The new tariffs on Chinese EVs finally go into effect on Tuesday, October 1, 2024. It was back in August that Canada announced the tariffs on electric as well as select hybrid passenger cars, buses, trucks, and delivery vans.
Prime Minister Justin Trudeau has called this move an attempt to “level the playing field for Canadian workers.” It will, according to him, allow the country’s nascent EV industry to compete not just in the domestic market but also in North America and globally.
“Actors like China have chosen to give themselves an unfair advantage in the global marketplace, compromising the security of our critical industries and displacing dedicated Canadian auto and metal workers. So, we’re taking action to address that.”
– Trudeau
With the 100% surtax, the price of Chinese-made EVs will effectively double. As is the case with most taxes, most of them will be passed on to customers, discouraging them from purchasing imported vehicles.
Up until now, Canada has been imposing a 6.1% import tariff on electric vehicles that are manufactured in China.
Last week, Minister of Finance Chrystia Freeland also said that the country is “absolutely” considering banning Chinese-made software in EVs. Freeland told reporters:
“We take really seriously intentional Chinese overcapacity, and we take very seriously the security threat from China. That’s why we acted decisively… and we are looking at whether to impose further measures.”
In addition to Chinese EVs, the federal government will also be levying an additional tax of 25% on imports of aluminum and steel products from China. These taxes go into effect a couple of weeks later, on October 15.
Late in August, the country’s Department of Finance (DOF) first announced a series of measures to protect local workers from China’s unfair trade policies. Also, with this, the aim has been to be in alignment with the trading partners of Canada and prevent any trade diversions due to their recent actions.
At the time, DOF noted that the local auto manufacturing industry is directly responsible for more than 125,000 good-paying Canadian jobs, while the local steel and aluminum sectors support more than 130,000 jobs across the country.
It also pointed out that the potential of Canada’s EV supply chain is rated top in the world, driven by the country’s raw materials, talented workers, clean electricity, and specialized production capabilities needed to build EVs.
However, the Canadian auto sector is facing unfair competition from Chinese manufacturers, “who benefit from unfair, non-market policies and practices,” noted the government officials.
The intentional, state-directed policy of China—overcapacity and lack of rigorous labor and environmental standards—undermines Canada’s long-term economic prosperity and threatens the EV industry around the world, said the agency.
The DOF further announced the launch of a 30-day consultation, which would run until October 10, concerning other sectors critical to the future prosperity of Canada. The sectors covered here are crucial minerals, semiconductors, solar products, and batteries and battery parts.
The government has also shared its plan to further limit the eligibility of its various incentives related to zero-emission vehicles to products that are made in those countries that have free trade agreements with Canada.
“This is about securing the fair, prosperous future Canadians deserve.”
– François-Philippe Champagne, Minister of Innovation, Science and Industry
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Alignment with Trading Partners
The punitive tariffs from Canada came as the industry pressured the Canadian government to copy programs in other countries. Canada’s international partners have already been responding aggressively to unfair competition in their EV industries.
This year, the US increased tariffs on Chinese EVs—which went up from 25% to 100% for certain hybrids—along with steel and aluminum. The European Commission meanwhile began applying anti-subsidy duties on Chinese-made EVs.
So, the tariffs on Chinese EVs from Canada are similar to the initiative taken by the US. At the time, Trudeau and his cabinet also met with Jake Sullivan, the national security adviser of US President Joe Biden, who told reporters that the US wants its partners to adopt a coordinated approach to Chinese EVs.
Canadian government officials meanwhile denied enacting tariffs due to US pressure and that they had already been looking into the issue for months, even before the US imposed its tariffs in May.
The government, as per a senior government official, has been concerned about the Chinese automakers flooding North America with heavily subsidized cars made amidst “abysmal” labor and environmental standards.
Deputy Prime Minister Freeland claims the decision was made to protect the substantial investment the government has made in domestic electric vehicle manufacturing. Ottawa, the capital city of Canada, has set aside tens of billions of dollars to support EV production at planned sites.
