Trade Tensions Bubbling Between Canada and the US

US President Joe Biden’s proposed tax incentive on the purchase of electric vehicles has changed Canada’s relief over the defeat of former US President Donald Trump to disbelief. The Canadian government has issued notice to the United States that should this proposal proceed, there will be retaliation. This issue could come to a boil in 2022. Let’s dig deeper into what could re-ignite the trade wars that were believed to be relegated to the history books along with the presidency of Donald Trump.

US Tax Incentives

Governments around the world are enacting policies to assist economies in recovering from the effects the COVID-19 pandemic. Part of US President Biden’s “Build Back Better” recovery plan is to stimulate green technology growth in America. Included in this plan is a proposal to provide tax incentives on the purchase of electric vehicles. For Americans to qualify for the full incentive, the electric vehicle would need to be union-made, and fully built in the US.

Why Canada is Concerned

President Biden’s proposal may indeed end up helping the US economy and the environment. Canada has voiced concerns over the requirements for Americans to take advantage of this incentive. Most vehicles produced in North America contain parts from Canada, Mexico, and the US. Currently, vehicles being assembled in North America cross the US/Canada border multiple times before completion. The manufacturing companies do so to take advantage of the production capabilities on both sides of the border. There are exemptions to duties and taxes specifically for vehicle manufacturers under the terms of the USMCA. The Canadian government views the electric vehicle tax incentive as a potential deathblow to the Canadian automobile manufacturing sector. Excluding Canadian-made electric vehicles and parts would create uncertainty about cross-border trade, disrupt supply chains, and cost jobs.

Canada’s Response

Canada’s response to the proposed tax incentives has been similar to their response to President Trump’s previous tariffs against Canadian steel. At the Three Amigo’s Summit held in Washington in November, Prime Minister Trudeau brought the matter up in person with President Biden. Furthermore, retaliatory tariffs were threatened in a recent letter to US officials. This tactic was used previously to target products imported into Canada from America. The Canadian government says retaliation is the last resort though, as coming to an amicable understanding is the preference. Another option available is to involve Mexico and bring a protectionist complaint against the US to a USMCA dispute panel.

Will electric vehicles spark a new trade war between Canada and the US? Or will politicians find a way to align their policies to ensure the success of the North American supply chain into the future? Contact us for more info, or follow us on Twitter for updates.