OTTAWA — Mark Carney has inherited Justin Trudeau’s nightmare.
In his decade as prime minister, one of the policy decisions that haunted Trudeau was the unavoidable question about whether to allow Chinese electric vehicles (EVs) into the Canadian market.
It was Trudeau’s nightmare, bequeathed to Carney pretty much in tact, because it forced him to choose between two clusters of powerful, competing political forces, both of which he was accustomed to going to bat for.
On one side of the ledger were the formidable forces in favour of allowing the increasingly well-regarded Chinese vehicles allowed into the Canadian market: consumers, the environment, farmers, fishermen and anybody else who exports to China, voters on the West and East Coasts and in farming regions and Canada’s relationship with China.
On the other side, in favour of using hefty tariffs or other measures to keep Chinese EVs out of the Canadian market: big auto, Canadian autoworkers, Southern Ontario voters and Canada’s relationship with the United States.
After much consternation, delayed on more than one occasion, the former prime minister’s government sided just over a year ago with keeping the Chinese vehicles out. Echoing the response from then U.S. President Joe Biden, Ottawa slapped 100 per cent tariffs on Chinese EVs, essentially pricing them out of the market, and 25 per cent tariffs on Chinese steel and aluminum.
To almost no one’s surprise, China retaliated with tariffs on some key Canadian exports: canola oil, canola meal, peas, seafood and pork.
Despite the powerful forces on both sides of the political tug-of-war, however, trade officials and government sources agree that Ottawa’s decision to tariff the Chinese EVs wasn’t that complicated. Canada simply couldn’t act against the U.S. and an industry as large and lucrative as the auto sector. There were also serious concerns, as with many things relating to China, about security. Electoral politics were of course also a key part of the equation.
“A year ago, I think it was an easy decision,” said Tyler Meredith, a senior policy advisor in the Trudeau government.
Between two superpowers
Fast forward more than a year, however, and a rematch between those two armies of political forces is looming.
Carney has since replaced Trudeau, but the threat of Chinese EVs continues to haunt a Liberal prime minister.
The equation is similar to a year earlier, with one significant component change: Donald Trump has returned to power in the United States. From Canada’s perspective, that’s made pretty much everything worse. And more complicated.
Tim Sargent, head of domestic policy at the Macdonald-Laurier Institute think tank and a former deputy minister of international trade, said the quandary is that Canada is unlikely to regain full access to the Chinese market without allowing at least some Chinese EVs into Canada. But doing so, Sargent said, would likely upset the U.S. and threaten those talks at a time when Canada’s top priority is of course to regain full access to the American market.
“I don’t think we can do it right now,” Sargent says of a trade deal with China.
A trade reset
Trump’s return to the White House then is preventing Canada from renewing critical trade relationships with both of the world’s superpowers, who are also the top two markets for Canadian exports. According to 2024 data, 75.9 per cent of Canadian merchandise exports go to the U.S., and about 4.1 per cent bound for China.
The U.S. president’s trade policies have also forced a reset, among many things on the international landscape, on the Canadian auto industry.
His controversial and punishing tariffs on Canadian vehicles — along with key vehicle inputs steel and aluminum — has placed much of the industry in peril without any help from Chinese EVs.
The fallout has already started.
At least two major manufacturers, General Motors and Stellantis, which owns the Jeep, Ram and Chrysler brands, have already said that they plan to move some production to the U.S., from Canada and Mexico. That has left the industry in peril and placing extra value on the remaining production.
But the Trump tariffs and the early production losses weren’t the only things to wallop the Canadian auto industry in recent years.
Volt-face
In the fall of 2023, federal and provincial governments — almost always Ontario — started a flurry of subsidy agreements that were to trigger massive investments in the EV and EV battery industries. It looked like those deals, while expensive and not without risk, might create a significant beachhead for the future of Canadian auto.
“Canada has positioned itself to be a leader in the EV industry,” said Trudeau last August at a Goodyear plant in Napanee, Ont., as the tiremaker was getting government money to grow its facilities and expand into the tire market for EV vehicles. “And we will continue to be because those are where the jobs are going to be, not just a couple of years from now, but a decade from now, a generation from now.”
EVs, it was widely agreed, looked like the future of auto and Canada was well-positioned to benefit. The hefty subsidies supplemented Canada’s solid auto industry lure of skilled workers, reasonable energy costs, weakened currency, public health care and, perhaps most of all, guaranteed tariff-free access and proximity to the U.S. market.
At least that’s how it looked.
Until it didn’t.
