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Notes for a Speech to the Canada-US Business
Association
David Worts, Executive Director
Japan Automobile Manufacturers Association
of Canada
Detroit Athletic Club, Detroit November
16, 1999
First let me say that I am here representing Japanese affiliated automakers
in Canada. My remarks today reflect my own views, as well as the views
of our association.
To start, allow me to briefly outline some of the remarkable changes
in the Japanese auto industry in Canada over the last 15 years.
In 1985, there were no Japanese automakers building cars in Canada. Four
years later, three assembly plants had been opened. Last year, these three
operations produced almost 400,000 units, of which a little over 300,000
were exported, all of which qualified under NAFTA. 1998 was our best year
ever for sales, which totalled about 330,000 units. Currently, about three
of every five of our sales in Canada are models built in North America.
Employment in Canada among Japanese affiliated companies in parts and
vehicle manufacturing, distribution, dealers sales and service stands
at about 50,000 – about 18,000 in manufacturing and 32,000 in sales and
service.
In autos, as well as trade in general, Canada clearly relies heavily
on access to the large US market. The Auto Pact set the tone for this
development in 1965, and the trend was accelerated by the FTA and NAFTA
agreements.
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.
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