39 31 Canadian motor-vehicle production, the impact of these restrictions on the balance of automotive trade between the United States and Canada should not have been expected to be a major one. The Canadian affiliates of the Big Four manufacturers, in the aggregate, have consistently exceeded their 1964 ratio of assembly to consumption for passenger automobiles, trucks and buses since 1968, and the minimum "Canadian value added" restriction in the production of motor vehicles in Canada is no longer a significant restriction, due to the effects of inflation and the growth in the Canadian market. However, it should be noted that these observations may not apply to individual motor-vehicle manufacturers for some years with respect to some classes of motor vehicles. Chrysler Canada, for example, failed in 1973, 1974 and 1975 to meet its 1964 assembly to consumption ratio for trucks, and was required to establish new facilities for the production of trucks in Canada. In speaking of the impact of the restrictions of annex A on United States-Canadian motor-vehicle trade, reference is made to the impact on the automotive trade balance of the two countries as it existed in 1964, under prior tariff structures and the duty-remission plan. 1/ At that time the United States enjoyed a favorable balance of automotive trade with Canada of approximately $550 million. If Canada had implemented the agreement without any restrictions whatsoever, the balance of automotive trade would have changed significantly in favor of the United States. The full impact of the expanded duty-remission plan which was implemented in October 1963, was not immediately apparent in its effect on the balance of automotive trade between the United States and Canada in 1964. The plan did stimulate increased investment expenditures in automotive production facilities in Canada, but the effect of this increased investment on automotive trade was not realized until 1966. A countervailing duty order against the duty-remission plan in the United States appeared inevitable, unless the agreement were signed and the plan terminated. 40 The Canadian motor-vehicle and motor-vehicle parts industries appear to be less efficient and innovative than their counterparts in the United States. Implementation of duty-free treatment in Canada without any conditions or restrictions whatsoever would have had a very serious detrimental impact on the Canadian automotive industry. Consequently, all of the restrictions in annex A are of importance when compared to what the level of automotive production in Canada might have been without comparable protection for the Canadian automotive industry. Rather the object of this discussion is to explain what has happened since 1965 to the favorable position that the United States enjoyed in its automotive trade with Canada during the years immediately prior to the agreement, a period during which the United States enjoyed a favorable balance of automotive trade with Canada (approximately $550 million in 1964) and during which the Canadian automotive industry enjoyed the protection of the Canadian tariff structure and the then recently implemented duty remission plan. 1/ The impact of the commitments made in the "letters of undertaking" appears to be more substantial than that of the restrictions in annex A of the agreement, particularly as they affect the production of passenger automobiles and original-equipment parts therefor in Canada. The requirement that a Canadian manufacturer increase "Canadian value added" by a certain percentage (60 percent for passenger automobiles) of the growth in the market for each class of vehicles sold in Canada by the manufacturer has the effect of preserving "Canadian value added" at approximately 1/ See footnote on preceding page. 41 60 percent of the value of Canadian consumption of passenger automobiles. This requirement preserved another aspect of the Canadian tariff structure prior to the agreement, whereby a Canadian manufacturer had to maintain under that structure "Canadian value added" at a certain percentage (for the larger manufacturers, 60 percent) of Canadian production of motor vehicles to be entitled to import original-equipment parts of a class or kind not made in Canada duty free. Under the Canadian tariff structure prior to the agreement "Canadian value added", if maintained at a certain percentage of Canadian production, was also maintained at an approximate percentage of Canadian consumption, since the high tariff rates on complete motor vehicles had the effect of tying Canadian production to Canadian consumption of motor vehicles. Consequently, the requirement that "Canadian value added" be maintained at a certain percentage of Canadian consumption (at a percentage approximately equal to its pre-agreement level), should not have substantially affected the balance of trade between the two countries. Indeed, The United States is free to contribute the remaining content as a percentage of the value of Canadian consumption under this commitment. Approximately 40 percent of the value added in Canadian consumption for automobiles (50 to 60 percent for trucks and buses depending on the manufacturer) can come from the United States in spite of this commitment, and since the United States parts industry is more innovative and efficient than its Canadian counterpart, there is an incentive to source this retaining percentage in the United States. Accordingly, as Canadian con sumption grows, the United States automotive exports to Canada tend to 42 increase. This is essentially the situation that existed prior to the agreement, when the United States enjoyed a surplus in automotive trade with Canada that increased as the Canadian market grew, with United State: exports of parts the major factor. In conclusion, the requirement that "Canadian value added" be maintained as a percentage of the Canadian market roughly equal to its 1964 level, would not alone have the effect of increasing Canada's 1964 share of United States-Canadian motor-vehicle production, or drastically influencing the 1964 balance of automotive trade between the United States and Canada. The second commitment in the "letters of undertaking", that "Canadia value added" be increased by a lump sum (the aggregate figure for all the manufactures in Canada was $241 million) by the 1968 model year, over and above the increase required as a percent of the growth in the market in the first commitment in the "letters of undertaking", had a much different effect. The effect of this second commitment--in that it required an increase in the value of Canadian production, regardless of the level of consumption of the automotive products in Canada--was to increase Canada's share of United States-Canadian motor-vehicle production. This second commitment also has the tendency to decrease the surplus the United States enjoyed in automotive trade with Canada, at least to the extent this lump-sum increase in Canadian automotive production is not offset by United States contributions to the growth in the Canadian market. However, at any event, the most this lump sum increase in "Canadian value added" would detract from the United States surplus in automotive 43 trade with Canada is the amount of the increase itself, 1/ or $241 million ($221.9 million for the Canadian affiliates of the Big Four). In addition, $241 million amounted to roughly one percent of the value of the United States-Canadian combined automotive production at the time, and this requirement alone would only increase Canada's share of United States-Canadian automotive production by approximately one percent of that production. This requirement also has had the effect of increasing employment in Canada at the expense of the United States, but its impact on employment would similarly have been appreciable, but not major in proportion. It should be noted that the commitments that the Canadian automotive industry made in the "letters of undertaking" benefit the originalequipment parts producers in Canada, whether they are related to the Canadian affiliates of United States manufacturers or are wholly independent. Canadian exports of original-equipment parts to a United States motor-vehicle manufacturer are counted towards the fulfillment of the Commitments that the Canadian affiliate of said United States manufacturer made in its "letter of undertaking", regardless of whether the Canadian affiliate of said manufacturer produced the parts. This understanding, that exports of original-equipment parts from an unrelated Canadian parts producer could count in the calculation of a Canadian manufacturer's Canadían value added", is an incentive for motor-vehicle manufacturers to source original-equipment parts in Canada. This incentive presumably 1/ Since this figure is a figure based on cost of production, it may be slightly understated in terms of its effect on the balance of trade. |