the Beatty Blog

The past week has seen a number of Canadian electric vehicle (EV) advocates making overly optimistic predictions about the impact that the recently announced import quota on Chinese EVs will have on consumer choice and affordability in Canada.  You can see that at play in comments by organizations like Clean Energy Canada: “Not only will this answer the problem of affordability very directly, with more affordable Chinese EVs for sale, but it sends a strong market signal to other automakers: the Canadian market is now competitive, so price your cars accordingly.” https://cleanenergycanada.org/deal-allowing-a-quota-of-chinese-evs-a-breakthrough-for-consumers-wth-potential-for-investment-in-a-modern-auto-sector/

Unfortunately, those claims fly in the face of Canada’s actual experience the last time the country set a targeted quota on vehicle imports. As so often happens, there is no reason to believe that history won’t repeat itself and the EV market in the United Kingdom may be giving an early indicator of what Canada can expect.

The last time this happened was in the 1980s in response to the oil shocks of the 1970s and the rise of small, fuel efficient vehicles imported from Japan, when first the US and then Canada imposed quantitative restrictions on imports of Japanese vehicles. The objective of these quotas was to protect the North American auto industry from new low cost competition and encourage the domestic industry to restructure and improve its competitiveness. Having imposed quotas, both Canada and the US discovered that the Japanese response was to increase the value of their products in order to maximize returns on the limited quantity of vehicles they could sell here. This effect is noted in various papers including an International Monetary Fund article written by Clemens F.J. Boonekamp (https://www.elibrary.imf.org/view/journals/022/0024/004/article-A001-en.xml) and the 1983 Report on the Canadian Automotive Industry for Canada’s Department of Regional Industrial Expansion (https://publications.gc.ca/collections/collection_2024/isde-ised/c1/C1-35-1983-eng.pdf). Simply put, quota creates economic rent and importers will try to use that to their advantage. Meanwhile, the North American industry became increasingly specialized in trucks, minivans and SUVs further exacerbating the long term trend away from affordability.

In the current instance, Canada and China have agreed to a 49,000 unit quota that will rise to 70,000 units over several years. The Canadian government is attempting to reassure the car-buying public that this will result in an increase in the number of affordable EVs available in the Canadian market. The tool they claim will drive affordability is a sub-basket of quota that will be reserved for vehicles with a value for duty of $35,000 or less. What nobody is bothering to acknowledge is that there is no direct connection between import costs and retail prices. 

Vehicles will ultimately sell for whatever price the market will bear. Importers will want to maximize their use of the quota while earning the highest margins possible. There is no incentive for those importers to cut prices and create more demand than can be met through the gradually increasing quota allocation. In the absence of price controls or excess profit taxes Canada’s only method of driving down retail prices is some form of moral suasion or threats of further quota restrictions. 

It is worth noting that the decision to eliminate 100% tariffs on 49,000 vehicles priced at the $35,000 cut point yields a more than $1.7 billion advantage if allocated to a single importer. That is a strong incentive to claim first mover advantage and harvest as much of that rent as possible. And that is before factoring in the impact of the tradeable zero emission vehicle (ZEV) credits these vehicles would generate if Canada maintains its federal ZEV mandate.  Incidentally, the Chinese quota is likely the straw that broke the camel’s back on the ZEV mandate. The domestic industry will argue with some justification that subsidizing imports with these credits undermines local manufacturing and jobs.

Meanwhile, the Chinese electric vehicle industry is fighting subsidy-driven overcapacity and declining prices in China by pursuing export markets. They need to keep factories operating while also offsetting losses at home. So what is happening in other global markets that can give us insight into what is likely to happen with Chinese EVs in Canada.  The United Kingdom, where average EV prices continue to be higher than those of conventional vehicles even in the absence of punitive tariffs and quotas (the standard duty rate is 10%) demonstrates this profit-seeking behaviour. Vehicles which sold at exceptionally low prices in China commanded a higher price in the UK as companies priced their imports to the market. Why would the situation in Canada be any different?

But far beyond car prices there is a bigger issue at play here.  By returning to quotas, a pre-World Trade Organization method of managing trade, Canada is stepping onto a slippery slope where much of international trade could once again be conducted outside of international norms and rules. That usually doesn’t end well for countries of our size with our level of dependence on international trade.

However, if we are committed to this path, then it is essential to bring industry into the conversation (so far this has been done without active consultation) and consider the best way to use these trade tools to advance the competitive advantage of Canada’s manufacturing sector. There is no time to waste given that this new policy comes into effect in a matter of weeks.