Eric Desaulniers, chief executive of Montreal-based Nouveau Monde Graphite Inc., figured it was spam when he received an email inviting him to the White House for a vague policy announcement.

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But his IT department told him the email was authentic, and days later, on May 14, United States President Joe Biden announced sweeping tariffs on China’s electric-vehicle supply chain that affect everything from EVs themselves to critical minerals, including a 25 per cent tariff on Chinese graphite beginning in 2026.

“I was suspecting a good announcement because why would they invite a graphite producer if it wasn’t good?” Desaulniers said.

Although politicians in both the U.S. and Canada frequently speak about their close ties, the race to build an EV supply chain in North America is showing that the sheer size of the U.S. economy gives it a wider range of policy options, and the benefits of that do not always transfer over to Canada.

Desaulniers, who hopes his company will by 2027 be producing graphite from a mine in Saint-Michel-des-Saints, Que., and processing it at a plant in Bécancour, said the tariffs are good news and bad news.

China controls an estimated 66 per cent of global graphite production, and he said he can breathe easier now that he knows Chinese producers won’t be able to flood the market and undercut prices. But the tariffs also mean he is unlikely to sell any graphite — a key battery component — to automakers in Canada, unless the country adopts a similar slate of tariffs.

“We’re talking to customers, and since Tuesday, we have more incentive to sell in the U.S.,” Desaulniers said.

It puts Canada in an odd position. Investissement Québec has helped Nouveau Monde raise money from its earliest days and still holds five per cent of the company’s shares, he said. The federal government has also provided key investment tax credits, which Desaulniers estimates could amount to $375 million once he finishes building his mine and processing plant.

Canadian tariffs risky

But not everyone watching the EV supply chain develop thinks it is wise for Canada to match the package of tariffs that the U.S. has announced, particularly given reports indicating China intends to develop retaliatory measures.

“We have seen reports that China will retaliate against the U.S. tariffs,” said Brian Kingston, president of the Canadian Vehicle Manufacturers’ Association, a lobbying organization for automakers. “I have no idea what that would entail, but if you look at previous trade disputes, they tend to target products that are politically important and of equivalent value.”

Kingston said his organization doesn’t take a position on whether tariffs make sense for Canada, but said an investigation into how and to what extent China subsidizes its EV supply chain makes sense as a first step for Canada.

Others agree.

“Tariffs are probably not the first tool Canada should be reaching for,” Derek Eaton, an economist and director of industrial policy at the Transition Accelerator, said. “You could say all the tariffs do is increase costs. What they’re probably trying to do is create some more space for companies that do have some projects to grow.”

Without tariffs, Chinese companies could flood the market with graphite, and make it harder for companies such as Nouveau Monde to raise financing or pay down the debt necessary to build their mines.

In that way, the tariffs announced on metals and critical minerals, including graphite as well as steel, aluminum and other critical minerals used in EVs, are considered a way to help upstream automakers in the battery supply chain. But Biden also announced tariffs on Chinese EVs, batteries, semiconductors and more.

So far, Canadian policymakers have not said whether they’re planning to unveil a similar set of tariffs.

“We are following this issue very closely and we continue to have an open dialogue with our American partners,” Navpreet Chhatwal, a communications adviser to Deputy Prime Minister Chrystia Freeland, said in an email.

Chhatwal said Canada would never allow China to use this country as a “backdoor,” where it could ship products such as steel and aluminum in order to avoid entering the U.S. directly and dodge tariffs.

There’s a broad range of opinions about whether Canada should try to match the U.S. tariffs. Many executives in the affected industries see the tariffs as a necessary protectionist step to compete against China, where state-owned enterprises do not face the same market pressures as private companies in North America.

But some details on the tariffs have only been sketched out so far.

China dominates EV chain

For example, Jean Simard, president of the Aluminum Association of Canada, said he is still waiting to see which aluminum products are subject to the U.S. tariffs. Once he knows, he can then determine if Chinese exports to Canada will shift in any meaningful way, and come up with a more informed opinion about what type of policy response Canada needs to adopt.

