On 26 August, the Canadian government formally announced its new long-expected tariffs on Chinese-made electric vehicles, and proposed new surtaxes on many steel and aluminum products. The move, a 100% surtax on many electric vehicles, brings Canada in line with recent US tariffs on such Chinese produced vehicles when it comes into effect on 1 October. The government also proposed a 25% surtax on many steel and aluminum products, which is set to come into effect Oct 15 following a 30 day comment period and sets in motion a third 30-day review that will likely result in tariffs on associated supply chains including batteries, chips, solar products and critical minerals. The moves, announced on the sidelines of a Cabinet retreat aiming to reset the ruling liberals political plans, reflect Canada’s alignment with the US, its reliance on the integrated North American auto supply chain and concern about drivers of economic growth.
Globally, the move highlights the continued reliance on tariffs to protect industries, especially those which are also benefiting from government incentives. With more countries relying on tariffs and subsidies, de-facto common external tariffs, and even partial sectoral imbalanced customs unions will only rise. Whether these measures just keep Chinese goods out or actually help to build new supply chains will require not just tariffs, but incentives, regulations, catering to customers and tools that better help companies hedge their costs (say for key resources).
The Canadian moves take a similar approach to the US rather than those of the European Union. The EU aimed to calculate the benefits China-based producers gain and apply targeted tariffs. The interlinkages of the North American auto market, which have grown even more integrated since the 2020 signing of the USMCA increased pressure for an aligned approach. Some in Canada have criticized the decision as forced by the US, but implicitly, the integration of the sector and Canadian need for access to the US market meant that an aligned policy was effectively the only choice. While there are no real scope for major trade diversification, even those other countries are also concerned about China’s latest phase of export led growth.
Canada currently does not import many EVs made in China from Chinese producers, but it does buy Teslas and other cars which include some of their production in China. The measure is thus designed in part to force Tesla to ship cars to North America that are produced in North America (or perhaps in Europe). Like the US thus, this move is partly pre-emptive, putting a higher cost on Chinese-made products that are deemed oversupplied before they directly flood global markets. The goal in part seeks to avoid Canada either being a soft underbelly for cheap Chinese goods to enter the North American market or being a location where such goods are dumped. Mexico too, has taken some steps to avoid being a dumping ground for cheaper Chinese goods, raising some of its own tariffs in several tranches over the last year. Sheinbaum’s new government, set to take office later this fall, will undoubtedly face pressure to align with US tariffs or possibly lose access to US markets. Other countries such as Brazil too are preparing for how it might avoid diversionary trade.
Canada also adjusted its EV consumer incentives. Cars benefiting from Zero emission vehicle incentives must come from a free trade partner country. In practice, this means in North America, though vehicles from the EU, Korea and Japan (the latter CPTPP members) could still benefit from the Canadian subsidy even if they don’t benefit from the integrated channels.
The measures seem likely to keep some Chinese goods out, but it remains to be seen if Canada and indeed the US will be able to develop attractive alternatives especially affordable ones. To some extent these tariffs aim to work with the incentives in place such as those in the IRA in the US that give funds only to autos that avoid foreign entities of concern and which source an increasing amount of battery components in North America.
More tariffs ahead: Looking ahead, the Canadian government launched a new 30 day consultation on potential tariffs on a wide array of other products including battery supply chains, semiconductors, solar panels and critical minerals. Those watching closely would note that list sounds rather similar to those subject to new US tariffs a few months back. Jake Sullivan, recently meeting with the Canadian Cabinet over the weekend, has been a proponent of coordinated tariff response within US allies.
For some of these other products, Canada has been providing financial support (batteries and critical minerals), for others, they have accepted that Canada is unlikely to be a hub of production and innovation. The US push to coordinate tariffs, suggests that Canada may add surtaxes on both areas. Overall, Canada has joined the view in the US and EU that the energy transition will no longer be simply cheap and made in China. For the areas where Canada may realistically be part of new less China reliant supply chains, tariffs may be phased in or ratched-up accordingly. Gregory Wischer sketched out a concept for how tariffs might be phased in to support mining in the US by increasing tariffs more for products produced in countries that pose a national security threat. Some ideas like this may percolate within Canada also.
China will likely respond with investigations of its own such as those it is engaged in with Europe. Perhaps another round of concerns on canola or other agricultural products is ahead. On the margins any resource related retaliation or coercion is likely to impact the west of the country more than the industrial central.
Overall, today’s move highlights the fact that tariff support is generally an area of cross-party agreement in Canada, like in the US, as long as they are directed towards China and may help Canada maintain market share in US markets. However tariffs on their own won’t support innovation or reduce the G7 and globe’s reliance on China. Efforts to incentivize new production, being realistic about which parts of the supply chain may develop will be key. Otherwise today’s tariffs will merely be inflationary.
Ziemba Insights 