy at the University of British Columbia, characterized the announcement as “basically such a blunt instrument that the reaction from Beijing will be to impose some kind of countermeasures,” especially as Canada had avoided following WTO procedures altogether.
Moshe Lander, Senior Lecturer at Concordia University, said the move “allows Canadian producers to hide behind the tariff and increase their prices to capitalize on China’s damage… the amount that is passed on to the consumer in the case of a small economy, which Canada technically is, is effectively 100%.”

The word in China — Chinese commentators have largely recognized the impact on Chinese entry into the Canadian market, but underscored the political dimension:

Liu Chunsheng, Associate Professor at Central University of Finance and Economics, observed that the risk was not to present auto exports but that “the U.S. is now encouraging its allies to reduce or block the imports of Chinese EVs. Canada’s tariffs will become a showcase and affect other countries’ decisions.”
Cui Dongshu, Secretary-General of the China Passenger Car Association, suggested "the impact will be significant. With tariffs like these, it will be almost impossible to enter the market. However, we can build factories overseas, produce electric vehicles in other regions, and then enter the market."
Wang Qing, Deputy Director of the Market Economy Research Institute of the State Council’s Development Research Center, stated that "Canada's alignment with the U.S. is primarily about taking a side, and Chinese products have a minimal market share in Canada.”
Going further, Wang added that “although both the EU and Canada are imposing tariffs, the EU’s actions are driven by local industry and market considerations, while the U.S., Canada, and even Australia are using automobiles as a vehicle for broader containment of China, not specifically targeting the automotive sector."
Hu Yi, Associate Professor at Wuhan University’s Institute of American and Canadian Economic Studies, called the move “primarily driven by political considerations to align with the U.S. in containing China’s new energy vehicle industry,” adding that retaliation may affect Canadian grain and apparel exporters.

Featured

David Zweig, Professor Emeritus at the Hong Kong University of Science and Technology, recently published ‘The War for Chinese Talent in America: The Politics of Technology and Knowledge in Sino-U.S. Relations’. It documents China’s efforts to access U.S. technology and America’s reactive policy, highlighting how the conflict has undermined Sino-American scientific collaboration and triggered an outflow of Chinese talent from America and back to China.

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