CPTPP gets a red flag: Many in the auto industry are concerned

Working on vehicle subassemblies at FCA’s Brampton, Ont. plant.
PHOTO: FCA

As the Canadian government switches its public relations machine lauding the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) into overdrive, the Canadian automotive industry, parts manufacturers as well as the country’s largest union are standing on the brake pedal and raising many red flags about the trade deal.

Despite a side letter to the agreement that International Trade Minister François-Philippe Champagne says will give Canada unprecedented access to the highly protective Japanese market through the elimination of non-tariff barriers, many of the players in Canada’s automotive sector are concerned. The Canadian Vehicle Manufacturers’ Association (CVMA), the Automotive Parts Manufacturers’ Association (APMA) and Unifor, Canada’s largest private-sector union, say the 11-country agreement that represents a market of $495 million and GDP of $13.5 trillion is a bad deal for Canada’s auto sector, especially in the wake of NAFTA renegotiations.

“Minister Champagne’s claim that Canada has the largest market access to the Japanese market for auto manufacturers is a bit of an over-exaggeration that attempts to sell what is, on balance, a bad trade deal for Canada and especially bad for the auto sector,” says Angelo DiCaro, Unifor national representative and trade policy analyst. “Canada exports virtually no cars or parts to the Japanese market. In fact, we import $5.5 billion in auto goods from Japan each year, while they buy back about $30 million. That means we sell to Japan in one year what they sell to us every two days. It’s a gross imbalance that a trade agreement can hardly help fix – but it certainly can make things worse.”

In a nutshell, the CPTPP reduces Canada’s 6.1% import tariff for all CPTPP countries to zero over four years and requires a fully-assembled vehicle to have 45% regional content to be considered duty free. The content requirements for parts will range between 35% to 45%. Current regional content requirements in NAFTA stand at 62.5% cent for vehicles and 50% for parts. During the current NAFTA renegotiation, the US is pushing for even higher content levels.

“The danger of signing the CPTPP is that it sends mixed signals to US and Mexican negotiators. On auto rules, NAFTA talks are moving in a completely different direction, with parties looking to raise content levels instead of loosen them,” says DiCaro. “The problem is that Mexico and the US were part of the group of nations that negotiated the original TPP. That certainly makes any pitch for higher standards in NAFTA a lot more difficult, especially when you’re staring across the table at the same group of negotiators.”

And that’s also troublesome for Flavio Volpe, president of APMA, who says that we can’t be in two boats at once. Volpe has been constantly raising red flags about the impact on NAFTA renegotiations, access to the Japanese market and the impact on the Canadian auto sector. He took to Twitter Feb. 20 – the day complete text of the agreement was released – to point out some key challenges in the Canadian government’s own economic analysis, published the same day.

“The report states that US imports into Canada would now drop $3.3 billion through 2040, mainly in automotive. Never mind that those cars have Canadian parts – if correct, that’s a gap that smart US negotiators could then be seeking to close in NAFTA 2.0 final terms. One pocket to another,” Volpe tweeted. “The net CPTPP auto and auto parts gain claimed is only $172 million by 2040. Contextually, the Canadian auto sector ships $85 billion in goods annually. This huge 22-year increase represents approximately 0.2%. If you account for inflationary dynamics, this actually represents a decline in real dollars.”

That reinforces the concern of Mark Nantais, CVMA president, that access for automotive exports from domestic factories to the CPTPP markets has not been materially improved by the agreement.

“Canada’s trade agenda needs to ensure our large manufacturers get fair reciprocal access to the markets of our trading partners before we further open up Canada’s market to companies that do not manufacture in Canada or employ significant numbers in Canada,” he says. “Otherwise this is a harmful one-way street for automakers who invest billions in Canada.”

Ontario Premier Kathleen Wynne says that she knows the agreement will have consequences for the auto sector, especially on jobs.

“I have been clear that new opportunities for trade should not come at the expense of these workers. That would not be fair. It would hurt Canada’s competitiveness,” she said at the Toronto Board of Trade Feb. 22. “And frankly, as a country, we haven’t always got it right when it comes to properly dealing with the challenges of trade deals while benefitting from the opportunities.”

