89 81 sales of vehicles of those classes for consumption in Canada, in terms of value. In terms of production, this provision has the effect of preserving at least Canada's 1964 share of the Canadian market. This share is determined by taking the ratio of the net sales value of Canadian production of vehicles of a class for a model year to the net sales value of Canadian consumption of vehicles of that class for the same model year. For each manufacturer, this ratio in each model year has to be equal to or higher than the ratio for the base year (1964 model year), and in any case cannot be lower than 75 percent. The third condition was designed to preserve a mimimum absolute level, in terms of dollar value, of production of vehicles of a class in Canada. This provision required that for each manufacturer the "Canadian value added" in the production of vehicles of a class for each model year be equal to or greater than the "Canadian value added" in the vehicles of that class produced by the manufacturer in Canada in the base year. "Canadian value added" is defined in Canadian Tariff item 950 regulations. 1/ tially is the cost It essen of parts produced in Canada (which have not been exported and re-imported) which go into the assembly of completed vehicles in Canada, plus transportation costs and overhead such as labor costs, plant expenditures, property taxes, administrative expenses, depreciation of equipment and a to the production of such vehicles and parts. "Canadian value added" does not include marketing and distribution expenses, or income taxes; capital allowance of 5 percent which are attributable See appendix G of this report. 90 82 moreover it is not clear whether it includes any element of profit. Accordingly, the valuation of Canadian production is somewhat conservative pursuant to this method of valuation. This point becomes much more important in our discussion of the "letters of undertaking" in the following section of this report. In the case of its use in annex A, "Canadian value added" in each year is measured against the "Canadian value added" in the base year. Recently, this condition has become increasingly less and less significant as a result of inflation and the increase in the total value of motor-vehicle production in Canada. Nevertheless, American Motors for the first 2 years of the agreement paid duty on its imports into Canada because it failed to satisfy this provision. This essentially is a result of the fact that "Canadian value added", for the purposes of annex A, does not include exports of originalequipment parts to the United States, or exports of components to the United States which are subsequently imported back into Canada as sub-assemblies in original-equipment parts. Since the "value of Canadian components" would only be counted if it went into a car assembled in Canada, this provision has tended to encourage final assembly in Canada of motor vehicles and has assured that the value of Canadian components in such vehicles would at least be maintained at its base year level. Finally, Canada reserved the right in annex A to designate a manufacturer, which did not meet the conditions of the annex, as entitled to the benefit of duty-free treatment with respect to imports of the products of the United States described in the annex. However, the Government of Canada apparently requires a firm to undertake the production of 91 83 motor vehicles of a class in Canada before designating that firm as entitled to duty free treatment for motor vehicles of that class and original-equipment parts there for. Mack, White, and a few other smaller motor-vehicle manufacturers were so designated pursuant to this provision, since they did not produce vehicles of the relevant class in Canada prior to 1965. Collateral Commitments: the "Letters of Undertaking" Signed by the Canadian Motor Vehicle Manuafacturers A few days before the signing of the agreement, "letters of undertaking" were sent by the Canadian affiliates of the major motor-vehicle manufacturers to the Government of Canada. The terms of the letters sent by each of the Canadian subsidiaries were quite similar, and commited the firms to requirements over and above those contained in the provisions of annex A of the agreement itself, while at the same time confirming the manufacturers intentions to fulfill the requirements of annex A. 1/ The two collateral undertakings in each of the letters involved commitments by each manufacturer to increase "Canadian value added (1) in each model year over the amount achieved in the 1964 or "base" model year by an amount equal to 60 percent of the growth in the Canadian market in the relevant model year, 2/ and (2) in addition to the foregoing, by a lum sum by the 1968 model year. Growth in the Canadian market is defined as the difference between the cost to the manufacturer of vehicles of each class sold in Canada during the relevant model year and the cost to the manufacturer of vehicles of each class sold during the 1964 or "base" model ye The lump sum "Canadian value added" which had to be achieved by model year 1968 amounted to a total of $221.9 million for the Canadian subsidiaries of the Big Four motor-vehicle manufacturers 3/. Since the total "Canadian value added" for the subsidiaries of the Big Four 1/ For the texts of the "letters of undertaking", see appendix F of this report. In light of the fact that the Canadian affiliates of International Harvester and Mack Truck also signed "letters of undertaking", it is probable that all major Canadian manufacturers of motor vehicles made comparable commitments to the Government of Canada. 2/ For automobiles. For specified commercial vehicles, the figure was 50 percent. 3/ $241 million for all manufacturers. 93 85 manufacturers amounted to $726 million during the 1964 model year, this requirement meant that these manufacturers were required to increase their Canadian production of motor vehicles and original-equipment parts, measured in terms of "Canadian value added" by approximately one third, over and above the increases needed to meet their other commitments. This increase had to be achieved by the 1968 model year, and was required to be maintained in every year thereafter. 1/ The first commitment in the "letters of undertaking" involved a promise on the part of the Canadian motor-vehicle manufacturers that they would increase their "Canadian value added" in the production of motor vehicles and original-equipment parts in each year over the "Canadian value added" in the 1964 or "base" model year by an amount equal to a certain percentage of that year's growth in the manufacturers' Canadian market for vehicles of each class over the market the manufacturers enjoyed in the 1964 or "base" model year. 2/ This provision guaranteed that Canadian production of motor vehicles and original-equipment parts would grow proportionately to the growth in the Canadian market. As previously noted, the value of Canadian exports of original-equipment parts is not included in the calculation of "Canadian value added" for the purpose of meeting that commitment in annex A of the agreement. However, the calculation of "Canadian value added" by a manufacturer for fulfilling its commitments in its letter of undertaking includes (1) the value of original-equipment parts produced by the manufacturer (or any associated person) in Canada and sold for export, and (2) the value of 1 See tables 105 and 106 of this report. |