Globe and Mail, Toronto

Auto industry an unlikely roadblock in Ottawa’s ambitious free-trade talks

By Barrie McKenna

OTTAWA — The Globe and Mail

31 March 2013

Agriculture has long been the bane of Canadian trade negotiators. No trade deal gets done without crossing farmers first.

Suddenly, however, it’s Canada’s auto industry that has become the unlikely spoiler in the federal government’s ambitious free-trade plans.

The issue of autos is holding up a long-sought deal with South Korea. And it has plagued the tricky final negotiations towards a sweeping free-trade agreement with the European Union.

On the surface, it’s hard to figure out what all the fuss is about. The Canadian duty on cars from Korea and Europe is just 6.1 per cent – as it is on all vehicles manufactured outside North America.

Canada already has a very open auto market. Roughly four out of five cars sold in Canada are made somewhere else. And 85 per cent of the cars produced here are exported, almost exclusively to the United States.

The evidence suggests that eliminating the tariff would have a small impact, according to a series of studies by both Industry Canada and the Department of Foreign Affairs and International Trade dating back to 2005, when it began negotiations with Korea.

A 2012 DFAIT study, for example, predicted that the unilateral lowering of the tariff to zero for all cars made in Korea, Europe and Japan would result in 14,407 fewer cars a year being manufactured in Canada, or less than one per cent of total domestic production. That translates into 660 jobs lost.

Interestingly, the same study concluded that Canadian auto makers have a lot more to fear from the U.S.-Korea free-trade deal, which is now being phased in, than any future changes Canada makes to its own trade policy. The U.S. deal is expected to result in a hit to production of 20,175 vehicles in Canada – nearly four times larger than the losses inflicted by a Canada-Korea free deal on its own.

But the losses under virtually any scenario pale next to the expected benefits of free trade with Korea and the European Union. Free trade with Korea, the world’s 15th largest economy, would boost Canadian exports to the country by 56 per cent and add as much as 0.3 per cent to gross domestic product, according to a DFAIT study conducted in the mid-2000s.

The cost of not doing a deal is already inflicting a heavy toll. Canadian merchandise exports to Korea fell nearly 30 per cent to $3.7-billion (U.S.) last year, according to the United Nations’ comtrade database.

Part of the reason is that the U.S. and Europe already have free-trade deals with Korea. That’s allowing them to undercut countries without agreements. Canadian pork producers, for example, say they are rapidly losing a market once worth $300-million a year (Canadian) in Korea and may never get it back as U.S. competitors lock up distribution channels there. And that’s just one industry.

But Ottawa may have underestimated the complexity of the auto problem. It isn’t just about dollars, jobs and production. It involves a host of factors that may not be picked up by the “state-of-the-art demand model” that Ottawa uses to forecast the impact of free trade. For example, the impact of the Korea deal is likely to be felt much more in the low end of the market, driving down the cost of cheaper vehicles.

It’s also about emotion. The U.S. and Japanese auto makers in Canada look at the industry from a global perspective. And it galls them that they are repeatedly thwarted in the Korean market by various non-tariff barriers and alleged regulatory harassment.

Honda and Toyota, which have invested heavily in Canadian production, may well wonder why they should be here at all if Hyundai can make cars in Ulsan and sell them duty-free in Uxbridge, Ont. A decision on just one new auto assembly plant can affect thousands of jobs and where hundreds of thousands of cars are produced.

If there’s a lesson for Ottawa in all this, it is that auto makers can be just as determined as farmers in protecting their interests.

Trade deals are always about balancing interests. No one said it would be easy.