facturers of motor vehicles and original equipment parts in the United States and Canada to ship certain automotive products across the border duty-free under specified conditions. There are important exceptions to the duty-free treatment provided by the Agreement which are contained in the annexes to the Agreement, referred to in Article II, which deserve emphasis. First, several automotive equipment categories, such as certain specialty vehicles, used vehicles, tires and replacement parts, are excluded from duty-free treatment. Second, Canada confines the privilege of duty-free automotive imports to the manufacturers, as defined below, of motor vehicles or original equipment parts. Thus, a Canadian consumer who purchased a vehicle in the United States and returned to Canada would be required to pay Canada's Most Favored Nation 15 percent duty. Canada also enforces an embargo on used car imports. Annex A to the Agreement precisely defines the obligation incurred by the government of Canada in pledging to accord duty-free treatment to imports of certain products from the United States. At the same time, Annex A established a floor for Canadian production for motor vehicles. Duty-free treatment is Annex A, Paragraph 1) accorded automobiles, buses, specified commercial vehicles and all parts and accessories thereof (except tires and tubes) when imported for use as original equipment by "a manufacturer." A manufacturer is defined (Annex A, Paragraph 2) as a manufacturer that: 1. Maintained the ratio of net sales value of its production of motor vehicles in Canada to the net value of its total sales in Canada (of vehicles of that class) at not less than the ratio of the model year 1964 and in any case not lower than the ratio of 75:100. 2. Maintained a level of Canadian value added in absolute dollar terms which is at least as great as that achieved in model year 1964. These two qualifications of the definition of a "manufacturer" established the loor below which Canadian production of motor vehicles is not allowed to fall. The object of the first was to assure continued growth of vehicle assembly in Canada while the second provided protection to Canadian parts manufacturers. The restrictions, which precluded the establishment of a regime of truly free rade, were justified on two grounds. First, that given higher Canadian costs at he time the Agreement was concluded, a migration of Canadian vehicle producion to the United States would occur in the absence of such restrictions. Second, t was believed that without the restrictions, Canada's critical and unsustainable rade deficit in automotive products with the United States could not be reduced. However, even with the restrictions, the deficit has not been reduced.) These angers were expected to recede as the industry was integrated and Canadian sts fell as Canada specialized in producing fewer models. Nothing in the Agreement, however, suggested when, if ever, these safeguards sere to be removed. The question of their termination was reportedly discussed uring the negotiation of the Agreement but the conclusion to which the negotiaors came, if any, is not reflected in the Agreement. As a result, the issue over hether, as the Canadians maintain, they are permanent safeguards, or, as the S government maintains, they are transitional provisions, has been one of ontinuing controversy between the two governments. Because the Canadian government was concerned about the future growth of he Canadian segment of the anticipated integrated North American market, the Canadian government initiated consultations with Canadian manufacturers subsidiaries of the major U.S. producers) regarding their future plans. As reuired by the Canadian government, each Canadian automobile manufacturer bmitted a "letter of undertaking" 19 to the Canadian government prior to the gning of the Agreement. In each case the Canadian firm gave a statement conming its expectations about the probable expansion of its production over the llowing four years, subject to necessary qualifications about market conditions ad other factors beyond the control of individual companies. In effect, however, e companies undertook to: 1. Increase the total Canadian value added in vehicles and original equipment arts by an amount equal to 60 percent of the growth in the value of passenger r sales in Canada (50 percent in the case of commercial vehicles). 2. Increase the Canadian value added in vehicles and original parts by a total C$260 million 20 over and above that achieved in model year 1964. The letters are attached as appendix C. This represents the total figure; levels for each company were: General Motors: C$122 million; Ford tor Company: C$74.2 million; Chrysler Corporation: C$33 million; and American Motors: C$11.2 million; hers: C$19.6. The U.S. government was not a party to the discussions which led t commitments, but it was informed in detail by the Canadian governmen the essential provisions of the letters.21 Annex A, which established the obligation incurred by the governm Canada in pledging to accord duty-free treatment to imports of certain pr from the United States, establishes a minimum Canadian content requiren establish eligibility for duty-free treatment. Paragraph 3 of Annex A make that articles imported into the United States from Canada but which contain at least 50 percent Canadian value added (of which components ori imported from the United States may be included will not be accorded dui treatment. This restriction was aimed at preventing third country producer limited Canadian operations (such as Volvo and Renault-Peugeot) from Canada to circumvent the U.S. tariff as well as limiting the use of comp from third countries by the major U.S.