Automotive Trade

Canada is a trading nation. Trade in automotive products is at the forefront!

Canada's trade in automotive products has historically been with the United States, our major trading partner, due to the negotiation of the hugely successful Automotive Products Trade Agreement (otherwise known as the "Auto Pact") in 1965. Over time, trade in automotive products on a North American basis has been further reinforced by the Canada- U.S. Free Trade Agreement (NAFTA) in 1989 and the North American Free Trade Agreement in 1994. In 2002, over 99.7% of Canada's automotive exports were destined to NAFTA countries, while over 85% of our automotive imports come from NAFTA countries.

CVMA members and other Canadian vehicle manufacturers export over 85% of the vehicles that they build here in Canada.

CVMA's Position on Automotive Trade

As an open economy, the CVMA believes that Canada should pursue a "fair but firm" automotive trade policy regime.

The CVMA encourages the government to pursue access to the automotive markets of other countries that currently export significant volumes of vehicles to Canada prior to any further reduction in the current 6.1%. Efforts to improve reciprocal market access for Canadian vehicle automotive exports must also focus on non-tariff barriers imposed by other countries as well as the tariff level.

Canada's Tools for Negotiation

Canada's finished vehicle tariff structure should be changed only within the context of bilateral or multilateral trade agreements when the other countries have eliminated their non-tariff barriers and lowered their tariffs to levels enjoyed in Canada.

Impact

Unilaterally eliminating tariffs would pose severe consequences for Canada:

	Direct loss of government revenues;
	Greater incentive for foreign producers to increase shipments to Canada, displacing domestically produced vehicles, while reducing Canadian parts sourcing;

In total, the elimination of the current MFN tariff duty rate under Auto Pact would affect the Canadian economy to the tune of $10 billion in lost GDP and a 5-year cumulative job loss estimated at 116,900 Canadian person years.

Trade Facts

	In 2002, Canada was the world's eighth largest automobile producing nation
	In 2002, Canada produced more than 2.6 million vehicles, accounting for 16% of NAFTA production
	Automotive is Canada's #1 export industry – achieving an overall automotive trade surplus of $11.5 billion in 2002
	Canada benefits from a highly skilled and highly productive workforce, a well-developed educational system, sophisticated transportation infrastructure, a publicly funded health care system and a competitive research and development environment
	The Canadian automotive industry is highly integrated with that of the United States - in the areas of supply, manufacturing, product standards and trading environment by virtue of the Auto Pact, the FTA and NAFTA

Canadian automotive manufacturers export vehicles to over 50 countries around the world. Global markets continue to recognize the quality and reliability of North American products.

Significant Trade Agreements

The Automotive Products Trade Agreement (the "Auto Pact")

Prior to the negotiation of the Auto Pact with the United States in 1965, the automotive industry in Canada was characterized by the inefficient production of a large number of vehicles for the small Canadian market due to the high tariff on imported vehicles.

The Auto Pact, essentially created sectoral free trade allowing automotive products (finished vehicles and parts) to move duty free across the border, provided certain conditions were met.

The way the Auto Pact was implemented in Canada and the United States was quite different. The U.S. approach to the agreement was bi-lateral, that is it granted duty free treatment on parts and vehicles coming from Canada only. Because the U.S. was affording Canada preferential treatment it sought – and received – a "waiver" from the GATT (the forerunner to the World Trade Organization (WTO)) to allow it to give Canada preferential treatment.

Canada implemented the agreement multi-laterally, that is, it was prepared to allow parts and vehicles to enter Canada duty free from any country so long as the Auto Pact conditions were met.

A Canadian manufacturer of motor vehicles could import vehicles and parts duty free if it met the conditions, which essentially were:

1.		Build one vehicle in Canada for every vehicle they sold here
2.		Achieve essentially a "Canadian Value Added" level of at least 60%

These "safeguards" as they became known ensured that as the automotive industry was rationalized on a North American basis that Canada would retain its fair share of motor vehicle production and parts manufacturing.

These safeguards, which ensured that the industry survived and prospered in Canada, also became the subject of a WTO action by Japan and the E.U. in the late 1990's.

The Canada - U.S. Free Trade Agreement

In 1989 Canada and the United States implemented a comprehensive Free Trade Agreement (FTA) with the automotive industry being at the core of the overall negotiations

In the mid-1980's Japanese manufacturers were enticed to set up assembly facilities in Canada through the use of duty remission programs with the view that these assemblers would one day meet the Auto Pact requirements. The FTA forever limited the number of Auto Pact participants to those firms that qualified prior to 1989, when the agreement was implemented. CAMI (the joint venture between Suzuki and General Motors in Ingersoll, Ontario) was the only additional manufacturer to secure Auto Pact status. The FTA effectively created two classes of automotive manufacturers in Canada, those that were Auto Pact participants and those that were not.

The FTA provided that tariffs on all automotive goods between the two countries would be phased out over a 10 year period (by 1998) enabling automotive products to enter either country from the other duty free provided a 50% North American content level was achieved.

Thus while enshrining the Auto Pact, the Canadian safeguard requirements (production to sale ratio and Canadian Value Added) became, in some ways obsolete, with all automotive tariffs being phased out in 1998. However, the incentive to comply with the Auto Pact safeguards was the ongoing ability for Auto Pact participants to import parts and vehicles from anywhere in the world duty free.

The North American Free Trade Agreement

The NAFTA effectively expanded the Canada - U.S. FTA to include Mexico however new Rules of Origin were established and new North American Content requirements were established that eventually (2002) required 62.5% regional value content for duty free access.

Tariffs on automotive products under the NAFTA were phased out on a staged basis from 1994 – 2003.

The WTO Challenge to the Auto Pact

As a result of the federal government's decision in 1998 to retain its finish vehicle tariff at 6.7% (moving to 6.1% in 1999), Japan and the EU launched a formal complaint with the WTO on the grounds that the ability of the Auto Pact participants to import vehicles duty free from anywhere in the world was discriminatory and that Canada's Auto Pact safeguard provisions were discriminatory. On June 19th, 2000 the WTO's final report was upheld and Canada was asked to remove the production-to-sales safeguard within 90 days. The remainder of the Auto Pact was formally repealed on February 19th, 2001. Since that time there has been no formal government or industry strategy in place to induce new automotive assembly investment in Canada.

In June 2002, the Canadian, Ontario and Quebec governments along with the 5 vehicle assemblers, parts manufacturers, the CAW, representatives from the automotive retail sector and academia formed the Canadian Automotive Partnership Council (CAPC) under the Co-Chairmanship of Mr. Michael Grimaldi, President, General Motors of Canada Limited and Mr. Don Walker, President and Chief Executive Officer, Intier Automotive. One of CAPC's objectives is the construction of a strategic vision to sustain and attract automotive investment in Canada.