Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 6 - Evidence - December 2 meeting
OTTAWA, Tuesday, December 2, 1997
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-11, respecting the imposition of duties of customs and other charges, to give effect to the International Convention on the Harmonized Commodity Description and Coding System, to provide relief against the imposition of certain duties of customs or other charges, to provide for other related matters and to amend or repeal certain Acts in consequence thereof, met this day at 9:35 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, today we begin our consideration of Bill C-11. It is commonly referred to as the Customs Tariff, although, as is typical with bills, it has a much longer title than that.
We will hear from four sets of witnesses this morning. The first group comprises officials from the Department of Finance and the Department of Revenue Canada. Minister Jim Peterson will be with us on Thursday when we wrap up consideration of this bill. We also have with us today representatives of the Canadian Vehicle Manufacturers' Association and the Automotive Parts Association, and the final witnesses today will be from the Japan Automobile Manufacturers Association of Canada.
Mr. Collins-Williams, would you begin by introducing your staff for the purposes of the Hansard reporters and then proceed to your opening comments. I understand that, as a result of a meeting between officials from Senator Tkachuk's office and my office with you yesterday, you understand the concerns that the witnesses following you will raise. I presume, therefore, you will attempt to deal with those during your opening comments in addition to any other opening comments you might make.
Mr. Terry Collins-Williams, Director, International Trade Policy Section, Department of Finance: With me today from the department are Mr. Gilles Le Blanc, Senior Chief, International Trade Policy; Mr. Fraser Laschinger, Coordinator for the Simplified Tariff; Ms Chris Wiecek, an officer in the International Trade Policy Division; and Ms Candace Breakwell, the Director of Tariffs Simplification.
We are pleased to have the opportunity to appear before this committee to assist in your examination of Bill C-11.
[Translation]
I have been told you were given the following documentation: a notice in the Canada Gazette dated March 23, 1996, on a proposal for an overall simplified Customs Tariff System; a brief summary of the parts of the bill concerned; the press release issued on October 7 when the ways and means motion on this bill was tabled, along with the accompanying information document and a booklet commenting on each provision of the bill.
Before answering your questions, I will just provide a brief overview of Bill C-11. Bill C-11 is the result of a study of the customs tariff and of its regulations, as announced in the February 1994 budget. The examination involved broad consultations with interested parties on a series of proposals, and was aimed at achieving the following objectives: adapting the customs tariff more effectively to competitive pressures which Canadian industries face as a result of trade liberalization, simplifying the tariff, and making it both more transparent and more predictable in order to reduce the regulatory burden and associated costs.
Bill C-11 repeals the existing customs tariff, replacing it with a tariff that updates and rationalizes the legislative text; proposes to broaden the scope of an existing power through which dues on imports can be reduced by Order-in-Council by extending it to all manufacturing inputs and to the service sector; provides for temporary authority to correct errors in the schedule by order; reduces customs tariffs on a wide range of manufacturing inputs.
The same tariff provisions also regulate requirements that are no longer justified. The bill replaces the Machinery Remission Program with specific tariff provisions in the Tariff Schedule; eliminates or reduces administrative procedures associated with some tariff provisions; groups tariff provisions into a single schedule -- instead of the current seven -- which contains about 8,000 provisions, instead of the current 11,000; establishes a simplified tariff structure, for example, by eliminating very low rates like those below 2 per cent by rounding off; and proposes amendments that complement the Customs Act.
[English]
The bill enjoys the broad support of Canadian industry which is anxious to see it implemented on January 1, 1998 as scheduled. Major industry associations -- namely, the Canadian Importers Association, the Alliance of Manufacturers and Exporters of Canada, the Canadian Chamber of Commerce, and the Canadian Pulp and Paper Association -- have written to the government to state their support for the bill and to seek its early adoption.
