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China to hit back hard if Canada slaps tariffs on Chinese EVs: Experts

Visitors look at an electric vehicle from China's BYD during the 45th Bangkok Motor Show in Nonthaburi , Tuesday, March 26, 2024. Thailand. (AP Photo/Sakchai Lalit)
Visitors look at an electric vehicle from China's BYD during the 45th Bangkok Motor Show in Nonthaburi , Tuesday, March 26, 2024. Thailand. (AP Photo/Sakchai Lalit) (The Associated Press)

Canada will slap tariffs on Chinese electric vehicles, say two trade experts, predicting the world’s second-largest economy will forcefully retaliate if Ottawa falls in line with Washington and Brussels.

Ottawa started a 30-day public consultation period on July 2 on possible responses to what Finance Minister Chrystia Freeland calls China’s “state-directed policy of overcapacity, undermining the Canadian EV sector’s ability to compete in domestic and global markets.”

On Tuesday, the federal government released a paper outlining options ranging from a surtax under section 53 of the Customs Tariff, to changes to EV purchase incentives, to restrictions on Chinese investment.

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This follows crackdowns on Chinese EVs by the United States and the European Union. Chinese EV imports to Canada are currently subject to a six per cent import tariff. The U.S. imposed a 100 per cent tariff last month. In Europe, countervailing duties of up to 38.1 per cent kicked in on July 4.

Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, says the Canada-China trade relationship was already tense before this potential flare-up over electric vehicles. She notes Ottawa’s recent move to block the sale of rare earth metals mined in Canada to Chinese buyers as an example of the federal government’s increasingly strategic posture.

“I’m expecting they will find tariffs are warranted. The question is if they will be applied retroactively, and whether they extend to process materials as well as finished vehicles,” Ziemba told Yahoo Finance Canada. “This is an environment of escalatory policies on a range of sides.”

Prime Minister Justin Trudeau’s government aims to build an electric vehicle supply chain from mining to finished products. Canada topped BloombergNEF’s 2024 global lithium-ion battery supply chain ranking, overtaking China, despite the fact that Canada produces only a tiny fraction of China’s battery output.

I don’t think Chinese electric vehicles are a meaningful threat to the Canadian market.”Rachel Ziemba, adjunct senior fellow at the Center for a New American Security

“China doesn’t want to make it easy for Canada or the U.S. to develop supply chains that don’t involve major involvement of China,” Ziemba said. “Like in the U.S., I don’t think Chinese electric vehicles are a meaningful threat to the Canadian market.”

Mark Warner, a Canadian and American trade and investment lawyer, expects the government to impose section 53 tariffs in a manner amounting to a legal first. The main motivation, he says, is to garner political favour with the U.S. as the country heads into a presidential election this fall.

“I don’t remember Chrystia Freeland being so anti-China when she was trade minister,” Warner told Yahoo Finance Canada, referring to Freeland’s role from 2015 to 2017. “We’ve never used [section 53 tariffs] proactively to sort of aggressively go after another country the way we’re proposing to use it here. There are a lot of legal ramifications to doing that.”

These could include challenges through the World Trade Organization.

Warner says Canada is effectively playing catch-up to America’s hardening views on China. He notes it wasn’t so long ago that Canada's Automotive Parts Manufacturers' Association cheered Chinese investment in the country’s auto sector.

“This is primarily driven by the idea of staying on the right side of the United States, and to some extent Europe. My guess is if there weren’t the threat of American retaliation, if [Chinese automaker] BYD were to say to someone in Canada, ‘We’d like to set something up in Markham,’ they’d be welcomed by the Ontario and federal governments.”

“It’s pretty obvious this is going to invite retaliation.”Mark Warner, Canadian and U.S. trade and investment lawyer

Warner and Ziemba say the fate of Tesla (TSLA) in this equation is a key question. The U.S. automaker’s vehicles represent the majority of claims for Ottawa’s electric rebate purchase incentive program. According to the University of Alberta’s China Institute, passenger vehicles were the third-largest category of imports from China in 2023, amounting to $2.64 billion. That’s a 326 per cent year-over-year increase.

“This meteoric growth in imports of Chinese-produced passenger vehicles is likely reflective of Western models produced in China – such as Tesla EVs – as opposed to Chinese vehicle brands, which are largely unavailable in the Canadian market,” the university's policy research analyst Daniel Lincoln wrote in a report published last month.

“It does set up a tricky situation,” Warner said. “We are going to make Elon Musk very angry. We are going to make China very angry. We might make some people happy in the United States. Others will say, ‘Why are you going after an American company?’”

Ziemba says a response from China’s government would be virtually inevitable, and imports of Canadian agricultural products are an easy target. According to the University of Alberta, Canada’s exports to China amounted to $30.5 billion last year, led by canola, coal, and iron.

“The other thing China might do is restrict Canada or its allies from access to some of its critical minerals, like graphite, and some other battery parts,” Ziemba said.

“It’s pretty obvious this is going to invite retaliation,” Warner said. “The Chinese have shown a willingness to retaliate against smaller trade-dependent countries, and make examples of them. They know there is a discrete group of industries that would be hurt.”

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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