If Canada chooses to engage in activist trade policy, it should make sure it does so strategically

When the Trudeau government announced its decision to implement tariffs of 100% on Chinese electric vehicle (EV) imports, it aligned itself with nearly identical policies enacted by the United States. Paying heed to recent U.S. action in this sector is not surprising, given the strong political incentive for Ottawa to maintain policy harmony with Washington. 

But the question that should be on Canadians’ minds now is: What are these tariffs for? If the government’s objective is to limit competition and protect companies that are falling behind the global race in EVs and battery technology, Canadians will end up losing. If we use tariffs to incentivize supply chain migration to Canada, and the localization of Chinese firms into North American markets, Canadians will end up ahead.

This raises a set of critical questions: As the world increasingly shifts toward green technologies like EVs, what is truly in Canada's best interest? What is it that policymakers and the public don’t get about China’s EV industry? What strategic and effective measures should Ottawa consider, while demonstrating due concern for American priorities?

Simply put, Canadian competitiveness is not enhanced by a 100 percent levy on China-made EV imports. Although it is indisputable that Beijing does heavily subsidize its domestic EV industry (albeit with designated phase-out periods), it is unclear how a purely punitive 100 percent tariff could level the playing field for Canadian workers and consumers. In addition, by not even purporting to play by WTO rules in this case, Canada is undermining its reputation as a strong proponent of fair trade and of the rules-based international trading system - an outcome that could cost it elsewhere as well. 

In contrast, the European Union’s approach explicitly takes into account current and past subsidy levels and overall production cost advantages and aims at a more balanced auto trade between the two economies. The EU implemented tariffs after a thorough investigation on Chinese EVs that was at least on the surface more reasonable and balanced, reinforcing the EU’s international position as aligned with, but ultimately separate from, Washington. As a result, the EU has arrived at producer-target tariffs ranging from 17 to 38 percent. Mexico, taking an interesting middle ground, imposed a tariff of 50 percent on Chinese EV imports, which all but explicitly aims at onshoring Chinese EV production.

Ottawa should be careful not to systematically conflate overcapacity with intense market competition, both of which are realities in China’s complex and sprawling domestic political economy. China has several policy levers and factors that give it a natural advantage in some sectors vis-a-vis its trading partners. These include large-scale government ownership of land, an extremely large domestic market, and, paradoxically, the advantage of a legacy of technological backwardness that has allowed it to skip stages of technological development. Rather than focus on competing with the west on mature technologies – namely, internal combustion engine vehicles - it has over the past fifteen years explicitly focused on EV innovation and supply chain development, electric battery technology and critical mineral supply.

The world is still adapting to a trading environment where China, in some cases, is the technology and innovation leader. Given China’s pole position in EVs, Canada could take advantage of the desire of Chinese EV producers to enter the Canadian – and, more broadly, North American – market by proposing a “market access for technology” approach to Chinese EV firms, akin to what China did with Western companies in the 1990s and 2000s. This would allow Canada to reap significant gains by building domestic industrial clusters and supply chains that have exposure to advanced technologies and technical expertise from highly sophisticated Chinese EV makers that are at the cutting edge of the industry.

Some of our trading partners have already taken note of this emerging reality and are seeking to turn challenge into opportunity. The technological lead enjoyed by Chinese EV and battery manufacturers should not be underestimated. While Western economies excel at innovation across many sectors, EVs are an area where China is clearly ahead. Industry leaders in the EV battery space such as BYD and CATL are not just beneficiaries of government support; they are also led by visionary entrepreneurs and scientific innovators. By granting market access in exchange for investment from these Chinese industry leaders, Ottawa could also turn some lemons into lemonade, fostering the development of domestic industry, all while maintaining some level of tariff protection in response to Chinese subsidies. 

Looking forward, Ottawa should therefore also pay close attention to other areas of technological and environmental advancement in China as it prepares to launch additional consultations in related industries, including batteries and battery parts, semiconductors, solar products, and critical minerals. 

Ottawa should also continue to use trade as a strategic policy lever to improve its own role in regional and global supply chains. It should tread carefully and purposefully, in order not to sacrifice the opportunity of technological advancement and economic efficiency on the altar of defending against unfair trade practices. Economic globalization exposes Canada to often contradictory, buffeting forces; dexterity in charting an optimal path has the potential to deliver great benefit.

While it should not necessarily be a determining factor, Canada will also want to be mindful of the impact yesterday’s decision might have on Ottawa-Beijing diplomatic relations. Although we have recently seen signs of gradual re-engagement and thawing of relations, this tentative reset will be tested by Ottawa’s tariff policy. We should also not be surprised to see retaliation from China, targeting Canadian exports. 

These are some of the short and medium-term problems with the current approach. If we look further into the future, it is not difficult to surmise that large tariffs on energy-saving technology like EVs and hybrid vehicles will also be harmful to Canada’s environmental goals. Expert analyses indicate that without Chinese EVs, Canada will most likely be unable to achieve its 100% zero-emission auto sales goal by 2035. These new tariffs will raise EV costs, reduce consumer choice, and hinder the widespread adoption of EVs, despite government rebates. 

Ottawa’s decision is understandable from a political perspective, as our largest trading partner by far continues to adopt an aggressive trade posture toward Beijing. But immediate political priorities should be balanced with a dexterous and forward-looking strategy that serves the Canadian interest. From our vantage point today, yesterday’s decision undermines Canada’s commitment to ambitious zero-emission targets, does little to strengthen our EV industry, and likely slows Canada’s technological advancement even as the country engages in continued economic competition with none other than Beijing itself.