Speaking Notes for David Worts - Canada-US Business Association
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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