Will she or won’t she? Will Deputy Prime Minister Chrystia Freeland announce tariffs on Chinese electric vehicles this week? If so, will she follow the American lead and tack on a 100% levy on any battery-powered vehicle BYD or Geely might dare to try to import to the United States? Or will ours be a more nuanced — dare I say World Trade Organization-approved — approach like the “variable” tariffs the E.U. are finalizing? The entire Canadian automotive industry awaits her decision with bated breath, with more than $50 billion — the monies promised to Volkswagen, Stellantis, et al to build battery plants here in the Great White Frozen North — hanging in the balance.
Perhaps the better question is, Should she or shouldn’t she impose such tariffs? Both sides of the argument are fairly easy to define. On one hand, as many climate alarmists have already posited, importing cheap and cheerful Chinese EVs would hasten the electric-vehicle revolution they see as absolutely necessary to prevent disastrous climate change. And the federal government, already seeing its 2035 mandate under threat, needs cheap EVs to hasten its imposed transition to battery power.
On the other, importing boatloads of cheap and cheerful EVs would potentially, almost assuredly, cripple our domestic auto industry just as it embarks on this once-in-a-lifetime transition. It would also seriously cheese our American friends at a time when the solitary thing the two warring parties down there can agree on is that Chinese electric vehicles are evil. And finally, because we are Canadian and have a sense of fair play that our neighbours to the south apparently lack, we wonder whether such tariffs — punishments, really — are the right way to go. Aren’t we, after all, subsidizing the hell out of our own EV industry?
How China’s handing out subsidies on steroids
To use an Olympic metaphor, it’s not that the Chinese electric-vehicle industry has been taking a steroid — it’s been taking all of them. Stanozolol. Winstrol. Orals and injectables. All of them. Simultaneously, not just in cycles. According to numbers just released by the U.S. Center for Strategic & International Studies, the Chinese government has been mainlining subsidies at a pace that would make Lance Armstrong blanch. Since 2009, says the author of the report, Scott Kennedy, Chinese industry policy spending on electric-vehicle manufacture has totalled USD$230.9 billion.
True, a quarter of a trillion dollars ain’t, as they say, what it used to be. Perhaps better context is provided by, per Kennedy’s calculations, the fact those hundreds of billions represent 18.8% of the total cumulative sales of every electric vehicle sold in China between 2009 and 2023. Yes, almost 20% of every EV sold in China for the last 15 years has been subvented by one form of government program or another.
And that’s despite the country’s cutting consumer subsidies over the last few years. Earlier, between 2009 and 2017, says CSIS, “spending as a share of total sales” averaged a whopping 42.4 per cent, and, even as recently as 2020 — when the Chinese EV-manufacturing sector could no longer claim to be in its infancy — more than a quarter of every dollar that went into a Chinese electric vehicle was from one form of government assistance or another.
Nor does that, according to Kennedy, include all the government largess directed at the manufacture of electric vehicles in China. The aforementioned USD$230.9 billion, says the report, only includes consumer rebates, sales-tax exemptions, R&D grants, subsidies promoting infrastructure, and government procurements. What it doesn’t include is local consumer rebates, local municipal and provincial manufacturing support, and — for those of you who have read Motor Mouth’s endless rants on the monies being handed out by the American Inflation Reduction Act (IRA) — battery manufacturing.
In fact, to quote Kennedy again, these other kinds of support “could potentially rival the scale of funding identified above.” That would mean, if you care to add up all the zeros, that Chinese subsidies so far could have already totalled half a trillion dollars. Those still thinking the Chinese play fair need to take notes.
Indeed, those trying to claim the Americans are doing the same thing with their IRA subsidizations — and, in Canada, our IRA-matching subsidies — need understand that ours are monies promised but largely yet undelivered.We are, to put a fine point on it, just getting started. The Chinese, meanwhile, have been subsidizing like drunken sailors for the last 15 years. So, if you’ll forgive yet another (sadly) Olympic metaphor, we’re half-a-trillion behind; any cheating we’re doing is just to catch up with their cheating, and we’re still only spending about half the money they are.
How Europe and the U.S. have responded so far
Both the European and U.S. governments have responded to the Chinese threat to their automotive industries. The American tactic, not surprisingly, is pure brute force. Using a Section 301 investigation professing security and intellectual-theft issues, the U.S. has imposed a 100% tariff on Chinese electric vehicles, and a further 25% levy on EV batteries and components. These penalties don’t even pretend to be commensurate with whatever unfair advantage might be afforded by the Chinese governments’ subventions. Rather, as Kennedy says, they are designed to prevent Chinese automakers from even contemplating entering the U.S. market. They almost assuredly won’t pass World Trade Organization (WTO) muster. The Americans don’t care.
