Protectionism protects backwardness at cost of future

Editor's note: Tang Jie is a researcher at the Chinese Academy of International Trade and Economic Cooperation, under the Chinese Ministry of Commerce. The article reflects the author's opinions and not necessarily the views of CGTN. 

Canada announced on August 26 that it would impose a 100 percent tariffs on electric vehicles (EVs) made in China effective October 1. The duties would apply to all EVs shipped from China, including passenger cars, trucks, buses and vans. This 100 percent additional tax will be levied on top of the 6.1 percent tariffs currently levied on EVs made in China. 

In addition, it was announced that a 25 percent tariffs would be imposed on Chinese steel and aluminum from October 15, which may involve stainless steel products, auto parts and so on. Notably, these tariffs apply not only to Chinese automakers – but also to American firms and European firms that make EVs in China, such as Tesla, BMW and Volkswagen. Canadian imports of automobiles from China to its largest port, Vancouver, jumped 460 percent year on year to 44,356 in 2023, when Tesla started shipping Shanghai-made EVs to Canada.

Limited impact of Canada's protectionist stance 

This decision indicates that Canada has taken a more protectionist stance on trade policy, especially in its trade relations with China. These measures may have a long-term impact on Canada's economic and trade interests, international image, consumer welfare, environmental protection goals, and the stability of the global industrial chain and supply chain. Western media generally believe that Canada is following U.S. trade policy and acting in concert with the U.S. to gain leverage with them. This move can be considered in line with the U.S. policy of "nearshore outsourcing" and "friendly shore outsourcing," forcing companies to move their factories back to the Americas.

A basic fact we need to make clear is that imposing tariffs on China will not significantly improve the competitiveness or market conditions of Canada's auto manufacturing industry. The preliminary tariffs are unlikely to significantly reduce the growing tide of Chinese EVs entering the Canadian market. China's EV industry expressed low levels of concern in its initial assessments of the tariffs' effects. Some exporters said that the measures will not have much of an impact on the majority of Chinese firms. Many Chinese automakers are planning to expand their manufacturing and supply chain, a trend that is expected to accelerate in response to the tariffs.

Canada has no EV brands and the auto market capacity is limited. China's exports of domestically produced EVs and related products to Canada account for a very small share of the Canadian market. The exports from China are mainly cars produced by Tesla in its Shanghai factory (the company applied for and was approved a separate tariff in the EU). Some major Chinese EV manufacturers such as BYD have not even entered the Canadian market. According to MarkLines, a global automotive industry platform, from January to July, Canada's EV sales totaled 76,462 units. Geely was the only Chinese automaker on the list, with a total of 974 units sold in Canada, accounting for less than 1.3 percent of the total. Therefore, Canada's additional tariffs have limited direct impact on Chinese EV companies.

Tariffs 'long-term negative' for Canadian auto market

Chinese EV manufacturers not only export fewer vehicles to Canada, but in fact, according to data from the China Association of Automobile Manufacturers, from January to July, the domestic output of new energy vehicles was 5.9 million, with domestic sales taking up 5.2 million. EVs produced in China are mainly used for domestic sales. The production and sales ratio of vehicles for export was less than 12 percent, accounting for less than 8 percent of global sales (8.86 million). Canada's argument that "China's overcapacity is transferred to Canada and affects Canada's auto industry" or that "the purpose of the tariffs is to remove the substantial unfair competitive advantage of Chinese EV supply chains due to the existence of unfair subsidy schemes in China" is completely unreasonable.

From an economic perspective, Canada's decision may have a negative impact on the long-term development of its auto market. The overall impact of the tariff increase on Chinese EV companies is very limited, but it will damage the interests of Canadian consumers, related companies and the development of Canada's auto industry. The Canadian government announced that it would impose tariffs on Chinese EVs and other products, and this move will ultimately have a long-term impact on Canada's national interests.

