From 2 July 2024 until 1 August 2024, the Government of Canada is holding consultations on “potential policy responses to protect Canada’s auto workers and growing electric vehicle (EV) industry from China’s unfair trade policies and practices, and prevent trade diversion resulting from recent actions taken by the United States and the European Union”.

On 14 May 2024, the United States unilaterally imposed 25-100 percent Section 301 tariffs on Chinese EVs and EV inputs, such as EV batteries. On 4 July 2024, the European Union imposed 17.4-38.1 percent provisional countervailing duties on imports of Chinese EVs. To the extent that these measures discourage exports from China into the United States and the European Union, there is a risk that the affected trade flows may be re-directed into unprotected markets (generally referred to as “diversion”). The Canadian government’s concern appears to be that unless appropriate action is taken to mitigate this risk, Canada could become an attractive alternative destination for EV-related goods from China to the detriment of the developing Canadian manufacturing industries in the EV supply chain.

The consultations go beyond EVs to encompass a wide range of production inputs, such as “critical minerals, steel, and aluminum as well as problematic environmental or labour practices or any other non-market policies and practices”. They also encompass data security risks associated with “information and communications technology and services (ICTS)” from China in relation to “connected vehicles”.

The consultations are forward-looking and consider the risks to Canada’s planned EV investments and the transformation of Canada’s automotive sector from petroleum fuels to electric power. Policy responses being considered include: (i) a surtax pursuant to section 53 of the Customs Tariff; (ii) excluding Chinese EVs from Federal EV purchase incentive programs; (iii) restrictions on Chinese investments in Canadian EV supply chains; (iv) restrictions on Chinese ICTS; and (v) other measures, including protecting broader Canadian EV supply chains (e.g., steel and aluminum).

The application of measures against Chinese imports is explicitly contemplated. In this regard, the Government of Canada’s intention is that “any measures applied following the consultations will be reviewed within a period of one year from implementation and could be extended for a further period of time and supplemented by additional measures, as appropriate”.

Issues to consider

The notice of consultations does not identify all issues that should be considered. Additional issues include the following:

     Canada is not the United States or the European Union

Given its small domestic market and the stage of its EV industry development, import-based policy responses that work for the United States and the European Union (which have established EV industries and whose economies are 7-10 times larger than Canada as measured by GDP) may not work for Canada.

Exports account for a significant share of Canada’s GDP, with China being its second largest export market. Those exports, which include canola, coal, iron, wood pulp, and copper, will be immediately exposed to the risk of Chinese retaliation should import restricting measures be imposed on Chinese EVs and inputs.

Since this risk arises immediately upon application, the timing of any measures could be important and should be considered.

     Reducing risk of retaliation

The potential policy responses could take many forms. Different levels of risks with respect to retaliation may be associated with each form.

Unilateral measures which cannot be justified under international trade rules would result in the highest retaliation risks. Measures that are notionally permissible or sanctioned under international rules would pose a lesser degree of risk. The United States’ Section 301 tariffs and a surtax pursuant to section 53 of the Canadian Customs Tariff likely fall into the former category. The EU countervailing duty (CVD) against Chinese EVs falls into the latter category. Although there is some indication that China retaliated against the EU CVD with its own trade remedies investigations, such retaliation is subject to the disciplines of international rules to which China subscribes (e.g., the WTO agreements on trade remedies).

Imposing measures internally rather than at the border, such as qualification requirements for Canadian subsidies that exclude Chinese EVs and inputs, may further reduce the risks of retaliation.

The forms of any measures, and the associated levels of retaliation risks, should be carefully considered.

     Addressing widespread EV and EV input subsidization

The subsidization of EV manufacturing, EVs and EV inputs is widespread because countries are in a race to develop their own EV industries. Measures imposed on imports of EV components into Canada could put Canadian EV producers at a competitive disadvantage to producers in other countries who build EVs using lower-cost inputs from China.

Therefore, the impact of the measures on the competitiveness of Canadian EV and EV input industries in the global marketplace should also be carefully considered. The Government of Canada may need to develop precise, targeted measures that balance the interests of different Canadian stakeholders throughout the EV supply chain.

     Meaningful consultations in 30 days?

The policy responses being considered could have profound effects on Canadian businesses both within and beyond the EV-related production industries. Whether 30 days is sufficient time to conduct meaningful consultations should be considered.

Tereposky & DeRose LLP regularly provides advice and acts as counsel in international trade disputes, including WTO and USMCA dispute settlement proceedings. Our lawyers have advised and represented clients in many complex subsidy issues going back to the Canada-US Autopact and the Canada-Brazil aircraft disputes. If you have any questions about the foregoing subject, please do not hesitate to contact us.

Authors: Greg Tereposky, Daniel Hohnstein.