China Surtax Order (2024): SOR/2024-187

Canada Gazette, Part II, Volume 158, Number 21

Registration
SOR/2024-187 September 20, 2024

CUSTOMS TARIFF

P.C. 2024-1027 September 20, 2024

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance and the Minister of Foreign Affairs, makes the annexed China Surtax Order (2024) under subsection 53(2)^{footnote a} and paragraph 79(a)^{footnote b} of the Customs Tariff ^{footnote c}.

China Surtax Order (2024)

Definition of goods that originate in China

1 In this Order, goods that originate in China means goods that are eligible to be marked as goods of China in accordance with the Determination of Country of Origin for the Purpose of Marking Goods (Non-CUSMA Countries) Regulations.

Non-application

2 This Order does not apply to goods that originate in China that are in transit to Canada on the day on which this Order comes into force.

Surtax — tariff items set out in schedule

3 Goods that originate in China that are classified under any of the tariff items set out in the schedule are subject to a surtax in the amount of 100% of the value for duty determined in accordance with sections 47 to 55 of the Customs Act.

Coming into force

4 This Order comes into force on October 1, 2024, but if it is registered after that day, it comes into force on the day on which it is registered.

SCHEDULE

(section 3)

• 8702.20.10
• 8702.20.20
• 8702.30.10
• 8702.30.20
• 8702.40.10
• 8702.40.20
• 8702.90.10
• 8702.90.20
• 8703.40.10
• 8703.40.90
• 8703.50.00
• 8703.60.10
• 8703.60.90
• 8703.70.00
• 8703.80.00
• 8703.90.00
• 8704.41.90
• 8704.42.00
• 8704.43.00
• 8704.51.00
• 8704.52.00
• 8704.60.00
• 8704.90.00

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Order.)

Issues

The acts, policies and practices of the Government of China in the electric and hybrid vehicle sector are having adverse effects on Canada’s trade in goods. If left unchecked, China’s non-market support for its electric vehicle (EV) sector could lead to an exponential surge of imports that could adversely affect the transformation and planned investments in Canada’s vehicle sector.

Background

EVs and their associated supply chains represent a strategic sector in support of Canada’s clean future. Over the past four years, manufacturers of EVs and goods in the EV supply chain have announced $44 billion of investments to expand Canada’s EV production capacity all along the supply chain, from critical mineral refinement to battery production to final vehicle assembly, which will play an important role in building Canada’s clean economy and securing long-term opportunities for workers in the sector.

China’s pervasive use of non-market policies and practices has led to significant overcapacity in its EV production. These include, but are not limited to, pervasive subsidization, including of the supply chains of necessary components; insufficient or non-existent labour and environmental standards; and other measures to artificially lower production costs. As a result, China is exporting EVs at unfairly low prices, distorting global trade. There has already been an increase of imports of EVs made in China into the Canadian market, from $84 million in 2022 to almost $2.3 billion in 2023.

On July 2, 2024, the Government launched a 30-day consultation on potential policy responses to protect Canadian workers and EV supply chains from unfair Chinese trade practices, including the imposition of a surtax on Chinese-produced EVs, and possible additional measures such as adjustments to the federal Incentives for Zero-Emission Vehicles and the Incentives for Medium- and Heavy-Duty Zero-Emission Vehicles programs and investment restrictions. The consultations also sought comments on cyber and data security related to protecting Canadians’ privacy and Canada’s national security interests, and perspectives on policies driving China’s overcapacity and surging exports of EVs, including labour and environmental standards, and unfair and non-market practices.

Section 53 of the Customs Tariff provides for the ability to apply trade measures (including surtaxes) to respond to acts, policies or practices of other countries’ governments that adversely affect, or lead directly or indirectly to adverse effects on, trade in goods or services of Canada.

