JAMA Canada - Position Papers: Comments on Auto Trade & Tariff Policy

Position Papers

Comments on Automotive Trade Policy for Industry Canada’s Interdepartmental Automotive Competitiveness Review, February 1998

As part of the Federal Government’s review of the auto industry in Canada, JAMA Canada has prepared this paper to contribute to the discussion and debate about automotive trade policies necessary to sustain a vibrant, globally competitive industry in Canada which will continue to attract investment into the 21st century and, as a result, will also create jobs for Canadians and benefits for consumers.

Who We Are:

The Japan Automobile Manufacturers Association of Canada is a non-profit trade association established in 1984 to promote greater understanding on economic and trade matters pertaining to the motor vehicle industry and to encourage closer cooperation between Canada and Japan. JAMA Canada’s members include the following companies who import, distribute, manufacture and export automotive products:

Hino Diesel Trucks (Canada) Ltd., Honda Canada Inc., Honda of Canada Manufacturing , Mazda Canada Inc., Nissan Canada Inc., Subaru Canada Inc., Suzuki Canada Inc., Toyota Canada Inc., and Toyota Motor Manufacturing Canada Inc.

The Japanese auto industry in Canada has grown and changed a great deal over the last decade. In 1986, Honda of Canada Manufacturing started vehicle production at their plant in Alliston, Ontario. In 1988, Toyota Motor Manufacturing Canada began making cars in Cambridge, Ontario. And in 1989, CAMI Automotive, a joint venture between General Motors of Canada and Suzuki Motor Corp., opened their plant in Ingersoll, Ontario. In 1997, current output is forecast at these three plants to be about 375,000 units. However, due to expansions at both Honda and Toyota, total capacity will rise to about 730,000 units over the next few years, more than double the level of all JAMA Canada members’ vehicle sales in 1997.

In addition to producing more than one vehicle in Canada for every one sold, Canada has been a net exporter of Japanese badged vehicles since 1994, as exports from Canadian plants have exceeded imports from Japan, the U.S. and Mexico. What’s more, Japanese automakers have been increasing their purchases from Canadian suppliers, and with current expansions substantial new business opportunities will likely more than double current levels of activity.

Furthermore, these expanding operations in Canada have encouraged more auto parts investment from Japan. Over the past year, eight companies have announced new auto parts plants in Canada.* Also, NAFTA content levels have been increasing as a result of continuing localization of suppliers. At the same time, imports of auto parts from Japan by non-Auto Pact companies dropped 15.4% in 1996 over the previous year, in spite of the fact that tariffs on imported auto parts were reduced to zero at the beginning of 1996 by the Government of Canada. In a nutshell, all these changes mean more investment and more jobs for Canada and Canadians.

Our Contribution to Canada:

As a group, JAMA Canada members are an integral part of the Canadian auto industry that makes a significant contribution to Canada in a variety of ways:

Through an extensive distribution, sales and service network employing over 25,000 Canadians from Newfoundland to British Columbia, about a third of which are in Ontario;
Through several billions of dollars in direct investment, joint ventures and industrial cooperation in vehicle and parts manufacturing;
Japanese vehicle and auto parts manufacturing operations are currently employing 14,000 Canadians. Current vehicle assembly expansions and new auto parts plants will add over twenty-five hundred new jobs over the next few years.
Manufacturing activities are adding to Canada’s trade balance by exporting about 75% of total production, primarily to the U.S. It is widely acknowledged that Japanese automakers presence in the Canadian market stimulates competition which ultimately benefits consumers.
At the same time, Japanese vehicle and parts makers are adapting Japanese manufacturing technologies to the Canadian business and industrial culture, and establishing a growing array of supplier relationships which helps Canadian industry be globally competitive through the diffusion of both product and process technologies.

* For further details, please refer to the attached information sheets on Japanese automakers and Japanese affiliated parts makers’ activities in Canada.

