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Lilley: Horse trading by Trudeau and Ford may save Stellantis deal

Trudeau squeezed Ford to ante up on Stellantis deal and Ford squeezed back but it may have worked.

Be glad you aren’t reading a stuffy report about tax credits, incentives and understanding what the government is offering “expressed on a kilowatt-hour basis” this long weekend. As most Canadians are spending time with family, firing up the BBQ, maybe even visiting a lake, the executives at Stellantis are looking at the latest offer from the Canadian and Ontario governments.

After a bizarre two weeks that saw Stellantis threaten to back out of their plans to build a massive electric vehicle battery plant in Windsor, Ont., it appears things are back on track.

The Ontario government has agreed to step up and assist the federal government on production tax credits for the plant. In exchange, it looks like the Ford government was able to extract promises from the Trudeau government on other files like highways, homes and mines.

It was on May 12 that the public first heard there were problems in paradise between the Trudeau government in Ottawa and Stellantis, the automaker behind brands such as Chrysler, Jeep and Fiat to name a few. Local officials began to express concerns late on that Friday that the deal to build the first large scale EV battery plant in Canada was in trouble.

News that Stellantis and the federal government hadn’t finalized their deal came as a surprise to the Ford government at Queen’s Park. They weren’t part of the negotiations between the company and the feds and only started getting a sense of how bad things were in the days before it became public.

By Monday, May 15, Stellantis had stopped construction on their plant and said they were looking at contingencies, meaning they just might move the operation south of the border. At that point, the Trudeau government, feeling pressure from all sides, decided to put pressure on Ford and his team by demanding they become part of Stellantis’ demand for bigger incentives.

Without even telling Ford ahead of time, Trudeau’s cabinet ministers went to the media saying it was time for Ontario to “pay their fair share.” It was a high-stakes negotiating tactic that worked in the end but not without Ottawa having to make concessions elsewhere.

How Stellantis came to ask for more money

When the deal with Stellantis was announced in March 2022, there was no Inflation Reduction Act from the Biden administration in Washington. Up until that point, the major concern for Canadian politicians had been beating back Biden’s plans to offer massive tax breaks for the purchase of an electric vehicle but only if it was made in America, in a unionized shop with mostly American parts.

That proposal would have devastated Canada’s auto industry but thankfully went too far for even many Democrats and thankfully didn’t pass. Months later though, in August of 2022, the Biden administration introduced the IRA, as it is called for short, with massive incentives for companies investing in products the White House favours.

The plan out of Washington offered tax breaks to companies willing to set up shop producing things like batteries for electric cars. Despite having announced the deal with Stellantis in March, the Trudeau government still hadn’t finalized their contract with the automaker and Stellantis looked at what Washington was offering and asked if Ottawa would match.

The answer was an emphatic yes from the federal government and so began months of negotiations.

According to the company, the feds made several proposals in writing in the intervening months and it appeared a deal was in the works. Then talks hit a wall and seemed to stall earlier this year, sometime around February.

Before the Volkswagen deal had even been announced, the Trudeau government had made Stellantis a similar pledge but they didn’t follow through and finalize the agreement. Even after the Volkwagen deal was announced with much fanfare, by Trudeau himself, Stellantis felt talks had stalled.

They decided it was time to play hardball.

Getting a handout or paying less tax?

The Volkswagen deal is worth up to $13 billion over 10 years but only if the company meets certain production targets, an unlikely scenario. Early reports said the production tax credits the Trudeau government agreed to are between $8 billion and $13 billion.

What the company will get is likely in the middle but again, that won’t be in the form of a cheque or a handout from the federal treasury, it will be in the form of a tax credit.

They will still be paying tax, just less tax if they perform as promised.

To get the tax breaks they have to build the plant, hire the workers, start production and meet targets. At that point, they will pay a lower tax rate than would have been applied otherwise.

The American tax credit the federal government promised to match is a 25% discount on taxes, meaning, the company will pay 75% of the taxes otherwise applicable and get a 25% break over the first 10 years.

Put another way, a 75% of something is better than 100% of nothing.

In exchange governments at various levels will collect higher property taxes, higher income taxes, higher HST revenue on what the workers spend but also on what the companies spend.

Ontario over a barrel

When the Trudeau government began their campaign to get Ontario to cough up more for this deal, first with media leaks and then direct statements, it quickly became clear that the question wasn’t whether the Ford government would offer more to seal the deal but what form that support would take.

“Stellantis falling through would be Armageddon for Ontario’s auto sector,” one senior source in the Ford government said as the new round of talks were beginning.

With the original Stellantis deal, and with Volkswagen’s, the Ford government had promised support for various aspects of getting the plants built, much of that including infrastructure. The roads, the highway off ramps, assisting with servicing the lands to get the plants built were part of Ontario’s package but it didn’t require the province to offer production tax credits.

Now, the province was being asked to join the federal government in taking on a share of the credits.

Part of the calculus for the Trudeau government was the worry they would be seen as giving preferential treatment to Ontario. Federal Finance Minister Chrystia Freeland made it clear that the government was feeling pressure from MPs and even premiers in other parts of the country over the level of financial support being put into landing new industrial plants in Ontario.

Turning lemons into lemonade

Stuck without many options, the Ford government agreed to take on a portion of the cost, but under certain conditions.

In exchange for partnering to try and save the Stellantis deal, Ontario asked for favourable treatement on other priorities.

Hwy. 413, a planned new highway west of Toronto, was the biggest request. The long-planned highway has faced some opposition from environmental groups and a skeptical eye from federal Environment Minister Steven Guilbeault who has threatened to block the road using federal laws.

That highway expansion has been sold by the Ford government as helping commuters but it’s also considered vital by the province’s manufacturing sector including the many companies in the auto parts sector. That federal resistance is likely to fade away at this point as part of the wider negotiations that resulted in a new offer being sent to Stellantis in time for the weekend.

The Ford government has also faced resistance from Guilbeault on issues such as expanding housing supply and on development of the Ring of Fire. While the Trudeau government has been generally supportive of opening up the critical mineral deposits in the Ring of Fire, an area 400 kilometres northeast of Thunder Bay, Guilbeault has not.

On Friday, Federal Natural Resources Minister John Wilkinson released a letter to the province expressing support for the Ring of Fire, including a $40-million commitment and the promise of a working group with the province on developing the area. That letter was leaked just around the time the new deal for Stellantis was signed off on by the two govovernments and sent to the company for consideration.

The week started off choppy for the Trudeau and Ford governments, it ended with a new deal on the table to try and salvage the Stellantis agreement but perhaps the most interesting part was what happened on the sidelines, the parts of the deal that don’t involve Stellantis.

Source: torontosun