As indicated at second reading, despite the broad support the bill is receiving, two areas of concern have been raised. The first area of concern is the timing of implementation. Some are worried that their importing systems may not be ready for January 1, 1998. In recognition of the fact that there is a large change-over in data that must be installed in these systems, Revenue Canada has conducted, since April of this year, an extensive outreach campaign to provide the data needed to update importers' systems, including providing, in the summer, an electronic version of the database containing the necessary tariff and statistical information.
These efforts by Revenue Canada are continuing to ensure that importers have all the information they require before January 1, 1998.
In the same vein, some importers have asked that, for the first six months of 1998, Revenue Canada waive penalties for submitting incorrect statistical information. Revenue Canada has discussed this issue with the importing community and, in this regard, Revenue Canada has indicated that it is prepared to be flexible, provided importers make their best effort to apply the new tariff correctly.
Revenue Canada has also indicated that it is prepared to assist those who need help to identify the proper statistical information and to do so before the goods are imported into Canada.
The Canadian Vehicle Manufacturers' Association, which will appear before the committee today, has sought the withdrawal, from the schedule to the bill, of a duty-free provision for auto parts used in vehicle assembly in Canada by non-Auto Pact companies, namely Toyota and Honda. This would result in Toyota and Honda facing a duty on auto parts, something that has not incurred since Toyota and Honda commenced assembling vehicles in Canada. Auto Pact companies, on the other hand, continue to import all their parts duty free under the Auto Pact.
Since 1965, when the Auto Pact was implemented, no vehicle manufacturers, whether they operate under the Auto Pact, or not, have paid duties on the parts they import to assemble vehicles in Canada. The bill does not propose a policy change; rather, it continues the status quo to ensure a uniform manufacturing environment for all auto assemblers in Canada, so that Canada remains an attractive place for automotive investment.
The government has indicated to the industry that there is no current change in circumstances to cause it to change this policy.
Regarding the tariff on auto parts in the United States, a 2.5 per cent tariff applies. However, this tariff applies to imports of all auto assemblers in the United States, be they Auto Pact or non-Auto Pact companies. The United States, like Canada, provides a level playing field on input costs for all its auto assemblers. Bill C-11 ensures that this policy is continued in Canada.
Finally, I note that the Canadian Steel Producers Association will be appearing before the committee. I should point out that we have received no formal representations from the CSPA regarding the issues they may raise. We would be pleased to respond to any questions that might arise from their presentation afterward.
Senator Angus: As a matter of clarification, you are saying that this is basically a simplification bill; right? It is a morass of documentation, the whole customs tariff, and so forth. As the bill, by its very name, suggests, its main intention is to cut through all of this complexity and to simplify it for people in the business who interface one way or another with customs matters. Those are, the importers, customs brokers, your own people, revenue people. Is that correct?
Mr. Collins-Williams: That is correct. The objective of this bill, and the long consultation exercise we have been through leading to the drafting of this bill, is to simplify the tariff, to make it more transparent, more usable for the Canadian business community.
Senator Angus: In that sense, would you say that it is more of a technical bill? It is a housekeeping bill in the sense of what we have just said. Is that not correct?
Mr. Collins-Williams: Yes. In approaching the review of the Customs Tariff Act and the drafting of the amendments, our objectives were to achieve greater transparency and simplification of the legislation and the tariff itself.
Senator Angus: You do not mean in any way to change policy on big issues or on trade issues; correct? I am just trying to get the perspective of it.
We get housekeeping tax bills before us. We are told that we need not worry, that the changes are technical in nature and that there is nothing of substance in terms of a new policy direction.
We were presented with a pile of documents the other day, which Senator Meighen measured at 30.24 centimetres. His assistant nearly got a hernia carrying it in to the Senate chamber on the day of Senator Meighen's speech.
Mr. Collins-Williams: I will ask my colleague, Gilles Le Blanc, who directed this exercise, to explain in more detail our objectives and how they relate to policy.
