Could Biden tax Canada’s auto industry out of existence?

Competition for scarce automotive investments can be fierce, but if the Canadian government cannot ensure everyone is playing by the same rules, the future for the domestic auto industry looks bleak.

When the Windsor Assembly Plant (WAP) announced its second shift cut in three years Oct. 16, Peter Frise, a professor at the University of Windsor and director of its Centre for Automotive Research and Education, chalked it up to the marketplace making choices it has “always made.”

Microchips are in short supply; those available are being put into vehicles with higher profit margins than the minivans built in Windsor. It is a hard reality but one that does not stray far from the basics of supply and demand.

“We are entitled to nothing other than to compete,” Frise said. “That goes for Windsor, it goes for Oshawa, and it goes for [assembly plants in] Oakville, Alliston, Cambridge, Woodstock. It goes for Canada. It goes for every country.”

Yet this spirit of healthy competition is threatened by a new tax credit  U.S. Congress passed and is now off to the Senate. If passed, an electrified vehicle produced at WAP — where they are scheduled to be built by mid-decade — would cost American consumers at least US $4,500 more than one built across the river in Detroit. By 2027, that figure would rise to up to $12,500, thanks to President Joe Biden-sponsored tax credits boosting U.S.-made electric vehicles.

This scenario is far from the level playing field supposedly established under the United States-Mexico-Canada Agreement (USMCA), and it would wreak havoc on Canada’s auto sector, which ships the lion’s share of the vehicles it builds south.

Brian Masse, MP for Windsor-West and NDP auto critic, said it is hard to “begrudge” the Americans for wanting to shore up their EV sector, but added the plan is “short-sighted” and fails to consider the two countries’ integrated supply chains.

He also blamed Ottawa for allowing the bill to get this far.

“We have not been engaged in Washington like we have in the past. It comes about as a result of not doing the heavy lifting that was required in between the last Buy American [push] and this one.”

With the rules of the game well-established in the USMCA and at the World Trade Organization, a host of countries and automakers have criticized the U.S. bill as a flagrant violation of trade rules. Valerie Hughes, a trade lawyer and senior counsel at Calgary-based Bennett Jones, anticipates Canada will launch a trade dispute under the USMCA.

A lot will hang on the result, but Hughes is confident the dispute mechanism has been finetuned for producing a fair result in just this scenario.

A less adversarial White House could also play a role.

“The United States’ previous administration didn’t seem really to care about international mechanisms,” Hughes said. “This administration says it does — says it wants to work with its allies and play by the rules.”

Still, the Canadian government needs to get aggressive to keep Biden honest. If not, Ottawa might not have an auto industry left to defend.