The United States and Canada have arrived at an agreement which provides for the elimination of customs duties by both countries on motor vehicles (passenger cars, trucks and buses) and original parts for production of new vehicles. This paper presents background on the structure of the automotive industry in the two countries, and a description of the benefits to the two countries which are foreseen from the agreement. I The Canadian market for automobiles is a natural extension of the U.S. market, the two parts forming what is in most respects a single North American market. Canadian consumers overwhelmingly choose automobiles of American design and make (91 percent of all cars purchased in Canada in 1963 were American models.) They prefer and they get a range of body types and models almost as wide as is available to American consumers. Production in Canada is almost wholly in the hands of subsidiaries of the United States motor vehicle manufacturers: General Motors, Ford, Chrysler, American Motors, Studebaker, International Harvester, Kaiser, Jeep, and others. The value of Canadian automotive output in 1963 was $1.4 billion, the bulk of which was accounted for by United States subsidiaries. Canada is now the world's sixth largest consumer of automobiles and other motor vehicles. Sales in 1963 amounted to about 600,000 units. In 1964, total sales probably exceeded 700,000 units. The Canadian market is growing rapidly, more rapidly than in the United States, and is likely to continue to do so since the number of automobiles in Canada per capita is relatively smaller than in the United States, and since Canadian incomes are growing at a faster rate than American incomes. Canada is our major export market for automotive products. In 1963 the United States sold to Canada cars, trucks, and, most important, automobile parts valued at $560 million. In the first eight months of 1964 our exports were about $455 million, an increase of almost $90 million over the same period of 1963. We are importing from Canada a smaller but growing volume of automotive equipment. Imports in 1963 were $33 million. In the first eight months of 1964, imports were $46 million, as compared with $16 million in 1963. II Although Canada produces and comsumes the same automobiles under much the same conditions as does the United States, costs and prices are significantly higher than in the United States. This is so even in the face of lower Canadian wages and certain other Canadian -cost advantages. A principal reason is the lower volume of Canadian output. In an industry in which economies of scale are very important-that is, high costs of capital plant and equipment need to be spread over large numbers of units of output-Canadian manufacturers typically operate at levels too low to permit them to get the full advantage of such 53-383 0-65 20 29 economies. For example, the Ford Motor Co now makes some 60 different models of five distinct passenger car lines at its assembly plant in Canada. Just across the river on the U.S. side, Ford's great River Rouge assembly plant produces only three models of the Mustang line. Similar disparities exist for the other producers; in only a few auto parts and in none of the vehicles is the volume of Canadian output large enough to bring costs down to American levels. This relatively high cost industry-and the word "relatively" should be emphasized because Canadian plants are for the most part modern and well-equipped-is protected by customs tariffs and by the so-called Commonwealth content requirement. Tariffs on finished vehicles are 17 percent and range from duty-free up to 25 percent on component parts. The content requirement calls for up to 60 percent of Canadian parts and labor and other costs in the finished automobile. These restrictive devices have helped to screen producers located in Canada from U.S. competition. They have served to maintain a Canadian automotive industry in being but they also have worked to perpetuate uneconomic production runs, higher costs in Canada, higher priced cars for Canadian consumers, and a smaller total North American market. III So long as there are tariff and other barriers to the automotive trade between Canada and the United States, there is no possibility of achieving the full potential of a North American automotive industry and automotive market. Our tariff duties are considerably lower than Canadian duties, at 61⁄2 percent on vehicles and 8% percent on most parts, but they of course also have been a burden on the flow of trade in the automotive sector. Together with the higher Canadian tariffs they have helped to shape a pattern of trade and production that falls far short of the efficient pattern that could otherwise be developed. With tariffs and other restrictive devices eliminated, an American motor company having a Canadian subsidiary will be able gradually to concentrate in Canada on a limited number of models-and on those component parts which could be most efficiently produced in Canadawhile supplying the Canadian customer with a full range of other models from American plants. Canadian management naturally will work toward getting high volume production of specific components and models in Canada. The result, over time, will be to create a rationalized and integrated North American industry. With lower costs and prices, the Canadian market for automobiles will grow faster than before. The total of North American production and the total of United States-Canada trade similarly can be expected to expand. IV Canadian and American officials have worked together over several months to see whether the abstract concept of a North American market and industry, unimpeded by tariffs and other barriers, could be given substance and reality. Their talks took place against the background of serious differences between the two countries over a Canadian program, initiated in November 1962 and extended a year later, under which the automobile companies operating in Canada were allowed to have the benefit of tariff-free treatment on certain automobile parts, through the technique of tariff rebates, in return for increased exports of automobiles or parts. This Canadian program was challenged by interested parties in the United States as being contrary to a section of our basic Tariff Act concerned with foreign "bounties or grants" on exports to the United States. If the Canadian plan were judged to fit the statutory definition of a bounty or grant, then the Secretary of the Treasury would be required to assess countervailing import duties on Canadian automotive equipment entering the United States so as to compensate for the export incentive being offered by Canada. The applicability of countervailing duties was, of course, a legal question. Nevertheless, this issue and the Canadian program from which it derived has overhung the future of United States-Canadian automobile trade. If the differences between the United States and Canada were to have ended in trade retaliation and counter-retaliation, the consequences for North American commerce and commercial relations could have been harmful for both countries and, in particular, for the North American automobile industry. This situation gave urgency, therefore, to the exploration of possibilities for the constructive alternative of a mutual attack on Canadian and United States barriers to trade in the automotive