Geopolitics Meets Trade: Canada’s Tariffs in the Shadow of U.S.-China Rivalry
As of October 1, 2024, Canada has imposed significant tariffs on imports of Chinese electric vehicles (100%) and steel and aluminum (25%) in response to concerns over unfair competition stemming from Chinese state subsidies and overcapacity. Framed as a measure to protect Canadian workers and critical industries, this policy aligns closely with actions by the U.S. and EU. Economists generally favor free trade, but this decision highlights a shift towards protectionism driven by lobbying from domestic manufacturers, geopolitical tensions, and national security concerns. Canada's strained relations with China—exacerbated by issues like foreign interference and trade disputes—further contextualize this move. While the policy aims to safeguard burgeoning domestic industries, it risks undermining Canada's green transition by delaying the adoption of competitively priced EVs. The strategy reflects a broader trend of aligning economic decisions with high politics, raising questions about the balance between security, economic interests, and long-term global competitiveness.
As of 1st October 2024, imports of Chinese electric vehicles have charged an additional tariff of 100%. Similarly, imports of Steel and Aluminum have faced a surcharge of 25% (Global News 2024). The Government of Canada has stated that “Canadian workers, the auto sector, the steel and aluminum industries, and related critical manufacturing supply chains are threatened by unfair competition from Chinese producers” (Canada, Department of Finance 2024). Minister of Finance Chrystia Freeland emphasized that “we are moving in lockstep with key international partners,” referring to the U.S. and EU, “to protect Canadian workers and businesses from China’s intentional, state-directed policy of overcapacity and oversupply, which undermines Canada’s ability to compete in domestic and global markets” (as cited in, Canada, Department of Finance 2024). Additionally, the government has initiated consultations on potential surtaxes to safeguard critical manufacturing sectors and prevent “trade diversion resulting from recent actions taken by Canadian trading partners” (Canada, Department of Finance 2024).
Few economists disagree that free trade is usually a good thing. Centuries of economic literature have been set on the understanding of comparative advantage. Yet very few countries and policymakers today fully explore the reality of free trade and are increasingly aligning themselves with protectionist or industrial policy instead; Canada is no exception. The question then becomes, is this a matter of economic interest or high politics?
Both empirical evidence and general trade models tell us that, despite its high support among economists, free trade has clear (and not so clear) winners and losers. The protectionist policy is often viewed the same way but with fewer winners and way more losers. However, some policymakers praise industrial policies or protection for infant industries. In a retaliatory form, tariffs may help level the damages for each economy. In theory, China’s alleged state subsidies may be directly harming Canadian manufacturers, and tariffs can help return competitive prices. But whether this stands up in reality is another question, and is it really in Canada’s best interests? Looking at recent evidence, political factors may be pushing economic incentives to the side.
Canadian manufacturers have reportedly been hard at work lobbying the Canadian Government to pursue a high tariff option (CBC 2024). Indeed, the role of key interest group lobbying has been considered an important factor in explaining government trade policies in academic literature. “Justifications for various trade policies that are accepted by the electorate seem to be significantly influenced by lobbying activities on the part of economic interest groups and the government itself” (Baldwin 1989, p. 130).
In a 2023 report, the Business Council of Canada (BCC) attacked what they believed were state-centred Chinese business practices. They claimed that these provided an unfair advantage for Chinese-based exporters and directly hurt Canadian businesses through policies such as export subsidies (BCC 2023). As mirrored in the Government of Canada’s announcement on August, the BCC argued that for Canada, “Economic Security is National Security” (BCC 2023). Indeed, this slogan became the heart and title of the report.
Evidence from domestic manufacturers, clear losers of trade with subsidized Chinese products, suggests they may have played a large role in pushing for a stronger policy stance on trade with China. Since 2020, federal and provincial governments have pledged billions to automakers and battery producers, particularly in Ontario and Quebec. “Now, fears are growing that China, which has a more mature EV industry that is already producing at scale, could undermine those investments by selling cheaper EVs in North America” (Financial Post 2024).
