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Prime Minister Justin Trudeau and Ontario Premier Doug Ford attend an announcement at Seneca College, in King City, Ont., on Feb. 9.Chris Young/The Canadian Press

Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.

Honda’s announcement on Thursday that it would build out its EV supply chain in Ontario is an enormous victory for both the Canadian economy and the government’s climate goals. However, landing the Japanese car manufacturer was ultimately more a stroke of good fortune rather than the outcome of prudent policy, belying the weakness of the electric vehicle tax that is bringing them here.

The new tax credit for EV manufacturers, announced with the 2024 federal budget, is demanding, oddly specific, and not particularly generous. It asks that a taxable corporation have its vehicle assembly, battery production, and cathode material production all in Canada, while offering only a 10 per cent tax credit on the cost of new buildings as a reward.

Speculation that the EV supply chain credit was specifically geared toward landing the Japanese firm is supported by the fact that Chrystia Freeland led discussions on both the budget and negotiations with Honda. This would certainly help explain its awkwardness.

First of all, the supply-chain tax credit is much too small and narrow to attract many new foreign investors that do not already have a large footprint in Canada.

To believe in its efficacy, we have to imagine that global car manufacturers who are currently unimpressed by Canada’s sizable critical mineral deposits, our proximity to large North American markets, and the far more generous Clean Technology Manufacturing Investment Tax Credit (ITC) from 2023, can be swayed with a tax credit that is a mere tenth of their building costs.

The problem is not that offering such incentives will be costly, but rather the opposite; it is unlikely that many companies take advantage of it. A tax credit that costs the government very little is a tax credit that isn’t making a difference.

It’s also not clear why building investments were singled out. A general tax credit on additional capital investments worth the same amount would have cost the same, all without distorting companies’ decision-making. There is no real reason to subsidize buildings over other kinds of investments that a company might make in its plants. The auto manufacturer is more than capable of deciding where to put its cash.

Furthermore, this obsession with having each portion of the supply chain located in Canada misses a crucial purpose of clean incentives — which is not just to collect capital, but to spur home-grown innovation. The EV credit puts stringent requirements on companies having a much larger physical presence in Canada, when requirements on technological transfers or intellectual property, which is where long-run economic growth actually comes from, would have been much more useful.

Given that we are willing to ask for large commitments from EV companies the focus should have been giving Canadian engineers the expertise to develop better batteries and cathode active materials on their own. This is precisely the strategy that Taiwan took with regard to semiconductors in the 1970s — with radical success. Had the Taiwanese simply convinced the Radio Corporation of America to build semiconductor factories instead of transferring the technology to domestic innovators, the Taiwanese economy would look drastically different today.

One might argue that if the supply-chain credit was meant only for Honda, then it shouldn’t matter how narrow it is. Ottawa can tailor new credits for new investors. Offering new incentives ad hoc is necessary for these kinds of private-public partnerships; this is a fact of life.

But these incentives could have been broad enough to be useful to other prospective investors while still being generous enough to sway Honda. They also could have asked for less in the way of physical capital and more in the way of intellectual property exchange. Throwing out a poorly constructed tax credit to secure the investment of one firm smacks of “picking winners.”

A good rule of thumb with industrial policy is that it should be avoided when possible, and broad when necessary. Clean growth is necessary and thus warrants state support. But that support should be agnostic about which firms, and what kinds of investments, ought to be supported. The new EV supply chain credit fails on this account. This is especially confusing given that the same government passed the far more sensible Clean Technology Manufacturing ITC in 2023, which meets all these criteria.

It’s not that the EV supply chain credit will be especially harmful. Rather it is a lost opportunity, one that the government has spent precious time and political capital on. Here’s to hoping that future incentives are a little better thought out.

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