Consultations on potential surtaxes in response to unfair Chinese trade practices in critical manufacturing sectors

Introduction

The government held consultations, from July 2, 2024 to August 1, 2024, on potential policy responses to unfair Chinese trade practices in the electric vehicles (EVs) sector. During this process, Canadians shared concerns about unfair competition from China, including pervasive subsidization, and lack of rigorous labour and environmental standards, across the lifespan of a product from manufacture through to end of life, in other sectors essential to the net-zero transition, and suggested that a surtax would be appropriate to protect Canadian industry and workers. They indicated that Chinese producers that benefit from unfair, non-market acts, policies and practices are jeopardizing investments for producers around the world, including in Canada, thereby threatening workers and businesses in those sectors, and undermining Canada’s long term economic security.

The significant threats posed by these Chinese policies and practices require consideration of exceptional measures. Therefore, the federal government is launching a 30-day consultation, from September 10, 2024, to October 10, 2024, on potential surtaxes under section 53 of the Customs Tariff.

These potential measures would protect Canada’s workers, supply chains, and investment in critical manufacturing sectors from China’s unfair trade policies and practices and prevent trade diversion resulting from recent actions taken by Canadian trading partners. These measures would also ensure an adequate and affordable supply of products in critical manufacturing sectors to support Canada’s transition to net-zero emissions by 2050.  

The Government of Canada invites interested stakeholders to provide input, including from:

• the Canadian public;
• Indigenous partners;
• provincial and territorial governments;
• labour unions;
• small, medium, and large Canadian enterprises, including but not limited to the automotive, battery, semiconductor, solar, critical minerals, and clean technology sectors;
• other small, medium, and large enterprises whose sectors are impacted by relationships with China, including but not limited to, agriculture and agrifood, forestry, and fisheries;
• industry associations;
• academics and experts; and,
• other interested stakeholders.

This consultation represents part of the federal government’s broader work on guaranteeing Canada’s future economic security and prosperity, and is aligned with Global Affairs Canada’s ongoing consultations on potential new measures to advance and defend Canada’s economic security interests.  

Issue

Canada is committed to achieving a net-zero future by 2050 and to building the industries necessary to make this transition possible. Investments in critical manufacturing sectors such as batteries, semiconductors, solar, and critical minerals are essential to achieving this goal.  The federal government has announced investments of over $160 billion in its net-zero economic plan, and despite global economic headwinds, public markets and private equity capital flows into Canada's net-zero economy have grown in recent years, reaching $14 billion in 2023.

These investments, and the growth of domestic jobs and industries to support Canada’s transition to net-zero emissions by 2050, are at risk of being undermined by China’s use of a broad range of non-market policies and practices in critical manufacturing sectors, which include, but are not limited to, pervasive subsidization, lack of rigorous labour and environmental standards, and other measures to artificially lower production costs.  China’s policies and practices to establish a dominant position in these critical manufacturing sectors have led to significant overcapacity and increased Chinese exports as well as distortions in Canadian and global markets for critical goods, which could drive down investments in Canada and threaten Canada’s long term economic resilience and security. For example:

• According to BloombergNEF, in 2023 China’s battery production was – on its own – sufficient to meet total global demand.
• Rhodium Group research found that in 2022, China’s production of lithium-ion batteries was 1.9 times the volume of domestically installed batteries.
• The International Energy Agency estimated that the Chinese Government and Chinese firms have invested over C$67 billion (US$50 billion) in new solar production capacity since 2011. China now accounts for over 80 per cent of manufacturing in all stages of solar panels globally—from wafers to cells to modules, depressing prices and stifling innovation and growth in solar manufacturing in Canada, and other market economies.
• Despite falling prices and growing overcapacity, Wood Mackenzie projects that Chinese solar production will continue to expand to 1,700 GW by 2026, up from 1,000 GW in 2023.
• China’s manufacturing capacity in semiconductors is expected to more than double in five to seven years, according to Barclays’ analysis of Chinese manufacturers’ development plans, leading to an anticipated over-supply in the market as early as 2026.
• Furthermore, TrendForce analysis suggests that China’s manufacturing capacity for mature node semiconductors is expected to increase, potentially causing a flood of mature nodes semiconductors into the global market.
• According to the International Energy Agency, China is the dominant global producer and processor of critical minerals essential to reaching net-zero by 2050, processing over half of all lithium, cobalt, graphite, and rare earth elements.

China’s dominant position in these sectors threatens the growth and competitiveness of Canadian producers and creates strategic risks. For example, Canada is a producer of many critical minerals that are essential for the clean energy technologies needed for the transition to net zero. However, China’s non-market policies and practices, particularly in critical minerals processing capacity, have led to a distorted concentration of supply, creating risks related to market manipulation, price volatility, and unpredictable supply chains. This dampens incentives for investment in Canada, threatening the competitiveness of Canada’s critical minerals sector—which follows world-leading labour and environmental standards—and leads to non-market investment offers in Canadian firms distorting the proper functioning of the domestic market.