Moody's: American consumers to bear tariff costs on China

The most direct impact is that it will lead to an increase in the price of Chinese EVs in the Canadian market, thus affecting consumer welfare. Canadian companies that rely on Chinese EVs or their components may also be negatively affected just like the situation faced by the U.S. that imposed tariffs on Chinese EVs in May. According to Moody's research, American consumers will bear 92 percent of the tariff costs on China, with American families increasing their expenses by $1,300 each year. This shows that Canada's increase in tariffs is most likely to be passed on to its own consumers, increasing their economic burden and affecting their consumption preferences and experience. We can also see from the experience of the EU, that while the European Commission reiterated that the tariff hikes do not undermine its goal of transitioning to clean energy, but high tariffs drive elevated EV prices in European markets and therefore, depress European demand for EVs. Tesla, for instance, has already announced price hikes on its Model 3 vehicles, which is also the company's bestseller in Canada and worldwide.

Canada's tariffs to hinder EV development

Furthermore, Canada's tariffs on Chinese EVs will hinder the rapid popularization and fair competition of EVs in the Canadian market, because Chinese EVs are competitive in terms of cost-effectiveness, technological innovation and human-machine interactive services. Restricting the entry of Chinese products will inevitably limit consumer choices, thereby slowing down the upgrading and development of the Canadian EV market. Tariff measures may cause Chinese automakers to accelerate the construction of factories in other countries, ultimately affecting the business development of joint ventures and Canadian companies operating in China. For Canada, it will not only affect the import of complete vehicles, but also the import of spare parts, which may increase the production costs of original equipment manufacturers and weaken their motivation to improve productivity and innovation. At the same time, it may also reduce market competitiveness and hinder the development of Canada's new energy vehicle industry.

Tariffs in violation of WTO rules

From the perspective of maintaining international trade rules, imposing high tariffs for improper reasons violates the rules of the World Trade Organization (WTO), triggers trade frictions, damages Canada's reputation in international trade and reduces its development and cooperation opportunities, although it is obvious that Canada does not care about these. The Canadian side claims to support free trade and the multilateral trading system based on WTO rules, but it flagrantly violates WTO rules, blindly follows individual countries and announces that it will adopt unilateral tariff measures, which is typical of trade protectionism. This is undoubtedly a distortion of market laws and will only harm the economic welfare of both sides. The resulting long-term trade frictions will hinder the technological innovation and international cooperation of the global EV industry, damage the interests of enterprises of the two countries and affect the sustainable and rapid development of the entire industry.

China is Canada's second-largest trading partner, although it trails far behind the U.S. The economic and trade relations between China and Canada are in a state of relatively stable development. The commodity trade structure between China and Canada is highly complementary, reflects the comparative advantages of the two countries' respective resource endowments and industrial development, and is in line with the laws of the market economy. According to data from the General Administration of Customs of China, the total import and export volume of goods between China and Canada in 2023 was $88.99 billion, of which imports and exports were basically balanced. China's top imports from Canada last year consisted of around $4 billion worth of petroleum, $3.5 billion of rapeseed and just over $2 billion in iron ore, in addition to almost $14 billion of non-monetary gold. China, the world's largest agriculture importer, also bought sizeable quantities of other crops and commodities from Canada, giving Beijing options were it to countermeasures.

Canada's announcement of additional tariffs on China is based on its tariff law. It is neither anti-dumping nor countervailing duty, or other trade relief measures based on WTO rules. One thing that needs to be mentioned is that Canada has frequently implemented anti-dumping and anti-subsidy measures against Chinese products. Since the establishment of the WTO in 1995, Canada has launched 51 anti-dumping and 33 anti-subsidy cases against China. If the trade relationship between the two sides deteriorates, more trade remedy cases cannot be ruled out. Canada's measure on EV cars from China is similar to the tariff increase measures taken by the U.S. under its Section 301 law, which directly violates the WTO's rules on most-favored-nation treatment and tariff commitments. In this case, China will inevitably take countermeasures and impose tariffs on Canadian products exported to China, which will also affect Canada's commodity exports and employment in other industries.

