Opinion: Why is Canada eyeing the nuclear option for tariffs on Chinese electric vehicles?

Nicolas Lamp is associate professor at the faculty of law at Queen’s University.

Wolfgang Alschner is associate professor at the common law section of the University of Ottawa. He holds the Hyman Soloway Chair in business and trade law.

Few were surprised when the Government of Canada announced that it was looking into imposing additional tariffs on Chinese-made electric vehicles – an almost inevitable move after the United States and the European Union announced their own tariffs in recent weeks. What caught observers off guard, however, is how – on which legal basis – the government is proposing to impose those duties.

The federal government seems intent on following the United States in taking the scofflaw route: its proposed tariffs would openly defy Canada’s obligations under international trade law and would align Canada closely with the United States’ confrontational policy toward China, instead of charting an independent course.

This week’s announcement spelled out the possibility of “a surtax under section 53 of the Customs Tariff” – a provision of Canadian customs law that allows the government to levy tariffs in response to foreign practices that adversely affect trade. Section 53 is the nuclear option: it makes the Canadian government judge, jury and executioner when it comes to the trade policies of its trading partners. Absent an international ruling that authorizes Canada to retaliate in the context of a specific trade dispute, the use of Section 53 is inconsistent with Canada’s obligations under the law of the World Trade Organization.

Wisely, Canada has so far used this provision without international legal authorization only once, namely, in response to the steel and aluminum tariffs imposed by the Trump administration. That use of the provision was defensible, as Canada had to hit back quickly to deter Washington from doing further damage. There is no credible claim to urgency now. Canadian electric vehicle and battery production is just starting and, apart from Tesla’s Shanghai-manufactured Model Y, which counts as Chinese-made, China exports virtually no EVs to Canada.

With time on its side, why would Canada choose Section 53 to impose its tariffs? The likely reason is that it would allow Canada to follow the United States, which is using its own version of a judge-jury-executioner trade law, the notorious Section 301 of the Trade Act of 1974, to raise tariffs on Chinese EVs to 100 per cent. However, it is far from clear that following in the United States’ footsteps is in Canada’s interest.

The United States has been willing to pay the price for the unilateral imposition of tariffs on China, which includes undermining the WTO and suffering Chinese trade retaliation in response. For Canada, which is more dependent on international trade and less able to throw its weight around, the cost would be disproportionately higher. Canada’s trade with China still takes place on WTO terms. If Canada started ignoring its WTO obligations, on what basis could it ask China, or any other WTO member, to live up to its obligations toward Canada? More broadly, the use of Section 53 would shatter Canada’s reputation as a supporter of the rules-based trading system and make Canada’s efforts to restore the WTO’s central role in international trade regulation less credible.

The federal government has several legal alternatives to raising tariffs on Chinese electric vehicles. To offset Chinese subsidies that, according to Ottawa, give an unfair disadvantage to Chinese EVs, Canada can impose so-called “countervailing duties” after an investigation. This is the path that the EU has taken and that has allowed it to avoid Chinese retaliation for now. Because anti-subsidy tariffs target subsidized producers rather than China per se, they are less confrontational. They also allow differentiating tariffs between exporters based on the subsidies they have received, possibly levying a lower duty on Tesla than on Chinese brands.

Even if the Canadian government wanted to keep foreign EVs out rather than just level the playing field, international trade law provides options. Canada could impose so-called “safeguard” tariffs that temporarily provide the domestic industry with breathing space. Canada chose this option to help its steel industry in the face of global overcapacity between 2018 and 2021. Canada could also renegotiate its tariff ceiling on imported cars, which currently stands at 6.1 per cent, to increase the tariff permanently, while compensating its trading partners with market access opportunities elsewhere.

Section 53 would set Canada on a dangerous trajectory. While the United States is Canada’s closest ally, Canadian trade policy should be made in Ottawa and not in Washington. A good way to start is to craft an independent WTO-compliant Canadian response to the challenges posed by Chinese EVs.