Senator Angus: Do you understand the thrust of what I am getting at? There are times when we have debates about public policy. If there is evidence that would suggest reason for change, then it is aired and we discuss it. When it is technical in nature, we understand that you are the experts and that you are only trying to streamline the facilitation, if you will, of the legislation, not to bring in new policy. I am not too sure with this bill because of what I am hearing.
Mr. Gilles Le Blanc, Senior Chief, Department of Finance: As Mr. Collins-Williams has indicated, this initiative has two main objectives. The first was to try to adapt the tariff to make it more responsive to the competitive pressures that domestic industry is facing as a result of freer trade, partly in the North American market. The other aspect was to simplify the tariff and lessen the regulatory burden on industry and government.
On the competitiveness side, already in 1995 the government has implemented tariff reductions on a wide range of manufacturing inputs. That was part of the tariff simplification initiative. With the competitiveness aspect, an aspect of that was addressed in 1995. That was in anticipation of the scaling-down of the drawback program under the NAFTA on January 1, 1996. Basically, the government implemented those tariff reductions to maintain and enhance the competitiveness of Canadian industry. That initiative was very well received by the domestic industry. It was implemented in June 1995.
In simplifying the tariff, we have made proposals which have some policy ramifications. For example, a provision exists right now in the tariff that allows for unilateral reductions in the rates of duty on some inputs used in Canadian manufacturing. We propose to broaden this to cover a broader range of inputs as well as to extend this to the service sectors for their inputs when they are using goods in the provision of services. In that sense, this is the broadening of an instrument which reflects a policy to assist domestic industry in improving its competitiveness. This was put to the Canadian public and it was well received.
Senator Angus: That is an example of the type of policy.
Mr. Le Blanc: That is right.
Senator Angus: It is not exclusively technical and a matter of simplification, it has some overriding policy provisions.
Mr. Le Blanc: I agree, but it is not new policy. This is existing policy.
One of the objectives is to adapt the Customs Tariff to the pressures the industry now faces. We have stated that we would make every effort to help the industry improve its competitiveness in the world market and in the domestic market.
Senator Angus: Mr. Collins-Williams indicated that two problems have been raised with respect to the legislation. The first relates to the timing of implementation which I gather, if the bill proceeds through Parliament on schedule, would be January 1, 1998; is that correct?
Mr. Le Blanc: Yes.
Senator Angus: We have heard representations from the customs union people who represent the people at the borders who must deal with these matters. They told us that implementation of this bill would, in some cases, create new duties for them and, in others, eliminate duties. However, the overriding representation they made to us dealt with proper training.
Ms Breakwell, can you give us the assurance that, as far as the department is concerned, everything will be according to Hoyle and these folks will be able to do their jobs properly on January 1, 1998?
Ms Candace Breakwell, Director, Tariff Simplifiation, Trade Policy and Interpretations Directorate, Department of Revenue Canada: Absolutely. As a matter of fact, when the motion was first tabled in the House of Commons in April, we started working with industry, releasing all kinds of information on the motion and what that it to business generally. That began in April very aggressively by means of the electronic bulletin board and departmental bulletins.
With respect to departmental training, we immediately established several internal committees with regional representatives. We also established a committee to review the type of training that is required, not only at the border and the regional offices, but at headquarters.
As of June, we started developing national training programs for every officer in the regional offices respecting the proposed amendments to the Customs Tariff and the Customs Act. In early November, we delivered the training sessions to the regional trainer representatives who are currently delivering those training packages to every officer in the region. We have sent out 9,000 training packages. I am confident the training will be finished by early December.
Senator Angus: The record will reflect it is now December 2.
Ms Breakwell: By the end of this week or early next week, training will have been completed.
In addition to those formal training packages, over the summer we have been quite aggressively working and communicating with the regions on the details of the bill and what it means to their work.