“The reality is China has an intentional state-directed policy of overcapacity and oversupply designed to cripple our own industries. We will simply not allow that to happen.”
– Freeland
According to her, the Canadian government will do what’s in the national interest. But this is not all, as Freeland puts it, “Geopolitics and geoeconomics is back,” which means “Canada plays an even more important role for the United States.”
Meanwhile, Flavio Volpe, the president of APMA (the Automotive Parts Manufacturers’ Association), who lobbied the government for imposing the tariffs, said that by doing so, the Canadian government has “stepped up” for the local automotive sector. He said:
“It’s very important for us to have a level playing field. The Chinese are very good at what they do, but what they do also includes breaking the rules.”
But, of course, not everyone is in favor of the move with some climate change activists voicing against the decision as they want the country to achieve its emission reduction targets. Chinese tariffs, according to them, will make the transition to a carbon-free future more costly and difficult.
The decision “will result in fewer affordable electric vehicles for Canadians, less competition, and more climate pollution,” said Joanna Kyriazis, director of public affairs at Clean Energy Canada. Moreover, Kyriazis said that this will have “a chilling effect on future EV sales,” in addition to driving EV prices up and slowing down their adoption in the near term.
However, Volpe counters that, saying that while China is selling Canada green products, which can help the country fulfill some of its EV mandates, the Chinese “do it in a regulatory environment where they forgo any stewardship of the environment.”
Meanwhile, Freeland has said that Canada’s push for an EV revolution won’t be a policy based on pollution and workers’ abuse in China. The Canadian government has mandated that all new cars that are sold in the country must be zero-emission in the next decade by 2035.
Meanwhile, Minister of Transport Pablo Rodriguez has said that the path to net-zero emissions and a green economy won’t be achieved without Canadian workers and that tariffs and the iZEV program will protect Canada’s economy.
China Retaliates, Introduces Countermeasures
PostSince 2020, China has emerged as the largest manufacturer and exporter of EVs in the world. Thanks to the country’s policies like extensive state subsidies, its capacity has continued to grow, with China’s annual EV exports surging from just $0.2bln in 2018 to $47.2bln in 2023.
According to Canadian government officials, vehicles containing Chinese technology pose significant risks to the data and privacy of Canadians and the national security interests of the country.
As for other affected industries, the Canadian government noted how despite softening global demand, China’s steelmaking capacity has increased by 18.6 million metric tonnes, which is more than the total production capacity of Canada, in the last six years. With that, China has become the world’s largest steelmaker with over 1 billion metric tonnes (MT) produced last year.
Similarly, the aluminum capacity of China has risen to 59% of the global production share (from just 11%) over the last two decades.
With Canada citing unfair trade practices — poor standards across supply chains and trade policies supporting oversupply, for the tariffs, China has lashed out with an investigation, suggesting that there could be consequences for the country.
China “expresses strong dissatisfaction and firm opposition to this,” said a spokesperson for the Chinese embassy in Canada, in a statement. Such a move “will undermine the normal economic and trade cooperation” between the two countries.
Moreover, the spokesperson said, it negatively affects the interests of both Canadian enterprises and consumers. Not to mention, it isn’t really favorable to the green transformation of Canada or its fight against climate change.
China has previously reacted with a range of countermeasures against other countries. For instance, it targeted EU pork and brandy, though provisional antidumping duties haven’t yet been imposed.
This time, China is taking an even more aggressive approach. Earlier in Sept., the Ministry of Commerce laid down its countermeasures, which involved antidumping investigations on Canadian canola oil and chemical products. Canada exports more than 90% of its canola and more than half of that makes its way to China, which is the biggest oilseed importer in the world.
Canada and China maintain a balanced import and export with the export of Chinese EVs to Canada accounting for about 2% of China’s total goods entering its market.
Liang Ming, director of the Institute of International Trade at the Chinese Academy of International Trade and Economic Cooperation, called Canada’s actions reflecting political calculations instead of legitimate economic concerns.
“Canada has blindly followed the US and the EU without conducting its own investigation or research. It has been extremely subjective, malicious, and reckless in announcing these restrictions.”
