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The government’s zero-emission vehicles mandate is an arrogant, unnecessary gamble

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From the MacDonald Laurier Institute

By Jerome Gessaroli

This poor policy will disproportionately hurt middle- and working-class Canadians.

In December 2023, Steven Guilbeault, the federal minister of environment and climate change, announced that all new auto sales in Canada must be zero-emission vehicles by 2035. The Liberal government’s mandate to restructure the auto sector is industrial policy on a massive scale. Whether one agrees or disagrees with the mandate, there is general consensus on the substantial nature of this government intervention.

Many people write about whether wholesale government mandates will benefit or harm Canadians. Pundits of all stripes invoke their favoured political and economic ideologies (whether it is capitalism, command socialism, dirigisme, or economic nationalism) when discussing the government’s actions. When evaluating the efficacy of these government mandates, I will refrain from using polarizing labels and instead apply a first principles approach to assess how successful products, markets and entire industries are created.

To illustrate this approach, I reference a classic essay written in 1958 by Leonard E. Read, “I, Pencil.” In this essay, Read questions whether anyone truly knows how to produce a pencil from scratch, a simple commodity that has been mass-produced for over 300 years.

Read describes a pencil’s components, including wood, lacquer, graphite, a bit of metal, an eraser, and labelling. He delves into the intricacies of each element needed for pencil production. For instance, harvesting wood involves using saws, trucks, railcars, radios, and other equipment. The extensive skills, knowledge, and capital needed to design and manufacture this equipment are immense. Motors, railcars, trucks, and radios all require mining and refining ores, engineering design, manufacturing, distribution, and deployment, just so loggers can do their job.

After the wood arrives at the sawmill, it is cut, machined, and dried. The equipment and expertise needed for this second step are too long to list. Power for the mill and kiln, generated by a hydroelectric dam and transmitted through power lines, requires its own design, construction, and operation—a testament to human ingenuity.

The pencil’s graphite must be mined and imported. Transforming raw graphite into the final pencil material involves mixing it with various compounds at the mine site, moulding, cutting, multiple drying rounds, and quality checks. The graphite then travels to the pencil plant, where it undergoes further mixing, moulding, and cutting and is then placed inside the pencil. Chemists, manufacturing engineers, production workers, millwrights, and truck drivers, not to mention the specialized equipment for graphite manufacturing, all play crucial roles in this intricate process.

The pencil lacquer, made up of various compounds, is applied to the wood, and then the pencil runs through a specialized machine multiple times to get the desired finish. Inputs, including the chemical process, labour, and co-ordination for this procedure are too lengthy to detail. The aluminium band around the pencil serves to secure the eraser.

The eraser must be abrasive enough to remove the graphite from the paper without damaging the paper itself. Over time, chemists have changed the eraser’s composition, using their knowledge of polymers and other chemicals. The intricate production of a simple pencil requires diverse material inputs from various sectors and production processes, all of which must be cost-efficient to keep the pencil’s cost very low.

The collective knowledge, capital, and materials needed to produce a pencil are dispersed among millions of individuals and companies throughout society. No single person, even the CEO of a pencil company, possesses anything but a tiny fraction of the knowledge needed to make a pencil.

Despite this diffusion, spontaneous order emerges, driven by individuals pursuing their own interests, needs, and wants. As Read argues, those involved in the pencil’s production from miners, loggers, and engineers to CEOs, perform their tasks not because they desire a pencil but for other motivations. Instead, each participant exchanges their specific ability for the goods and services they need, with the pencil potentially being one of many items in this exchange.

Creating a zero-emission vehicle sector is vastly more complicated than a pencil. Given this complexity, the feasibility of any single entity, including the government, to successfully direct an auto sector restructuring is doubtful. Sustainably producing zero-emission vehicles instead will require decisions, capital, and resources dispersed throughout society that spontaneously arrange themselves in a manner that responds to the demand for such vehicles.

The federal government has assured Canadians that they will help with this transition, primarily through government subsidies to consumers and businesses. Money is given to subsidize zero-emission vehicle purchases to make them a bit less costly.

A total of $43 billion will be provided by the federal, Ontario and Quebec governments in subsidies for three battery plants, enabling the companies to manufacture batteries profitability. As well, funding is provided for 42,000 electric chargers, which are in addition to the 40 percent of existing chargers that the government has already subsidized to help keep drivers’ vehicles on the road.

The federal government cannot be certain its decisions are correct. It might be better to not subsidize battery plants and instead relax restrictions on supply chain development. This would involve ensuring the supply of critical minerals, chemicals, electrode production, transportation services, testing equipment, recycling, and more.

The government’s approach bypasses the price system and diverts money from its best use. The subsidies are artificial. While companies may initially react to these subsidies, their response is contingent upon the government’s continued support.

Without the millions of people making individual decisions that are spontaneously organized through the price system to create a sustainable zero-emission car market, the federal government’s mandate will likely fail.

It is the height of hubris to assume that the government can restructure the auto industry in such a fundamental way. More likely, the massive subsidies will financially burden Canadians for many years, leading to a disarray of misallocated resources that will take years to correct. Indeed, the Parliamentary Budget Office estimates that the debt charges for the federal and participating provincial governments subsidizing battery manufacturing will increase the total cost by $6.6 billion over 10 years.

This poor policy will disproportionately hurt middle- and working-class Canadians, through lower employment and higher taxes that would otherwise be unnecessary.

Jerome Gessaroli is a senior fellow at the Macdonald-Laurier Institute and leads The Sound Economic Policy Project at the British Columbia Institute of Technology.

