|
Today, the auto industry in Canada is at record levels of performance.
Contributing factors include strong economic indicators (including
low interest rates, low inflation, declining unemployment, Federal
Budget surplus, and strong consumer confidence), a continuing focus
on innovation, new technology, and cost reduction, as well as a
skilled workforce and a stable business environment.
So, with things so good, why are we concerned about tariffs and
trade policy, particularly when about 85% of all vehicles sold in
Canada are already duty free?
The short answer is that it’s a matter of principle. The principle
is simply fair and equal treatment. We don’t think it makes sense
for Canada to maintain automotive policies that treat some automakers
more favourably than others.
In many respects, we would have preferred that this auto tariff
and trade issue would have been settled in Canada. In our view,
it was a domestic issue from the moment the FTA was implemented
in 1989.
Our concerns were heard in Ottawa, and in the ensuing years a number
of measures were introduced to address them. However by 1998, with
only the issue of auto parts tariffs resolved, the Government decided
to abandon any further unilateral action on finished vehicle tariffs,
and the matter was subsequently taken up in the WTO.
As the WTO dispute is still ‘before the court’, and as the final
report of the panel will not be released publicly for awhile, I
am not going to comment specifically about the case. But let me
elaborate on a few key points that I think are crucial in understanding
our position in this policy debate.
First, the context – what this is and what it is not. The core
of this issue is the differential treatment of finished vehicles
imported from outside NAFTA.
It does not affect free trade in parts or vehicles between the
US and Canada. Nor is it about the Auto Pact in the US. In fact,
there is no Auto Pact in the US – it has been replaced by NAFTA.
What we are concerned about is the fact that some companies, who
do not have any manufacturing operations in Canada, can import vehicles
duty free from offshore because of an alliance with an Auto Pact
company.
At the same time, other companies, who have set up extensive and
integrated manufacturing in Canada, are not eligible for similar
benefits. We think auto trade policy should be open, equal, transparent
and non-discriminatory.
Secondly, the background of trade policy in Canada – from the Auto
Pact to NAFTA.
Non-discrimination is a pillar of the GATT and the WTO, and a foundation
for the establishment of the rules-based international trade system.
The 1965 Auto Pact was a sectoral free trade agreement that was
implemented in fundamentally different ways by the US and Canada.
For the US, the Auto Pact was a bilateral trade treaty that allowed
duty free entry of parts and vehicles from Canada, providing those
goods contained at least 50% North American content. Because this
preferential treatment applied only to Canada, the US was obliged
to seek a waiver in the GATT.
Canada, on the other hand, decided they would implement the agreement
multilaterally. Qualifying manufacturers could import parts and
vehicles duty free from any GATT country as long as they agreed
to meet certain minimum levels of production and Canadian value
added in their operations in Canada.
These so-called safeguards were somewhat controversial for two
reasons: first, because Canada’s performance requirements were seen
as promoting managed rather than free trade; and secondly, while
the US viewed the safeguards as temporary, they have been maintained
by Canada on a more or less permanent basis.
In 1965, while the US obtained a GATT waiver, Canada argued that
the multilateral Canadian Auto Pact was GATT consistent. Moreover,
there was no intent to discriminate against any other automaker
that might want to participate under similar conditions.
There were only five major automakers active in Canada at the time
of the Auto Pact ( the Big 4 US automakers including American Motors,
and Volvo).
Due to the restrictive base year conditions in the Auto Pact, numerous
other companies were offered similar treatment over the following
two decades through Special Remission Orders, which contained similar
conditions and benefits.
Fast forward to the time of the FTA in 1989, there were some 190
companies named in an FTA annex that were eligible for Auto Pact,
or Auto Pact-like preferential treatment. However, Honda, Toyota
and Hyundai were excluded. Suddenly automotive policy direction
made a dramatic turn. In particular:
- The Auto Pact was closed to new entrants.
- Remission programs for non-Auto Pact companies were to be eliminated.
- At the same time, Auto Pact and other related Special Remission
Orders would continue indefinitely.
Obviously, Japanese automakers were very concerned about these
sudden developments, particularly the closure of the Auto Pact,
the termination of their remission programs and the tougher rule
of origin for trade with the US.
Clearly there was a different agenda in the negotiations with the
US, because prior to the FTA, the Big 3 in Canada, along with the
Auto Parts Manufacturers Association, took the position that the
Auto Pact should apply to everyone.
While the FTA remission and drawback programs were in effect,
non-Auto Pact companies were given Auto Pact-like remission benefits,
which allowed them to bring in OE parts and vehicles duty free.
Our concern was that these benefits were only temporary and would
end in 1996.
Since 1965, no automaker in Canada had paid any tariff on imported
parts for assembly , and the Government was adamant that they would
continue this policy by simply eliminating tariffs on auto parts
used in manufacturing.
However, rather than deal with tariffs on parts and finished vehicles
together (an approach we preferred given that remission and drawback
applied to both), the Government moved forward on auto parts.
This separate treatment of parts and vehicles reinforced the fact
that the auto industry in Canada is fundamentally decoupled. What
I mean by decoupled is that the vast majority of vehicles made in
Canada are exported, while the majority of vehicles sold in Canada
are imported.
For the Canadian Government, eliminating tariffs on OE parts levelled
the playing field for all automakers, and also maintained duty free
vehicles for Auto Pact companies. This was clearly an important
step, but fell short of a complete solution. In general, tariff
reduction as a replacement for duty remission was both effective
and practical.
However, in my view, eliminating tariffs on the small percentage
of vehicles that were not already duty free made sense for two reasons:
First, Canadian consumers would benefit, particularly in those
segments where imports compete largely with other imports. And secondly,
the impact on Canadian jobs and manufacturing among Auto Pact companies
would be negligible as the vast majority of production is exported,
and those products already benefit from duty free treatment for
OE parts.
The debate over vehicle tariffs was taken up during a two year
government led review of the industry. The Automotive Competitiveness
Review Report was issued in June 1998 by Industry Canada. After
two years of sometimes heated debate, the Government concluded that
there would be no unilateral changes to finished vehicle tariffs,
although vehicle tariffs could be reduced through multilateral negotiations.
It was this result that prompted the Governments of Japan and the
European Community to seek consultations at the WTO.
Just a couple of observations and I will conclude my remarks. In
spite of the many similarities between the US and Canada, the auto
sector in Canada stands apart in two respects: first, all automakers
are foreign-owned; and second, production and consumption are decoupled.
For the past decade or more, we have been vexed by the references
to the US Big 3 as domestics and all the other foreign automakers
as imports and transplants.
The fact is that Japanese automakers, through their investments
in manufacturing, import and export distribution, national sales
and service have established a significant local presence in Canada
and have become an integral part of the North American auto industry.
Finally, to recap, this issue for us is a matter of principle
– simply fair and equal treatment. As it stands today, the problem
arises from the discriminatory application of tariffs on imports
of motor vehicles from non-NAFTA countries.
The bottom line is the auto industry in Canada is healthy, competitive
and profitable. At the same time, it is also dependent on open trade
and foreign direct investment. That is why we support transparent,
non-discriminatory trade policies, as well as tariff elimination.
I hope my remarks have been helpful. Thank you.
For further information, contact:
David Worts
Executive Director
Tel: 416-968-0150
Fax: 416-968-7095
Email: [email protected]
|