“We have to make sure that what was blocked in the U.S. doesn’t start coming into Canada,” he said, adding that he is concerned China will use other countries as a backdoor.

Other executives, particularly in sectors where China’s dominance is more apparent, take a stronger view.

“Can you imagine if the Canadian government stepped up and said, by the way, here’s all the money you need, don’t worry about whether you make a profit or not?” Pat Ryan, chairman and chief executive of Halifax-based UCore Rare Metals Inc., said.

He said his company initially planned to develop a rare earth mine in Alaska, but after careful consideration of the market, it decided in 2019 to shift its focus to the midstream. China controls around 60 per cent of rare earth ore and, by some estimates, as much as 90 per cent of the processing of rare earths.

Ryan said China’s dominance gives it the ability to manipulate prices and that a better plan would be to process ore from a non-Chinese producer. Today, Ucore is building a roughly $65-million separation plant in Louisiana, and it operates a demonstration plant in Kingston, Ont.

Some of his concerns about China’s dominance of the rare earth sector are steeped in history. In 2010, China reportedly halted rare earth exports to Japan amid rising tensions between the two countries. The ban on exports to Japan ended within months, but the threat it posed is still discussed.

More recently, rare earth prices have precipitously dropped. For example, prices of a specific type of rare earth, known as neodymium praseodymium (NdPr), used in permanent magnets — which are considered the most efficient way to convert electrical energy into mechanical energy and, therefore, crucial to EVs, wind turbines and other technologies — dropped 40 per cent in 2023 and are now 20 per cent below the 10-year average.

“The weakness in NdPr prices was due to continued surplus in the China rare earths market,” BofA Securities Inc. analysts said in a note on March 12, adding that the spot price even fell below the cash costs of the world’s largest producer.

They attributed the price slump mainly to an 11 per cent increase in Chinese production in 2023, noting that industrial demand was weaker than expected. Still, supply and demand for NdPr in China will continue to be the largest factors on pricing for now, the analysts noted.

Trade trouble

There are, of course, some economists who believe the use of tariffs by the U.S. is misguided and will ultimately hinder the industries it seeks to protect.

Dan Ciuriak, an Ottawa-based economist and fellow in residence at the C.D. Howe Institute, who studies trade, believes the U.S. and Canada should rely on the World Trade Organization to investigate whether China is illegally subsidizing segments of the EV supply chain and to take appropriate action.

“If there’s a subsidy there, then you can countervail that” with an equivalent-sized duty, he said.

Otherwise, he said the tariffs increase the cost of the targeted goods, which hurts both consumers and the industry.

But many inside the EV industry say global trade organizations have increasingly lost their ability to arbitrate as trade has grown more global and complex. In their view, China has a huge head start in building an EV battery supply chain, and it can easily adjust production quotas through central planning to suppress competition.

For Canada, where automobiles and auto parts remain a top export, the stakes are high.

“We are in a new world right now,” Kingston said. “Industrial policy has taken hold, and countries are competing to control an element of this industry as it develops. This isn’t political posturing; this is the future of the automotive industry and we need to ensure we have a share in it.”

However, he said China’s early dominance means it is likely to have a role in North America’s EV supply chain for years to come.

Chris Berry, who advises lithium and rare earth exploration companies, said China’s EV supply chain emerged through protectionist steps taken by the government there.

He said the premise of the U.S. Inflation Reduction Act was that if the country developed enough parts of the supply chain, the price of EVs would eventually fall. But that could take years. In the meantime, China controls many parts of the supply chain.

That’s bad news for Canada’s junior mineral exploration companies, many of which have struggled to raise financing, get permits and manage the challenges of bringing a new mine online.

“(The tariffs) buy them a little more time to get through the teething problems we always see with junior mining companies,” Berry said.

• Email: gfriedman@postmedia.com

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