Canada found evidence of significant and diverse acts, policies and practices of the Chinese government for EV manufacturing and the production of key inputs in China from both the central and regional levels of government. These include

• pervasive subsidization in various forms, including production subsidies, demand incentives, below-market financing and preferential tax treatment supporting both EV production as well as the production of key inputs, such as steel, aluminum and EV batteries;
• concerning labour practices: evidence that Chinese EV companies and their suppliers have benefited from a lack of rigorous labour standards, including selective enforcement of labour rules, weak or non-existent worker representation and bargaining rights, as well as evidence of forced labour in the Xinjiang region;
• lax environmental standards: China’s EV production is characterized by a distinctly higher emissions intensity, mainly attributable to a comparatively high carbon footprint in EV battery production and key inputs, such as aluminum and steel. China’s reliance on fossil fuel (particularly coal-fired) power generation was a key contributor to the higher carbon footprint. Canada also found evidence of environmental damage related to China’s mining of minerals used in battery production; and
• other protectionist measures, such as export restrictions on key inputs, foreign ownership restrictions and other unfair practices, including the favourable application of Chinese laws, which have also unfairly supported the development of Chinese EV manufacturing.

These unfair Chinese practices, which benefit Chinese-made EVs by enabling them to be produced at artificially lower prices and which have led to significant overcapacity, are currently having adverse impacts on the trade in goods of Canada in at least three ways:

• Chinese-made EVs are unfairly competing with Canadian producers.
  • Chinese-made EVs have rapidly increased their share of Canada’s EV sales market, growing from only 2% of Canada’s EV market in 2022 to 11.3% in 2023, including 25.9% of the fully EV market in 2023. This rapid rise means Canadian producers of substitute products are forced to compete with unfairly advantaged Chinese-made EVs that put unwarranted downward pressure on pricing, challenging the profitability of Canadian producers.
  • Additionally, Chinese-made EVs generally use Chinese inputs, including steel, aluminum, batteries and other components, while Canadian-made vehicles tend to use a much higher proportion of Canadian and North American inputs. This means that the rising prevalence of Chinese-made EVs in Canada also has adverse effects on Canada’s steel, aluminum, battery and auto parts industries.
• Chinese-made EVs are taking import share away from imports of other countries.
  • Aside from their increasing share of Canada’s EV sales market, Chinese-made EVs have also considerably increased their share of overall EV imports into Canada, gaining approximately a 13% share of EV imports into Canada in 2023. This growth has coincided with a drop in the import share of the United States (U.S.) from 60% in 2021 to 40% in 2023. For fully EVs, the impact has been even more pronounced, with the U.S. import share declining from 74% to 38% in a single year, from 2022 to 2023. This significant change in import patterns reduces choice for consumers and poses adverse effects for Canada, as imports made with pervasive subsidization and under lax labour and environmental standards crowd out imports from jurisdictions that are made fairly and subject to higher labour and environmental standards.
• Chinese-made EVs are undermining investments in Canadian EV production.
  • The rise in Chinese-made EV imports also undermines investments in Canada’s production of EVs and comparable vehicles. In the consultations, stakeholders underscored concerns with an unfair playing field that devalues existing investments and deters future investments. Therefore, it directly or indirectly leads to an adverse effect on the trade in EVs in Canada.

There are also concerns that, absent a policy response from Canada, the adverse effects of increasing Chinese EV imports are expected to undermine the growth and development of the Canadian EV industry. Chinese EV production now exceeds its domestic consumption, and it is expected that Chinese companies will produce millions of automobiles in excess of China’s domestic demand in the coming years. This overcapacity is already resulting in the exponential growth of Chinese EV exports from Can$4.7 billion in 2020 to Can$58.6 billion in 2023. Correspondingly, the import share of Chinese EVs in third-country markets (the European Union [EU], the United Kingdom, Australia and Mexico) is rising rapidly. In 2023, Canada represented approximately 3.84% of Chinese EV exports, but could see that share rise considerably in the coming years if no trade action is taken, particularly if other countries take action to reduce Chinese EV access to their markets.

