In August, the Canadian government announced plans to impose a 100% tariff on battery-electric vehicle (BEV) imports from mainland China, as well as a 25% import tariff on Chinese steel and aluminum. The tariffs are set to be implemented in October 2024.

The Canadian government sees several products as "critical to Canada's future prosperity, including batteries and battery parts, semiconductors, solar products, and critical minerals," according to a government statement. Along with imposing the tariff, Canada will revise its zero-emission incentive programs for BEVs and limit eligibility to vehicles produced in countries with which Canada has free-trade agreements. Today, those vehicles could be eligible. Products from mainland China are already subject to a Most-Favored-Nation 6.1% tariff, so the new BEV import duty will actually be 106.1%. The tariff on steel and aluminum imports from China will have a lower impact on the auto industry than the BEV tariff.

A government statement on the tariff said: "Canadian auto workers and the auto sector currently face unfair competition from Chinese producers, who benefit from unfair, non-market policies and practices. China's intentional, state-directed policy of overcapacity and lack of rigorous labor and environmental standards threaten workers and businesses in the EV industry around the world and undermine Canada's long term economic prosperity. Recent consultations with stakeholders have confirmed that exceptional measures are required to address this extraordinary threat."

Data reported by Bloomberg from national statistical agency Statistics Canada indicates that the value of imported mainland Chinese electric vehicles increased to C$2.2 billion in 2023, from less than C$100 million in 2022. Most of the increase was the result of US EV manufacturer Tesla's exports of the Model Y from its plant in Shanghai, China, to Canada.

With no indication Tesla would receive an exemption, Tesla may choose to supply Canada from its US or German production plants. In July, reports surfaced that Chinese automaker BYD wants to discuss its plans to enter the Canadian market with the country's lawmakers and officials.

Canada's imposition of tariffs on BEV imports from China echoes similar moves made by the EU and the US, as well as some other countries. These reflect concerns from automakers around the world about mainland China's ability to export relatively low-cost BEVs and undercut automakers operating under different cost structures. These tariffs are being set as a defensive mechanism.

Chinese automakers have more aggressively entered the markets of Europe, Asia and South America and have not yet tackled entry into the US and Canadian markets. However, there are indications that mainland Chinese auto brands would like to enter the US and Canadian markets. Automakers in mainland China also have excess production capacity, providing further reason to begin exporting their vehicles. The question isn't really "if" they will enter these attractive markets, but "when."

The US had announced its tariffs would be imposed starting August 1, 2024, however as of September 13 they are still not in force and the government has not released an update following stakeholder input. The EU's plans for tariffs on Chinese BEVs have been revised, and talks with China's authorities continue. China's government has also registered complaints with the World Trade Organization over tariff plans from several countries, has continued negotiations, and has indicated plans for imposing retaliatory tariffs.

While the stance of the Canadian government is strong and echoed in other markets, the slow progress for US tariff implementation and the changes the EU has made underscores that getting these tariffs into place is just not as simple as it might sound.

At this stage, there has been no indication if Canada would allow accommodation for mainland Chinese automakers if they chose to begin production in Canada, which has a free-trade agreement with the US and Mexico. There has been concern that mainland China automakers will build plants in Mexico meant to serve the US and Canada. However, Canada's production costs today are somewhat higher than those in Mexico, including labor costs, so the likelihood is that it would be more cost efficient for mainland Chinese automakers to build plants in Mexico, as BYD is considering, rather than Canada.

Compared with the US and the EU, Canada's light-vehicle market is dependent on imports, though most of those imports are from the US or Mexico. According to S&P Global Mobility data, only about 10% of Canada's light-vehicle sales are of units produced in the country; about 16% are imported from Mexico and about 47% are from the US. We estimate about 25,000 units will be imported from mainland China and sold in Canada in 2024, accounting for about 1.3% of all vehicles sold in Canada this year.

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This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.