Auto Tariff Debate
International Business: BUS – 2275 – C01
Case Study 2
February 27, 2015
Submitted to:
Alan Andron
IB1135
[email protected]
Submitted by:
Tashina White Cow
s0017728
[email protected]
BUS 2275 C01
Case Study 2
Auto Tariff Debate
Tashina White Cow
February 27, 2015
Abstract
The Japanese auto makers wanted to be treated to international trade principles, zero difference
between pact and non-pact members, and pay duty on only part of their own imports. The
American Parts Auto-Makers wanted the Japanese firms to commit to more Canadian
procurement. The American Auto- Makers did not want the Canadian Government to reduce the
6.7% Tariffs on Japanese imports. They wanted the Canadian Government to Reinstate the OEM
Parts tariffs from 2.5% back to 9.2% and receive support (which they did) from Canadian
Automotive Workers and Automotive Parts Manufacturers’ Association. The American AutoMakers also felt strongly that Toyota and Honda should not receive pact status. The main goals
of the Canadian Government was to augment the assemblers’ investments and increase
employment for Canadians. If I was in a position to offer the Canadian Government advice the
two options I would present would be: (1) Change the pact and the Tariffs and other such
influencers so that all the current automobile stakeholders are equal and therefore can engage
in a purely competitive market. And (2) Through an assessment to measure who provides better
services to Canadian consumers, brings in more investments and revenue to Canada and the
Canadian government, who provides more jobs to Canadians and will follow Canadian laws and
guidelines for business within Canada to ensure that their wishes are met and provides Canadian
Consumers with the diversity and quality of product that they have become accustom to and
adjust the pact/duty remissions etc. to greater benefit this company. The preferred option would
be the latter.
2|Page
BUS 2275 C01
Case Study 2
Auto Tariff Debate
Tashina White Cow
February 27, 2015
The Canadian Auto Tariff Debate
The Canadian Auto Tariff Debate occurred between three major stakeholders. Canada, the
American Auto-Makers and the Japanese Auto-Makers. Canada was looking for investors into the
Automobile industry as well as companies that would be able to produce more employment for
Canadians. The Canadian Market is a lucrative place for the automotive industry. The other
Major Stake holders would be the Japanese Auto-Makers and the American Auto Makers. Both
wanted to have a competitive edge in Canada and needed the Canadian governments’
cooperation to gain and keep their edge, by way of reduction of duties, tariffs and importing
costs. The American Automakers are comprised of the “Big Three” Automobile companies which
are General Motors, Ford, and Chrysler, it also includes Volvo as they were already a
manufacturing vehicles in the North American market at the time this pact was made. In 1966
Canada entered into a pact with the American Auto-Makers, which would make a single
integrated U.S.-Canada market for automobiles, trucks and parts.1 This meant that the pact
members did not pay duties on any vehicles or parts they imported into Canada, regardless of
the Country of Origin if the Canadian Value Added was about 60% and a vehicle was produced in
Canada for every vehicle sold.2 In the 1980s Canada began actively trying to recruit more Foreign
Direct Investment which led them to entice foreign automakers to Canada to boost the economy,
1
James H. Tiessen. “The Canadian Auto Tariff Debate” Richard Ivey School of Business, The University of Western
Ontario, Pg. 4
2
James H. Tiessen. “The Canadian Auto Tariff Debate” Richard Ivey School of Business, The University of Western
Ontario, Pg. 5
3|Page
BUS 2275 C01
Case Study 2
Auto Tariff Debate
Tashina White Cow
February 27, 2015
employment and FDI. This led to Japanese Auto-Makers beginning to enter the Canadian Market,
who were Honda, Toyota, Suzuki and Nissan. To entice the Japanese Auto-Makers to make their
entry into the Canadian Market Canada had offered duty remission based on Canadian
production, as well as location-based incentives.3 In 1965 the Tariffs on Canadian Automotive
and parts was 17.5% but by 1984 it was down to 11.4% and the remission programs began. In
1996-97 Canada had to discontinue its duty remission programs and essentially revoke the
“junior pact status” given to Honda and Toyota.4 The North American Free Trade Agreement and
General Agreement on Tariffs and Trade cause a sticky situation for importing vehicles for both
the American and Japanese Auto- Makers. The Americans were still allowed to import duty free
but the Japanese were charged a 6.7 % tariff, however they could import major vehicle
components such as Engines and Transmissions duty free. Following the changes to the
previously set out agreements both the Japanese and the American Auto-Makers had voiced
their concerns and what they would be expecting Canada to afford them and their counterparts
going forward.
The Japanese auto makers wanted to be treated to international trade principles which are those
of the General Agreement on Tariffs and Trades three main principles as described in the
Canadian Auto Tariff Debate are: “(1) non-discrimination, multilateralism, and the application of
the Most Favored Nation (MFN) to all signatories, (2) expansion of trade through the reduction
3
James H. Tiessen. “The Canadian Auto Tariff Debate” Richard Ivey School of Business, The University of Western
Ontario, Pg. 3.
4
James H. Tiessen. “The Canadian Auto Tariff Debate” Richard Ivey School of Business, The University of Western
Ontario, Pg. 6
4|Page
BUS 2275 C01
Case Study 2
Auto Tariff Debate
Tashina White Cow
February 27, 2015
of trade barriers, and (3) unconditional reciprocity among all signatories” 5; Zero difference
between pact and non-pact members, which was between GM, Ford, Chrysler (The Big Three)
and Volvo, Pact Members didn’t have to pay duty on the vehicles or parts they imported, from
any country but they had to be at least 50% North American, additionally Canada would refund
duties to pact members if they had a specified level of Canadian Value Added and produced one
car in Canada for each car sold. 6, and pay duty on only part of their own imports, which was a
6.7 per cent tariff on autos imported by the non-pact members from outside North America and
were allowed to import major parts such as engines and transmissions duty free. The Japanese
Auto-Makers wanted all the regional agreements (“The Pact) to comply with WTO rules.
