154 146 until 1975, automobile price differentials were greater in the 1970's than they had been in 1965--the year the agreement was implemented. 1/ In looking at factory list and manufacturers' suggested retail list prices the Commission recognizes that these prices may only supply an indication of true price differences between comparable passenger automobiles in the United States and Canada since such list prices do not reflect rebates, discounts, or prices negotiated to levels lower than list prices. The Commission further recognizes that very few, if any, passenger automobiles are sold at retail at the suggested retail list price in either the United States or Canada. 1/ It should be noted that the conclusions drawn here regarding pricing vary from those stated in most Annual Reports of the President to the Congress on the Operation of the Automotive Products Trade Act of 1965. The Commission's staff equated Canadian and United States dollars using the official exchange rate in effect for each year 1965, and 1971-75 rather than using the most recent exchange rate as a constant for each prior year as was done in the annual reports of the President. Use of constant exchange rates results in annually declining differentials between the prices of vehicles sold in the United States and vehicles sold in Canada, throughout the period 1965-75, both on the factory price and on the retail list price levels. In order to provide continuity of data, the Commission was required to use different vehicle models than those used in the 1971-75 annual reports of the President to the Congress. 155 147 IMPACT OF THE AGREEMENT ON UNITED STATES AND CANADIAN INVESTMENT Investment Expenditures on Plant and Equipment in the The Commission's questionnaires requested information concerning investment in the United States and Canada by the major motor-vehicle manufacturers for the period 1960-74. Investment data were requested for the period 1960-64 in order to determine the investment patterns are in order. that preceded the agreement, which became effective in 1965, and the Canadian duty-remission plans, which became effective in 1962 and 1963. Although the questionnaire recipients were unable to supply the desired data, some general comments on the pre-agreement period The motor-vehicle manufacturers report that their investment in new plant and equipment increased substantially following the implementation of the Canadian duty-remission plans in order to obtain the benefits of the plans. Much new investment in Canada was committed prior to the implementation of the agreement. In fact, for the most part, Canadian motor-vehicle manufacturers report that little in the way of additional investment in Canada was required, under the agreement or the "letters of undertaking" over and above that already made or committed under the prior plans. "Canadian value added" requirements of the agreement and "letters of undertaking" for the 1968 model year reportedly could easily be met with investments made or committed prior to 1965. The major investments made in Canada following the agreement, therefore, were probably made by independent 156 148 United States original-equipment parts producers rather than by the major motor-vehicle manufacturers. In view of the preceding paragraph, it is not surprising that Big Four net investment in Canada increased in 1965 to $194 million from $125 million in 1964. Much of the increase in investment was planned prior to the agreement in order to benefit from the Canadian duty-remission plans. From $194 million in 1965, Big Four direct investment in Canada fell to a level of $140 million in 1966, $90 million in 1967 and $50 million in 1968, as investments made or committed under the duty-remission plan were sufficient to allow the motor-vehicle manufacturers to meet their committments under the agree ment and the "letters of undertaking". From 1964 to 1968, Big Four expenditures on plant and equipment averaged $1.5 billion annually in the United States and $119.9 million annually in Canada. 1/ Canadian expenditures were 7.5 percent of combined United States and Canadian expenditures for the 1964-68 period. While annual United States expenditures remained approximately the same between the 1964-68 and the 1969-74 periods, they declined by about 36 percent in Canada. Specifically, from 1969 to 1974, United States expenditures averaged $1.5 billion annually and expenditures in Canada averaged $76.4 million annually. Canadian expenditures for the 1969-74 period were just over 5 percent of the combined United States and Canadian expenditures. During the periods January-June 1974 and January-June 1975, net investment expenditures on plant and 1/ See table 111 of this report. 157 149 equipment by the Big Four in the United States were $939.4 million and $720.4 million, respectively--a decline of approximately 23 percent. In Canada. such net investment expenditures by the Big Four totalled $52.3 million for January-June 1974 and 36.9 million for January June 1975, a decline of 29 percent. Financing of Net Direct Investment Expenditures Practically all of the investment expenditures for plant and equipment made by the Big Four motor-vehicle manufacturers in Canada were financed from retained earnings of their affiliates. Only a minimal amount of borrowing was done by the affiliates from Canadian sources. There was no outflow of capital from the United States to finance direct investment expenditures in Canadian motor-vehicle operations. Net Investment Income Flows From Motor-Vehicle In this section only dividend income from direct investment is discussed. Fees and other income earned from performing certain services, such as tooling and engineering, are included in the next section where balance of payments effects are discussed. The income flows have been exclusively from Canadian affiliates to the United States parent companies; none flowed in the opposite direction. As will be seen later, this is not true to the same extent in the case of certain services like tooling and engineering. As in the case of investment expenditures on plant and equipment, investment income received by the Big Four from their Canadian operations 158 150 fluctuates from year-to-year. From 1964 to 1968. the average annual income repatriated to the United States from Canadian operations by the Big Four was $36.7 million. 1/ From 1969-72 the average annual dividend income flowing into the Big Four was $39.8 million. During more recent years, 1973 and 1974, the average annual inflow was $114.1 million. In addition, the higher than average annual dividend inflow to the United States in recent years reflected the fruition of heavier investments made prior to 1967. 1/ See table 112 of this report. |