Good morning. Canada is moving ahead with tariffs on electric vehicles made in China, following pressure to match or exceed those recently imposed by the United States on Chinese imports. More on whether that’s the right approach below.
Up top
Earnings this morning: Bank of Montreal has reported quarterly profit below analysts’ estimates, hurt by weakness in its U.S. retail segment, as it made bigger than expected provisions for potential bad loans. Adjusted net income stood at $1.98-billion, or $2.64 per share, in the three months ended July 31, compared with $2.15-billion, or $2.94 per share, a year earlier.
Bank of Nova Scotia recorded a drop in third-quarter profit, as the lender set aside more funds to cover potential credit losses. Net income was $1.91-billion or $1.41 per share, compared with $2.19-billion or $1.70 per share a year earlier.
- Big picture: Both banks cited the need to set away provisions for credit losses – the reserves that banks set aside to cover potential losses if loans go bad – as consumers face mounting economic strain.
- Following: One analyst recently downgraded BMO’s stock over worries its credit quality “appears to be deteriorating faster than U.S. peers,” despite having a “remarkably similar loan mix.”
Ottawa tightens TFW program: The federal government is clamping down on its low-wage temporary foreign worker program and considering reducing the number of permanent residents Canada accepts, Marieke Walsh and Matt Lundy report. Prime Minister Justin Trudeau said businesses need to be investing in training and technology, “not increasing their reliance on low-cost foreign labour.”
In focus
Will Canada tax Chinese electric vehicle imports? 100 per cent.
Does anyone reading this own one of these things? Email me: cws@globeandmail.comDavid Zalubowski/The Associated Press
The Tesla effect: The most immediate impact Canadians might notice from the new tariff announced on Monday is the number of Teslas you hear (or barely hear) coasting around your neighbourhood.
The vast majority of imported electric vehicles in Canada are Teslas. With the new tax, those imports will likely come from the U.S. instead of China, said Wolfgang Alschner, associate professor at the common law section of the University of Ottawa.
Having to make Canada-bound cars in the U.S. will raise costs for Tesla, which could decide to pass those costs down to consumers. And with less pressure to lower prices to stand up to Chinese competition, it’s “almost certain” that Canadians will end up paying more for their Teslas, Alschner said. “Although Canada may receive a slap on the back for subsidizing U.S. manufacturing.”
The road ahead
As Pippa Norman and Marieke Walsh report, the EV tariff applies to some hybrid passenger cars, trucks, buses and delivery vans, and is in addition to a pre-existing import tariff of 6.1 per cent that already applies to Chinese-made EVs coming into Canada.
The announcement also follows similar moves made by economic allies in recent months.
- Last week, the European Union said it made small tweaks to tariffs it announced in June, but they would still range as high as about 37 per cent.
- In May, U.S. President Joe Biden announced plans to quadruple the import tariff on Chinese-made EVs to 100 per cent, citing both unfair subsidies from Beijing as well as national security concerns.
Canada’s problem: Ottawa is concerned domestic automakers stand no chance against Chinese EV makers, which are backed by a government bent on oversupplying the world with EVs. It wants to save the country’s budding EV industry and thousands of potential jobs.
A report in June from the Center for Strategic and International Studies, a Washington-based think tank, found Beijing boosted China’s electric vehicle industry with at least US$231-billion in government subsidies from 2009 to the end of 2023. The report notes that number was a conservative estimate.
To Canada, that level of support gives Chinese automakers an “unfair advantage” in the global marketplace, compromising critical industries and a loss of jobs for Canadians.
- Hmmm: Beijing’s $231-billion over 15 years averages out to about $15-billion a year. Ottawa and the provinces have pledged about $42-billion in subsidies since 2022, according to research from McMaster University in Hamilton. An average of $20.5-billion per year.
- We acknowledge these are vastly different sample sizes, and we can’t know the true extent to which China supports its automakers. A big ol’ grain of salt is warranted. But if nothing else, let’s at least remember to revisit these numbers in a decade.
Canada’s solution: Increase taxes on those imported cars to more than 100 per cent from 6 per cent.
The problem with the solution: Some experts say following directly in the footsteps of the U.S. ignores other important dynamics, and that more nuanced approaches might have been considered.
One key dynamic pointed out to me by Greig Mordue, an associate professor in Engineering and Business at McMaster University in Hamilton, is that Canada is not the United States.
Ottawa might have felt a desire to be in relative harmony with the U.S. with the renegotiation of the Canada-United States-Mexico Agreement on the horizon, Mordue said. But “simply mimicking a U.S. policy, which we got into the habit of with the Inflation Reduction Act and the battery incentives, is probably not entirely or always exclusively appropriate for Canada.
“The industry in Canada is different. The dynamics are different, the competitive factors are different.”
One such competitive factor: The U.S. is protecting a homegrown market “with all kinds of dominant homegrown automakers,” Mordue said.
Canada doesn’t have those.
Ottawa and the provinces are hoping to build homegrown champions of their own through the billions in subsidies they’ve pledged. But part of that hope rests largely upon those major automakers, whose earlier promises have been scaled back or scuppered as sales proved a sticking point for consumers. Building electric vehicles in North America is expensive.
As demand weakens, Alschner argues, Chinese EVs could have kept the momentum alive in Canada long enough to help secure Canadian jobs as more plants go online.
“It would have been then that Canada could have put protections in place.”
Both economists said Canada would have been better served by following a more nuanced model, such as the one being implemented by the EU.
Counterpoint: “Tariffs on Chinese EVs are a no-brainer.” Earlier this month, Meredith Lilly, a professor in international economic policy at Carleton University, argued in favour of following in Biden’s footsteps more swiftly. Lilly points out large-scale imports of Chinese EVs could threaten Canada-U.S. trade more broadly through increased border scrutiny as the U.S. investigates Chinese-made cars over security concerns.
Charted
No, not the actual bottles. Norman Rothery’s “Champagne portfolio” seeks to invest in stocks when they hit all-time highs and hides out in bonds the rest of the time. Most recently, investors popped the bubbly as the stock market hit new highs in July but paused the party when the market wobbled into August. You can read more about the portfolio here.
The outlook
On our radar and reading list
Today: We’ve already mentioned BMO and Scotiabank, but they set the stage for ...
Tomorrow: Earnings from Royal Bank of Canada and National Bank of Canada.
Also tomorrow: Nvidia Corp. reports after the close. The leading AI chipmaker is likely to report on that its second-quarter revenue more than doubled, but unless it reveals a portal to a utopian planet, its share price could be in danger. Later in the day, CrowdStrike leaders could shed light on the financial cost of shutting down a large portion of the online world.
The superyacht investigation: Italian prosecutors are putting the captain of the sunken Lynch family yacht under the spotlight.
Morning markets
Global markets were little changed in cautious trading, as investors looked ahead to Nvidia earnings as well as U.S. inflation data later this week to bolster the Federal Reserve’s case for interest rate cuts. Wall Street and TSX futures pointed lower.
Overseas, the pan-European STOXX 600 was up 0.09 per cent in morning trading. Britain’s FTSE 100 was up 0.37 per cent, Germany’s DAX rose 0.34 per cent and France’s CAC 40 added 0.04 per cent.
In Asia, Japan’s Nikkei closed 0.47 per cent higher, while Hong Kong’s Hang Seng gained 0.43 per cent.
The Canadian dollar traded at 74.20 U.S. cents.