She called on the federal government for $1.26 billion over the next decade and the government should only ratify the deal after it has worked with Ontario to put in place the transitional funding for workers.

Consumer choice

However, Japanese auto manufacturers in Canada don’t agree with their domestic competitors. They say the agreement levels the playing field and will ultimately provide better options for the consumer.

“CPTPP is simply a matter of fairness – equitable tariff treatment for all automakers in Canada. For the Canadian auto industry, CPTPP will provide guaranteed, preferential market access to Japan and the other CPTPP members, an improvement over the original TPP,” says David Worts, executive director of the Japanese Auto Manufacturers Association (JAMA) Canada. “CPTPP will not only further diversify and enhance trade opportunities, it will also provide an important first-mover advantage for Canadian exporters and send a positive message to investors by restoring a level playing field on vehicle tariffs for the benefit of Canadian consumers. Open competition will bring greater choice, along with innovations in vehicle safety, lower emissions, higher fuel efficiency, alternative power trains as well as the promise of enhanced mobility and reduced congestion through connected and autonomous vehicle technologies.”

Nevertheless, Unifor remains convinced the new trade deal is moving the Canadian auto industry in the wrong direction.

“It’s difficult to determine the total impact this will have on Canada’s autoworkers. All we know is that it is likely to make a bad trade situation between Canada and Japan even worse,” DiCaro adds. “Nothing that’s been negotiated, or said to have been negotiated, will make it better. The CPTPP will not mean new auto jobs in Canada, only fewer.”

However, Worts says CPTPP will open new doors of opportunity for Canadian companies.

“As a country that relies on global trade, Canada’s focus must be on building bridges, rather than barriers,” he adds. “This agreement brings significant new opportunities for Canadian companies in all the CPTPP member states.”

But Volpe concludes that the government’s own math on the economic impact of the agreement reinforces his biggest fear.

“To me this very brief report confirms our concerns for the erosion of competitive dynamics for auto in Canada,” he says. “Side letters that exist outside the actual CPTPP agreement [that] do not address barriers inventoried by industry are meaningless – like a fancy napkin stapled to a contract.”

CPTPP by the numbers

11 countries: Canada, Australia, Japan, Chile, Peru, Malaysia, Mexico, Brunei, Vietnam, New Zealand, Singapore

495 million people

Combined GDP of $13.5 trillion

$105 billion, Canada’s bilateral trade with the 10 other CPTPP in 2016

$4.2 billion, projected increase to Canada’s GDP

How CPTPP will impact trade

Phased tariff elimination will apply for all vehicles and vehicle parts into CPTPP markets. Japan is already designated a most-favoured nation (MFN) duty-free.

Canada’s 6.1% tariff on passenger vehicle imports will be phased out over four years through five annual back-end loaded cuts to retain greater tariff protection during the first two years – higher protection than in the Canada-Korea FTA and CETA deals.

Tariffs of up to 8.5% on auto parts will be eliminated upon entry into force of the agreement

Canada’s bilateral automotive agreement with Japan includes a safeguard mechanism that applies in cases of import surges, binding accelerated dispute settlement procedures, and the establishment of a bilateral committee on motor vehicle trade to discuss issues and investment.

Canada has negotiated a more liberal rule of origin for motor vehicles with Australia and Malaysia to ensure that Canadian manufacturers benefit from preferential tariff treatment in these markets.

Commitments on standards and regulations will address non-tariff measures that prevent Canadian companies from realizing their full export potential.

With the US

Canadian exports to the US (not part of the CPTPP) aren’t expected to change significantly. However, there would be a decline ($3.3 billion) in imports from the US led by automotive products, resulting from erosion of the US’s NAFTA preferences in the Canadian market.

By sector

Overall, Canada’s exports to the world would expand in beef, pork, vegetable oils, wood products, motor vehicles and parts, machinery and equipment, and services. Increases in imports would be dominated by apparels, leather products, chemical products and machinery and equipment.

Jeff Brownlee is the associate publisher of PLANT and CanadianManufacturing.com, as well as an Ottawa-based communications specialist.