Mr. EBERLE. First the foreign cars have to pay a tariff to enter the nadian market and United States cars do not-that is an advantage have. Second, we have facilities there and, being integrated, they more efficient. We can compete better, so it obviously has an pact.

Mr. GAYDOS. We had a very confusing report raised in the Congresnal Record submitted by the Treasury Department. We tried to ionalize why this country continues to use FOB as distinguished m CIF in their trade statistics. Are we or are we not using the ne basis for the comparison, CIF and FOB? What is Canada using? Mr. EBERLE. Canada and the United States are among the few intries using FOB. I agree with the Ways and Means and Senate ance Committees-I'm on public record-we ought to be using F. We now are since I took the initiative. The Commerce Departent reports it both ways now. You can get both numbers, so you ve a choice. Everybody else in the world uses the CIF method and should be using the same thing here.

Mr. GAYDOS. One more question. In reevaluating and considering e reevaluation of the exchange which we're talking about here, I d it very difficult to accept the figures and I don't think the figures manufacturers have put together were purposely for some type of oterfuge, but I always have doubt. For instance they talk about the lue in American product going to Canada or coming back and that an interplant transaction. The automobile body partially completed, ng in and coming back with other things done on it. The Governnt and our Customs don't analyze that particular item, that autobile, which may be one of 40,000 or 50,000 bodies but who puts evaluation on it? Isn't that an incompany decision? They can put y evaluation on it?

Mr. EBERLE. I would suggest there are two checks on this. First of there are accounting principles and the Accounting Principles andards Board has some pretty precise rules on transfer pricing. ere are parameters they must meet.

Mr. GAYDOS. Internally?

Mr. EBERLE. Internally, or the auditors will not give them a clean tificate. Having been a chief executive of a multinational company, an tell you they watch that very carefully.

Mr. GAYDOS. So I understand. What I want to know is who tches? Are any Government people watching this?

Mr. EBERLE. Yes; I'm going to come to that. First of all, you we internal auditing. In each of these companies you have profit ters. Each fellow who runs his center wants to look reasonably od and they act as a check on each other. The external auditors also watching to see that the internal accounting is in accordance h internationally accepted standards. If it is not, they will give an exception to your public financial statement. And we are ing some exceptions to the accounting statements.

Second, and equally important, there are tax treaties between inties and the U.S. Internal Revenue Service checks those transfer ces. Those transfer prices are watched carefully to see if there is a ange in them. The Internal Revenue has access to price data and y look at it. Not only is it the Internal Revenue Service of the ited States but the equivalent of the Internal Revenue Service

72-532-768

in the other countries are checking it because both countries maximize their tax income.

So you have two kinds of cross-checks. You have both
and then you have the internal and outside auditors.
Mr. GAYDOS. That transfer prices are checked?
Mr. EBERLE. Absolutely.

gover

Mr. GAYDOS. I find it so difficult understanding the afterms net results of an agreement between two countries. Both are fine by it, both are making more profit, more employment; understand somebody in this real fast shuffle not getting th share. Somebody has to be suffering.

Mr. EBERLE. I only suggest to you there are two questions of all, did both sides benefit and I suggest to you the answer yes. I think if you look at the facts I've given to you, we hav to demonstrate that.

is

The second question which the chairman raises is did we g relative share, and that is a different issue. As I say, if you loo] the numbers one could argue, that we did not get quite as m Canada. And I would have to agree for the reasons I've ou But the division is still reasonable.

Mr. GAYDOS. Would you the recommend the agreement co because of that, even because we're getting short changed tempo Mr. EBERLE. I hope I can get to the end of my statemer my recommendations. I'm almost there.