-Canadian manufacturers. Other provisions Articles III-VII contain the remaining provisions of the Agreement: Either country may take action consistent with its obligations under A III-XXIII of the General Agreement on Tariffs and Trade (FATT) ( include antidumping duties, escape clause measures, and national security act Consultations may be instituted at the request of either government regai any matter relating to the Agreement; special problems regarding U.S. producers without facilities in Cana the time the Agreement was negotiated; special problems regarding the establishment of new automotive prod in Canada who may not be required to establish significant production could thus serve as a conduit for third country products to secure duty entry into the United States. A comprehensive review of the operation of the Agreement will be hel January 1, 1968, on progress toward achieving the three objectives. Either government may, by agreement, provide access to their marke similar terms to other countries. The Agreement shall be of unlimited duration but each government res the right to terminate the Agreement one year after giving written notice t other government of its intention. PART III. THE OPERATION OF THE AGREEMENT Production rationalization and efficiency gains One of the basic objectives of the Agreement was to encourage the integra and rationalization of production of automotive products in the United States Canada. The purpose was to bring about the most economic production of mum volumes of components and vehicles in plants in both countries in o that the productivity of the automotive industry would be improved and both the U.S. and Canadian economies would benefit therefrom. The Agreement has, in fact, produced a marked increase in the degre integration of the North American automotive industry. Integration has resu in a significant improvement in the utilization of facilities in Canada and in United States and the achievement of important production economies in a motive operations. Manufacturers reduced the number of passenger car and tr models produced in Canada between 1964 and 1975 by a substantial amoun significant portion of this reduction is attributable to the economies of scale m possible by the Agreement. There has also been a reduction in the amoun duplicative production of differing automotive components such as engi transmissions, starting motors, etc., in both countries. The reduction in the number of vehicle lines and components produced Canada has enabled the Canadian manufacturers to use their machinery equipment more effectively through larger quantity production runs for line which Canadian manufacturers have specialized. Production of many low volu items has been relocated into plants where the benefits of higher volume prod tion can be achieved. This, in fact, has happened on both sides of the bor because the Agreement has permitted the sourcing of many automotive prod 21 From written answers prepared by the Executive Branch to questions posed by the Senate C mittee on Finance, 1965 Senate Hearings, p. 70. in the most practical location, eliminating the duplication of production facilities on bo sides of the border. The degree to which production decisions in both countries have become geared to the total North American market is dramatized by these facts: (1) Bilateral automotive trade has grown 19-fold, now exceeding $13 billion, and is the single largest item of trade between the United States and Canada; (2) In 1975, the U.S. exported 698,000 vehicles to Canada, accounting for almost 61 percent of the Canadian market for North American produced vehicles and representing 8 percent of United States production; in 1965, the U.S. exported 54,000 vehicles, accounting for only 8.5 percent of Canadian sales of North American vehicles and representing .6 percent of U.S. production. (3) In 1975, Canada exported 849,000 vehicles to the United States, accounting for 9 percent of the United States market for North American vehicles and representing 59 percent of Canadian production; in 1965, Canada exported 48,000 vehicles, accounting for only .5 percent of U.S. sales of North American vehicles and representing 6 percent of Canadian production; (4) In 1975 the value of U.S. original equipment parts exports to Canada was $4.60 billion compared with $738 million in 1964. In the same period, exports of original equipment parts from Canada to the United States increased from $139 million to $2.07 billion. One would expect to see efficiency gains accompanying this marked increase in integration in the North American industry. Because the large size of the U.S. market had allowed U.S. manufacturers to achieve economies of scale and other conomic efficiencies prior to the implementation of the Agreement, the larger ffects of efficiency gains have been felt in Canada's less developed automotive industry. Evidence of efficiency gains does exist in the lowering of costs in Canadian production. One study 22 found that by 1968 the Canadian producer's average costs had fallen considerably although they still exceeded costs of U.S. producers. This overall cost saving was achieved despite increasing labor costs in Canada as Canadian workers gradually achieved wage parity with U.S. workers. Efficiency gains have also resulted in a substantial reduction in the factory price