Workers assemble an EV car inside BYD's electric vehicle factory in Rayong, Thailand, on July 4.Chalinee Thirasupa/Reuters
Over the past two years, federal cabinet ministers have popped up in manufacturing hubs across Ontario and Quebec to promise billions of dollars in subsidies to foreign carmakers willing to set up electric vehicle and battery factories in Canada.
When Finance Minister Chrystia Freeland took the stage at a Martinrea International Inc. auto parts plant in the Toronto suburb of Vaughan last month, the message was different and altogether more dire.
Recent investments in the auto sector are at risk, Ms. Freeland said, flanked by Trade Minister Mary Ng, industry representatives and union leaders. The culprit? Inexpensive Chinese EVs that could flood the Canadian market and undercut North American vehicles before the industry has time to retool for an electrified future.
Canadian automakers are “facing unfair competition from China’s intentional, state-directed policy of overcapacity,” Ms. Freeland said, announcing a month-long consultation on tariffs and other measures aimed at keeping Chinese EVs out of Canada, or at least making them less appealing. The consultation runs until Aug. 1.
The announcement wasn’t a surprise. In May, the United States quadrupled its tariff on Chinese EVs to 100 per cent. A few weeks later, the European Union imposed additional tariffs of between 17.4 per cent and 37.6 per cent on Chinese EV companies, on top of its existing 10 per cent duty on auto imports.
There’s little doubt Canada will follow suit. The question is whether it will stick with the U.S. in a Fortress North America strategy aimed at keeping Chinese EVs off Canadian and American roads. Or follow the Europeans with a more nuanced approach, designed to level the playing field for domestic automakers but not necessarily block Chinese vehicles altogether.
The explosive growth of Chinese EV sales around the world, led by companies such as BYD Auto Co. Ltd., SAIC Motor Corp. Ltd. and Geely, has caught Western automakers and politicians off guard. Not only are those EVs cheaper than their international competitors, Chinese manufacturers are ahead of the curve on technology.
“There’s lots of conversations, discussions and hyperbole about the unfairness of the Chinese industry. But the reality is China is far ahead of North America, and frankly even Europe, on electrification,” said Greig Mordue, ArcelorMittal Dofasco chair in advanced manufacturing policy at McMaster University and a former Toyota Motor Manufacturing Canada executive.
Tesla Inc. chief executive officer Elon Musk put it bluntly on an earnings call in January. He called Chinese carmakers the “most competitive” in the world and warned that “they will pretty much demolish most other companies in the world” unless countries put up trade barriers. This happened a decade ago with the Chinese solar panel industry.
So far, most Chinese-made EVs entering Canada are Teslas from the U.S. automaker’s plant in Shanghai. However, Canadian policy makers are looking at Europe and Australia, where Chinese brands are gobbling up a growing share of the EV market. In 2023, China surpassed Japan as the world’s largest auto exporter, although a majority of these vehicles are still gasoline powered.
In some ways, this looks like a rerun of the 1980s, when Japanese and Korean carmakers began to outcompete their sluggish North American and European rivals. This time, however, the competition is overlaid with national security concerns and happening against the backdrop of huge industrial policy spending, dysfunction at the World Trade Organization and a protectionist turn in American politics.
This puts Canada in a tricky spot.
Auto industry representatives want Ottawa to close ranks with Washington and erect towering trade barriers against Chinese EVs. This would likely contravene WTO rules. But it would help keep Canada in America’s good books ahead of the renewal of the United States-Mexico-Canada Agreement (USMCA, which was preceded by NAFTA) in 2026.
“The automotive industry exists in Canada because, going back to the 1960s and the Auto Pact, successive governments have realized that alignment and harmonization with the United States is what makes us attractive for automotive investment,” said Brian Kingston, CEO of the Canadian Vehicle Manufacturers’ Association, which represents the Canadian divisions of Ford Motor Co., General Motors Co. and Stellantis NV.
There’s “simply too much at stake” ahead of the USMCA negotiation “if the United States perceives Canada as out of sync on automotive policy and the approach to China,” he said.
Others aren’t so sure. A maximalist approach to tariffs could see Canada getting sucked into someone else’s trade war. That could invite harsher retaliation from China against other Canadian industries and keep the cost of EVs high at a time when most Canadians can’t afford them – hardly a recipe for meeting the federal government’s goal of having 100 per cent of new passenger vehicle sales be zero-emission by 2035.
“The U.S. essentially believes that it can get its way with bilateral pressure. But for Canada to believe that it could get anywhere with bilateral pressure is ludicrous,” said Nicolas Lamp, associate professor of law at Queen’s University and a former dispute settlement lawyer at the WTO.
“We’re in this for the long term, and we’ll have to manage competition from Chinese EVs for decades.”
In talking about the Chinese auto industry, Western politicians tend to reach for words such as “overcapacity” and “unfair and non-market practices.” This language is politically charged and somewhat ironic, given the staggering sums of public money the U.S., Canada and other countries are now pouring into their own EV sectors. But the complaints do have some merit.
China’s economy is “hard-wired to produce more than it consumes,” said Stuart Bergman, chief economist at Export Development Canada, as a result of high household savings rates and low consumption rates. This macroeconomic imbalance, combined with fierce competition between Chinese automakers, means more cars are produced than purchased in China.
There’s also little doubt China’s EV makers became world-beaters with significant help from the Chinese Communist Party.
Starting around 2009, Beijing began offering tax breaks and subsidies to EV manufacturers, and generous rebates to consumers. Local governments offered procurement contracts and discouraged the use of gasoline vehicles in cities. And crucially, the Chinese state pushed the development of a battery supply chain, from mining, to refining, to assembly.