Mr. DENT. Before you get there I've got to clear somethi in my mind. Apparently we are satisfied with shipping 8 perc our total production to Canada. Now you say well, we have so production that 8 percent is a greater number insofar as uni concerned but the Canadian Pact allows them to ship 68 perce their total production back to the United States. The point is while those parts were manufactured here and go to Canada, same parts are in the cars that come back from Canada. So i parts would have been assembled in cars in the United State would have had the same situation that developed in 1863 Abraham Lincoln was arguing with his Cabinet as to whether o to build a transcontinental railroad with locomotives and rails co from Great Britain or to build factories here and build them Lincoln finally, after 3 months, said it will be done this way. He "If we buy the rails and the equipment from Great Britain, we have the equipment, we'll have the rails, we'll have the locomo but they will have our money." He said, "If we, in turn, build own plants, we will have the rails and the equipment and we'll have our money."

Isn't it true that the sales coming out of Canada are not part o American producers income balance until it is returned from Can It's not one corporation? You have a corporation or a subsidiar Canada, is that right?

Mr. EBERLE. You have a subsidiary in Canada.

Mr. DENT. But that subsidiary for purposes of earnings and lo and their own report, handling their money as if it were comple separated from the parent corporation until they decide how m they are going to send back to the parent corporation. So in exchange of parts you will show little profit in the United St

and you will show a greater profit in Canada. That's been going on all over the world with our multinational corporations, withholding the profits from coming back into the United States because they are not taxed until they do come back. That gives them an opportunity to expand their operation in Canada which is what has happened. If Canada can ship into the United States' high cost market 68 percent of all Canadian production, the balance has to be in their favor on jobs.

Mr. EBERLE. Mr. Chairman, the problem is you're dealing with only one side of the picture.

Mr. DENT. I only want one side, I want the job side. I don't get into the intricacies of corporate maneuvering. I'm interested in the fact we have 12 million workers who got $19 billion for unemployment compensation last year.

Mr. EBERLE. Let me point out we shipped to Canada in 1975 a total of 698,000 units.

Mr. DENT. And they shipped back 713,000. Our exports will decline when the economy strengthens.

Mr. EBERLE. So there is a small difference in that area. Just a minute, you are saying to me that we shipped the parts up there and if we had kept the cars down here the parts would have gone in anyway. Well, we shipped many more parts up to Canada than the number of cars that came back to the United States. In fact, you're going to hear from the Canadian parts manufacturers who feel that this unbalance is an outrage. It's the total picture I'm trying to get at. There has been an absolute increase in jobs in the United States when you consider both the vehicles-total units-and the parts that are exported go up under this agreement. You cannot separate them. If you do separate them and you assume that there was no agreement, then you wouldn't have had this trade because you would be paying a 33-percent effective tariff.

Mr. DENT. We don't have a 33-percent protective tariff on any automobile that's coming into the United States.

Mr. EBERLE. Canada does.

Mr. DENT. On us. We would have had the same tariff against them if we had played reciprocal trade agreement rights.

Mr. EBERLE. If we didn't have the agreement, we wouldn't have the trade with Canada that we have today and it's a positive trade. Mr. GAYDOS. Would you expand on that? Why do you reach that conclusion?

Mr. EBERLE. Two reasons. First of all, when you look at a 33percent effective tariff, there is no way you can compete without manufacturing on the other side of the border. It's a competitive problem. The point of the tariff is to keep people from shipping in. And second, the incentives that Canada had at that time was an nducement to make the industry Canadian owned and self-sufficient, o Canada wouldn't have had an automotive trade deficit. It was the opportunity to participate in the Canadian market by shipping From the United States that was made possible by this agreement. Mr. DENT. Isn't it true if Canada didn't have the American market, she never could have generated the sales.

Mr. EBERLE. They would have generated the sales in their own

market.

Mr. DENT. Are the cars from the other countries going into C. assessed 33 percent?

Mr. EBERLE. Effectively, yes.

Mr. DENT. Right now?

Mr. EBERLE. The way it's operating today. When I was s 33 percent, that's what it was at the time the agreement wen effect and I spelled this out.

Mr. DENT. Isn't it true that they reduced their tariff pretty. on all other automobiles coming into Canada?

Mr. EBERLE. There is a nominal tariff on the units themselv 15 percent and then they have some rules-local content-that the effective rate well above that but it depends on what the are that go into the particular car. It's higher than 15 percent. T the absolute minimum. That applies to anything coming in than under the agreement.