– Tu Xinquan, dean of the China Institute for WTO Studies at the University of International Business and Economics in Beijing
There’s also a separate anti-discrimination investigation, which hasn’t been done before, making it the first such probe initiated by China as well as the first-of-its-kind in the world. On September 26, the Ministry announced the start of its investigations against Canada’s tariffs, which could last up to three months but then can be extended further if need be.
China says it strongly opposes what the preliminary investigation indicates to be “discriminatory unilateral restrictive measures” by Canada and wants to have discussions with the nation at the World Trade Organization (WTO) about the tariffs.
The tariffs certainly have an effect as seen with Chinese EV car sales in Europe. As per Bloomberg, in the last 18 months, Chinese manufacturers sold a small number of electric cars across Europe. Registrations have also fallen by almost half in August from a year earlier. The 48% decline marks the second straight month of drop in Chinese bands’ share.
Interestingly, MG, the British company that’s now part of state-owned SAIC Motor Corp., took a 65% drop in August and lost its top spot across the continent to Chinese rival BYD. MG was taking advantage of its long-held recognition only to be hit with a 38% additional tariff. Meanwhile, in Norway and the UK, which didn’t take the same route as the EU, EV registrations jumped during the month.
Another instance is China’s Chery Automobile, which has pushed back the goal to start building EVs in Spain by a year.
Companies Impacted
Now, let’s take a look at EV manufacturers that are set to benefit and ones struggling due to the tariff.
1. BYD
BYD is a Chinese heavyweight that’s been planning to expand into Canada and, as such, is set to face the brunt of these tariffs. These measures will significantly increase costs for affordable models like the Seagull and Dolphin. Meanwhile, in the European market, the company continues to make strides, recording an increase of 19% YoY in registrations in August.
The company shares (BYDDF:OTC) are trading at $35.4, up 27.92% year-to-date, which brings its market cap to $100.5 bln. It has a P/E (TTM) of 22.91, an EPS (TTM) of 1.55, and a dividend yield of 1.23%. In Q2 of 2024, the company posted $1.3 bln (9.1 billion yuan) in net profit, which was a 33% increase from the previous year. Meanwhile, its revenue jumped 26% from last year to 176.2 billion yuan.
During this quarter, BYD sold a record 982,747 passenger vehicles, which included a record 340,211 electric and hybrid vehicles in June alone. Its exports meanwhile surpassed 100,000 for the first time. However, earnings growth for China’s largest electric vehicle maker for the first half of 2024 slowed due to a prolonged price war.
2. Tesla (TSLA -0.87%)
The top EV seller in the US, Tesla, can profit from Canada’s tariff. Tesla is the only automaker selling Chinese-made EVs in the nation after it switched from US factories to Shanghai-based manufacturing plants for its Canadian sales. Now, Tesla would have to supply the Canadian market with vehicles made at its plants in the U.S. or Europe.
Tesla, Inc. (TSLA -0.87%)
The company shares (TSLA:NASDAQ) are trading at $258.34, up 4.82% year-to-date, which brings its market cap to $830.65 bln. It has a P/E (TTM) of 73.22 and an EPS (TTM) of 3.56. For Q2 2024, Tesla reported a drop in its automotive sales for the second time in a row.
The companys’ revenue for the quarter was $25.50 billion, up 2% from a year earlier. Tesla’s automotive revenue declined 7% to $19.9 billion from the same quarter a year ago, which included $890 million in regulatory credits, which is more than 3x from last year. Net income in Q2 dropped 45% to $1.48 bln while capital expenditures jumped 10% to $2.27 billion.
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Conclusion
As we have seen, trade tensions between the major economies of the world are on the rise, and the latest measures by the Canadian government mark a pivotal moment for the country and China’s burgeoning EV industry. As Canada aligns its policies with the US and Europe, the global EV market may see a significant shift in power dynamics. But this is not all; China’s retaliatory measures may escalate trade tensions, which can affect industries far beyond the automotive sector.
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