A recent report by the Center for Strategic and International Studies, a U.S. think tank, estimates that state support for the Chinese EV industry totalled at least US$230-billion between 2009 and 2023.
Over that period, China became by far the largest EV market in the world, with hundreds of carmakers churning out millions of vehicles. Many companies folded amid cutthroat competition. But some have become industrial giants, making cars of comparable quality to those of international competitors at a fraction of the cost.
BYD’s Seagull – a compact hatchback with a driving range of around 300 kilometres – sells for less than $15,000 in China and less than $30,000 in some Latin American countries. The cheapest EV available in Canada, by contrast, costs more than $40,000.
Western politicians typically point to cheap labour and dirty electricity grids to explain China’s cost advantage. But that’s only part of the story.
“They’ve got a monopoly on the whole supply chain … and they’ve had 15 years to develop the technology and to get to scale in terms of the production of vehicles,” said David Adams, CEO of Global Automakers of Canada, which represents non-U.S. car companies, including Volkswagen, Toyota Motor Corp. and Hyundai Motor Group.
“We’re just not there yet. We’re in the nascent stage of building out our ecosystem for the battery supply chain, in some cases building new plants, in other cases converting existing plants to build EVs. So frankly, we’re probably 10 years or so behind where the Chinese are at.”
Western governments dawdled in their support for electric mobility. However, they have recently grasped green industrial policy with the fervour of converts.
The 2022 U.S. Inflation Reduction Act promises somewhere in the range of US$800-billion to US$1.2-trillion over 10 years to promote the transition to a low-carbon economy. This includes subsidies for battery factories and a US$7,500 consumer tax credit for EV purchases.
Canada rolled out its own $80-billion suite of tax credits in 2023. And the federal government, Ontario and Quebec have promised up to $50-billion in additional support to a handful of companies, including Northvolt AB, Stellantis, Volkswagen and Honda Motor Co., to coax them into setting up EV and battery factories in Canada. Most of this support takes the form of production subsidies, which will be paid out as vehicles and batteries roll off the line.
This is industrial policy at a scale not seen since the Second World War. Politicians, automakers and unions aren’t keen to see these investments dashed by a tide of cheap Chinese imports before the new factories even open. The question is what to do about it?
The EU has taken a more conventional approach in responding to competition from Chinese car companies. It launched an anti-subsidy investigation last fall, then raised tariffs on a company-specific basis, increasing duties on BYD by 17.4 per cent and on state-owned SAIC by 37.6 per cent, for example.
This was calculated to stay within WTO rules, said Wolfgang Alschner, Hyman Soloway chair in business and trade law at the University of Ottawa. “What the Europeans are doing is trying to offset an unfair competitive advantage that Chinese companies have enjoyed because of the subsidizing. They are not trying to shield the European market from Chinese cars,” he said.
Indeed, some EU countries, notably Hungary, are actively courting investment from Chinese companies.
By contrast, U.S. President Joe Biden opted for a sledgehammer approach, in an apparent attempt to one-up his protectionist opponent Donald Trump ahead of the November presidential election. Mr. Biden raised tariffs on Chinese EVs across the board to 100 per cent from 25 per cent, and on lithium-ion batteries to 25 per cent from 7.5 per cent.
Prof. Alschner said Canada should follow the European example, and “keep its powder dry” for USMCA negotiations with the Americans in 2026. “Whatever we give for free now is not a bargaining chip we can use later,” he said.
Guy Saint-Jacques, former Canadian ambassador to China and a senior fellow at the University of Alberta’s China Institute, isn’t sure Canada has that luxury.
“Our first preoccupation has to be with the United States,” Mr. Saint-Jacques said. The Canadian and American auto industries are wholly integrated, and almost 80 per cent of Canada’s total exports go to the U.S. Moreover the possible return of Mr. Trump to the White House should focus minds in Ottawa.
“We will have to be very careful, because we know how vindictive and tough Trump can be,” Mr. Saint-Jacques said. “So I suspect the tariff could be pretty high.”
Ms. Freeland has said she’s contemplating at least one aggressive option: a surtax under section 53 of the Customs Tariff Act, last used in response to Mr. Trump’s tariffs on Canadian steel and aluminum in 2018.
Ottawa is also considering whether Chinese-made EVs should be ineligible for federal consumer incentives, and whether additional restrictions are needed on Chinese investment in Canadian EV supply chains. Canada has already placed restrictions on Chinese investment in critical minerals mining companies, and banned Chinese telecom giant Huawei Technologies Co. Ltd. from the country’s 5G network for national security reasons.
Whatever path Canada chooses, it will likely face retaliation. After Ms. Freeland announced the tariff consultations last month, the Chinese embassy said the move “violates World Trade Organization rules and will harm China-Canada bilateral economic and trade co-operation,” and warned “China will take resolute actions to defend its legitimate rights and interests.”
China has launched anti-dumping investigations against the European pork and wine industries in response to the EU tariffs. Canada’s top exports to China, such as canola, barley and coal, could be in the crosshairs.
Carlo Dade, director of trade and infrastructure at the Canada West Foundation said Ottawa needs to think hard before getting into a tit-for-tat trade war. “If the Americans are going to play this game, can we afford to play with them?” he asked.
Canada also needs to take consumers into account. Tariffs may protect manufacturing jobs, at least in the short run. But they can stifle competition and prevent prices from falling.
That’s a problem when EV adoption is being inhibited by affordability challenges, said Rachel Doran, vice-president of policy and strategy at Clean Energy Canada. “It’s in everyone’s interest to ensure there’s ongoing consumer demand for EVs,” she said.
In 2023, around 10 per cent of new car registrations in Canada were EVs. In China, that number was more than one in three.