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What is EV tax credit and why is Canada threatening the U.S. with tariffs?

WATCH ABOVE: Canada threatens new tariffs on U.S. exports if electric vehicle tax credit approved – Dec 11, 2021

Canada, in its most aggressive display so far against a proposed United States electric vehicle tax credit plan, has threatened to impose new tariffs on its biggest trading partner.

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The threats, sent in a stern letter Friday to several members of the U.S. Senate leadership, included promises to slap taxes on a swathe of American products should President Joe Biden’s proposed plan to encourage the development and sale of U.S.-made electric vehicles become law.

The development is the latest in a months-long spat between Canadian and U.S. leaders over a provision in the president’s Build Back Better Act, which — if passed — would allow Americans to claim incentives worth thousands of dollars on some electric vehicles.

With the plan threatening to severely impact Canada’s automotive sector, valued at tens of billions of dollars in exports alone to the U.S., here’s everything you need to know about the dispute so far.

Biden's Build Back Better

Biden’s Build Back Better plan — a major part of the then-presidential candidate’s platform in the 2020 election — includes a very enticing incentive worth  US$12,500 for Americans looking to buy electric vehicles made and built on U.S. soil.

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Biden’s administration promoted the tax credit plan as a means to increase middle-class American families’ access to electric vehicles that would also allow the U.S. to create millions of jobs and hit its climate change goals.

The bill has already been passed in the U.S. House of Representatives and now waits for approval in the U.S. Senate, which is divided by 48 Democrats, 50 Republicans and two independents that are closely aligned with the Democrats.

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U.S. Vice President Kamala Harris, a Democrat, holds a deciding tie-breaking vote within the Senate, however, presenting a chance for the bill’s passing should all Democrats, independents and the vice-president vote in support.

How will this hurt Canada

Canada has a lot to lose should the bill be made into law.

Canadian-made exports in 2020 were valued at about $43 billion, of which about 93 per cent — or roughly $40 billion — wound up in the U.S., according to the Canadian Vehicle Manufacturers’ Association (CVMA).

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Auto manufacturers and parts companies employ as many as 125,000 Canadians, according to recent government statistics. The auto industry itself also indirectly employs around 370,000 people in Canada, factoring in employees in sales and finance.

As a part of the economy itself, auto-making accounts for at least $12.5 billion of Canada’s GDP, and is the second-largest sector of exports just behind oil and gas.

Car manufacturers like General Motors are also planning to spend billions on upgrading plants in Ontario that are building new electric vehicles for the U.S. market.

The industry response to the impending law in Canada has also been far from welcoming.

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Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association, said in November that the proposed U.S. incentives were “a bigger threat than anything pointed at us by Donald Trump.”

And in the same month, Ontario Premier Doug said the credit violated trade rules and promised that he would “do whatever it takes” for Canada to be excluded from “Buy America.”

“It’s going to hurt both sides of the border if he continues to do this.”

Canada's threat

With the Senate promising to vote on the act by Christmas Day, Canada sent its most scathing rebuke of the bill so far on Dec. 10 with a direct threat to impose tariffs on a raft of U.S. goods.

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In a letter to Senate leadership Friday, Deputy Prime Minister Chrystia Freeland and Trade Minister Mary Ng issued the threat, adding that the proposal amounted to a 34 per cent tariff on electric vehicles made in Canada — and that it would violate the U.S.-Mexico-Canada Agreement (USMCA).

“We want to be clear that if there is no satisfactory resolution to this matter, Canada will defend its national interests, as we did when we were faced with unjustified tariffs on Canadian steel and aluminum,” the ministers wrote.

“In that regard, Canada will have no choice but to forcefully respond by launching a dispute settlement process under USMCA and applying tariffs on American exports in a manner that will impact American workers in the auto sector and several other sectors of the U.S. economy.”

Canada also threatened to stop certain concessions already being made to U.S. dairy producers under USMCA, reasoning that the passing of the EV tax credit would result in a “significant change in the balance of concessions” agreed to under the trade agreement.

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Among the recipients of the letter were Senate Majority Leader Chuck Schumer, Senate Minority Leader Mitch McConnell and the chairs and ranking members of the U.S. Senate finance, foreign relations and energy and natural resources committees.

Canadian-built vehicles amount to about half of U.S. content, the letter states, with more than $22 billion in American-made auto parts imported into the county every year.

Among the states that supply the parts — and would feel the fallout should it get passed — were “Michigan, Ohio, West Virginia, Indiana, Kentucky, Illinois and New York, among others,” the letter stated.

But the ministers did offer a possible solution to the dispute: to make sure that Canadian-made vehicles and batteries would qualify for the same credit.

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“To be clear, we do not wish to go down a path of confrontation,” read the letter. “That has not been the history of the relationship between our two countries — nor should it be the future.”

Canada’s direct threats do not come without months of warning, however, with federal ministers repeatedly raising concern over the proposed law.

In a letter to U.S. legislators in late October, Ng said that the credits — if approved — “would have a major adverse impact on the future of EV and automotive production in Canada.”

On Nov. 4, Innovation and Industry Minister Francois-Philippe Champagne said that Canada would respond “appropriately” to the proposed tax credit, adding that it would harm workers on both sides of the border.

Later that month, Prime Minister Justin Trudeau said that Canada was “a little bit concerned” over the act, and that he was planning to have a conversation with the president on the issue.

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“We are a little bit concerned about the zero-emission vehicle mandates or rebates brought forward in the current proposal in Congress right now,” Trudeau said.

“But that’s part of the conversations we’re going to have today to make sure that people understand that doing this together is good for all of us, good for the jobs, good for the future as we fight climate change, as we build prosperity in North America.”

with files from Reuters and Global News’ Brian Hill


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