Interview: US EV rebates ‘devastating’ for Canada’s economy

Stefan Baumgarten

16-Dec-2021

TORONTO (ICIS)–The electric vehicle (EV) rebates in the US Build Back Better (BBB) legislation would be “devastating” for Canada’s economy, Bob Masterson, CEO and president of trade group Chemistry Industry Association of Canada (CIAC) told ICIS in an interview.

It would be particularly hard for the most populous province, Ontario, where the country’s auto industry is concentrated.

The rebates or tax credits in the BBB spending bill – up to $12,500 for EVs built by US unionised labour – would translate into the equivalent of a 34% tariff on Canadian-built EVs, Canada’s government has said.

The BBB bill is currently before the US Senate, after the US House of Representatives passed it last month.

The US moves come as Canada is working hard to attract investments into the EV and batteries value chain – a fast-growing market that is a big opportunity for the chemicals and plastics industries, Masterson said.

If passed into law, the US measure would be a hit to the prospects of auto manufacturing in Canada, one of the country’s most important industries, he said.

From the perspective of the overall Canadian chemicals industry, however, the US measure is unlikely to be a material blow, although it is too early to determine precise impacts, he said.

The bulk of Canada’s chemical production goes into export – mostly to the US – and chemical trade in North America was free under the North American Free Trade Agreement (NAFTA) and continues to be so under its successor, the US-Mexico-Canada (USMCA) trade deal, he explained.

Nevertheless, there could be impacts on a company-to-company or plant-to-plant basis, he said.

For example, a chemical or plastics firm with plants in Canada whose primary customer is Canada’s automotive industry was not likely to continue investing if they know that the next generation of cars is not going to be manufactured in Canada.

If EV auto production ends up being based in the US, many suppliers from chemical, plastics, electronics and other sectors will follow suit, locating their manufacturing close to their customers.

The much bigger threat is to Canada’s overall economy, as well as to trade relations with the US.

If the US government, through the EV measure, moves to essentially allow only cars and vehicles that are made in the US, “that is devastating for the Ontario economy and the Canadian economy”, Masterson said.

The EV measure was “completely inconsistent” with the US’s obligations under USMCA, he said.

If it becomes law, Canada would need to respond, “to focus peoples’ minds” and send the US a reminder that Canada is an important trading partner, he said.

While every Canadian knew that Canada’s biggest customer is the US, the US “needs a constant reminder” that Canada is the largest trading partner for the majority of US states, Masterson said.

In auto, Canada is the largest customer for US automotive exports.

At the same time, vehicles assembled in Canada for export to the US contain about 50% US content in the deeply integrated auto industry the two countries built jointly over the past 60 years, he said.

“The North American automotive industry supply chains have been rationalised, things are being built where they are for good fundamental and economic reasons” – to the benefit of customers who get their vehicles at the lowest price possible, he said.

If the US now puts up a big trade barrier with its EV rebates, it will be at the expense of auto buyers on both sides of the border, he said.

With the many geopolitical, supply and trade issues in the world, North America needed even deeper economic integration – rather than having the US put the Canadian automotive industry out of business, Masterson added.

“We have enough problems with trade and the rest of the world, we have problems with China, problems with Russia – so don’t we need deeper North American integration and collaboration” to respond to those external threats, he asked.

RETALIATION
Canada’s government has said it would seek to challenge the US measure through the USMCA dispute settlement process, and it would apply retaliatory tariffs on US exports to Canada.

Masterson expects the Canadian response to be strategic and targeted to specific sectors, for example whiskey from Kentucky – as it was when the Trump administration imposed tariffs on Canadian steel and aluminium.

However, “once the first shot gets fired”, such a trade dispute can quickly spiral out of control, he warned.

The EV rebates add to Canada’s trade issues with the Biden administration, coming after the still-unresolved dispute over the Line 5 oil pipeline and the US revocation earlier this year of the presidential permit for the Keystone XL pipeline project.

Ottawa-based CIAC speaks for both the chemical and the plastics industries in Canada.

The automotive industry is a major global consumer of petrochemicals which contributes more than a third of the raw material costs of an average vehicle.

The automotive sector drives demand for chemicals such as polypropylene (PP), along with nylon, polystyrene (PS), styrene butadiene rubber (SBR), polyurethanes and methyl methacrylate (MMA)/polymethyl methacrylate (PMMA).

Please visit the ICIS supply chain topic page and visit the ICIS automotive topic page

Thumbnail photo: Bob Masterson, CEO and president of Chemistry Industry Association of Canada/Association canadienne de l’industrie de la chimie

Interview story by Stefan Baumgarten

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