Another bump in the road

PHOTO: THINKSTOCK

The Trans-Pacific Partnership’s full text was revealed Nov. 5, a day after newly elected Prime Minister Justin Trudeau took office, and it contains what some of Canada’s key auto sector players are calling an unpleasant surprise.

Now, they say, it will depend on Trudeau’s federal Liberal government to decide whether it will sign or seek changes to the massive trade agreement, which covers more than 40% of global GDP and makes major cuts to regional content requirements for the auto sector. Many believe current provisions will be detrimental to an industry crucial to the Canadian economy.

The agreement reveals that many key auto parts product clusters will require just 35% regional content, down from what was initially thought to be 40% when news of the deal broke in early October. And despite a renewed and friendly dialogue between Canada’s new prime minister and the US president, Barack Obama is pushing Canada to approve the deal.

But auto parts manufacturers and related industry associations are now encouraging Trudeau to revisit the deal agreed to by the preceeding Conservative government.

Within NAFTA, a car had to contain at least 62.5% local content to be sold tariff free in Canada, Mexico and the US.

It was originally believed the TPP’s local-content requirements for vehicle components would be between 40% and 45%. But Flavio Volpe, president of the Auto Parts Manufacturers’ Association (APMA) in Toronto, says this isn’t about a 5% drop in regional value requirements, but further spreads in the gap from NAFTA requirements. Volpe is particularly concerned about the viability of small manufacturers.

“The most important thing for volume parts manufacturers is access to customers, and the trade agreement provides those larger companies with more global potential, but small and medium-sized businesses don’t have those capabilities,” he says. If the deal proceeds as is, it will be critical for Canada to pad its automotive OEM base if it’s going to compete under TPP rules, he added.

Engine parts and body stampings such as truck frames and metal roof panels will only require 35% TPP content. Volpe said there are 26 Canadian parts companies that manufacture stamped metal components and 18 that make engine parts.

Unlike his predecessor, Trudeau has promised the new Liberal government will consult with the public on the 6,000-page deal.
“The fact that the new government is open to a formal public consultation is refreshing,” said Volpe. “The Conservatives brought industry groups into the conversation later in the process, and that obviously limited the impact we were able to have on the final result.”

Not only are auto and auto parts makers concerned about regional content requirements, the Canadian Vehicle Manufactuters’ Association told the Globe and Mail that it’s displeased with Canada’s willingness to eliminate a tariff on imported Japanese vehicles more rapidly than what was agreed to by the US. Canada has agreed to eliminate its 6.1% tariff over five years, while the US will do so over as much as 30 years.

Dennis DesRosiers, president of DesRosiers Automotive Consultants in Richmond Hill, Ont., isn’t particularly optimistic about the looser local content requirements.

“We are in a long phase of the slow willowing out of the automotive and parts manufacturing sector in Canada, and [TPP] is just another initiative that reaffirms that point of view,” he said.

Something has to change

Unifor, Canada’s largest private sector union, is among those urging the Trudeau government to revisit provisions in the agreement that it says will cause major damage to key Canadian industries, including automotive, and eliminate thousands of jobs.

“The new government needs to commit to fixing whatever mistakes lurk in the TPP text because the former Conservative government was in such a rush,” said Jerry Dias, president of Unifor.

The union’s chief economist Jim Stanford estimates Canada’s automotive concessions would result in the loss of up to 20,000 manufacturing jobs.

“It is outrageous that the [Harper Conservatives] have signed a deal that would allow the majority of a car to be made in China, yet still come into Canada tariff-free,” said Diaz.

After the tentative deal was released Harper promised a $1 billion package for the auto sector spread over 10 years, to protect jobs and boost innovation.

While the TPP provides Canadian companies with access to Japan’s massive consumer markets, it also makes it easier for manufacturers to use offshore parts, a windfall for low-wage Asian parts suppliers. This is an impediment for Canadian firms already dealing with fast-growing production in places like Mexico, where automakers are taking advantage of lower labour costs and bloated government investment incentives.

“At some point, you reach a tipping point on content that doesn’t make it financially viable to manufacture in Canada,” said Volpe.

The auto sector doesn’t want a handout. Volpe would rather see that compensation go towards investment opportunities. He told the Windstor Star he has not asked the federal government to re-open negotiations, but is instead seeking cooperation on how to address vulnerabilities he thinks will impact the sector.

“We’re not looking for a compensation package. I don’t need to send a cheque to each manufacturer we represent,” he says. “That money would be put to much better use in a macro fund that would be tapped for the investment opportunities the Canadian sector needs to grow and compete on a global scale.”

DesRosiers agrees.

“Our auto policy in Canada comes down to three words: cut a cheque. And sure they’re very large cheques, but there has to be a better way of maintaining Canada’s automotive landscape.”

This article appears in the November/December 2015 issue of PLANT.