Angry Canada threatens to impose tariffs on U.S. goods over EV tax credit plan

© Reuters. FILE PHOTO: A U.S. and a Canadian flag flutter at the Canada-United States border crossing at the Thousand Islands Bridge in Lansdowne, Ontario, Canada September 28, 2020. REUTERS/Lars HagberG/File Photo

By David Ljunggren

OTTAWA (Reuters) -Canada dramatically hardened its tone with Washington in a dispute over proposed U.S. credits for electric vehicles on Friday, threatening to slap tariffs on a range of American goods unless the matter was resolved.

In a letter to senior members of the U.S. Senate, Finance Minister Chrystia Freeland and Trade Minister Mary Ng also said Canada was ready to launch a dispute settlement process under the U.S.-Mexico-Canada (USMCA) trade deal.

Canada fears the tax credit for American manufacturers will undermine its own efforts to produce electric vehicles in Ontario - the country's industrial heartland - and also undermine the integrated North American auto industry.

"We are writing to register our objection in the strongest terms," said the letter, which emphasized that the government of Prime Minister Justin Trudeau did not want a confrontation.

If the matter was not resolved "Canada will have no choice but to forcefully respond by ... applying tariffs on American exports in a manner that will impact American workers in the auto sector and several other sectors of the U.S. economy," the two ministers continued.

In previous trade disputes between the two close neighbors and trading partners, both sides have slapped sanctions against a wide range of goods.

Ottawa is preparing to publish a list of U.S. products that may face Canadian tariffs, Freeland and Ng said, adding that Canada might also suspend dairy quotas for U.S. producers it agreed to under the USMCA, the letter said.

Months of lobbying has done little to dissuade U.S. legislators, who are considering a new $12,500 tax credit that would include $4,500 for union-made U.S. electric vehicles.

In the letter, Freeland and Ng said the proposal was equivalent to a 34% tariff on Canadian-assembled electric vehicles and represented a significant threat.

The White House says President Joe Biden considers the tax credits a personal priority and that the administration does not view them as a violation of the USMCA. Officials have said they hope to work to resolve the dispute with both Canada and Mexico, which also opposes the credit proposal.

As recently as last Friday, Ng had said Canada still had some room for maneuvering before the U.S. Senate voted.

Asked why Canada had hardened its tone, Ng spokeswoman Alice Hansen said: "We have always made clear we will stand up for the Canadian auto industry. This is the next step."