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Automotive

Trump warns U.S. automakers: Do not raise prices in response to tariffs

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Quick Hit:

Former President Donald Trump warned automakers not to raise car prices in response to newly imposed tariffs, arguing that the move would ultimately benefit the industry by strengthening American manufacturing. However, automakers are signaling that price increases may be unavoidable.

Key Details:

  • Trump told auto executives on a recent call that his administration would look unfavorably on price hikes due to tariffs.
  • A 25% tariff on imported vehicles and parts is set to take effect on April 2, likely driving up costs for U.S. automakers.
  • Industry analysts predict vehicle prices could rise 11% to 12% in response, despite Trump’s insistence that tariffs will benefit American manufacturing.

Diving Deeper:

In a conference call with leading automakers earlier this month, former President Donald Trump issued a stern warning: do not use his new tariffs as an excuse to raise car prices. While Trump presented the tariffs as a boon for American manufacturing, industry leaders remain unconvinced, arguing that the financial burden will inevitably lead to higher costs for consumers.

Trump’s administration is pressing ahead with a 25% tariff on all imported vehicles and parts, set to take effect on April 2. The move is aimed at reshaping trade dynamics in the auto industry, encouraging domestic manufacturing, and reversing what Trump calls the damaging effects of President Joe Biden’s electric vehicle mandates. Despite this, automakers say that rising costs on foreign parts—which many depend on—will leave them little choice but to pass expenses onto consumers.

“You’re going to see prices going down, but going to go down specifically because they’re going to buy what we’re doing, incentivizing companies to—and even countries—companies to come into America,” Trump stated at a recent event, reinforcing his stance that the tariffs will ultimately lower costs in the long run.

However, industry insiders are pushing back, warning that a rapid shift to domestic production is unrealistic. “Tariffs, at any level, cannot be offset or absorbed,” said Ray Scott, CEO of Lear, a major automotive parts supplier. His concern reflects broader anxieties within the industry, as automakers calculate the financial strain of the tariffs. Analysts at Morgan Stanley estimate that vehicle prices could increase between 11% and 12% in the coming months as the new tariffs take effect.

Automakers have been bracing for the fallout. Detroit’s major manufacturers and industry suppliers have voiced their concerns, emphasizing that transitioning supply chains and manufacturing operations back to the U.S. will take years. Meanwhile, auto retailers have stocked up on inventory, temporarily shielding consumers from price hikes. But once that supply runs low—likely by May—the full impact of the tariffs could hit.

Within the Trump administration, inflation remains a pressing concern, though Trump himself rarely discusses it publicly. His economic team is aware of the potential for tariffs to drive up costs, yet the administration’s stance remains firm: automakers must adapt without raising prices. It remains unclear, however, what actions Trump might take should automakers defy his warning.

The auto industry isn’t alone in its concerns. Executives across multiple sectors, from oil and gas to food manufacturing, have been lobbying against major tariffs, arguing that they will inevitably result in higher prices for American consumers. While Trump has largely dismissed these warnings, some analysts suggest that public dissatisfaction with rising costs played a key role in shaping the outcome of the 2024 election.

With the tariffs set to take effect in just weeks, automakers are left grappling with a difficult reality: absorb billions in new costs or risk the ire of a White House determined to remake America’s trade policies.

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Automotive

Trump announces 25% tariff on foreign automobiles as reciprocal tariffs loom

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President Donald Trump announced a permanent 25% tariff on automobiles made in other countries that will go into effect on April 2.

Trump made the announcement Wednesday in the Oval Office. He also hinted that the reciprocal tariffs he plans to announce on April 2 could be more lenient, suggesting the tariffs would be less than fully reciprocal.

“What we’re going to be doing is a 25% tariff on all cars not made in the U.S.,” the president said.

Asked if any changes could avert the auto tariffs, Trump said they would be “permanent.”

“This will continue to spur growth like you haven’t seen before,” Trump said.

Trump said the tariffs will be good news for auto companies that already build products in the U.S. He also said carmakers that don’t build in the U.S. are looking to do so.

“We’re signing an executive order today that’s going to lead to tremendous growth in the automobile industry,” Trump said.

The White House said it expects the auto tariffs on cars and light-duty trucks will generate up to $100 billion in federal revenue. Trump said eventually he hopes to bring in $600 billion to $1 trillion in tariff revenue in the next year or two.

Trump also said the tariffs would lead to a manufacturing boom in the U.S., with auto companies building new plants, expanding existing plants and adding jobs.

Trump also urged House Speaker Mike Johnson to approve a measure that would allow car buyers to deduct the interest on loans for cars that are made in America. Trump said that such a plan would make cars nearly free for buyers.

“So when you get a loan to buy a car … I think it’s going to pay for itself, I don’t think there’s any cost,” he said.

Trump also said the reciprocal tariffs he plans to unveil on April 2 would be fair.

“We’re going to be very nice actually,” he said. “It’ll be, in many cases, less than the tariff they’ve been charging us for decades.”

European Commission President Ursula von der Leyen said tariffs would hurt businesses and consumers.

“I deeply regret the U.S. decision to impose tariffs on European automotive exports,” she said. “Tariffs are taxes – bad for businesses, worse for consumers, in the U.S. and the EU.”

Business groups, including the U.S. Chamber of Commerce and American Farm Bureau Federation, have urged Trump to back off tariff threats.

Trump has promised that his tariffs would shift the tax burden away from Americans and onto foreign countries, but tariffs are generally paid by the people who import the products. Those importers then have a choice: absorb the loss or pass it on to consumers through higher prices. He also promised tariffs would make America “rich as hell.” Trump has also used tariffs as a negotiating tactic to tighten border security.

Tariffs are taxes charged on imported products. The company importing the products pays the tariffs and can either try to absorb the loss or pass the additional costs on to consumers.

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