Explained: Why is Canada threatening tariffs over Biden's proposed EV tax credit?

For months, Canada has spoken out against proposed U.S. legislation that would offer tax incentives on American-made electric vehicles (EV).

Included in U.S. President Joe Biden's Build Back Better Act is a provision that, if passed, would provide thousands of dollars worth of incentives on certain electric vehicles.

Canada is opposed to this over concerns it will adversely impact the country's own automotive sector, which is closely integrated with the United States.

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That came to a head on Friday as Canada threatened to impose retaliatory tariffs on the U.S. should the bill pass in its current form.

WHAT DOES THE BILL PROPOSE?

Biden's Build Back Better bill includes up to US$12,500 in incentives for certain electric vehicles built in the United States and made with union labour.

That includes US$4,500 for union-made vehicles and US$500 for batteries made in the United States. Vehicles would need to be assembled in the U.S. by 2027 in order to qualify for the full US$12,500 amount.

The White House has touted the tax credit as something that will lower the cost of American-made electric vehicles for middle-class families, while the bill itself will help the U.S. achieve its climate goals and create millions of jobs.

The bill has passed in the U.S. House of Representatives and awaits approval in the U.S. Senate, which is currently divided among 48 Democrats, 50 Republicans and two Independents, both of whom caucus with the Democrats. U.S. Vice-President Kamala Harris also holds a tie-breaking vote in the Senate.

WHY IS CANADA OPPOSED?

The federal government has pushed back against the so-called Buy America provision, arguing it will cut out Canadian-made vehicles and parts and, in turn, harm the North American auto industry, including U.S. workers.

Canada also argues the tax credit runs counter to the renegotiated NAFTA, or United States-Mexico-Canada Agreement (USMCA).

In a letter sent Friday to U.S. Senate leadership and committee leaders, Deputy Prime Minister Chrystia Freeland and International Trade Minister Mary Ng said about half of the content that goes into Canadian-made vehicles comes from the U.S., with Canadian manufacturers importing more than $22 billion worth of American auto parts each year.

They say the U.S. tax incentives amount to a 34 per cent tariff on electric vehicles made in Canada. The two cabinet ministers also proposed that, as a potential solution, Canadian-made vehicles and batteries be eligible for the same tax relief.

However, their letter also threatened retaliatory tariffs and a reversal of certain dairy-related trade concessions if Congress approves the incentives.

The move would harken back to when Canada retaliated against the U.S. after former president Donald Trump imposed tariffs on imports of Canadian steel and aluminum.

Ng told CTV's Power Play on Friday that while Canada does not want to impose tariffs, it is prepared to defend the country's national interests in the event of an unsatisfactory resolution.

"This issue is moving quickly," Ng said. "It's really important that we communicate very clearly to the United States how impactful this is to Canada."

There also is the question of where the U.S. auto sector will source the minerals and rare-Earth elements it needs to manufacture EV batteries.

In a letter sent in October to U.S. lawmakers and the White House, Ng said Canada is the only country in the Western Hemisphere with all of the critical minerals required to manufacture EV batteries.

White House press secretary Jen Psaki has previously said they don't believe the tax credit violates the USMCA, but rather will help consumers and incentivize the purchase of electric vehicles.

"The electric vehicles component of the package is something the president is personally very excited about because he believes it's an industry of the future, an industry that can help create good-paying union jobs," she said.

WHAT HAS INDUSTRY AND LABOUR SAID?

Speaking on BNN Bloomberg's The Open on Nov. 18, Maryscott Greenwood, CEO of the Canadian American Business Council, said she believes "there's a lot of room" for some agreements to be worked out, suggesting the option of North American union-made tax credits.

Others, such as Flavio Volpe, president of Canada's Automotive Parts Manufacturers' Association, have called the proposed incentives "a bigger threat than anything pointed at us by Donald Trump."

Unifor national president Jerry Dias, who heads the country's largest private sector union and whose members include those employed in the auto sector, penned a column last month in which he said Biden is "wrong" about his belief that Americans buying U.S.-made battery electric vehicles will create jobs.

"These vehicles are built with parts made in Canada and contain essential components such as nickel and cobalt from Canada," he said.

"The fact is the Canadian and American fates are intertwined when it comes to auto."

Earlier this month, the president of Unifor Local 444, which represents unionized employees at the Stellantis Windsor Assembly Plant, and Windsor West NDP MP Brian Masse called on the federal government to increase its zero-emission vehicle incentive to match the one proposed in the U.S.

On Nov. 17, during an announcement in Guelph, Ont., on domestic EV and battery production, Ontario Premier Doug Ford also said the proposed tax credit violates trade rules.

"We'll do whatever it takes to get excluded from this 'Buy America,'" Ford said. "It's going to hurt both sides of the border if he continues to do this."

With files from The Canadian Press, Reuters and CTV News Windsor