How tariffs on Chinese semiconductors, batteries could hit Canadian wallets

Ottawa might not be finished challenging China with trade measures, as Finance Minister Chrystia Freeland indicated that the federal government is considering additional tariffs.

If the consultations announced this week lead to new trade actions, experts warn that Canadian consumers could see price increases in the near future.

“Tariffs don’t necessarily lead to shortages, but users will have to absorb the costs and then pass on the price hikes to consumers. It’s not an ideal situation, but it is a possible outcome,” said David Dienesch, CEO of Allianz Trade in Canada, an international trade insurance group.

Last month, the federal government raised tariffs to 100 percent on Chinese electric vehicles and 25 percent on Chinese steel and aluminum.

On Tuesday, Freeland, speaking at a Liberal caucus retreat in Nanaimo, B.C., announced a 30-day consultation on imports of batteries, battery parts, semiconductors, critical minerals and metals, and solar products from China.

Semiconductors, used in various consumer products from cars to cellphones, experienced significant supply chain disruptions during the COVID-19 pandemic, affecting Canada with shortages and higher prices on items like vehicles and appliances.

Dienesch noted that tariffs on Chinese semiconductors could cause short-term disruptions in the automotive and telecom markets. “China is a major semiconductor producer, and the auto sector is a significant user. We might see some immediate negative impacts as manufacturers adjust to new pricing and look for alternative sources,” he said.

Robert Khachatryan, CEO of U.S.-based Freight Right Global Logistics, pointed out that the North American automotive industry is already struggling with a global semiconductor shortage. “Semiconductors are crucial for electric vehicles, and further disruptions could complicate vehicle production,” he said. “This could lead to longer production delays and higher costs for the EV sector, particularly in North America.”

Erik Johnson, senior economist at BMO Capital Markets, suggested that Canadian manufacturers might be more concerned about tariffs on batteries. The U.S. and Canada rely heavily on China for lithium-ion batteries, with about 20 to 25 percent of these batteries coming from China.

Johnson also noted that a higher tariff on Chinese batteries could raise production costs, potentially impacting projects like Ford’s planned EV battery plant in Michigan, which is in collaboration with Contemporary Amperex Technology Co., Limited (CATL), a leading battery manufacturer. Additionally, Chinese EV manufacturer BYD operates a 45,000-square-foot facility in Newmarket, Ont., producing electric buses. Increased tariffs could make it more difficult for municipalities to invest in electrifying their fleets.

Johnson added that tariffs could also affect the cost of solar panels. “China plays a significant role in the production of semiconductors for solar cells and panels,” he said. However, outside of the EV sector, the impact on consumer prices might be less pronounced, as other industries can more easily adjust their supply chains.

Canada needs to enhance its battery production capabilities. “Our critical mineral battery production supply chain is still quite nascent,” Johnson said. Similarly, Dienesch noted that Canadian companies will need to find new semiconductor sources due to ongoing instability between Canada and China. The U.S. is working to boost its production capacity, which could be beneficial.

In 2022, the Biden administration enacted the CHIPS and Science Act, allocating $280 billion to support domestic semiconductor manufacturing in the U.S. Canada is also making progress, with a 2023 agreement between Canada, the U.S., and Mexico to strengthen regional supply chains in sectors like semiconductors. Prime Minister Justin Trudeau announced a $59.9 million federal investment in April to support domestic semiconductor projects by IBM Canada and the MiQro Innovation Collaborative Centre (C2MI).

Experts agree that more efforts are needed. “To deliver these products at a globally competitive scale and cost, we need to accelerate our efforts,” Johnson said.