Canada, Mexico challenge Biden’s electric vehicle tax increase

President Biden plans to meet with leaders from Canada and Mexico tomorrow, where he is expected to receive a pushback on his proposed electric vehicle tax credits and “Buy American Products” policies.

While Biden has long been committed to boosting domestic supply chains and electric vehicle manufacturing, he’s also pledged to facilitate North American business alliances following strained relations under former President Trump. . The automotive supply chains of the three countries are closely linked.

Opposition to Biden’s fundamental climate policy from two of the country’s biggest trading partners further complicates the administration’s decarbonization plan, which has already been drastically curtailed due to internal Democratic struggles.

The cuts in social spending and Biden’s $ 1.75 trillion climate bill currently underway in Congress would provide up to $ 12,500 in incentives for U.S.-made electric vehicles, including a credit of 4 $ 500 for cars and trucks made by unions.

Supporters of the proposal include environmental groups and unions, who say the measure would boost widespread adoption of electric vehicles while boosting domestic jobs and higher wages. The transportation sector is the largest source of greenhouse gas emissions in the country, with passenger vehicles accounting for the bulk of the pollution trapping the heat.

The auto industry, however, remains divided with non-union and foreign auto makers leading the charge against the tax provision (Climate wire, October 29).

Today, Canada and Mexico, two of the country’s most important trading partners, say the policies are protectionist and potentially violate international trade agreements.

“It seems to go against at least the spirit, and in the opinion of many people, the technical details of the renegotiation [North American Free Trade Agreement] accord, ”said David Perry, vice president and senior analyst at the Canadian Institute of World Affairs.

Negotiated under the Trump administration, the United States-Mexico-Canada Agreement (USMCA) – or NAFTA 2.0 – effectively prohibits the United States from granting subsidies for traded goods that favor domestic products over imported products. . The same prohibition is set out in the agreements of the World Trade Organization.

A tax incentive for electric vehicles made in the United States would likely be considered a prohibited subsidy, said Jennifer Hillman, senior researcher in international business and political economy at the Council on Foreign Relations (CFR).

Hillman, who has served on the top WTO tribunal, said it’s possible the Biden administration may argue that the tax incentive is only prohibited if it benefits car and truck makers, not to buyers of electric vehicles.

“In theory, this type of tax credit is a consumer subsidy,” she said. “This can be their argument because, in general, the disciplines on subsidies relate to a financial contribution actually paid to a producer. ”

Tomorrow’s meeting of Biden, Canadian Prime Minister Justin Trudeau and Mexican President Andrés Manuel López Obrador – the so-called Three Amigos summit – will be the first since 2016 after former President Trump disbanded the informal leaders’ meeting .

Trudeau told the Canadian press earlier this week that he would take the opportunity to highlight the importance of the two countries’ integrated supply chains and push back efforts to unravel them.

The North American auto industry is highly integrated. Across the continent, hundreds of supply manufacturers are supplying thousands of vehicle parts, often crossing borders seven or eight times before full assembly, according to a congressional research service. report.

Business leaders from all three countries have expressed concern over the proposal. In a declaration released earlier this week, Lance Fritz, president of the US Business Roundtable, urged the three leaders to prioritize North American competitiveness as a whole. Don Lindsay, president of the Business Council of Canada, and Juan Gallardo Thurlow, head of the Mexican Business Roundtable, also signed the declaration.

“The three organizations urge leaders to work together on a comprehensive economic partnership and a trilateral North American agenda,” they wrote.

Boosting manufacturing in the United States could go both ways, Perry said. While the Canadian auto industry is the fourth largest sector in terms of overall goods exports, there are a significant number of states in the United States whose largest export market is Canada.

“So it’s a lot that the two countries have benefited from building things together, and if [the U.S.] try to sort that out, I think Canadian governments would feel compelled to take retaliatory action, ”he said.

If Canada and Mexico believe the United States has violated the trade agreement, they can file a formal complaint, which will be tried by a USMCA panel, Hillman said. She is currently a member of a panel in another US-Canadian dispute.

World leaders are also expected to discuss climate change, COVID-19 and policies relating to migrants.

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