Mr. DENT. Do you know the effective rate of tariff on foreign coming into the United States?

Mr. EBERLE. Very well.

Mr. DENT. What is it?

Mr. EBERLE. The effective rate is something in the neighbor of 2 percent.

Mr. DENT. I thought that would be interesting.

Mr. GAYDOS. Did you say ineffective? [General laughter.]

Mr. DENT. Proceed. It's rather difficult for those of us who hav cover the gamut of all legislative matters to be able to try to l these figures match when they come from areas covering the s subject.

Mr. EBERLE. Mr. Chairman, I appreciate that and I tried in appendix to explain these differences.

Mr. DENT. Isn't it true, before you go any further, that this is worst possible moment for this committee to be holding these hear because of the recent upsurge in the production in the automo industry?

Mr. EBERLE. No; I disagree. It's an ideal opportunity to raise issue because I'm about to make some recommendations for char in the agreement which I think you might be interested in.

Mr. DENT. I'd like to hear them because I'm for change. Mr. EBERLE. Oversight committees like yourself have to r these issues when governments don't want to raise them. Mr. GAYDOS. Where are they in the short statement?

Mr. EBERLE. They start at page 19.

Mr. Chairman, we continue to support the agreement as a reas able response to the problems and opportunities of the indust However, we think the agreement can be improved. We would reco mend first the agreement should be broadened to encompass aft market parts, original equipment tires and tubes, and buses for n manufacturers. We think the agreement ought to be broadened a this would be a logical way of increasing the trade between countries.

Second, truck cab chassis, that is, trucks without bodies, shor also be accorded duty-free treatment, regardless of the final use which they are put, and I've explained the reason for that in 1

statement.

Third, the Canadian value-added and sales ratio requirements ould be modified in two ways. First, the separate car, truck and s categories should be combined at the manufacturer's option, d second, rather than make the manufacturers meet these requireents on an annual basis, companies should be permitted to compute em on the basis of running average over several years.

I might say here you could get even higher efficiency if this could worked out.

Fourth, in any future negotiations to revise the agreement, all quirements to be imposed upon vehicle manufacturers relative to oduction and content by either country should be in the agreement. you know from the ITC reports, there was a question raised about ese letters which are outstanding and the ITC felt that Canada d not lived up to the agreement because of these letters. I would ly suggest to you I do not believe the agreement was violated. I ink you have a serious misunderstanding between two governments ad that misunderstanding is that the U.S. Government thinks there ere certain transitional requirements including the letters which ere to become inoperative and the Canadian Government never cepted that. I've listened to that both as a Government official ad as a private individual and I simply say it was obviously not ear at the time of the negotiation. You have a misunderstanding ad the industry is caught in the middle of it which allows the Canaan Government to use these letters to achieve purposes which might contrary to the interest of the United States. Therefore, we think requirements ought to be included in the agreement, whatever

Ley are.

And lastly, not in my statement, I think it is important that there some bilateral arrangement between the two Governments, whether be a Commission or whatever, to talk about trade problems generally cause we and Canada are very close. Our economies are very closely lated and we don't have a quick way of talking about problems and iding solutions. The two Governments like to talk but never did. tdown to solving the problem and we need a problem-solving mmission of some kind.

And let me just conclude by saying while the agreement is not erfect, it is a reasonable response. There have been, on balance, nefits to both sides even though there may have been a little more enefit to the Canadians. It still has been beneficial in total and with e kinds of changes. I had recommended, it should become ever ore beneficial in increasing trade and, in turn, increasing jobs in the nited States.

Mr. DENT. Mr. Eberle, I, of course, apologize if we created a little Ferenthusiasm on our position.

Mr. EBERLE. I like it.

Mr. DENT. I know we will take this material you have given us ad your recommendations and look at them and continue the hearings ntil we arrive at some conclusion. I do think you have some preminary figures for us that you were going to make available.

Mr. EBERLE. I don't have them yet. We're still working on them I our own shop and we're not satisfied. As soon as we do get them, e'll get back to you with them as to what the job creation means in hese various industries based on the total trade, including trade 1 parts. (See appendix for data.)