US President Joe Biden’s Build Back Better Act shows that American protectionism was and continues to exist even before the Donald Trump administration. Canada must eventually learn from this hallmark of American politics and re-examine its trade policy for a stronger industrial focus.
Under the proposed bill, consumers of electric vehicles can receive up to US$12,500 in tax credits. But to receive the full exemption, the vehicle must be manufactured by American manufacturers.
The act, which has yet to be ratified by the Senate, serves as a response to both economic and environmental crises. It aims to restore the US auto industry by addressing climate change.
Canada’s minister of international trade, Mary Ng, says in a letter to congressional leaders that the bill is discriminatory and will cause “irreparable harm” to both the Canadian and US auto sectors. Prime Minister Justin Trudeau said he also expressed concerns about the exemptions and their impact on continental trade in his recent Oval Office meeting with Biden.
American protectionism is nothing new
Despite their frustration, Canadian policy-makers should not be surprised. The proposed legislation is one of many protectionist measures pushed by several administrations.
In the wake of the 2008 economic downturn, the Barack Obama administration backed provisions for US purchases. Canadian policymakers complained at the time that the provisions were discriminatory, and were eventually abolished.
The Trump administration was particularly protectionist. It imposed tariffs on Canadian steel and aluminum twice as widely. As of 2019, the United States was leading the world with more sanctions than any other period in its history.
Biden signaled his support for America-first provisions during his presidential campaign. The Democratic platform included references to restoring auto sector jobs and increasing electric vehicle sales.
In April 2021, the Biden administration opened the Made in America office and directed agencies to increase the amount of American content in their purchases.
Broadly speaking, Americans have long offered significant subsidies to their agricultural sector.
The trend line in US trade policy is clear. Protectionism is back on the table in important ways.
Scholars have argued that the crisis calls for extraordinary state intervention to ensure a return to stability. The Biden administration must lead the way in the environment, economy, health and social justice while remaining politically viable. These pressures leave Biden with little choice.
Canada’s response through industrial policy
NG has already indicated Canada’s intention to fight the US EV exemption. Beyond the recent lobbying visit of the Canadian delegation to Washington, D.C., Ng has argued that the exemptions are “incompatible” with agreements such as the Canada-United States-Mexico Agreement, known as CUSMA.
Putting aside the potential success of a challenge, Canada has other and better options.
The Canadian government has often been the driver of the industry. Especially before the 1980s, Ottawa used federal subsidies, Crown corporations and strategic infrastructure development to support the industry.
While these tools continue to exist, new economic thinking has tended to dissuade policy-makers from using them. Instead, the priority has been to let the markets function.
But federal support continues in the form of regional development. The aerospace, dairy, cod fishing, forestry, and petroleum industries each have regional dynamics that help motivate government support.
Although not all state inventories are the same, as the consumer EV exemptions in Biden’s Build Back Better law, their purposes are similar. Pro-industry policies help promote economic growth and social cohesion and can help governments achieve other political goals, such as net-zero emissions.
Canadian governments have the tools to protect domestic industries from significant market changes.
These tools are actively used in some areas. The government continues to protect dairy supply management, for example, which is vital to our prosperity.
Canadian governments also use tax credits to boost consumption. Without limiting them to vehicles manufactured in Canada, both federal and provincial governments provide electric vehicle subsidies. These subsidies have the same dollar value as the current US offer.
There may be reason to believe that this is not a sustainable practice. But Canada has some other options.
It appears that Canadian lawmakers are still hoping that Americans will exempt Canada from Build Back Better. Ontario’s Conservative government under Doug Ford is opposing electric vehicle exemptions, while the Trudeau government continues to appeal to Washington to exclude Canada from the measures.
But even if Canada succeeds in stopping the proposed EV exemption, American protectionism is here to stay.
While embracing protectionism is not to Canada’s advantage, holding on to exemptions is not a good policy. Instead, Canada needs to accept the reality of global trade conditions.
There are, of course, international reactions to Canada. Canada should give more thought to its inclusive trade agenda. This review should include a rethinking of the value of global trade deals on bilateral agreements.
But Canada should also look inward. Coping with this protectionist storm will require targeted support to Canadian industries.