Canada says U.S. electric vehicle tax credit plan could harm industry, violate trade pact

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Canada said on Friday that US proposals to create new electric vehicle tax credits for US-made vehicles could harm the North American auto industry and mess with trade agreements, according to a letter seen by Reuters.

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Separately, a Canadian government source expressed confidence that a solution would eventually be reached, but said Ottawa may have to launch a challenge through a United States-Mexico-Canada (USMCA) trade deal.

In an October 22 letter, Canada’s Trade Minister Mary Ng told US lawmakers and the Biden administration that the credits, if approved, would “have a major adverse effect on the future of EV and automotive production in Canada.”

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She said this would increase the risk of serious economic damage and the loss of thousands of jobs in one of Canada’s largest manufacturing sectors, adding that US companies and workers would not be safe from the fallout. The auto industry in both the countries is highly integrated.

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Ng said the proposed credits were inconsistent with US obligations under the USMCA and the WTO.

The Canadian government source stressed that Ottawa did not want to challenge the USMCA, but added that “it is entirely conceivable that this is a tool we will look into” if need be. The source requested anonymity because of the sensitivity of the situation.

A US House panel approved legislation in September to increase EV credits to $12,500 per vehicle, including $4,500 for union-built vehicles produced in the United States and $500 for batteries manufactured in the United States. Beginning in 2027, all vehicles will need to collect in the United States to qualify for the $12,500 in tax credit.

Detroit’s Big Three automakers — General Motors, Ford Motor Co. and Chrysler parent Stellantis — will disproportionately benefit from the credits as they all assemble their American-made vehicles at union-represented plants.

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The province of Ontario, home to most of Canada’s auto industry, is geographically close to American automakers in Michigan and Ohio. GM, Ford and Stelantis have announced plans to build electric vehicles at factories in Ontario.

US arms from foreign automakers have drawn criticism of tax incentives. Tesla Inc. has also been critical, although the tax credit is strongly supported by the United Auto Workers union.

A Canadian government source said cabinet ministers would step up their lobbying efforts.

“I think we will eventually reach a resolution – it just depends on what timeline. Ideally we would be able to change the law before it is passed,” the source said.

Ng said Canada is deeply concerned about the “protectionist elements” of the proposed tax credits, adding that they discriminate against EVs and parts produced in Canada.

“Canada is also essential to achieving its electric vehicle objectives in the future,” he wrote, adding that Canada is the only country in the Western Hemisphere that has all the vital minerals needed to make EV batteries.

He said the automotive industries in the US and Canada depend on each other for both finished vehicles and components, with a total automotive business of more than $100 billion annually.

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(Reporting by David Shepardson in Washington and David Ljunggren in Ottawa Editing by David Goodman and Matthew Lewis)

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