sector. The technical and economic problems involved were given extensive and searching examination by the two Governments. Various alternatives were considered and these were discussed with representatives of industry and labor. V The negotiators on both sides found that the mutual advantage of both countries lay in taking a long step toward freeing United StatesCanadian trade in motor vehicles and original parts for the production of new vehicles. Terms for achieving this end were agreed on and the overall agreement to this end has now been concluded. The two Governments agree to seek the early achievement of a broader market for automotive products within which the full benefits of specialization and large-scale production can be achieved. They agree also to the early liberalization of automotive trade in respect of tariff barriers and other factors tending to impede it, so that the industries of both countries may participate on a fair and equal basis in the expanding total market in North America. And they agree to develop conditions in which market forces may operate effectively to attain the most economic volume of investment, production, and trade. Each government will avoid actions which would frustrate the achievement of these objectives. Canada, on its part agrees to award duty-free treatment to automobiles and parts for original construction imported by Canadian vehicle manufacturers. Canada is bringing its measures into effect immediately by an order in council. The U.S. Government will ask the Congress during its current session to enact legislation authorizing duty-free import into the United States of Canadian automobiles and parts for original construction-to be retroactive to the earliest date administratively possible following the date when Canada removes its duties. At the request of either Government, the parties will consult concerning the application of the agreement to new automotive producers in Canada and for other purposes. A comprehensive review will be made of progress toward the objectives of the agreement no later than January 1, 1968. The parties may agree to give other countries similar access to their markets. The agreement will continue indefinitely but may be ended by either party on 12 months written notice. The agreement will come into provisional effect on the date of signature and into definitive effect after action is completed in the legislatures of both countries. VI The new agreement not only provides a solution for a difficult existing problem. It is also a positive development for the North American automobile industry and for United States-Canadian automobile trade. It has been warmly welcomed by the automobile companies on both sides of the border. Under the agreement, tariffs will be removed. The effects of the old Canadian content requirement will disappear as the industry grows. As a result, North American production will become substantially more efficient. Both the United States and Canada will benefit from increased consumption of automobiles and from expanded trade, as efficiency increases. Employment in both countries can be expected to increase and the earnings of the Canadian and American automobile companies can be expected to grow. The Canadian sector of the industry at present is relatively much weaker than the American and special arrangements have been made to cover the transitional period of interindustry rationalization. Under Canadian tariff procedures duty-free treatment will be accorded to manufacturers maintaining their assembly operations at existing rates, subject to market developments. Customs duties on replacement, or services, parts will not be reduced under the agreement. It is anticipated that the removal of duties and other barriers will result in a substantially increased market above the increase which would otherwise have developed. In the light of this widening opportunity, Canadian companies have made plans for an expansion of their production and have assured the Canadian Government that Canadian production will fill a substantial part of the increased demand. VII Apart from the specific benefits expected to accrue to automobile production and trade, the U.S. Government considers this step toward freer trade to be in a highly desirable direction so far as the broad United States-Canadian commercial relationship is concerned. The United States and Canada are one another's largest markets, by a wide margin over all others. The economic ties between the two countries are very close. Both countries have an interest in practical measures to make these ties as mutually beneficial as possible. The present agreement will contribute to this end and to the good relations that have historically marked the association between two great and friendly nations. LETTERS OF UNDERTAKING GENERAL MOTORS OF CANADA, LTD., Hon. C. M. DRURY, Minister of Industry, DEAR MR. MINISTER: This letter is in response to your request for a statement with respect to the proposed agreement between the Governments of Canada and the United States concerning trade and production in automotive products, as you have described it to us. The following comments assume that the proposed agreement for duty-free treatment has the full support of the respective Governments, and that the program may be expected to continue for a considerable period of time. It is our understanding that the important objectives of the intergovernmental agreement are as follows: (a) the creation of a broader market for automotive products within which the full benefits of specialization and large-scale production can be achieved; (b) the liberalization of United States and Canadian automotive trade in respect of tariff barriers and other factors tending to impede it, with a view to enabling the industries of both countries to participate on a fair and equitable basis in the expanding total market of the two countries; (c) the development of conditions in which market forces may operate effectively to attain the most economic pattern of investment, production, and trade. We subscribe to these objectives and agree with the suggested approach of removing tariff barriers and moving in the direction of free trade even in this limited area. Such an approach is fully compatible with General Motors' expressed position with respect to the desirability of free trade in automotive vehicles and components, not only in Canada, but in all other countries in the free world. It is noted that under the proposed agreement the right to import vehicles and certain automotive parts, free of duty, into Canada will be available to Canadian vehicle manufacturers who (1) maintain. Canadian value added in the production of motor vehicles in ensuing model years at not less than the Canadian value added in motor vehicle production in the 1964 model year; (2) produce motor vehicles in Canada having a net factory sales value in a ratio to total net factory sales value of their motor vehicle sales in Canada and those of their affiliated companies in Canada of not less than the ratio prevailing during the 1964 model year; (3) increase in each ensuing model year over the base model year, Canadian value added in the production of vehicles and original equipment parts by an amount equal to 60 percent of the growth in their market for automobiles sold for consumption in Canada and by an amount equal to 50 percent of the growth |