On the green transition, Canada’s trade policy is between a rock and a hard place

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Wolfgang Alschner is an associate professor at the University of Ottawa’s faculty of law. He holds the Hyman Soloway Chair in Business and Trade Law.

A bumpy road lies ahead for Canadian policy-makers. The triple-c shocks – COVID-19, climate and conflict – have exposed Canada’s vulnerabilities in international trade.

With two-thirds of Canada’s trade going to the United States, this country is uniquely intertwined with and dependent on its southern neighbour. Canada often needs to follow the U.S.’s lead, lest it be sidelined in North American supply chains. At the same time, as a multilateralist and middle power dependent on rules-based international trade, Canada is fighting an uphill battle to maintain an independent trade agenda and support institutions currently being sabotaged by the U.S., such as the World Trade Organization.

Squaring this tension while managing the repercussions of the triple-c shocks will require a smart and assertive trade policy.

The challenges are most obvious when considering critical mineral production and electric vehicle battery manufacturing, two fast-growing industries widely considered sources of future economic prosperity essential for the energy transition.

China dominates critical mineral extraction and refinement globally, and has weaponized its control of those resources for economic coercion. Western states have vowed to build alternative production networks. Canada, rich in critical minerals, is to be a vital part of that effort.

The Pentagon is considering funding mining projects in Canada, and Europe rushed to sign a critical minerals partnership with Ottawa. Canada, for its part, seems committed to seizing the opportunity. The federal government’s critical minerals strategy, released last year, touts the country’s competitive advantage in sustainable mining. The message is that critical minerals from Canada, even if pricier than those from China, will be sought after by investors and manufacturers committed to environmental, social and governance (ESG) standards.

And yet in reality things are more complicated. For example, many of Canada’s critical mineral riches lie in the far North, away from the hydro-powered green electricity grids of Southern Quebec and Ontario. Those remote mines are instead powered by diesel, which is harmful to both workers and the climate. In contrast, China’s Inner Mongolia is home not only to the world’s biggest rare earth mine, Bayan Obo, but also to the world’s largest desert solar plant.

Canada would therefore be complacent to assume that its green minerals will be competing with dirty foreign ones. China is set to be competitive both on cost and carbon footprint.

Of course, with Beijing increasingly at odds with the West, the ultimate competitive advantage of Canadian minerals is that they are not Chinese. But that is a contentious premise upon which to build Canadian policy.

Instead, policy-makers need to make use of their trade policy toolbox. Beyond the blanket national security bans and naive open-market approaches of the past, that toolbox contains a range of instruments to help Canadian mining and refining remain competitive. These include measures for temporary protection from import competition. They also include rules of origin, which set out how much production must occur in a country or region for a product to be considered to have been made there.

Policy-makers face similar concerns when it comes to batteries. Canada, in part thanks to generous handouts to manufacturers from federal and provincial governments, has been extremely successful in attracting investment in battery factories – notably facilities being built by Stellantis near Windsor, Ont.; Volkswagen near St. Thomas, Ont.; and Northvolt near Montreal.

But that investment is under threat. China is building up significant overcapacity in battery production, making it easier for Chinese electric car producers, already dominant in China, to undercut prices for electric vehicles in foreign markets. This affects the viability of battery plants in Canada.

The European Union, partly in response, recently launched a countervailing tariff probe to limit imports of Chinese electric vehicles, which it deems to be state-subsidized. The EU currently charges a 10-per-cent duty on imported cars, and that duty is set to increase for Chinese electric vehicles after the anti-subsidy investigation. Donald Trump’s trade war ramped up the U.S. import duties on Chinese cars to 27.5 per cent. But Canada, in contrast, imposes only a meagre 6.1-per-cent tariff on imported vehicles.

Some may hope that brand loyalty and a preference for bigger cars will keep away the smaller, lower-range electric vehicles popular in China. But relying on market forces alone is risky when investments worth billions of taxpayers’ dollars are at stake. As with critical minerals, trade policy needs to play an active role in ensuring the competitiveness of Canadian battery producers.

To be clear, Canada should not close its borders or keep Chinese minerals and electric vehicles out of the country. Trading with China and the world is vital to making the energy transition less costly, and easing geopolitical tension. But Canada needs a trade policy that accompanies its industrial policy objectives and buttresses nascent regional supply chains, while maintaining an open economy and a commitment to the rules-based multilateral trading order.

That is no easy feat. It is all the more important to put the gears in place now.