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A proposed electric vehicle tax credit in US Democrats’ Build Back Better bill is raising trade tensions with Canada and Mexico. Both countries claim the policy, if included in the final bill, will violate the USMCA (formerly NAFTA) by disadvantaging their respective auto manufacturing industries. 

The credit at issue would provide a $4,500 tax credit for US-made EVs produced by unionized workers. That’s on top of a $7,500 credit for all EV purchases made within five years of the law taking effect. 

In a letter sent Friday to key US senators, Canada’s finance and trade ministers called the tax credit a “de facto abrogation of the USMCA.” 

The USMCA, a trilateral free trade agreement, does not explicitly prohibit tax credits for domestically-manufactured automobiles. Rather, it establishes a complex system of rules meant to facilitate the free trade of goods (including automobiles) within North America. In Canada’s letter, the ministers claim the tax credit would constitute an effective 34% tariff on Canadian-assembled EVs in violation of the agreement.

The letter states that “if there is no satisfactory resolution to this matter, Canada will have no choice but to forcefully respond by launching a dispute settlement process under the USMCA and applying tariffs on American exports in a manner that will impact American workers in the auto sector and several other sectors of the U.S. economy.”

The proposed credit presumably seeks to boost American EV purchases while benefiting US manufacturers and shoring up support among unionized auto workers in crucial midwestern states won by Donald Trump in 2016 and Joe Biden in 2020.

As Democrats’ continue negotiating the bill’s details, the credit could be cut in any event for a variety of reasons, including opposition by US-based EV manufacturers with non-unionized workforces, such as industry leader Tesla.