As Canada builds its production capacity in these critical manufacturing sectors, and grows the net-zero economy, it is important that these investments are not undercut by imports from China that benefit from non-market-based government support. This is why Canada is taking action to counteract Chinese actions, policies, and practices related to clean energy, EVs, steel, and aluminum.

Key likeminded trading partners have identified similar concerns with Chinese policies and practices in sectors critical in the net-zero transition.

• The 2024 G7 Leaders’ Statement committed to “acting together to promote economic resilience, confront non-market policies and practices that undermine the level playing field and our economic security, and strengthen our coordination to address global overcapacity challenges.”
• The 2024 G7 Finance Ministers Statement committed to “enhance cooperation to address non-market policies and practices and distortive policies including those leading to overcapacity through a wide range of policy tools and rules to ensure a global level playing field” and “express[ed] concerns about China's comprehensive use of non-market policies and practices that undermines our workers, industries, and economic resilience.”
• Similarly, the 2024 G7 Trade Ministers’ Statement committed to “tackle non-market policies and practices, as well as harmful non-market excess capacity and other market distortions resulting from them” and to use “trade tools, and, as appropriate, develop new tools, to identify, challenge, and counter these practices, and to promote stronger international rules and norms, together with partners.”  

Canada’s Potential Policy Response

The government is acting to level the playing field and ensure our domestic critical manufacturing sectors prosper in domestic and global markets and safeguard Canada’s economic security interests. These potential additional measures would ensure that Canada is not a potential destination for a surge of unfair imports from China resulting from the diversion of Chinese products from other markets that have recently announced trade protective measures.

The government welcomes comments on the potential to apply a surtax to certain goods in the following sectors: batteries and battery parts, semiconductors, solar, and critical minerals. For a specific list of products on which a surtax could be applied, see Annex 1. A surtax would be applied under the authority of section 53 of the Customs Tariff, which provides for the application of trade measures (including surtaxes) to respond to acts, policies or practices of other countries that adversely affect Canada’s trade interests.

The government is also seeking views on the timing of the coming into force of any potential measures.

Additionally, the government is welcoming information from stakeholders on Chinese policies and practices accelerating exports or distorting supply chains in these critical manufacturing sectors from China. In providing input, please include concrete information detailing the policy or practice in question, benefits to China’s production and the resulting adverse effects on Canada’s trade as well as Canadian workers and businesses.

It is the government’s intention that any surtax applied following this consultation process be reviewed within a period of one year from implementation and could be extended for a further period of time and supplemented by additional measures, as appropriate.

Feedback Sought

Issue for consultation: Please provide views on the possibility of imposing a surtax on all or some of the products found in Annex 1 when imported from China. Specifically, views are sought on the scope of tariff lines covered, the rate of a surtax, and the coming into force date.

In providing input, please include:

• The relevant eight-digit tariff item(s) and description of the goods of particular interest.
• Reasons for the expressed support for, or concern with, a potential surtax, including detailed information substantiating any expected impact.
• If concern is expressed with respect to a potential surtax, please provide views on ways to alleviate such concerns, such as delayed implementation or phasing in surtax rates over time.
• If appropriate, the potential impacts of a surtax on affordability of products in these critical manufacturing sectors.

Contact Us

Submissions for this consultation will be open from September 10, 2024, to October 10, 2024.

Email your comments and feedback to tariff-tarif@fin.gc.ca, including “Critical manufacturing consultation” in the subject line.

Comments and feedback may also be sent by mail to:

International Trade Policy Division (Critical manufacturing consultation)

Department of Finance
90 Elgin Street, 14th Floor
Ottawa, Ontario K1A 0G5

Please include the following information with your submission:

• Company/organization name, address, telephone number, and contact person;
• Views on the questions posed above, and any additional relevant information; and,
• Indication of whether any information provided is commercially sensitive.

Privacy

In order to respect privacy and confidentiality, when providing your submission please advise whether you:

• Consent to the disclosure of your submission in whole or in part;
• Request that your identity and any personal identifiers be removed prior to publication; and,
• Wish any portions of your submission to be kept confidential (if so, clearly identify the confidential portions).

Information received throughout this submission process is subject to the Access to Information Act and the Privacy Act. Should you express an intention that your submission, or any portions thereof, be considered confidential, the Department of Finance Canada will make all reasonable efforts to protect this information.

What’s Next

Following the conclusion of the consultation period, the government will use feedback from stakeholders to help inform decisions about which potential policy responses should move forward, and what the appropriate policy details, such as tariff rates, of those policies will be.

Annex 1 – Proposed Critical Manufacturing Sector Tariff Items

The proposed list of goods under consideration for surtaxes is provided below. Descriptions are included for illustrative purposes, with the scope established by the tariff item in column 1. For precise descriptions, please refer to the Schedule to Canada’s Customs Tariff.