Canada and the USA Arm Wrestle over Electric Vehicle Subsidies
Just over a year after he was elected to office, President Joe Biden welcomed his neighbours – Canada’s Justin Trudeau and Mexico’s Andres Manuel López Obrador – to the White House. The first North American Summit since 2016, this ‘Three Amigos’ get-together nevertheless got off to a rough start.
Despite the bulging grab-bag of issues facing this region, a single issue outstripped them all, in terms of discussions. Clogged supply chains, volatile energy costs, the migration crisis, and even the pandemic lagged behind a proposed $ 12,500 tax credit for electric vehicles made in the USA.
This relatively insignificant clause in the Biden Administration’s Build Back Better Act caused sparks to fly in the West Wing. Approved by the Lower House on November 30, this $ 1.5 trillion plan is seeking fast-track approval from the US Senate, before returning to the President for confirmation.
The Next Step
In the US Senate, Majority Leader Chuck Schumer is eager to pass this massive social safety net and climate bill before the Christmas recess. To do so, he will have to round up all fifty members of his caucus and persuade them to throw their support behind this huge deal.
It’s a really big deal for Canada as well – but a bad one. Its auto and parts manufacturing sector provides direct jobs for 25,000 Canadians, with a further 370,000 indirect positions, including online dealerships and auto-financing. Despite pandemic-hobbled sales, Canada’s auto finance market doubled over the past eight years, up from around $60 billion to $120 billion.
Automobiles Outperformed by Only Oil & Gas
One of the largest sectors in the Canadian economy, automobiles rank behind only the oil and gas industry for exports. Major multinationals, including US giants like General Motors, are also planning to channel billions of dollars into upgrading plants in Ontario, where they plan to build electric vehicles for the US market. In parallel, peripheral sectors (like insurance and auto financing) are already gearing up to meet Canada’s 100% net-zero emissions goal by 2035, eliminating cars and light trucks running on fossil fuels.
This is why Prime Minister Trudeau is very concerned that this US tax credit could stall Canada’s entire auto sector. This would be a disaster, particularly at a time when its plants are being converted along the entire supply chain, focused on producing zero-emission vehicles for sale throughout North America. This EV credit is a massive blow, as Canada’s auto exports hovered around $ 43 billion in 2020, according to the Canadian Vehicle Manufacturers’ Association (CVMA). Worse still, some 93% – $ 40 billion in sales – were to the USA.
Are EV Tax Credits Good or Bad?
Like so many other complex issues, the answer depends on the respondent. Many advocates striving to slow or even reverse climate change believe that rebates and tax credits for zero-emission vehicles are a necessary step along the way.
The purpose of these credits and rebates is to encourage manufacturers to transition away from the internal combustion engine, confident that their environmentally-friendly goods will find a market. The Province of Ontario is a great case study, illustrating the pressures and counter-pressures shaping reactions to the zero-emissions subsidy debate.
- Ontario is home to ten of Canada’s main auto assembly plants, dominated by five OEMs that also run huge powertrain, engine, and casting facilities;
- In 2018, newly-elected Ontario Premier Doug Ford dumped a long-established provincial rebate of up to $14,000 for electric vehicles, claiming it was ‘elitist’;
- Released in December 2019, and Electric Mobility Canada report showed that electric vehicle sales plummeted by 55% in Ontario, during the six months after its rebate programme was scrapped;
- However, the billions of dollars flowing into Ontario’s electric vehicle manufacturing plants may be changing his mind, particularly with provincial elections looming next year;
- Premier Ford recently hinted that he’ll look at whatever “the market will bear” in terms of subsidies and financing.
EV Tax Credits in Canada
In September 2021, parties from across the political spectrum put forward constructive proposals for encouraging non-pollutive car sales:
- the Liberals wanted to extend a $5000 EV rebate;
- the National Democratic Party urged a $15,000 EV subsidy;
- the Green Party urged EV exemption from federal sales tax.
Among EV supporters, this seesaw situation in Ontario shows that pollution-reducing car subsidies are an effective way of transitioning to a planet-protective transport economy. Meanwhile, other Provinces – including Labrador, Newfoundland, Nova Scotia, New Brunswick, British Columbia, Prince Edward Island, and Québec – are performing far better in the EV tax credit stakes. When added to federal point-of-sale incentives that range from $2,500 to $5,000 for EV buyers or renters, the daunting prices of many zero-emission cars draw far closer to the retail prices of their fossil-fuelled equivalents.
Does ‘Buy America’ breach international trade pacts?
For Trudeau, this tax credit would trample over two major international trade frameworks:
- The United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement signed in 1994; and
- The World Trade Organization (WTO) rules, particularly the Agreement on Subsidies and Countervailing Measures (SCM)
For López Obrador, the stakes are just as high, but focused on different issues, particularly immigration and regional vulnerabilities. However, these discussions of national borders, climate change, pandemic recovery, and energy use are shaping the future of supply chains throughout North America.
International Trade Storms
A point to ponder is that trade flows run both ways. And – as noted by Canada’s Foreign Affairs Minister Melanie Joly – Canada is sitting on vast supplies of the minerals needed to make the millions of battery packs and motors needed for tomorrow’s zero-emission fleets. Although strengthening commercial ties is certainly high on the agenda, boosting cross-border production is not necessarily tagged as top priority.
At the same time, burgeoning fintech is underpinning 100% online auto loans, with generous terms of up to 96 months. This is making it easier than ever for SUV-loving Canadians to climb relatively swiftly up the automobile purchase ladder.
A Zero-Sum Game?
Unlikely as it may seem, national interests are forcing long-time eco-warrior Trudeau to fight against an ostensibly planet-saving tax credit. However, with Biden clinging firmly to his ‘America First’ commitment, other global leaders – particularly in neighbouring nations sharing common borders – may be shoehorned into adopting we-too parallel stances that are regrettably short-sighted: Canada En Premier and México Primero.