The American Parts Auto-Makers wanted the Japanese firms to commit to more Canadian
procurement, which ultimately meant that Japanese vehicle companies would have to buy more
parts made within North America as opposed to Importing their parts, the Pact Members were
purchasing 94% of APAMs output.7 The American Auto- Makers did not want the Canadian
Government to reduce the 6.7% Tariffs on Japanese imports. They wanted the Canadian
Government to Reinstate the OEM Parts tariffs from 2.5% back to 9.2% and receive support
(which they did) from Canadian Automotive Workers and Automotive Parts Manufacturers’
Association. The American Auto-Makers also felt strongly that Toyota and Honda should not
receive pact status as they had been offered to join in the 80s but had declined then. The
5
James H. Tiessen. “The Canadian Auto Tariff Debate” Richard Ivey School of Business, The University of Western
Ontario, Pg. 6
6
James H. Tiessen. “The Canadian Auto Tariff Debate” Richard Ivey School of Business, The University of Western
Ontario, Pg. 5-6
7
James H. Tiessen. “The Canadian Auto Tariff Debate” Richard Ivey School of Business, The University of Western
Ontario, Pg. 8
5|Page
BUS 2275 C01
Case Study 2
Auto Tariff Debate
Tashina White Cow
February 27, 2015
American Auto-Makers did not want their duty free imports extended to competitors, this was a
benefit of being in the Auto-Pact.
The Canadian Government wanted to keep both the American and Japanese Auto-Makers happy
at the same time as both were investing in Canada, bringing more employment and had
numerous other benefits. They wanted to keep the Auto Pact and Continue Offering the Japanese
duty remission as well as tariff reduction on the vehicles and parts they imported. The main goals
of the Canadian Government was to augment the assemblers’ investments and increase
employment for Canadians. “By 1998 Japanese companies had made 38 auto-related
investments in Canada and employed approximately 8,800 people”8 Having both increased the
investments that they have in Canada because the company has to have a plant here to take
advantage of the Pact Benefits and Duty Remissions which can also increase the company’s
investment into the , country by the company investing in bringing other parts of their production
process to Canada as is exampled in the textbook “International Business The Challenges of
Globalization” It says “Toyota Motor Manufacturing Canada (www.tmmc.ca), a subsidiary of
Japan-based Toyota Motor Corporation, recently upgraded and expanded its assembly plants in
Cambridge and Woodstock, Ontario. As a result, Arvin Sango, one of Toyota’s auto-parts
suppliers, also increased its FDI investments by establishing a new production facility in London,
Ontario.”9 The Canadian consumers also enjoy the benefits of having both the Japanese and
American Auto-Makers in the Canadian Auto Market. There is more competition and diversity
8
James H. Tiessen. “The Canadian Auto Tariff Debate” Richard Ivey School of Business, The University of Western
Ontario, Pg. 4
9
Wild, Wild, Valladares Montemayer “International Business, The Challenges of Globalization” Pearson Toronto pg
219.
6|Page
BUS 2275 C01
Case Study 2
Auto Tariff Debate
Tashina White Cow
February 27, 2015
when both auto-makers are present in Canada; this means lower prices (of both vehicles and
parts for vehicles), safer vehicles and a wider selection of vehicles with possibly more options to
choose from.
If I was in a position to offer the Canadian Government advice the two options I would present
would be: (1) Change the pact and the Tariffs and other such influencers so that all the current
automobile stakeholders are equal and therefore can engage in a purely competitive market. And
(2) Through an assessment to measure who provides better services to Canadian consumers,
brings in more investments and revenue to Canada and the Canadian government, who provides
more jobs to Canadians and will follow Canadian laws and guidelines for business within Canada
to ensure that their wishes are met and provides Canadian Consumers with the diversity and
quality of product that they have become accustom to and adjust the pact/duty remissions etc.
to greater benefit this company. The preferred option would be the latter as it most specifically
appeases what the Canadian Government and Canadians want from an Auto-Maker. This might
mean having fines and other restrictions placed on Canada but it may actually be the better
option for Canada. As mentioned in class Apple corporation has encountered many fines from
not sharing their technological advances and market share with different countries and willing
pays them as it benefits the company more to pay the fines than to share their information. This
could be similar to the automotive situation in Canada.
If the Canadian Government was to open the market wide open to auto imports from all countries
the possible actions the US Automakers could take drastic measures and completely pull their
operations out of Canada, which would take their investments out of Canada and the
7|Page
BUS 2275 C01
Case Study 2
Auto Tariff Debate
Tashina White Cow
February 27, 2015
Employment that has been provided to Canadians. The American Auto-Makers would also have
a reason to complain to the World Trade Organization. Opening the market to auto imports from
all countries would take away the Competitive Edge that the American Auto-Makers have held
so tightly onto. It would reduce profits for their companies. With the reduction of profits that
could lead to companies trying to cut costs in other areas of the production cycle with could
possibly lead to the reduction in safety testing and additional safety measures that have been
taken or included in the make of a vehicle to make it the safest vehicle possible. All auto-makers
must abide by the Motor Vehicle Safety Regulations set forth by Transport Canada however most
to gain that competitive edge go above and beyond the Regulations. If there is no real benefit to
the company they may not feel the need to make their vehicles safer than they actually have to.
8|Page