Does good industrial policy make good neighbours?

Canada’s auto sector got a boost this month — from U.S. President Joe Biden’s administration. Will we be good neighbours and return the favour?

After a marathon voting session, the U.S. Senate finally passed a slimmed-down version of Biden’s landmark climate and economic renewal legislation.

The Inflation Reduction Act, as it’s now known, pumps billions of dollars into renewable energy and “clean” technology manufacturing to help the U.S. catch up with global competition while lowering carbon emissions. Any uptick in these sectors south of the border will naturally benefit the highly integrated Canadian economy.

In one critical area — electric vehicle (EV) manufacturing — Biden’s new law will have significant spinoff benefits for Canada and Mexico. Could we be seeing the dawn of a buy-North-American mentality in Washington? You might remember that an earlier version of Biden’s industrial strategy would have given consumers several new tax credits, on top of a base $7,500 (U.S.), if their newly purchased EV was assembled in the U.S., had a U.S.-built battery and was made in a union factory.

Using tax credits to favour domestic manufacturing and unionized auto jobs was courageous, but the idea drew pushback from Democrats representing nonunion automakers like Toyota and Tesla.

Canadians panicked when they noticed that, starting in 2026, the total $12,500 (U.S.) credit would be available exclusively for EVs assembled in the U.S.

Why would anyone build new electric cars and trucks in Canada if it meant those vehicles would be $12,500 (U.S.) more expensive than American-made cars sold on the U.S. market?

So it was a huge relief when these buy-American conditions were stripped from a compromise bill pitched by Democratic Senators Joe Manchin and Chuck Schumer in late July. The policy now requires qualifying EVs to be assembled anywhere in North America, and with substantial North American content in components and critical minerals.

Canadian government officials and auto sector leaders claimed victory for their months of lobbying against the earlier EV credit. Instead of patting ourselves on the back, Canada should get to work synchronizing its various EV credits with those in the U.S. — just as the prime minister promised we would do in December.

“There are a number of solutions we’ve put forward,” said Justin Trudeau. “One of them would be to align our incentives in Canada and in the United States, to make sure that there is no slippage or no unfair advantages on one side or the other. We are happy to do that.”

Currently, federal credits of up to $5,000 are available to consumers purchasing a long list of qualifying EVs. These are topped up in several provinces by additional credits of $1,000 to $5,000. The goal of these credits, which can be claimed to purchase popular European, Korean and Japanese EVs, is simply to speed up the adoption of electric cars and trucks to help lower carbon emissions.

A buy-North-American condition on Canadian EV credits would reinforce the U.S. incentive for firms to invest in domestic technology, manufacturing and jobs. The emissions reduction benefits would be the same as they are under Canada’s non discriminating credit, but the benefits to workers would be much greater — which will increase public support for decarbonization.