Andrew Evans: Giving Volkswagen billions in subsidies was a short-sighted, unsustainable mistake

Last week we learned more about the magnitude of the joint federal–provincial subsidies ($13 billion in total) to secure a major new Volkswagen plant in St. Thomas dedicated to electric vehicle production. While a big political win for Prime Minister Trudeau and Ontario Premier Doug Ford, the experience demonstrates the futility of competing for electric vehicle investments and the need for Canada to pursue a different economic path. Canada and Ontario have other industries with greater advantages and more long-run upside that policymakers ought to prioritize.

Let’s start with the crucial context of the Inflation Reduction Act in the United States. The IRA contains as much as $370 billion in new spending and tax breaks to boost clean energy and advance the goal of decarbonization. The enormity of these public dollars is hard to overstate: it’s more than Ottawa’s total annual budget. When one accounts for other U.S. advantages, including lower wages, right-to-work laws, and the size of its domestic market, it will be difficult (and enormously costly) for Canada to compete for electric vehicle investments. It may make for good one-off press conferences but it’s not a sustainable economic strategy. 

It’s also not obvious that the economic upsides are worth the costs. Electric vehicle manufacturing isn’t the same as traditional automobile production. Electric vehicles require less than half of the workforce to build as traditional internal combustion engine autos, need much fewer parts (reducing employment by downstream suppliers like Magna) and assembly is required to be physically located close to battery plants which reduces incentives for trade across long distances. According to the U.S.-based Economic Policy Institute, barring massive investment in onshoring battery plants, there are likely to be massive job losses in the auto sector, even if traditional production is fully replaced by EV manufacturing plants. 

This is exactly what the U.S. government aims to do with the Inflation Reduction Act. The early signs appear successful with as much as $210B in new electric vehicle investment announced as of Q3 2022. 

Canadian policymakers must therefore proceed with caution. We cannot match the U.S. public subsidies and even if we could the gains are probably not worth it. Consider, for instance, that Statistics Canada data show that even before the electric vehicle transition, there has been a significant decline in the number of jobs in Canada’s auto manufacturing sector. Between September 2001 and September 2022, the number of workers in the sector declined by one-third. The electric vehicle transition may be good for the environment but it’s unlikely to be a major source of national employment. 

There are also outstanding questions about the practicality of meeting the policy goals that the Canadian and the U.S. governments have set for electric vehicle production. The U.S. Environmental Protection Agency recently proposed regulations that would likely mean 67 percent of new cars sold by 2032 would have to be zero-emissions. The Canadian government has gone even further and mandated 100 percent of new car sales have to be electric by 2035. 

These aggressive targets assume a massive increase in electric vehicle supply and demand that isn’t necessarily obvious at the moment. That the U.S. target is more flexible in that it’s based on tailpipe emissions rather than a specific preference for electric vehicles means that American car companies may aim to meet it by investing in scrubbing technologies and other means to improve the emissions output of internal combustion engines rather than fully transitioning to electric vehicles. 

The key point here is that we would be wise to hedge and continue to invest in keeping existing internal combustion engine auto plants running. Not only will this protect continued (albeit declining) employment, but even under a scenario where 67 percent of new cars in the U.S. are electric, there will remain some level of demand for internal combustion engines—particularly in a world in which elevated costs, sourcing issues, or electricity supply problems undermine progress on the electric vehicle transition.  

There’s a strong case therefore that we should unilaterally surrender on the subsidy race for electric vehicle production and instead focus our policymaking attention on other parts of the economy where we have more of a comparative advantage, including agriculture and agri-food, responsible critical mineral mining, sustainable forestry, and low-carbon oil and gas. These sectors are regionally diversified, provide for employment across the skills distribution, and have significant export upsides. They represent the future of an “economic compact” that can effectively play the role that automobile manufacturing did in the second half of the 20th century. 

It will require political and policymaking discipline to walk away from the electric vehicle race. But it is the right decision for Canada. By prioritizing the parts of the economy where we have real comparative advantages, we can avoid capital destruction and distortions that would result from a wasteful and unproductive competition with the U.S., while boosting value and employment in less flashy yet more promising industries.