As well, a lack of policy response to restrict the entrance of Chinese EVs into the Canadian market could threaten the continued integration of the North American auto market. Canada’s automotive industry is heavily integrated with the North American automotive industry, with hundreds of suppliers that provide thousands of parts for vehicles, some of which cross the border seven to eight times as they are assembled into the final vehicle. In fact, from 2021 to 2023, automotive trade (including finished vehicles and parts) represented 16% of total Canada-U.S. bilateral trade. An increase in imports of Chinese EVs would undermine North American integration by taking more market share away from fairly traded Canadian and North American production and further undermining investments in Canadian EV production.

Some other like-minded trading partners, including the U.S. and the EU, have identified similar concerns with support programs in the Chinese EV sector and have taken steps to protect their markets. The EU is currently applying provisional countervailing duties on Chinese-produced EVs, and the U.S. announced that it will increase its 301 tariffs on Chinese EVs to 100% this year from the current 25%.

Objective

A surtax will respond to the acts, policies and practices of the Government of China that adversely affect, or lead directly or indirectly to adverse effects on, the trade in goods of Canada. It will help level the playing field for Canadian auto workers and allow Canada’s EV industry to compete by limiting imports into Canada of unfairly traded Chinese-produced EVs. A surtax also preserves deeply integrated North American automotive supply chains by aligning with similar U.S. action, and protects against a potential surge of EV imports from China resulting from action taken by other jurisdictions, notably the U.S. and the EU.

Description

The China Surtax Order (2024) [the Order] imposes a surtax of 100% on EVs produced in China and imported into Canada, effective October 1, 2024. This surtax applies in addition to the Most-Favoured Nation (MFN) import tariff of 6.1% that applies to EVs produced in China and imported into Canada. The Government intends to review this measure within a period of one year from its entry into force.

Regulatory development

Consultation

Public consultations were held between July 2 and August 1, 2024, after having been announced on June 24, 2024. The consultations, posted on the Department of Finance’s website, sought views on potential policy responses to unfair Chinese trade practices, including

• a surtax under section 53 of the Customs Tariff;
• whether to exclude zero-emission vehicles made in China from eligibility under the Incentives for Zero-Emission Vehicles and the Incentives for Medium- and Heavy-Duty Zero-Emission Vehicles programs;
• whether additional actions like further policy guidance, monitoring, or restrictions related to transactions and investment from Chinese sources in the Canadian EV supply chain are required or would be desirable;
• cyber and data security issues in connected vehicles and potential measures to address these concerns; and
• other measures related to protecting Canada’s broader EV supply chain.

The Government received a total of 232 submissions, including from industry and labour associations, non-governmental organizations, businesses, provinces, and individuals. Stakeholders in the automotive industry and its supply chain were highly supportive of a surtax, and highlighted the importance of aligning with the U.S. Some stakeholders requested expanding the scope to cover other goods related to the EV supply chain. Others raised concerns over potential negative economic impacts, including impacts on prices and on Canadian business operations, as well as potential impacts on the pace of Canada’s adoption of EVs.

Modern treaty obligations and Indigenous engagement and consultation

Following the completion of the assessment of modern treaty implications, no adverse impacts on potential or established Indigenous or treaty rights, which are recognized and affirmed in section 35 of the Constitution Act, 1982, were identified in the Order.

Instrument choice

Subsection 53(2) of the Customs Tariff provides the authority for the Governor in Council, on the recommendation of the Minister of Finance and the Minister of Foreign Affairs, to, by order, make goods that originate in any country subject to a surtax for the purpose of responding to acts, policies or practices of the Government of a country that adversely affect, or lead directly or indirectly to adverse effects on, trade in goods or services of Canada.

Other instruments were considered, but were not found suitable in terms of addressing the broad range of pervasive Chinese non-market policies and practices and the resulting global trade distortions in a timely manner.

