Canada to raise tariffs, limit subsidies for clean vehicles, steel and aluminum from China | White & Case LLP

On August 26, 2024, the Government of Canada announced that it would impose new tariffs and subsidy restrictions targeting clean vehicles, as well as tariffs on steel and aluminum products made in China.¹The tariffs on clean vehicles will take effect on October 1, 2024, while the proposed tariffs on steel and aluminum are tentatively scheduled to take effect on October 15, 2024. Proposals to impose more trade restrictions on Chinese exports could emerge in the coming months. These measures make Canada the latest country to join a growing trend of increasing restrictions on Chinese imports. The United States (Canada’s largest trading partner) has maintained tariffs on Chinese vehicles and metals since 2018, which the Biden administration plans to increase in the coming months.²

Legal basis for additional tariffs

Canada’s tariff action on August 26 was taken under section 53 of Canada’s Customs Tariff Act, an important but rarely used provision. Under section 53, the government can take unilateral action such as suspending rights or privileges under a trade agreement or imposing a surtax (i.e., an additional tariff) on goods based on their classification or origin “for the purpose of enforcing Canada’s rights under a trade agreement with respect to a country or to respond to acts, policies or practices of the government of a country that have an adverse effect on, or result in, directly or indirectly an adverse effect on, trade in goods or services of Canada.”

Canada has previously invoked Section 53 to impose retaliatory tariffs on U.S. products in response to U.S. tariffs imposed on imports of steel and aluminum products (including from Canada) pursuant to Section 232 of the Trade Expansion Act of 1962.

100% customs duty on Chinese clean vehicles

Canada will impose a new 100% tariff on imports of electric, hydrogen fuel cell and hybrid cars, buses, delivery vans and transport trucks made in China.³ The tariff is expected to come into effect on October 1, 2024, and will apply in addition to Canada’s 6.1% most-favoured-nation tariff, for a total tariff of 106.1% on imports of these clean vehicles from China. The August 26 announcement includes the final list of Harmonized System (HS) codes that will be subject to the 100% tariff.

The Government of Canada held a 30-day consultation on potential measures to protect Canada’s clean vehicle industry in July 2024.⁴ In announcing the consultations, the government said Canada’s auto industry faces “unfair competition from China, which has deliberately pursued a policy of overcapacity and a lack of strong labour and environmental standards.” The government also said Canada was concerned that Chinese auto exports would be diverted to Canada after the United States increased its tariffs, saying new trade restrictions would seek to “prevent trade diversion resulting from recent actions by Canada’s trading partners.”

Canada’s clean vehicle measure comes shortly after the European Union announced provisional tariffs of up to 38.1% in its countervailing duty investigation into Chinese electric vehicles and the United States announced its intention to increase its existing Section 301 tariffs on Chinese electric vehicles to 100%, both of which the Canadian Department of Finance referenced in its announcement. Canada’s measure, however, applies to a broader range of vehicle categories than the EU and U.S. measures. The EU countervailing duty investigation only covers electric passenger cars, while the pending U.S. tariff increase would not apply to trucks used for freight transportation or hybrid buses (which would instead remain subject to the existing 25% Section 301 tariff).

25% customs duties on Chinese steel and aluminum

The Government of Canada is proposing a new 25% tariff on imports of various steel and aluminum products made in China.⁵ Unlike the tariffs on clean vehicles, this additional tariff is not yet final. If Canada decides to impose the 25% tariff, it will come into effect on October 15, 2024. The announcement specifies that shipments already en route to Canada as of October 15 will not be subject to the tariff.

The August 26 announcement provides a proposed list of specific steel and aluminum products that will be covered based on HS codes, which includes certain ingots, plates, sheets, bars/rods, wire, pipes and other forms. The new tariffs would only apply to direct imports of the listed products that are of Chinese origin, as described in Canada’s Determination of Country of Origin for the Purpose of Marking Goods (Non-CUSMA Countries) Regulations. The tariffs would not apply to downstream products, whether imported from China or a third country, under HS codes that are not on the final list. The Department of Finance expects to publish the final list of products on October 1, 2024, after completing public consultations. The announcement adds that, if imposed, the government will review the tariff within one year, which could result in further extensions or modifications.

