Different approaches to Chinese electric vehicle (EV) imports threaten the otherwise cooperative framework between the U.S. and Canada in the auto-sector.
On the surface the U.S. and Canada are heading in the same direction, with both countries citing the adoption of electric vehicles as key to climate change mitigation policies; The Inflation Reduction Act offers generous subsidies for EV and battery manufacturing and Canada has responded with matching incentives to maintain a competitive share in the sector. Both countries see the benefit of collaborating over critical mineral mining and processing, recognizing their mutual interest in securing these supply chains.
But beneath this seeming cooperation is an underlying rift. The U.S. imposed a 100% tariff on Chinese EV imports, driven by national security concerns over data privacy risks and dependence on Chinese components. Retired U.S. generals warned the Biden administration about the risk of dependence on China in an open letter.
In contrast, Canada has taken a more open position, importing $1.6 billion worth of Chinese EVs in 2023. Currently, Canada has only a six percent tariff on such vehicles. And, unlike in the United States, Chinese EVs even qualify for government purchase subsidies in Canada.
One of the largest impediments to widespread EV adoption is consumer sensitivity to the high prices charged by North American automakers. And despite these high prices, U.S. and Canadian-based automakers incur an average loss of $6,000 per vehicle. Without access to lower-cost Chinese EVs, meeting ambitious government set EV sales mandates may prove elusive. Ottawa is well aware of this.
While Canada’s industry minister Francois-Philippe Champagne suggested Canada might follow the U.S. in imposing new tariffs, stating that the government is “considering all measures”, there will almost certainly be pushback within the Canadian Cabinet to raising tariffs, particularly from the minister of environment and climate change Stephen Guilbeault who is behind Canada’s EV sales mandate and has also been willing to engage directly with China on environmental initiatives.
This likely hesitation to impose tariffs combined with Prime Minister Justin Trudeau's political commitment to environmental policies will likely lead Canada to maintain an open approach to Chinese EV imports. Canadian governments have a record of diverging, on occasion, from the US on policy matters, but this will inevitably spark tensions.
Despite the fact that Chinese-made EVs offer both advanced technology and affordability, making them valuable in meeting EV adoption mandates, it is unlikely the U.S. will recant and accept the national security risks associated with Chinese EV imports. U.S. officials worry that EVs' cameras, sensors, and interconnectivity pose security and privacy risks and that China's control over the critical minerals used in EV batteries could be leveraged for economic influence.
However, blocking Chinese EV imports into the U.S. will make meeting their emissions reduction goals very difficult. It's worth considering whether a limited Chinese EV market share of 5% would still pose security and privacy concerns. If the concern is about dependence on Chinese components, would a small market share ease that issue?
Canada's open approach also raises concerns about whether Chinese EVs will simply find their way into the U.S. through the backdoor, undermining Washington's protectionist policies. Canada’s lack of barriers threatens to suppress prices and undercut domestic automakers, contradicting the USMCA's goal of boosting regional production. There’s no doubt that an influx of cheaper Chinese EVs into Canada, fueled by government incentives, would harm US automakers' sales in the Canadian market.
In sum, American tariffs’ prioritize national security over climate targets where Canada's approach is putting climate targets first. Tensions are inevitable.
Dealing with this tension before it becomes tied to fractious politics is important. The U.S. should seek clarity from Canada on how disparate their policies toward Chinese EV imports will be going forward. Our two countries will need to find common ground around negotiating market share limits on imported EVs and policies to limit re-exporting into the US.
Ultimately, the US and Canada must find a reasonable balance between their climate goals, trade relations, and security concerns regarding Chinese EV imports.
Jerome Gessaroli is a senior fellow at the Macdonald-Laurier Institute and the Center for North American Prosperity and Security. He leads the Sound Economic Policy Project at the British Columbia Institute of Technology.
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