What Can Canadian Policymakers Learn from Europe’s Approach to Chinese Electric Vehicles?

This report was produced by the China Strategic Risks Institute (CSRI), an independent, non-partisan global policy think-tank providing in-depth analysis of the risks and opportunities posed by the rise of the People’s Republic of China. The report was published with support from the Asia Pacific Foundation of Canada, and is presented here with CSRI’s permission.

Executive Summary

A Shared Challenge: What Can Canadian Policymakers Learn from Europe’s Approach to Chinese Electric Vehicles? draws on lessons from Europe, highlighting the importance for Canada in establishing a clear roadmap for localization and technology transfer as a key condition for Chinese automakers looking to enter the Canadian market.

The report comes at a significant moment for Canada’s automotive sector, with the federal government implementing a quota to allow 49,000 Chinese electric vehicles (EVs) a year to be sold in Canada and Chinese automaker Geely announcing it will begin selling cars in Canada in 2027. Other Chinese automakers BYD and Chery are reported to have launched Canadian versions of their websites in recent weeks as they are also planning to launch sales next year.

Using the European Union’s (EU’s) approach as a case study, the report suggests Canadian policymakers should consider the following lessons and policy recommendations. They are vital to ensure that promises by policymakers of a resurgent domestic automotive sector, technology transfer, and localization can come to fruition:

● EU tariffs on Chinese EVs have been too low to be effective. The EU’s tariff rate on Chinese EVs is below the rate needed to reduce their profitability (50% or higher), so the result has been slowing down rather than stopping Chinese EVs from gaining market share and weakening the EU’s bargaining power over technology transfer and localization.

● Tariffs are not a replacement for industrial policy. The success of the local brand, Togg, in Turkey demonstrates that through a mixture of government support, market incentives, and trade defence measures, you can create a competitive domestic EV sector.

● EVs are the spearhead of Chinese overcapacity and can’t be treated as a sector-specific problem, as a result, the EU is increasingly being forced to take a more holistic approach with sectoral safeguards.

● China weaponizes EV investment and leverages foreign automakers to gain access to overseas markets, build brand recognition, and prevent governments from adopting trade defence measures. The largest voices against EV tariffs were European automakers with their respective supply chains and previous profit centres in China. China has used European automakers and weaponized EV investment to keep the European Single Market open to its EV exports.

● There's little evidence that technology transfer has taken place — or will — between Chinese EV producers and their domestic rivals. Investment from BYD and Chery in Hungary and Spain, respectively, or from EV battery producers in France have not demonstrated any meaningful technology transfer to European counterparts so far. China's extraterritorial laws in particular make such transfer of technology without the explicit approval of the Chinese Government all but impossible.

● The EU's EV price-floor mechanism is divisive and isn't currently working; a voluntary market share quota is a far better approach. Whether it is establishing a price floor for Chinese EVs or hybrids, the EU has failed to establish a price-floormechanism with Member States who are in a race to the bottom. Many in Europe remain skeptical about it as a possible solution, with memories of the previous failure of a price floor for Chinese solar exports. The EU has shown in its successful negotiations regarding a voluntary quota for Chinese hybrid vehicles that this is a far better approach.

Key Recommendations

The Canadian government should:

1. Commit to reviewing the EV quota annually and prior to any increase. This review should consider the market share of Chinese EVs, the extent of localization of production actualized, the security and use of data collected from Canadians and Canadian infrastructure by EV producers that are utilizing the quota, and the economic impact on the domestic automotive sector.

2. Resist pressure by the Chinese Government to expand the EV quota beyond the agreed allocation of 49,000 EVs. The quota is too low to be profitable for Chinese EV producers, therefore it is likely that the Chinese Government will seek to expand it for them by leveraging the expiration of tariff relief for canola products.

3. Require every EV in Canada to use a trusted (and non-Chinese) software, cloud storage provider, and Cellular Internet of Things (CIM) Module, which would offer both a hardware and software solution to protect Canadian data security. Also require automakers to submit their source code annually to regulators, and allow regulators to inspect their data storage operations. This should be incorporated into any legislative effort to update the Personal Information Protection and Electronic Documents Act.

4. Require Chinese EV companies that receive a licence to operate in Canada to sign up to a roadmap for the localization of production and technology transfer. This roadmap should link the licence to an agreed upon timeframe for the localization of EV production into Canada, including a requirement for the formation of Canadian majority owned joint-ventures with technology transfer included. A failure to localize production after the agreed upon period of time should lead to the forfeiture of licences to sell EVs in the Canadian market.

5. Prioritize working with the Japanese and South Korea governments to create joint-ventures between domestic automakers and Japanese and Korean electric battery producers. This could include offering tax incentives and grants, as well as encouraging Canadian pension funds to invest in these joint-ventures.

6. Speedily adopt forced labour legislation, to ensure that EV imports include a requirement to abide by forced labour laws and provide information regarding the sourcing of their supply chain, and ensure that any EV investments from Chinese companies use domestic labour.

7. Expand investment and develop its capacity to refine lithium and rare earth elements as part of plans to support an EV battery supply chain, starting with prioritizing dual-use sites that can extract and refine lithium in Canada.

8. Review and consider loosening its current 75% EV adoption target rate by 2025. This would give domestic automotive producers a window to innovate and catch up with Chinese competitors.

9. Consider reviewing the Electric Vehicle Affordability Program to ensure it applies only to EVs that are produced by companies that have full vehicle production in Canada.