From the perspective of the global market, China is the world's largest EV market and an important exporter of EVs. According to the annual report released by the International Energy Agency, China's EV sales accounted for more than 60 percent of the world's total in 2023, and it is expected that China's EV sales will exceed 10 million in 2024.

China's EV industry important to global market

The development of China's EV industry has an important impact on the global market. Tariff measures may have an impact on the global supply chain of EVs, especially for multinational companies from the U.S. and Europe that operate in the Chinese market. For example, Tesla's EVs produced in China may face increased tariffs, which will prompt it to consider moving its production lines to other countries to circumvent tariffs. The global EV industry supply chain will be rearranged, and the resulting uncertainties such as increased costs and process changes will not benefit Canada. On the contrary, this layout will definitely be detrimental to the development of Canada's automotive industry.

Canada's tariff policy may have a certain impact on China's global EV supply chain for a period of time, but considering the overall scale of China's EV industry and the diversification of the global market, this impact is limited. Technological innovation, a sound supply chain system and market competition are driving the rapid development of China's EV industry. Even in the face of tariff policies from countries such as Canada, China's EV industry is expected to remain competitive in the global market by updating technology, improving product quality, reducing costs and expanding new markets. As far as China-Canada trade is concerned, Chinese EV manufacturers may reassess their supply chain strategies to cope with additional tariff costs, including finding alternative suppliers or re-arranging production lines, increasing product added value and strengthening brand value to reduce dependence on the Canadian market. Canada will bear the consequences alone.

EVs role in climate change, green transformation

Considering the important role of EVs in reducing carbon emissions and promoting green transformation, the imposition of tariffs may hinder Canada from achieving its environmental protection and climate change response goals. There are substantial emissions benefits to switching to EVs when considered on a lifecycle basis, which includes the emissions associated with the production of the vehicle as well as the well-to-wheel emissions. The development of China's EV industry has made positive contributions to the world's response to climate change and the realization of green energy transformation. Canada's tariff policy may hinder this process.

Since EVs are an important means of reducing carbon emissions and addressing climate change, the imposition of tariffs by the Canadian government may affect the speed of the popularization of EVs, thus having an adverse impact on global environmental protection and climate change response. Canada's measure may be seen as trade protectionism, which is inconsistent with Canada's self-proclaimed position as an advocate of global free trade and climate change response.

Canada also announced a 25 percent tariffs on imported steel and aluminum from China and is looking at further punitive measures such as tariffs on chips and solar cells. As the world's largest producer of steel and aluminum, China is an important exporter of these products. As one of China's important trading partners, Canada imports a considerable amount of steel and aluminum products from China. In the global steel trade, China's steel products are highly competitive, which makes many countries, including Canada, rely on China's steel products to a certain extent. Aluminum products are also widely used in the Canadian market. At any time, using irrational means to affect international free trade will ultimately backfire.

Background: China's breakthrough in the EV industry followed the technological explosion of China's automobile industry after long-term development. The EV system, characterized by power batteries and intelligence, is an industrial platform for China to achieve breakthrough as a latecomer. At present, the U.S. is using the available tools within its sphere of influence to build a tariff barrier alliance to block Chinese industrial products. In May, the U.S. announced that the tariff rate on EVs from China would be increased from 25 percent to 100 percent, and the final tariff rate would reach 102.5 percent. The tariff rate on lithium batteries for EVs and battery components will be increased from 7.5 percent to 25 percent. On August 20, the European Commission disclosed to relevant parties the draft decision on imposing final anti-subsidy duties on pure EVs imported from China. BYD, Geely Auto and SAIC Group will be taxed 17 percent, 19.3 percent, and 36.3 percent respectively, other partner companies will be taxed 21.3 percent, and other non-partner companies will be taxed 36.3 percent. Tesla, as a Chinese exporter, applied for a separate tariff rate and was approved. The current combined tax rate is 19 percent.