The bet by Canada, Ontario, much of the auto and EV industries, and many other jurisdictions was based on a single critical calculation: that EVs were the future.
While that may still be true, analysts say that it’s also fair to now question how much consumers have bought into that vision.
Even before Trump returned to power and centred his energy policy on the mantra “drill baby drill,” the EV industry’s cost equation was under threat. Emissions standards on gas-powered vehicles were weakened; some EV subsidies were lowered or simply expired; and then, not surprisingly, consumer demand stalled.
The industry had also failed to quell consumer concerns about EVs’ range, availability of charging networks, and higher sticker prices. Sargent said there should also be long-term concerns about whether electricity grids can handle dramatic increases to the size of the EV fleet.
The industry is clearly hemorrhaging. In 2024, zero-emission vehicles, a category that includes battery-electric vehicles and plug-in hybrids, accounted for about 15 per cent of all new car sales in Canada. In the second quarter of this year, that same category accounted for just 8.6 per cent of all sales.
But the industry seemed to see the tumble coming.
As 2024’s calendar pages were flipped, those factors combined to make EV companies question consumer demand and their own expansion plans. An increasing number of the massive EV and EV battery investments were either cancelled, delayed or at least in question.
In Canada, Northvolt Batteries, Volkswagen, Umicore Rechargeable Battery Materials Canada, Honda Canada, and Stellantis were among those forced to reassess their production plans.
But the market reset wasn’t just a Canadian problem. EV investments in the U.S., mostly in the bedrock auto industry regions of the midwest and the southeast, were suffering a similar fate.
The losses from those stalled investment plans extend far beyond the auto sector. They’ve also meant foregone losses in jobs, sales for supplier companies, customers for restaurants, accountants and other small businesses, investments in housing and schools, and tax revenue. About a year after the sector’s pullback, it’s unclear how many of the delayed production plans throughout North America will be revived at some point down the road.
“The future is still electric,” said Brian Kingston, chief executive of the Canadian Vehicle Manufacturers’ Association. “What’s changed is the pace.”
A thaw in relations
While many EV production plans may be on hold, that doesn’t mean the same is true for Carney’s dilemma.
In fact, the pressure to land a deal with China — even if it’s second in line behind the U.S. — may be greater now than it was under Trudeau. The U.S. market is no longer fully open, despite the continental free trade deal that Trump signed in his first term, and the Canadian economy is slowing.
Carney met late last month with Chinese President Xi Jinping on the sidelines of the Asia-Pacific Economic Cooperation (APEC) summit in South Korea, the first time that leaders from the two countries had met in eight years.
While there were no concrete deals from the almost 40-minute meeting, Carney said later that he believed the two countries had reached a “turning point” in trying to advance the relationship. Xi said the relationship “achieved a recovery and positive development.”
With Carney also accepting Xi’s invitation to meet again in China at an undetermined time, there seems to be interest on both sides to iron out the wrinkles in the Canada-China relationship.
But it’s not just about trade friction, says Meredith, the former Trudeau advisor. “There’s a level of distrust on both sides.”
There may be trade friction with both the U.S. and China, but Canada’s auto industry is clear on where its loyalty lies.
Kingston said the Chinese economic model is to use massive subsidies to make low-cost goods, then dump those products on foreign markets, leaving those markets without a domestic industry and dependent on China.
A recent report by TD Economics expressed a similar view, saying that Beijing’s $230-billion in subsidies to its automakers has caused overcapacity that have given Chinese producers an unfair advantage. But the report also suggested that Ottawa’s tariffs mean that Canada has missed the chance to gain expertise from China’s advanced battery technology and diversify domestic EV supply chains.
Michael Kovrig, a Canadian geopolitical advisor and former diplomat who was arrested by Chinese authorities in December, 2018 in what was seen as a politically motivated move,
told National Post that the Chinese economic model
involves providing artificial incentives that lead to intentional overproduction in key sectors such as EVs, and then low-cost exports.
“China’s view of trade is China exports lots,” said Kovrig, who spent 1,019 days imprisoned in China, “and everybody else opens their markets and absorbs it and China imports very little. Basically it wants to turn countries like Canada into suppliers of commodities and energy.
“It’s hard to stay an advanced industrial economy when you don’t have any industry left.”
Kovrig, one of the so-called “two Michaels” who was arrested in Beijing following the detention in Vancouver of Chinese national and Huawei executive Meng Wanzhou, said the security concerns about Chinese vehicles should not to be dismissed.