differential between Canadian and U.S. prices for comparable automobiles as reported in the Annual Report of the President to Congress on the Operation of the Agreement. The differential (excluding taxes) has declined from approximately 17 percent in 1965 to approximately 4-8 percent in 1975 (though it should be noted that curency fluctuations can obscure changes in price differentials). Other evidence exists on the stimulating impact Canada's more dynamic ndustry had on the Canadian economy generally. A recent study 23 estimated hat in the absence of the Agreement and compensating Canadian government action, Canada's Gross National Expenditure (read: GNP) 24 in 1961 dollars would ave been 4.7 percent lower in 1969 than it, in fact, was. The rationalization of production and the efficiency gains made possible as a esult of the Agreement have been accomplished with minimal disruption of employment on either side of the border (see discussion on page 48) and without gnificantly altering the relative shares of U.S. and Canadian production and employment in the North American automotive industry. Investment Aggregate data on investment for all companies participating in the automotive ndustry of North America are not available. Thus, a complete report on investnents made since the Agreement went into effect is not possible. Such data are vailable, however, for the major motor vehicle manufacturers and are recorded a the Annual Report of the President to the Congress on the Operation of the Autotive Products Trade Act of 1965. Expenditures for plants and equipment in the United States and Canada by he major motor vehicle manufacturers are shown in the table below: Paul Wennacott and R. J. Wonnacott, "The Automotive Agreement of 1965." 33 Can. J. Econ. & Pol. 1,200 (1968). # David L. Emerson, Production, Location, and the Automotive Agreement (The Economic Council of anada, Ottawa: Information Canada, 1975). #Gross National Expenditure (GNE) measures the same aggregate as does Gross National Product GNP). The procedures for arriving at the two figures are different; however, the two totals are the same. Year 1965. 1966 1967 1968. 1969 1970. 1971. 1972 1973. 1974. TABLE 1.-EXPENDITURES FOR PLANTS AND EQUIPMENT: UNITED STATES AND CANADA Note: Data for 1975 has not been published. Source: Annual reports of the President on the operation of the Automotive Products Trade Act of 1965. Much new investment in Canada was made prior to the implementation of U.S.-Canadian Automotive Products Trade Agreement. This investment stimulated by the inauguration of Canada's duty remission plans in the e 1960's (see discussion on pages 16-17). Proportionally, little additional inv ment in Canada was necessary on the part of the major motor vehicle manu turers to meet the requirements of the Agreement or the "letters of undertakin Larger investments may have been made by independent producers of orig equipment parts, but no published data on the investments exist. Investment Financing. The direct expenditures by the major motor vel manufacturers that took place in Canada following the implementation of Agreement were financed in Canada primarily out of the retained earning Canadian affiliates and by minimal borrowing in Canada.25 Investment Income.-Income received by the U.S. motor vehicle manufactu from the operations of their Canadian affiliates over the life of the Agreem (1965-1974) has exceeded $570 million.26 While the annual dividend inflow fluctuated, data show a substantial growth in repatriated earnings in rec years. Sales and production As the table on page 34 shows, the North American market for North Ameri type vehicles grew substantially in the years following the inauguration of Agreement, although general economic conditions and industry-specific pheno ena (e.g., strikes) resulted in significant deviations from the trend line. Sales of motor vehicles in Canada grew at a substantially greater rate thar the United States in the past ten years. The Canadian motor vehicle mar grew over 58 percent between 1965-1966 (average) and 1974-1975 (average). the same period, sales in the United States were practically unchanged, due t special phenomenon the recession-which had a particularly devastating eff upon the industry. However, compared to 1972-1973 (average) sales in the Uni States, back-to-back U.S. record sales years, the growth in the U.S. mar since 1965-1966 was 27 percent. Because of the larger size of the U.S. market relative to Canada, a look at relative positions of the two countries in total North American sales reveal different perspective. Canada's share of total North American sales fluctua between 6 and 8 percent from the inauguration of the Agreement through 19 when the Canadian percentage grew to 10-11 percent in 1974-75. This grow was due to the more severe recession in the United States, which inhibited sa in the United States more than in Canada. As a result of the recovery of sales the United States in early 1976, Canada's percentage of total North Americ sales returned to more traditional levels. Table 3 on page 36 presents sales data for all passenger cars (as opposed Table 2 which shows sales data for North American produced passenger cars a trucks) in the United States and Canada, including imports from third countri 25 United States International Trade Commission Report on the United States-Canadian Automot Agreement: Its History. Terms, and Impact, Committee on Finance, United States Senate, 94th Congr First Session, January, 1976, page 157. 26 Ibid, pages 157-158. |