However, this issue should not be viewed as a single event but as part of a larger trend in escalating Sino-Canadian relations. Canada’s policy decision is closely linked to U.S. interests, with Prime Minister Trudeau reportedly discussing “China and other national geopolitical issues with U.S. National Security Advisor Jake Sullivan” (Financial Post 2024). Geopolitical rivalry as well as decoupling between the two great powers has been a significant topic of discussion in recent years (Nye 2020). Canada’s historical alignment with the U.S. may play an important role in their decision to move “in step” despite many analysts suggesting that further integration with China will better serve Canada’s interests moving forward. Additionally, the relationship between Canada and China has reached a low in recent years after multiple security and political threats. Expelling diplomats, restricting foreign students, accusations of foreign interference and probing, unfair trade practices and banning certain Chinese goods, and, most blatantly, the “Two Michaels” crisis in the wake of Canada’s arrest of Menzou Weng have pulled the bilateral relationship to breaking point (Dade 2022).
From this perspective, Canada’s decision to raise tariffs on Chinese EVs is more than just domestic politics at work; it is part of their strategy of high politics. Close policy alignment with the U.S. – who initially put in place EV tariffs on China – reflects a similar interest-based and ideological stance and the role of U.S. pressure on Canadian Foreign policy. On these grounds, tariffs on steel and aluminum were put in place aimed to reduce vulnerabilities in bilateral trade. Decoupling between the two great powers has played out in multiple arenas, including over technology and intellectual property, where concerns over bad-actors in China have become linked to the sharing of tech and Chinese investment.
Substantial security concerns around China’s interference in Canadian affairs are strong grounds to pursue a line of policy that may be against economic interests. Alternatively, Canada may be hoping to protect a growing domestic industry due to its large investments in this area. In the short run, warding off competition from Chinese firms may have merit, but it is hard to reconcile this with larger trends in manufacturing and green technology. Canada has been falling behind compared to cheaper sources of manufacturing and early movers in green production. However, Canada’s ethos as a nation committed to climate action is also at risk. Our transition to net zero and EV proliferation will be delayed due to less competitive pricing.
But among the economic uncertainty, some factors stand clear: continued bilateral engagement with China as had been enjoyed until recent years exposes Canada to multiple security risks. Furthermore, their close alignment with the U.S. side in the geopolitical tension limits their foreign policy autonomy when push comes to shove – at least evidence to-date suggests so. The extent to which closely weighed economic interests can substantially influence the policy discussion when security concerns have been so heavily politicized seems unfortunately weak. Indeed, as Adam Smith claimed, “defence is of much more important than opulence” (Wealth of Nations, Book IV).
References
Baldwin, Robert E. 1989. “The Political Economy of Trade Policy.” Journal of Economic Perspectives 3 (4): 119–35. https://doi.org/10.1257/jep.3.4.119.
Business Council of Canada. Economic Security is National Security: The Case for an Integrated Canadian Strategy. September 7, 2023. https://www.thebusinesscouncil.ca/report/economic-security-is-national-security/
Canada to hit China with tariffs on electric vehicles, Steel | Financial Post. Accessed October 8, 2024. https://financialpost.com/commodities/energy/electric-vehicles/canada-to-hit-china-tariffs-evs-steel.
Dade, Carlo. "Keep Your Friends Closer: Managing Economic Relations in the Canada-U.S.-China Triangle" In Canada and Great Power Competition, edited by Palgrave Macmillan, 235–256. 2022. https://doi.org/10.1007/978-3-031-04368-0.
Mayor, Lisa. “Steel and Aluminum CEOs Warn of “Existential Threat” If Canada Doesn’t Impose Tariffs on China.” CBC, 8 Aug. 2024, www.cbc.ca/news/politics/steel-aluminum-existential-threat-1.7288870.
Rana, Uday. “Tariffs on Chinese EVs Are Now in Effect. What Does That Mean for Canadians?” Global News, Oct. 2024, globalnews.ca/news/10787673/canada-tariffs-chinese-evs/.