Although stopping short of a full ban, the U.S. ruled last year to prohibit the import or sale of vehicles from, or connected to, China or Russia that include either autonomous driving software or connectivity systems such as Bluetooth, Wi-Fi or cellular technology.
The restrictions, based on similar concerns as to those about Chinese-made telecom devices, kick in in 2027 for the auto software and three years later for the hardware.
Chinese state media have criticized these moves, calling them protectionist and unfair.
For Kingston, head of the Canadian Vehicle Manufacturers’ Association, Canada shouldn’t even consider veering from the U.S. policy in allowing Chinese EVs into the domestic market, Kingston said. “In the current environment, it can’t even be contemplated.”
A pivot point (if you want it)
In 2018, the Canada-China relationship turned frosty when Canadian authorities arrested Meng, the Huawei exec, but the election in April and the subsequent switch to Carney from Trudeau offered a chance to reset the relationship.
And the Trump tariffs, along with a sluggish economy and high unemployment in auto-centric southern Ontario, have put extra pressure on Ottawa to enhance trade beyond the U.S.
The problem in this case is that Canada doesn’t have too many cards to play, says Sargent, the former deputy minister of international trade.
While Carney has cautioned to keep expectations low, China has been surprisingly clear in what it wants from the new Liberal prime minister: If Canada wants to put its lobsters and peas on dinner plates in Guangzhou and Chengdu, it had better get used to the idea of Chinese-made EVs being part of the 401 gridlock.
Analysts say a deal with China could see Canada cut its 100 per cent tariffs, perhaps in half, and include an annual quota on Chinese EVs. Possible assembly of some Chinese vehicles in this country could also be part of the negotiations.
Many Canadians would take that deal, or at least one shaped around those two primary elements: agriculture for auto. The suggestion has been received enthusiastically by western premiers, Manitoba’s Wab Kinew, Saskatchewan’s Scott Moe and Alberta’s Danielle Smith, who argue the West is suffering disproportionately from the two-front tariff war. And many Canadian consumers would like the option to buy a lower-priced Chinese EV.
While there are concerns about Chinese automakers doing business elsewhere, a number of them are already manufacturing outside their home country and have taken great strides in doing business with some of the industry’s most recognizable foreign players.
BYD, for example, has built an assembly plant in Rayong, Thailand and announced plans to build plants in Hungary, Brazil, Turkey, Uzbekistan and Mexico. It also builds buses in Brazil, Hungary, the U.S. (Lancaster, Calif.) and in Canada (Newmarket, Ont.).
Geely, another major Chinese automaker, has plants in Egypt and Indonesia. Its holding group also owns Volvo, which manufacturers in Sweden and Belgium.
Great Wall Motor (GWM) has plants in Brazil and Thailand; SAIC Motor, which has a joint venture with the German giant Volkswagen, has assembly plants in Thailand, Indonesia and Malaysia. There have also been reports that Chery Automobile plans to build a factory in Argentina.
For top Chinese officials, the EV industry is clearly one they’d like to dominate, after seeing what successful auto industries did for economic development in Japan, and then South Korea. That ambition has played a large role in China’s efforts to control as many of the world’s critical minerals as possible. Chinese industry now specializes in cheaper lithium iron phosphate (LFP) batteries, rather than the more expensive nickel, manganese and cobalt-based batteries (NMC) that are more common in North America. That’s helped China produce EVs more cheaply than comparable internal combustion engine vehicles, in contrast to the 26 per cent EV price premium in the U.S. market.
While Carney may be caught between a rock and a hard place in the two trade wars with superpowers, he may have a pivot point.
When it decided to impose the tariffs on Chinese EVs a year ago, the decision included an automatic review after one year. As he shuffles back and forth between Washington and Beijing in search of market access in the land of superpowers, Carney will no doubt try to use that review and anything else he can muster as leverage, perhaps against both China and the U.S., or even play one against the other.
His hand may not be strong, but folding isn’t an option.
Like Carney, Trudeau had to make a decision on Chinese EVs. And that need to choose between two sets of powerful interests may have been his policy hell, one of the most gruelling files to cross his desk in almost a decade in office.
For Carney, however, the equation, while similar in most of its elements, is more complicated and treacherous because the U.S. tariffs mean that Canada is now embroiled in trade wars with both superpowers.
Settling up with the U.S., due to the risk of a deal with China upsetting the unpredictable U.S. president, must come first. That means the tariff-loving Trump is effectively blocking Canada from resolving either dispute.
And that, even if it was only partially inherited from his predecessor, is surely Carney’s nightmare.
National Post
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