The Department of Finance is accepting public comments until September 20, 2024. Stakeholders interested in products on which Canada proposes to impose tariffs are encouraged to submit “their reasons for supporting or having concerns about the proposed surtaxes, including detailed information justifying any anticipated beneficial or negative impacts.” The consultation notice provides more details on where to submit comments and procedures for protecting sensitive commercial information.

Changes to tax credits for zero-emission vehicles

The Government of Canada intends to limit eligibility for its zero-emission vehicle subsidies to vehicles and products manufactured in countries that have free trade agreements (FTAs) with Canada. The Canadian federal government maintains several subsidy programs to encourage the adoption of zero-emission vehicles. Unlike the complex national origin restrictions found in the U.S. Inflation Reduction Act (IRA), Canadian programs currently do not include national origin restrictions. According to Canada’s announcement, the new FTA restrictions would apply to the Incentives for Zero-Emission Vehicles (iZEV), the Incentives for Medium- and Heavy-Duty Zero-Emission Vehicles (iMHZEV), and the Zero-Emission Vehicle Infrastructure Program (ZEVIP). Further details on the proposed regulatory changes are not yet available.

While the change does not specifically target Chinese vehicles, imports from China would likely be most affected by the new restriction. Indeed, Canada has negotiated free trade agreements with all of its other major sources of motor vehicle imports, including the United States, Mexico, the United Kingdom, the European Union, Japan and South Korea.

Possibility of import restrictions in other sectors

The Government of Canada is also considering tariff increases in other sectors it considers “critical to Canada’s future prosperity,” such as batteries and battery parts, semiconductors, solar panels and critical minerals. Before finalizing any tariff increases, the Department of Finance intends to hold a 30-day public consultation as it did for clean vehicles and steel and aluminum. According to the August 26 announcement, the government will issue a consultation notice “in the coming days to help inform any further government action.”⁶

The United States is also preparing to increase Section 301 tariffs on imports of batteries and battery parts, semiconductors, solar panels and critical minerals from China.

Potential for further actions on clean vehicles

In addition to tariffs and tax credit restrictions, Canada’s July consultation notice suggested interest in new investment restrictions and data security measures targeting Chinese automakers. The government did not follow up on those suggestions in its Aug. 26 announcement, but it also did not rule out taking action in the future.

On investment, the Investment Canada Act (ICA) gives the government the power to restrict certain foreign investments that raise national security concerns. Canada used the ICA to force Chinese companies to divest from Canadian lithium mines in 2022 and may consider similar measures targeting other elements of clean vehicle supply chains.⁷

On the data security front, the August 26 announcement highlighted concerns that “connected vehicles containing Chinese technology also pose significant risks to Canadians’ privacy, their data, and Canada’s national security interests,” but did not propose any specific policy measures related to data security. The United States has also expressed similar concerns in recent months. The U.S. Bureau of Industry and Security (BIS) is currently developing new data security restrictions targeting the Chinese auto industry, which could lead to new import bans on certain vehicles (called “connected vehicles” by BIS) and components manufactured by Chinese companies.⁸

1“Canada implements measures to protect Canadian workers and key economic sectors from China’s unfair trade practices,” August 26, 2024.
2 See here for White & Case’s latest coverage of the impending increase in Section 301 tariffs in the United States.
3 “Surcharge on electric vehicles made in China”, August 26, 2024.
“Canada announces consultation to protect Canadian workers and electric vehicle supply chains from unfair trade practices by China,” June 24, 2024.
5 “Notice of Intent to Impose Surcharges on Chinese Steel and Aluminum in Response to China’s Unfair Trade Practices,” August 26, 2024.
6 The Department of Finance publishes consultation notices on its webpage at “Consulting Canadians: Active Consultations”.
“Government of Canada orders divestment of foreign investments in Canadian critical minerals companies,” November 2, 2022.
8 See here White & Case’s coverage of the US investigation into connected vehicles from China.