How tariffs on Chinese semiconductors, batteries could hit Canadian wallets

Ottawa may not be done firing trade salvos at China as Finance Minister Chrystia Freeland said the federal government was considering further tariffs.

If consultations announced this week yield more trade actions, experts say Ottawa should watch out for consumer prices in the coming months.

“Tariffs will not necessarily mean a shortage. Users will need to be prepared to pay for the tariffs and then pass on the pricing increases to consumers. Not an ideal scenario, but still a plausible response,” said David Dienesch, CEO of Allianz Trade in Canada, an international group that offers trade insurance.

Last month, the federal government raised tariffs on Chinese EVs to 100 per cent and on Chinese steel and aluminum to 25 per cent.

Freeland told reporters at the Liberal caucus retreat in Nanaimo, B.C., on Tuesday that more could be in the works.

“I’m announcing a 30-day consultation on imports to Canada from China of batteries, battery parts, semiconductors, critical minerals and metals and solar products,” she said.

Semiconductors are used in a range of consumer products, from cars to cellphones.

The COVID-19 pandemic upended the global semiconductor supply chain and Canada, too, was affected, with supply shortages and higher prices on things like vehicles and appliances.

Dienesch said there might be some supply chain disruptions in the short term in both the automobile and telecom markets if tariffs are applied on Chinese semiconductors.

“China is one of the world’s largest semiconductor producers. We saw the impact of semiconductor shortages during COVID. The auto sector is a significant user of semiconductors, so we can anticipate some short-term negative supply chain impacts as manufacturers adjust to new pricing and potentially seek new sources of inputs,” he said.

Robert Khachatryan, CEO of U.S.-based logistics company Freight Right Global Logistics, said the North American automotive industry was already feeling the pinch of a worldwide semiconductor crunch.

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“Semiconductors are among the most important components in electric vehicles, and any further disruption in supply could make vehicle production more difficult,” he said.

“Longer production delays and higher costs for the EV sector may ensue, particularly for those in North America.”

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Erik Johnson, senior economist at BMO Capital Markets, said it was the battery tariffs that Canadian manufacturers would be more worried about.

Many semiconductor supply chains shifted to Southeast Asia after the Trump administration placed tariffs on China.

But both the U.S. and Canada rely heavily on China for lithium-ion batteries.

“In the U.S., about 20 per cent of (battery) cells are coming from China. And it’s a pretty similar number in terms of Canadian imports. It’s varied between 20 to 25 per cent over the last two years,” he said.

In addition to lithium-ion battery prices going up, Johnson said some big North American automakers could be worried about their joint ventures with Chinese battery manufacturers being in jeopardy.

Last year, Ford announced it would open an EV battery plant in Michigan in collaboration with Contemporary Amperex Technology Co., Limited (CATL) – the world’s leading battery manufacturer.

Chinese EV manufacturer BYD also currently operates a 45,000-square-foot facility in Newmarket, Ont., where it makes electric buses.

A higher tariff on Chinese batteries could mean the cost of production there could go up, he said.

“That is going to make it harder for some of these municipalities across the country to invest in electrifying their fleet,” he said.

Johnson said the tariffs could also affect the cost of solar panels.

“One slice of the pie that China does feature a little bit larger in when we’re thinking about semiconductors is the semiconductors that go into things like solar voltaic cells and solar panels.”

However, Johnson said that outside of the EV sector, the impact on consumer prices would be “muted” since it was easier to redirect supply chains in other sectors compared with the auto industry.

He said that Canada needed to catch up when it came to battery production.

“Our critical mineral battery production supply chain is still pretty nascent in this country,” he said,

Dienesch said the same holds true for semiconductors.

“In the longer term, Canadian companies will need to find new sources of semiconductor inputs given the instability we are seeing between Canada and China. The U.S.A. seems determined to improve production capacity, so that will help,” he said.

In 2022, the Biden administration enacted the CHIPS and Science Act, which authorized US$280 billion in new funding to boost domestic semiconductor manufacturing in the United States.

Canada, too, is making strides.

In 2023, Canada, the United States and Mexico agreed to form stronger regional supply chains in industries such as semiconductors. In April, Prime Minister Justin Trudeau announced a new federal investment of $59.9 million to support projects from IBM Canada and the MiQro Innovation Collaborative Centre (C2MI) to create more semiconductors domestically.

However, experts say more work is needed.

“If we want to deliver these products at scale and a cost that’s globally competitive, we really need to get on our high horse today and start galloping,” Johnson said.