Four FAQs to better understand the Canada-U.S. spat over electric vehicle subsidies

It might be difficult to imagine Prime Minister Justin Trudeau arguing against a climate-friendly tax credit.

But that’s exactly what happened last week in Washington, D.C. during the so-called “Three Amigos” summit between Trudeau, U.S. President Joe Biden and Mexican President Andres Manuel Lopez Obrador.

The summit got off to a charged start when Trudeau objected to a proposed $12,500 tax credit for American-made electric vehicles included in the Biden administration’s $1.5 trillion “Build Back Better” Act.

The bill was passed by the U.S. House of Representatives on Friday and is pending approval from the Senate before it’s sent to Biden for confirmation.

Trudeau’s concern is that the tax credit could devastate Canada’s auto sector just as manufacturers are converting plants to make zero-emission vehicles for sale across North America.

These concerns were echoed by several prominent Canadian cabinet ministers, including Innovation Minister Francois-Philippe Champagne, who early in November warned the U.S. that Canada would respond “appropriately” if the tax credit becomes law.

So what does this disagreement between friends mean for Canada?

Here are four questions and answers that help explain the key issues.

Canada has a lot to lose. Canadian-made auto exports were valued at about $43 billion in 2020, according to the Canadian Vehicle Manufacturers’ Association (CVMA). Roughly 93 per cent of these — or $40 billion worth — ended up in the U.S.

Auto manufacturers, including parts companies, directly employ 125,000 Canadians, according to recent government statistics. The industry also indirectly employs about 370,000 people in Canada, including in car sales and finance.

Auto-making is one of the largest sectors of the Canadian economy, accounting for at least $12.5 billion of the country’s GDP. It’s also the second-largest sector in terms of exports, behind only the oil and gas industry.

Manufacturing giants, such as General Motors, also plan to spend billions of dollars upgrading plants in Ontario to build new electric vehicles destined for the U.S. market.

But exactly how much of Canada’s auto industry could be at risk because of Biden’s proposed “Buy America” tax credit is unclear.

Some experts have suggested the issue may be resolved once U.S. lawmakers realize the tax credit could hurt jobs on both sides of the border, due to the “interdependent” nature of North American automaking. Others say there’s good reason to be concerned, especially if Biden remains steadfast in his commitment to put “America first.”

Whether or not EV tax credits are good or bad depends on who you ask. Many environmentalists and climate change advocates support tax credits and rebates for zero-emission vehicles.

The subsidies help offset some of the higher production costs compared to cars and trucks with combustion engines. Tax credits and rebates also offer incentives to manufacturers keen on transitioning away from traditional vehicle production because they know there will be a market for the products they make.

But Ontario Premier Doug Ford scrapped a long-standing provincial rebate for electric vehicles in 2018 shortly after his election win.

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Ontario government increasing focus on electric vehicles

The rebate, which offered buyers up to $14,000, was criticized by Ford as elitist and as a subsidy for the rich who didn’t need government help to buy a new car.

As recently as last week, Ford said that before the last election he “didn’t believe in giving millionaires” rebates for $100,000 cars, according to a report from the Toronto Star.

But Ford’s position may have softened somewhat ahead of next year’s Ontario election. He said last week that the province is investing billions of dollars in electric vehicle manufacturing and that he’s looking at whatever the “market will bear” in terms of financing and possible subsidies.

A report by Electric Mobility Canada released in December 2019 showed the number of electric vehicles sold in Ontario dropped by 55 per cent in the six months after Ford scrapped the provincial rebate program.

Proponents of electric vehicles said this was evidence that subsidies work and are an important part of transitioning to a climate-friendly transportation economy.

Electric-vehicle tax credits have been featured in political platforms in Canada, too.

During the most recent federal election, the Liberals proposed extending a $5,000 federal rebate for electric and zero-emission vehicles. The NDP, meanwhile, proposed a $15,000 subsidy for “made-in-Canada” electric and zero-emission cars. The Green Party proposed exempting electric vehicles from federal sales tax.

Many provinces also offer subsidies, including British Columbia, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.

Quebec offers buyers up to $8,000 in rebates for electric and hybrid vehicles. Combined with the federal rebate, these subsidies bring many zero-emission cars much closer to the retail price of combustion engine equivalents.

Trudeau and his ministers have clearly stated their belief that the proposed “Buy America’ tax credit would violate the United States-Mexico-Canada Agreement (USMCA) and World Trade Organization (WTO) rules.

Trade Minister Mary Ng wrote a letter to U.S. congressional leaders in late October that said the proposed credit could cause “serious and irreparable harm” to the Canadian auto sector.

Canada sent the U.S. another letter, signed by foreign ambassadors from 25 different countries, that said limiting eligibility for the credit to vehicles made in America is “inconsistent with U.S. commitments.”

Foreign Affairs Minister Melanie Joly criticized the proposed credit during a visit to Washington. She added that Canada has vast supplies of the minerals needed to build electric cars — a possible hint at one of the steps Canada might be willing to take if the tax credit passes.

“We have lots to gain by working together,” Joly said on Nov. 12. “Canadians know that we have to defend our interests, and we can never take anything for granted.”

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Trudeau says he discussed pandemic, CUSMA, more with Biden amid Washington, D.C. visit

Deputy Prime Minister Chrystia Freeland has offered what is perhaps Canada’s strongest objection to the tax credit.

During a Nov. 17 press conference in Washington, she said the proposal has the potential to become the “dominant issue” in the Canada-U.S. relationship.

She also said Trudeau told top U.S. lawmakers from the House and Senate that Canada is “certain” the incentives would violate the USMCA, according to a report from Politico.

“Do you really want to violate it in such a significant way so soon after its passage?” Freeland said. “That was one of the points we made. I think they heard us.”

But the Americans were quick to disagree with Trudeau’s arguments, Politico wrote.

“In our view, the EV tax credits are an opportunity to help consumers in this country,” White House press secretary Jen Psaki said on Nov. 18.

“It’s not the first time there have been incentives and tax credits for consumers, to lower prices for consumers [and] help incentivize a move toward a clean energy industry.”