Canada Threatens Retaliatory Trade Action if U.S. Congress Passes EV Tax Credit

Trade Update • DECEMBER 10, 2021

Saying it had “put the U.S. on notice,” the Trudeau government on Friday threatened to impose sweeping retaliatory tariffs on American goods and suspend parts of the United States-Mexico-Canada Agreement should Congress greenlight a contentious electric vehicle tax credit in President Biden’s Build Back Better plan.

“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,” Canada’s Deputy Prime Minister and Minister of Finance Chrystia Freeland and International Trade Minister Mary Ng wrote in a letter sent Friday to key lawmakers in the U.S. Congress.

“Canada will have no choice but to forcefully respond by launching a dispute settlement process under the 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,” the ministers warned.

Background

The proposed incentives at issue are part of the Biden administration’s $1.5 trillion Build Back Better Act, which passed the House last month. Provisions in the bill would provide up to $12,500 in tax credits for buying an electric vehicle, including $4,500 if a vehicle is assembled at U.S. plants with unionized labour and $500 if it has at least 50% domestic content and U.S.-made battery cells. Moreover, beginning in 2027, credits would only be available for vehicles assembled in the U.S.

In talks with U.S. Trade Representative Katherine Tai since the measure was first proposed earlier this year, Ng made clear Canada’s stance that as currently formulated, the “discriminatory” tax credit would violate U.S. commitments under both the USMCA and World Trade Organization rules and be equivalent to a 34% on Canadian-assembled electric vehicles. As such, the EV tax credit poses “a significant threat to the Canadian auto industry” and the letter identified the issue as being at the “top of Canada’s agenda with the United States.”

Opposition from Mexico and Other Countries

Canada is far from alone in opposing Biden’s EV tax credit, which has been objected to as “discriminatory” by Mexico, the European Union, Japan, South Korea, and several other “countries of automotive producers that support millions of U.S. jobs in the sector.”

Last September, Mexican Economy Secretary Tatiana Clouthier likewise expressed “strong concern” about the provisions in the proposed legislation regarding final assembly in the U.S. and more demanding U.S. content requirements. Cloutier said they were “contrary” to regional value content rules in USMCA and should instead be changed to “include incentives for all North American content and assembly in a manner consistent” with the free trade pact.

Raising the stakes, earlier this month, Clouthier threatened to “retaliate commercially” if the U.S. goes ahead with the new tax incentives and content requirements, including by means of “important and strategic” tariffs targeted at “those places where it hurts… so that the consequences can be felt,” she said.

Domestic Opposition

Drafted by Michigan Democrats Senator Debbie Stabenow and Congressman Dan Kildee in collaboration with the United Auto Workers and General Motors, the explicitly pro-union provisions of the tax proposal have received pushback from Georgia, Tennessee, and other U.S. states with nonunion auto plants together with harsh criticism from foreign nameplate automobile dealers and disadvantaged companies such as Toyota and Tesla.

In a recent television ad, Autos Drive America, a trade group representing foreign-based car companies, accused Congress of “pushing a sweetheart deal that rewards unions at the expense of the environment and consumer choice.” Among other things, the group warned that the tax proposal would: “Invite retaliation from America’s trading partners over potential violation of WTO rules” and exacerbate “current supply chain challenges.”