Canadian officials say U.S. proposals to create new electric vehicle (EV) tax credits for American-built vehicles could harm the North American auto industry and violate trade agreements, according to a letter seen by Reuters.

Reuters also followed this with a statement from a Canadian government source, who expressed confidence that the countries could eventually reach a solution. However, the source also noted Ottawa may need to launch a challenge through the United States-Mexico-Canada (USMCA) trade deal.

In the letter to U.S. lawmakers and the Biden Administration, Canadian Trade Minister Mary Ng said that the credits, if approved, “would have a major adverse impact on the future of EV and automotive production in Canada.”

She stressed the move will raise the risk of severe economic harm and tens of thousands of job losses in one of Canada's largest manufacturing sectors. Ng also suggested U.S. companies and workers would also be affected as the auto industries of both nations are highly integrated.

According to Ng, the proposed credits are also inconsistent with U.S. obligations under the USMCA and the World Trade Organization.

The Canadian government source, who requested anonymity in the Reuters article, indicated Ottawa did not want to mount a USMCA challenge but said “it is entirely conceivable that that's a tool we would look at” if need be.  

A U.S. House panel approved legislation to boost EV credits to up to $12,500 per vehicle, allocating $4,500 for union-made vehicles produced in the United States and $500 for U.S. produced batteries made. Under the proposal, vehicles would need to be assembled in the United States as of 2027 to qualify for all of the proposed tax credits.

The credits also would disproportionately benefit Detroit’s Big Three automakers - General Motors, Ford Motor Co., and Chrysler parent Stellantis. These automakers assemble their American-made vehicles in union-represented plants.

GM, Ford and Stellantis have announced plans to make EVs at factories in Ontario.

The U.S. divisions of foreign automakers also criticize the tax incentive. Tesla also criticizes the move that is strongly supported by the United Auto Workers union.

The Canadian government source reports Cabinet ministers plan to step up their lobbying efforts.

“We will eventually reach a resolution … Ideally we would be able to change the legislation before it gets passed,” said the source.

Ng expressed concerns over the “protectionist elements" of the proposed tax credits, saying they discriminate against EVs and parts produced in Canada.

“Canada is also necessary for the United States to achieve its electric vehicle objectives in the future,” she wrote. She also noted that Canada is the only country in the Western Hemisphere that has all critical minerals required to manufacture EV batteries.