We’re half-a-trillion behind—any cheating we’re doing is just to catch up with their cheating, and we’re still only spending about half the money they are
The E.U., probably because some automakers like Mercedes-Benz, VW, and BMW have more to lose from Chinese retaliation, is trying to play by WTO rules. The European Commission, for instance, has tried to determine exactly how much subsidization each Chinese manufacturer has received over the years, and set their tariffs accordingly.
So, while BYD’s additional duties have been set at 17.4%, any Shanghai Automotive Industry Corporation (SAIC)-built EV imported into the E.U. could face an extra 37.6% tariff, the difference, presumably, being that SAIC is state-owned and has received maximum subsidization, while Build Your Dreams (BYD) is publicly traded and received fewer funds. According to the Commission’s official dictum, other Chinese BEV producers “which cooperated in the investigation” but whose benefits were not determined are going to be subject to a 20.8% “weighted” average duty while “non-cooperating companies” will be levied 37.6%.
What the E.U. doesn’t seem to want to do is impose duties on the components — batteries, and their constituent parts such as cathodes and anodes — that are the most expensive parts in an electric vehicle. Again, this is presumably because their domestic manufacturers want to continue to have access to cheap Chinese technology to keep their own prices down.
On the other hand, unlike the U.S., which has made no bones about the fact that Chinese transplants would not be welcome on American soil, the Europeans seems to be keenly open to investment by Chinese automakers and battery producers. Look for this last to be a major source of friction between the U.S. and European automakers and, indeed, the crux of any cooperation on tariffs between Canada and the States.
What Canadian rules might look like
According to the insiders I’ve spoken with, Ms. Freeland is much concerned with adhering to WTO rules, most probably because Canada is more susceptible to retaliation from the Chinese than our Yankee friends or the Europeans. Whether this means that, like the E.U., Global Affairs Canada will determine the subsidization each individual automaker receives and apply an appropriate duty to each, or whether there is a blanket duty for all Chinese imports, is not known. What does seem more certain, however, is that our tariffs will not match those of the United States, and will not approach its imposition of 100% fines.
You don’t need to be Milton Friedman to understand the only way that Chinese automakers can remain profitable is if they put pretty much every Western automaker out of business
What will probably be different from the E.U.’s implementation, however, is that we will impose tariffs on batteries and the all-important cathodes that represent more than a third of the cost of manufacturing a battery. This could raise the cost of any car sold and/or manufactured in Canada that uses Chinese-sourced components. The reason for this difference — and this is pure conjecture on my part — is that the Canadian government is looking to be completely WTO-compliant when the Chinese (inevitably) challenge our imposition of any tariffs.
As to whether this all pans out as presumed won’t be known until the government makes its announcement (presumably some time this month). The most important question — something unlikely to be answered when the initial announcement is made — is whether Canada will be, like the E.U., open to Chinese investment.
On the one hand, we are a nation of auto-manufacturing transplants. On the other, the Americans — especially Mr. Trump — have made no mystery of their displeasure if Chinese automakers were allowed to “back-door” their way into the U.S. through Canada. While the imposition of the tariffs will almost surely be the headline-generating news when Ms. Freeland makes her announcement, I suspect that how we treat future Chinese transplants will be the make-or-break part of any cooperation with the U.S.A.
How China’s overcapacity threatens the entire industry
The other issue, perhaps even larger than the price advantages Chinese automakers currently enjoy compared to the rest of the world, is the incredible overcapacity all this subsidization of electric vehicle manufacturing is creating. In a recent speech, the American Under Secretary for International Affairs, Jay Shambaugh, noted that China’s planned production for electric vehicles will reach 70 million vehicles by 2030. That is, just for context, some 50 million cars more — three-and-a-half times more! — than China’s entire domestic market. It is also an incredible 26 million more than the most optimistic estimate of global EV sales in 2030.
But perhaps most ominously — especially for those opining that we should let the Chinese automakers in — it’s enough leftover capacity to supply the entire automotive markets, EV and gasoline, of China, Canada, the United States, and the E.U., with another 20 million left over. You don’t need to be Milton Friedman to understand that the only way that Chinese automakers can remain profitable is if they put pretty much every Western automaker out of business.
When I first broke the news about the Inflation Reduction Act two years ago, I was literally agog at the monies it promised to subsidize battery manufacturing. So much so that I delayed publishing the story as I checked the numbers over and over again. Eventually, I came to believe that the Americans really would spend what was then viewed as an incredible USD$250 billion over the next ten years to promote domestic battery production.
Now, if we are to believe Kennedy’s numbers and suppositions, it turns out that China has already spent double that amount, and is using that advantage to, if Undersecretary Shambaugh’s estimations are likewise accurate, overwhelm Western auto industries. If all these numbers be true, China’s aggressive expansionism is as existential a threat to domestic automakers as electric-vehicle proponents claim ICEs are to climate change.
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