U.S. Supports Canada’s Move to Close Chinese EV ‘Loophole’

U.S. supports Canada’s move to close Chinese EV ‘loophole’

The country is concerned that Chinese companies may try to set up or exploit facilities in neighbouring countries to avoid tariffs

The U.S. ambassador to Canada said he’s encouraged by signs of Prime Minister Justin Trudeau’s government closing a “loophole” that might have allowed Chinese-backed electric vehicles to enter the U.S. via Canada, sidestepping its tariffs.

Canada appears to be discussing shutting a back door that risked letting “what are basically Chinese EVs” into the U.S., David Cohen said — highlighting the close attention being paid by the White House to stopping an influx of vehicles from fast-growing Chinese carmakers such as BYD Co.

In May, the Biden administration announced it would roughly quadruple tariffs on Chinese-made EVs. But the U.S. is concerned that Chinese companies may try to set up or exploit facilities in neighbouring countries, such as Canada and Mexico, that have trade agreements with the U.S.

“What Canada seems to be doing is talking about it taking some actions that would also help to address that loophole,” Cohen said.

Canada is nearing the end of a 30-day consultation on potential measures to restrict Chinese electric vehicle imports — including higher tariffs to align with the U.S. and European Union. Finance Minister Chrystia Freeland hinted in a recent interview with Bloomberg that the government may take broader trade action against China. She met with aluminum and steel producers this week.

Some Canadian government officials and industry representatives believe Canada will need to impose tariffs close to the U.S.’s 102.5 per cent rate, as opposed to the much lower tariffs the EU is considering. The people spoke to Bloomberg on condition they not be identified because no final decisions have been made.

No ‘back door’

Cohen raised the prospect Chinese companies might be considering this loophole, and that Chinese-backed entities could be buyers of smaller Canadian facilities. Trade Minister Mary Ng declined to comment on the EV consultation, but said: “What we’ve been very clear about with the United States is that Canada will not be a back door for trans-shipments that don’t meet rules.”

Canada’s auto supply chain is highly integrated with that of the U.S., which buys the vast majority of vehicles produced in the manufacturing belt of southern Ontario. That gives the Trudeau’s government little choice but to align its auto policy with its largest trading partner — particularly because of the prospect of a second Donald Trump administration and a 2026 review of the U.S.-Canada-Mexico trade agreement.

Canada has also pledged billions in government money to automakers such as Volkswagen AG to build parts of their EV supply chains in Ontario and Quebec.

Due diligence

Canada is looking at the use of the Investment Canada Act to control and block mergers and acquisitions as part of the EV consultation, according to Flavio Volpe, head of Canada’s Automotive Parts Manufacturers’ Association.

Volpe downplayed the risk of a “back door” being exploited, given state powers under the act and existing supply arrangements, but said “it’s a good question to ask in your full due diligence, especially when you’re trying to size up the reliability of your partner.”

“It’s a very valid point for officials to raise and to study, because the Chinese are asking questions, in anticipation of a tariff wall, of all their partner jurisdictions and potential partner suppliers around the world,” he said. “We know that Chinese manufacturers are in contact directly with Canadian suppliers today.”

Volpe and his board met Freeland last week and discussed the EV consultation in detail, he said, including potential Chinese reaction. China has already threatened trade retaliation against the EU and has not shied away from banning some Canadian imports during past disputes.

He said he anticipates the Canadian and U.S. measures will align. “I expect there not to be any daylight between our positions,” he said.

Bloomberg.com