BYD electric cars waiting to be loaded on a ship are stacked in China's eastern Jiangsu Province on Sept. 11, 2023.-/Getty Images
Greig Mordue is an associate professor and the ArcelorMittal Dofasco Chair in Advanced Manufacturing Policy in the faculty of engineering at McMaster University.
Last month, the United States raised tariffs on Chinese electric vehicles to 100 per cent. Just six years ago, those tariffs were 2.5 per cent, the rate the U.S. charges for imported vehicles from just about every other country. Last week, the European Union also stepped in, imposing tariffs as high as 38 per cent.
In Canada, the tariff on imported vehicles, including Chinese electric vehicles, is 6.1 per cent, the rate it has been since 2001.
Inevitably, Canadian policy makers have been pressed to match the U.S. and EU approach, warned by its automakers, parts makers and unions that failure to protect Canada’s burgeoning electric vehicle industry would be tantamount to “pushing our auto industry into Chinese hands.” Finance Minister Chrystia Freeland announced a plan on Monday to explore potential further measures on Chinese EVs.
However, as Canada contemplates its response, it must recognize that the imposition of tariffs will not bring the story of Chinese automakers in Canada to a close. Rather, it is likely to open an entirely new chapter – one that will disrupt the industry in ways those putting pressure on policy makers have probably not fully contemplated.
Tariffs or not, Chinese automakers are coming.
The pattern was established 45 years ago. At the time, North America’s auto industry was under threat. The economy was in recession and vehicle sales had sunk. More critically, in 1979, the OPEC oil crisis caused gas prices to jump. In North America, this triggered a rapid shift in consumer preferences toward smaller, more fuel-efficient vehicles. The problem: North American car makers made gas guzzlers.
The oil crisis caused sales of Japanese-made Toyotas, Datsuns, and Hondas to soar. In 1970, about 4 per cent of the North American market was occupied by Japanese-built vehicles. By 1980, Japanese imports represented 20 per cent, just over two million vehicles.
That’s when the Canadian automotive industry stakeholders called on policy makers to deploy versions of the same protectionist tools their successors are requesting today.
After much wrangling, in 1981, the U.S., then Canada, negotiated agreements with Japan to place ceilings on the number of vehicles individual Japan-based car companies could export. When that happened, the Big Three incumbents, autoworkers, parts makers and their trade associations thought they had won.
If Canada imposes tariffs on Chinese electric vehicles in 2024, the incumbents might think they’ve won again.
But here’s the thing. When limits were placed on the number of vehicles Japanese automakers could export to Canada in 1981, policy makers didn’t rest. Instead, they leveraged the protectionist tools they had imposed to begin a multiyear process of encouraging Japanese automakers to open manufacturing facilities here. To Canada’s policy makers, Japan and its automakers were no longer a threat. They became an opportunity to rebuild and expand Canada’s auto industry.
By 1990, Honda, Toyota and Suzuki had built assembly plants in Canada. Last year, Canadians made 1.55 million vehicles, more than half of them by Japanese companies that arrived here in the 1980s. Consequently, the introduction of protectionist tools did not keep Japanese auto companies out of North America. Instead, they accelerated the transformation of its automotive manufacturing base.
Just as they failed to do in the 1980s, protectionist tools will not cause Chinese automakers to give up on North America and the 20 per cent of the global auto market it represents. However, high tariffs will cause Chinese vehicle companies to adjust their approach, expediting their shift from exporter to local manufacturer.
As that process unfolds, their ultimate manufacturing destination will be Mexico – the lowest-cost option for manufacturing in North America. However, not wanting to fuel trade frictions with the biggest market, Chinese automakers will be obliged to place production facilities in the U.S. as well, forces that may result in Canada being left on the sidelines. After all, Canada is a small market; Chinese automakers can access it duty-free from manufacturing locations in the U.S. and Mexico; satisfying Canadian political sensitivities is of limited importance.
Combined, these factors suggest a clear, but difficult path. On the heels of slapping Chinese automakers with punishing tariffs, Canada must pitch those same automakers on the merits of investing here, just as they did with Japan in the 1980s. However, that task will be considerably more complex than it was back then. Mexico is now a fully integrated part of the North American auto industry. Unlike in the 1980s, Canada is no longer the low-cost North American production option. On top of that, for Chinese automakers, managing American – not Canadian – sensitivities will be the priority.
These undercurrents will dominate the next chapter in the Canadian automotive manufacturing story; dynamics that the incumbents must acknowledge and get ready to confront.