On August 26, Canada announced that, following the United States and the European Union, it would impose a 100% tariff on electric vehicles imported from China and announced a 25% tariff on steel and aluminum imports from China.

The tariff applies to all electric vehicles exported from China, including those produced by Tesla (TSLA.O). The stock price of the world's most valuable automaker closed down 3.2%.

In 2023, when Tesla began shipping Shanghai-made electric vehicles to Canada, the number of cars imported from China to Canada's largest port, Vancouver, increased by 460% year-on-year, reaching 44,356 units.

Canadian Prime Minister Justin Trudeau stated that Ottawa's move is intended to counter China's deliberate, state-led policy of overcapacity. He told reporters, "I think we all know that China does not play by the same rules." The tariffs will be implemented starting October 1.

Trudeau said during a three-day closed-door cabinet meeting in Halifax, Nova Scotia, "It is important that we take this action in coordination with other global economies."

'Protectionism'

A spokesperson for China's Ministry of Commerce said on August 27 that Canada's actions "will undermine the stability of global industrial and supply chains," severely disrupting the global economic system and trade rules.

The spokesperson said in a statement, "Canada claims to support free trade and a multilateral trading system based on WTO rules, but it openly violates WTO rules, blindly following certain countries, and announcing unilateral tariff measures. This is typical trade protectionism."

This move also seriously affects China-Canada economic and trade relations, harming the interests of companies in both countries.

China is Canada's second-largest trading partner, although it lags far behind the United States.

Tesla has not disclosed its export volumes from China to Canada. However, vehicle identification numbers indicate that Model 3 compact cars and Model Y crossovers are being exported from Shanghai to Canada.

"This is a 100% surcharge on all Chinese-made electric vehicles. If companies currently manufacturing cars in China choose to move production to other countries, they will no longer be subject to this tariff," said a government official.

U.S. Import Substitutes

Morningstar equity strategist Seth Goldstein stated, "In response to the tariffs, I expect Tesla to shift its logistics and possibly export cars from the United States to Canada."

Goldstein said regarding the stock price drop, "The market may be reacting to the tariffs and assessing the potential impact on profits if Tesla has to export cars to Canada from its more expensive U.S. production base."

Earlier this month, the European Union softened its stance on Tesla, imposing a 9% tariff on Chinese-imported electric vehicles, lower than the previous maximum of 36.3% imposed on other Chinese EV imports.

Further Measures

Trudeau stated that Ottawa will continue to work with the United States and other allies to ensure that customers around the world are not unfairly punished by non-market behaviors from countries like China.

Trudeau also mentioned that Ottawa is considering further punitive measures, such as tariffs on chips and solar cells, but did not provide details.

According to Chinese customs data, last year China's largest imports from Canada included about $4 billion worth of oil, $3.5 billion worth of canola, and slightly more than $2 billion worth of iron ore, in addition to nearly $14 billion worth of non-monetary gold.

As the world's largest agricultural product importer, China also buys large quantities of other crops and commodities, giving Beijing options for retaliation, similar to what it did with the European Union.

Canada is not among the top 10 destinations for Chinese steel and aluminum exports.

In May, U.S. President Joe Biden announced that tariffs on Chinese electric vehicles would be quadrupled to 100%, tariffs on semiconductors and solar cells would be doubled to 50%, and tariffs on other strategic materials such as lithium-ion batteries and steel would be set at 25%, to protect businesses from the impact of China's overproduction.

Ottawa is trying to position Canada as an important part of the global electric vehicle supply chain and is under pressure from domestic industries to take action against China.

Canada has signed multibillion-dollar deals to attract top European automakers to various stages of the electric vehicle supply chain.

"We feel vindicated and encouraged. Now, let's defend our market with Canada's best innovation and determination," Flavio Volpe, president of the Automotive Parts Manufacturers' Association, said in an email.

U.S. tariffs are scheduled to be implemented in September, with potential easing of the planned tariffs this week.

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