Regulatory analysis

Benefits and costs

A surtax on Chinese EVs is expected to be prohibitive, leading to a drop in imports from that country and a corresponding reduction in duties collected ($139.8 million in 2023). Imports of EVs are then expected to shift to other EV-producing countries, many of which have free trade agreements with Canada (e.g. the U.S., the EU, Japan, South Korea) and those imports are expected to enter Canada duty-free under those free trade agreements. Domestic production of EVs is also expanding. Because current imports from China tend to be higher-priced vehicles, and supply of these vehicles is expected to shift to other sources, there is no expected cost to consumers in the short term. Longer-term consumer impacts are possible, insofar as the surtax prevents the future importation of lower-cost Chinese-produced vehicles, but the scope and nature of those impacts depend on many variables, including overall demand for EVs and the evolving range of vehicles produced by alternate sources, including in Canada.

The duties foregone also represent corresponding savings on the part of Canadian automotive importers and producers that will no longer have to pay the tariffs if they subsequently import duty-free from countries with which Canada has a free trade agreement or produce the vehicles within Canada.

Canada’s EV sales mandates through to 2035 were developed prior to the recent sharp rise in imports of EVs from China, on the basis of Canada’s historical trends in imports of such vehicles. Although the surtax might negatively affect the rapid adoption of EVs by Canadian consumers, this is balanced by the long-term benefit that investments in Canada’s EV assembly and supply chain come to fruition. Put differently, the surtax will ensure these investments will not be undercut and forestalled by a surge in EVs that have received unfair support through the Chinese government’s use of a broad range of non-market policies and practices.

Small business lens

Analysis under the small business lens determined that the measure would not impose administrative or compliance requirements on Canadian small businesses. Taxes are not included in the definitions of administrative and compliance burden in the Policy on Limiting Regulatory Burden on Business.

One-for-one rule

The one-for-one rule does not apply, as there is no incremental change in administrative burden on businesses. Taxes do not meet the definition of administrative burden in the Red Tape Reduction Act and are not subject to the offset requirement under the rule.

Regulatory cooperation and alignment

As noted above, Canada’s like-minded trading partners, including the U.S. and the EU, have identified similar concerns and are taking steps to protect their markets.

On May 14, 2024, the U.S. announced an increase in section 301 tariffs applicable to EVs imported from China from 25% to 100%, among a range of other strategic sectors. Further, on June 12, 2024, the European Commission announced a provisional finding that China’s EV battery supply chain benefits from unfair subsidization, which is threatening to cause injury to European producers. Provisional duties ranging from 17.4% to 37.6% were imposed on imports of Chinese-produced EVs starting July 4, 2024, with the final determination expected in November 2024.

Effects on the environment

Limiting low-cost Chinese EVs from entering the Canadian market could slow the adoption of EVs in Canada and make it more difficult to meet the targets related to their adoption in Canada in the short term. However, a surtax would help support the Canadian automotive industry’s transition to EVs. EVs produced in Canada have a lower environmental impact than those produced in China, mainly due to cleaner sources of electricity used to produce them. Therefore, in the long term, the overall environmental impact is expected to be low.

Gender-based analysis plus

No impacts based on gender and other identity factors have been identified for this measure, as EVs from other sources will continue to be available.

Implementation, compliance and enforcement, and service standards

This Order will come into force on October 1, 2024. Consistent with similar previous measures, goods that are in transit to Canada on October 1, 2024, will be exempted from the surtax.

The Order will be implemented by the Canada Border Services Agency (CBSA), as the administrator of the Customs Tariff. The CBSA will notify clients of the new surtax through a Customs Notice and bulletins through their Technical Commercial Client Unit.

Contact

Mike Mosier
Director
Trade and Tariff Policy
International Trade Policy Division
Department of Finance
Ottawa, Ontario
K1A 0G5
Email: tariff-tarif@fin.gc.ca