AUTOMOTIVE TRADE POLICY REVIEW – The Tariff Issue in Context

The review is timely, as auto trade policy in Canada is in need of repair. While considerable attention has been given to the matter of MFN tariffs on finished vehicles, the focus on tariffs some times obscures the underlying problem with current policies. While lowering tariffs can alleviate the problem, the key concern is to have an auto trade policy that is fair and non-discriminatory, applied equitably to all foreign owned automakers in Canada consistent with international trade rules. To be sure, differential tariffs on finished vehicles are a major symptom of the problem, but the heart of the issue is more precisely the principle of having a fair and equitable trade policy. The two-tiered industry, established under the Auto Pact in 1965, has been fragmented by changes in the Auto Pact through both the FTA and NAFTA trade agreements.

In 1989, the Auto Pact abruptly changed and became exclusionary as a direct result of the FTA negotiations with the U.S. What’s more, over the last fifteen years or so, internationalization of the auto industry also changed both the competitive environment and the opportunities for cooperation and strategic alliances among globally-focused automakers and parts makers.

As a result, there are now four tiers reflecting different treatments in the Canadian market, keeping in mind that overall 80% of all vehicles produced in Canada are exported and 70% of all vehicles sold in Canada are imported.

Auto Pact importers that are eligible to import finished vehicles duty free from any country;
non-Auto Pact importers that pay applicable MFN duties on vehicle imports;
non-Auto Pact importers that do not pay MFN duties on imported vehicles due to business affiliations with an Auto Pact company;
and non-Auto Pact importers that qualify for (currently or in the near future) but are denied Auto Pact benefits due to a provision in the FTA, and therefore also pay applicable MFN duties on vehicle imports.

This differential treatment fosters confusion and distortions in the market, and sends negative signals to current or potential investors. Moreover, it raises questions about consistency of Canada’s trade policies with international trade rules. Given that the stated goal of the Canadian Government’s Automotive Competitiveness Review is to create a favourable environment for investment and jobs in Canada, both a re-balanced trade policy that is equitable and non-discriminatory, and lower tariffs are important elements in achieving this goal.

Economic analysis, together with the experience under successive GATT rounds, demonstrate that lower tariffs lead to expanded international trade and greater economic benefits for countries adopting open trade policies. Because tariffs add non-manufacturing costs to traded goods, generally both consumers and producers benefit from lower tariffs. This is particularly relevant in Canada where vehicle production and consumption are fundamentally disconnected. As a result of various trade policies and key competitiveness factors, Canada produces twice as many vehicles as it consumes. At the same time, 70% of all light vehicles sold in Canada are imported, while over 80% of Canadian production is exported. Currently, Canada’s MFN passenger vehicle tariff, while fairly modest by international comparison, is higher at 6.7% than either the U.S. at 2.5% or Japan at 0%.

OUR POSITION: Fair Treatment/Lower Tariffs

In simple terms, JAMA Canada is seeking fair and equal treatment for all automakers in Canada through open, transparent and non-discriminatory trade policies consistent with the GATT/WTO, as well as reduced tariffs on finished vehicles, a measure that will benefit Canadian consumers.

The members of JAMA Canada acknowledge that the need for changes in policy is often driven by dramatic and continuous changes not just in the auto industry, both globally and locally, but also in the broader context of liberalization of the global trading system. In the words of the Honourable Roy MacLaren, the former Minister for International Trade:

The continued existence of low tariffs, coupled with rules of origin, imposes a transaction cost on cross-border trade that is out of all proportion to the purported benefits to protected industries. It is time to acknowledge that the era of the tariff is finally over, and to get on with other, more pressing and difficult issues.

In this context, and in any event, JAMA Canada supports the ongoing effort to liberalize international trade through the GATT/WTO by reducing tariff and non-tariff barriers, thereby creating export opportunities for Canadian manufacturers. At the same time, we are prepared to work with the Canadian government to help increase the acceptability of necessary changes to Canada’s automotive tariffs and trade policies with the Canadian public.

For More Information Contact:

JAMA Canada

Suite 460, 151 Bloor Street West,

Toronto, Ontario,

Canada M5S 1S4

Tel: 416-968-0150

FAX: 416-968-7095

Email: [email protected]

Japan Automobile Manufacturers Association of Canada