Canada is threatening tariffs on imports of U.S. goods or other trade measures if Washington goes ahead with a proposal to grant new tax credits for purchases of electric vehicles made in the U.S. Washington, meanwhile, said any move by Ottawa to impose a digital services tax could be met with retaliatory measures.

A recent letter to U.S. congressional leaders from Canada’s deputy prime minister and trade minister asserted that the tax credits proposed in the Build Back Better Act are equivalent to a 34 percent tariff on Canadian-assembled electric vehicles. The proposal is thus “a significant threat to the Canadian automotive industry and a de facto abrogation of the USMCA,” the letter said. Given the deep integration of the U.S. and Canadian automotive industries, the proposal would affect U.S. production and jobs as well.

The ministers made clear that “if there is no satisfactory resolution to this matter” Canada will launch a dispute settlement process under the USMCA and apply tariffs on U.S. exports “in a manner that will impact American workers in the auto sector and several other sectors of the U.S. economy.” A list of potentially affected goods is expected to be published in the near future. Canada would also consider the suspension of USMCA concessions of importance to the U.S.; e.g., suspending dairy tariff-rate quotas and delaying the implementation of copyright changes.

The ministers said they “do not wish to go down a path of confrontation” and that “there is an opportunity to work together to resolve this issue by ensuring Canadian-assembled vehicles and batteries are eligible for the same credit as U.S.-assembled vehicles and batteries.”

The U.S., in turn, said that if Canada adopts a DST it will “examine all options, including under our trade agreements and domestic statutes.” The U.S. pointed out that Canada is part of a multilateral agreement on DSTs that is currently being negotiated and includes a “standstill” on new DSTs pending its implementation. A move by Canada to impose a unilateral DST anyway “would create the possibility of significant retroactive tax liabilities with immediate consequences for U.S. companies.”

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