The United States wants to pass a bill for incentivize electric vehicles produced on its soil. But Canada wants to defend the interests of its automotive industry against American protectionism.
On December 10, Canadian Minister of Finance Chrystia Freeland and Minister of International trade Mary Ng sent a letter to Washington’s congressional leadership to warn against retaliations if the Build Back Better Act passed in the current form.
According to the ministers, the United States‘ Build Back Better Act contains “provisions that are discriminatory against Canada, Canadian workers and our auto industry“.
US$12k of tax credit for American-built electric vehicles
The U.S. Build Back Better Act is a massive initiative across a broad arrays of areas like labor, education, healthcare, immigration, taxes or the environment. The original version provisioned a cost of $3.3 trillion but the price was then lowered to about $2.2 trillion.
One of the Build Back Better Act initiative would give tax credits worth US$12,500 to a middle-class family if it buys an electric vehicle “made in America with American materials and union labor“.
The bill has passed in the House of representatives and awaits approval in Senate.
On November 17, Prime Minister Justice Trudeau said he was “a little bit concerned” by the electric vehicle tax credits proposed by the United States administration on American-built cars.
In October, Mary Ng had already sent a letter informing the bill “would have a major adverse impact on the future of electric vehicles and automotive production in Canada“.
Because the electric vehicle tax credits currently proposed would be equivalent to 34% tariff on Canadian-assembled electric vehicles according to Canadian officials.
For Canada, a violation of the USMCA agreement
The proposed bill is “a de facto abrogation” of the Canada-United States-Mexico Agreement, the newest free trade agreement entered in force in 2020 and replacing NAFTA.
Mexico also denounced the U.S. tax credit scheme as a violation of the USMCA.
The USMCA – or CUSMA – requires that 75% of the content value of a vehicle comes from these three North American countries (vs. 62.5% with NAFTA).
Canada may not have a flagship car-maker brand but the country is a large manufacturer as the automotive industry is globally interconnected. According to the Canadian Vehicle Manufacturers’ Association, auto components may cross North American borders as many as 8 times before being installed in a final assembly line.
Vehicles is the second largest Canadian export by value, of which 93% was exported to the U.S. in 2020.
On the other hand, vehicles assembled in Canada are made with 50% of parts coming from the U.S. Moreover, Canada buys about 10% of the U.S. car production, making it the first export market for American cars.
“Canada will defend its interests“, the latest letter warns.
Potential retaliation with increased tariffs against U.S. products
And Canada laid out the potential pay back it could apply if the tax credit were to be adopted. Canada could suspend dairy tariff-rate quotas or delay the implementation of copyright changes.
Under the USMCA, U.S. ultra-filtered milk entering into Canada is not restricted anymore. U.S. producers have also access to an additional 3.6% of Canada’s dairy market.
With the USMCA, Canada agreed to align its copyright terms with the U.S. by extending them from 50 years to 70 years after an author’s death.
Canadian government is also going to draw a list of U.S. products potentially impacted by tariffs. It would include the auto sector but the measures would be extended across several industries as a retaliation.
In 2018, when the U.S. increased tariffs on steel and aluminum, Canada retaliated with the same tariffs and added a 10% tariff on U.S. consumer items like Kentucky bourbon, playing cards, lawn mowers, ketchup or boats. A year later, both sides ended the tariffs.