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(Bloomberg) —

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The trade war between the US and Canada threatens to throw a wrench into the prospects for decarbonizing both economies — though it may offer some longer-term opportunities for Canada. 

Bilateral tariffs on steel and aluminum are already in place, and industry is bracing for more US levies on April 2. President Donald Trump had said tariffs on auto imports from Mexico and Canada would go into effect on that date, but officials recently indicated that sectoral tariffs will be excluded from this round and could come later. 

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Canada is a world leader in making lower-carbon aluminum and has been building up its EV sector. The tariffs may also pose a short-term threat to exports of Canadian critical minerals and power grid equipment, both needed for US electrification efforts. 

The US is quickly pivoting away from decarbonization policies under Trump. Canada, which faces its own election on April 28, has struggled to bend the emissions curve enough to meet future targets, even under what was considered a pro-climate government led by former Prime Minister Justin Trudeau. Now the trade war will make matters even harder.

But Canada’s clean industries could also benefit down the line, starting with electric vehicles.

Gas cars could see higher price hikes than EVs

Canada exported C$78.8 billion ($54.8 billion) worth of autos and auto parts to the US in 2024 and imported C$81.92 billion in the opposite direction. Applying tariffs to this highly integrated supply chain — which often sees parts cross the border multiple times during assembly — would likely raise prices significantly.

Electric cars were more expensive than internal combustion engine vehicles even before Trump began threatening tariffs and would get more costly with them, on both sides of the border. But because traditional gasoline-burning vehicles contain more border-crossing parts than EVs, auto tariffs may drive up those prices more, providing a leg up to EVs, according to BloombergNEF research.

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“The overall impact is interesting because the tariffs might actually be a good thing for electric vehicle production, relative to ICE production,” said Antoine Vagneur-Jones, head of trade and supply chains for BNEF.

That benefit will be reduced if the consumer tax credit in the US Inflation Reduction Act of up to $7,500 for North American-made EVs disappears under Trump, Vagneur-Jones says. But gas car supply chains are still likely to be hit harder. 

Meanwhile, Canada has mirrored the US tariff rate of 100% on Chinese EVs — a rate much higher than the EU’s. That offers some protection to North American manufacturers from Chinese competition, but also may reduce the impetus for them to up their game to compete, says Vagneur-Jones. 

Late to the EV party — it has so far produced few electric models and only a modest number of plug-in-hybrids — Canada hopes to build a domestic ecosystem for the production of electric cars and batteries, leveraging the country’s supply of critical metals and minerals as well as its abundant clean power. The country has invested tens of billions of dollars to encourage EV and battery makers to set up shop, with Ford Motor Co., Stellantis NV, General Motors Co., Volkswagen AG, Honda Motor Co. and Northvolt AB striking deals in Ontario and Quebec in the last five years. 

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The sector was facing steep challenges even before Trump: Many of those corporate plans have been scrapped, scaled back or delayed. Canadians have been slow to switch to EV models. As things stand, ICE cars still need to be profitable to subsidize the production of EVs in Canada, says Andrew McKinnon, director of policy for Accelerate, which represents members of the Canadian EV supply chain. “You need to save the traditional auto industry before you can save what it’s going to become,” he said. 

But Ollie Sheldrick-Moyle, clean economy program manager for Clean Energy Canada, argues that there are steps Canada could take to reduce the impact of Trump’s tariffs. 

If Canada could mine, refine and use more of its critical minerals, it would boost the efficiency of the homegrown EV industry. Breaking down economic barriers between provinces, adopting more customer incentives and expanding trading relationships beyond the US would also help, says Sheldrick-Moyle. 

Meanwhile, as the US seems likely to scrap other climate-friendly policies and tax credits, there is potential for Canada to provide a home for stranded clean-tech investment dollars. US trade policies could also encourage further electrification on Canada’s grid, especially if Canadian (and Mexican) exports of power transformers and grid equipment to the US diminish, as BNEF analysis suggests may happen. 

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“We can produce abundant affordable power within our own borders and use that to power the needs of families every day,” Sheldrick-Moyle said. 

In his first speech as prime minister, Canada’s Mark Carney announced plans to pursue new trade corridors with “reliable” partners and forge a single Canadian economy out of 13 provinces and territories. He also vowed to make Canada “a superpower in both conventional and clean energies.”

Canadian aluminum, steel primed for new markets

The opportunities can be seen in other sectors as well. Aluminum is a key material in EVs as well as solar panels, wind turbines and power grid components. The US gets most of its aluminum from Canada, which sends roughly 90% of its production to the US. Canadian aluminum is already among the cleanest in the world, partly due to the hydroelectric power used to produce it, but also because of new technologies being adopted, like carbon-free smelting cells used by Rio Tinto Plc in Quebec. 

Steel is also used by the auto industry and in many green technologies. Canada has invested heavily in lower-carbon steel production in recent years, though the market is still small. The country also benefits from a robust supply of high-grade iron ore needed to make that kind of steel, says Sheldrick-Moyle. 

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Tariffed aluminum and steel will make clean-tech manufacturing more costly in the US — and potentially more carbon-intensive if it uses dirtier aluminum. That’s in addition to a slew of higher factory input costs from blanket tariffs, says Vagneur-Jones.

Companies that were expected to be big customers for lower-carbon aluminum and steel, such as wind turbine manufacturers and EV makers, so far haven’t been willing to stomach a huge premium to source materials sustainably, he says. As Canada seeks to diversify its trading relationships, there’s potential to access new policies that reward these producers.

The EU is implementing a carbon border adjustment mechanism next year, which means imported goods will pay the same carbon price as goods produced within the bloc. While it won’t include Scope 2 emissions to start — meaning Canada won’t gain a competitive advantage by producing goods with clean hydroelectric power — the UK is implementing a similar policy in 2027 that will include Scope 2, said Vagneur-Jones. “So there is a future where, if all countries put these kind of policies in place, then that starts to be material.”

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While the trade war may be a drag on progress, in the medium-to-long term, “the world’s trajectory of decarbonization remains clear,” said Rick Smith, president of the Canadian Climate Institute. “And the implications of that in terms of Canada and the US keeping pace and keeping competitive in that reality are inescapable.”

Carney — who has said Canada will develop its own carbon border adjustment mechanism — alluded to that on March 17 in London when he suggested the US may find itself playing catch-up to its neighbor in coming years if Canada is able to keep pace with European carbon standards.

“The Americans are going to start caring” again about greening industry, he said. “They have elections every four years. They cared a great deal about this three months ago; now all of a sudden they don’t care about it. They’re going to care about it again.”

—With assistance from Laura Dhillon Kane.

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