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General Motors workers connect a battery pack underneath a Chevrolet Bolt electric vehicle on the assembly line in Lake Orion, Mich., in March 2018.Rebecca Cook/Reuters

Canada is threatening trade retaliation against the United States – including U.S. auto workers – if Washington approves legislation on made-in-America electric vehicle incentives that could devastate auto assembly in Canada.

Retaliatory measures could target not only the U.S. auto sector but also block dairy shipments to Canada and suspend copyright protections sought by the United States in a 2018 trade deal.

The value of imports from the U.S. covered under possible trade action would number in the tens of billions of dollars, a government official said. The Globe and Mail is granting anonymity to the official because they are not authorized to speak on the record about future measures.

Deputy Prime Minister Chrystia Freeland and International Trade Minister Mary Ng sent a letter Friday to leaders in the U.S. Senate. The chamber is debating a bill that would give generous tax credits for consumers who buy electric vehicles, or EVs, that are assembled in the United States. Similar legislation has already been passed by the House of Representatives.

At issue is a new US$12,500 tax credit that would include US$4,500 for union-made U.S. electric vehicles. Only U.S.-built vehicles would be eligible for the US$12,500 credit after 2027 under legislation that’s passed the House.

In shadow of U.S. protectionism, Canada in heated battle for EV battery manufacturing

The Canadian and Mexican governments have warned the proposed credits could damage the future of EV production in Canada and Mexico. Offering the tax credits only for U.S.-made vehicles could cut Canada and Mexico out of the production of electric vehicles by encouraging auto companies to put their plants in the U.S. It could also hurt the auto industry and drive up costs for consumers by disrupting supply chains, which currently stretch across all three countries.

“We want to be clear that if there is no satisfactory resolution to this matter, Canada will defend its national interests,” Ms. Freeland and Ms. Ng wrote in the Dec. 10 letter.

The ministers said Canada considers the EV credit to be the equivalent of a 34-per-cent tariff on Canadian-assembled electric vehicles. “The proposal is a significant threat to the Canadian automotive industry and is a de facto abrogation of the United States Mexico Canada agreement (USMCA) signed in 2018 that replaced the North American free trade agreement.”

They said Canada would not only launch a challenge under the USMCA, but also slap tariffs on imports from the U.S. “that will impact American workers in the auto sector and several other sectors of the U.S. economy.”

The Canadian government would suspend measures to extend copyright protection for intellectual property, as the U.S. had sought under USMCA, and block American access to Canada’s heavily protected dairy market.

“If the U.S. proceeds with the tax credit provisions as drafted, we would see this as a significant change in the balance of concessions agreed to in the USMCA. As such, we would consider the possible suspension of USMCA concessions of importance to the U.S. in return,” the ministers wrote.

“Those concessions could include suspending USMCA dairy tariff-rate quotas and delaying the implementation of USMCA copyright changes.”

Ms. Freeland and Ms. Ng said Canada in the coming days will publish a list of American-made imports that would face Canadian tariffs. “We intend to make clear which U.S. businesses and workers will be impacted.”

Canada says the credits violate USMCA because the trilateral trade deal forbids discrimination against North American products by country of origin. The United States says it doesn’t believe the credits breach the USMCA.

The letter comes after a lobbying blitz by Canadian politicians and diplomats over the past two weeks. The made-in-America EV credits are part of an effort to shore up Democrat fortunes with unions and in Michigan, where a significant portion of the U.S. auto industry is located – support a Democratic presidential candidate will need in the 2024 election.

Flavio Volpe, the president of Canada’s Automotive Parts Manufacturers’ Association, said he couldn’t predict whether the made-in-America clauses in the EV credit measures would pass in the Senate version of the bill. He said that’s a change from four weeks ago when he was sure the Senate would green-light the offending measures. “We’re on the knife’s edge now.”

The Canadian ministers repeated earlier warnings about how the EV credit would also hurt American auto parts makers.

“Canada is the number one market for U.S. automotive exports, buying about 10 per cent of U.S. production,” the ministers said. “Canadian-assembled vehicles also contain approximately 50 per cent U.S. content and Canada imports over US$22-billion worth of automotive parts from the U.S. annually,” they wrote.

David Adams, president of Global Automakers of Canada, which represents Toyota and Honda among other car companies, said that the U.S. tax credit presents “an existential risk” to auto manufacturing in Canada.

“When they’re produced in Canada, the vast majority of those vehicles need to go into the U.S. market, because there won’t be enough production just for the Canadian market,” Mr. Adams said.

With files from Mark Rendell in Ottawa and from Reuters

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