Senator Angus: That is good. What comes across from the representations these workers have made to us is a concern that, given the general cutbacks in the labour force in this area, insufficient resources will be committed to the customs offices to deal with these new developments. Can you again give us your assurance in that regard?
Ms Breakwell: Yes, there will be sufficient resources. In regard to the custom processing side, the framework, what we attempted to do and did do is simplify the process not only for business but for the department. We will have a more efficient way of dealing with the processing of adjustments, refunds and appeals that would allow our staff to target more efficiently on areas of non-compliance and high risk.
At the same time, we can make those investments with business to educate them and, through achieving long-term goals, we will reduce a number of problems or misunderstandings. As a result of that improvement in the administration, we know there will be no requirement for additional resources.
Senator Angus: One of the most dramatically made points had to do with the determination processes. One of the statements in their brief was to the effect that what they would have had 30 days to do in the past they now have 30 seconds to do. I thought that sounded quite striking. What is your response to that?
Ms Breakwell: As I indicated, in keeping with the objectives of the bill, tried to simplify the way determinations, appeals and adjustments are processed.
We removed the 30 days from the determination process deliberately because the current system is a very transactional-based system; that is to say, it is paper driven. The decision was made that we no longer required the 30-day review. As the Customs Act does speak to voluntary compliance, importers and brokers are accountable for giving us accurate trade data. Therefore, we will make the investment in the verification function and the client services function rather than in the paper-driven processing environment. We are moving from a transactional environment to a more global verification environment. We will make investments in researching areas of high risk, non-compliance and client education. We do not need the 30-day review period.
Senator Angus: Do you think that will create a problem?
Ms Breakwell: No.
Senator Angus: The other point you raised, Mr. Collins-Williams, related to Auto Pact companies.
Senator Oliver: Before the witness deals with that point, I should like to ask a supplementary question.
In response to the first concern raised, that is, the timing and the implementation of new systems, you had been asked for a six-month moratorium by certain groups and your response to that was that you were prepared to be flexible if importers used their best efforts. I would suggest that that is not a direct answer to a request for a six-month moratorium. Will you agree to their request for a six-month moratorium while they work out the kinks, or will you use your discretion and carry out the law if it is in your best interests? Will you or will you not grant the six months requested?
Ms Breakwell: Yes, we will. We have already written various industry groups and the two national service provider associations to confirm our position.
We will be flexible with respect to the accuracy of the statistical information for the first six months. That means that we will not be imposing any penalties for inaccurate information. However, there are some conditions. One is that the importers and brokers must use a valid 1998 number. The eight digit tariff information in the bill must be correct. They must also show due diligence.
Our overriding theme has been that we would be happy to assist importers who are having problems in identifying their ninth and tenth statistical digit and that the they should come to us for assistance prior to the importation of the goods.
The Chairman: In light of the fact that you sent letters to various groups, would you be willing to table those letters with the committee?
Ms Breakwell: Yes, we would. I do not have them with me, but we will be pleased to provide them.
The Chairman: Our staff would like to see them before our meeting on Thursday. We would appreciate you forwarding them to our clerk.
Senator Angus: Continuing on this second point of concern, as I understand it, it relates to tariff item 9958.00.00 at page 2388 of the Customs Tariff Schedule. Is that one of the two areas of concern that has been raised?
Mr. Le Blanc: Yes.
Mr. Collins-Williams: That refers to the automotive parts tariff.
Senator Angus: This tariff item reads:
Parts, accessories and articles, excluding tires and tubes, for use in the manufacture of original equipment parts$
I gather that item is known as "OEP parts".
...for passenger automobiles, trucks or buses, or for use as original equipment in the manufacture of such vehicles or chassis therefor.
You indicated that there was no fundamental policy change, that this represents maintenance of a policy that has already been made. My question is: Am I correct that at some point there was a policy decision made which led to the passing of an Order in Council which expires on December 31 this year?
Mr. Collins-Williams: Yes.
Senator Angus: What was the policy decision that led to that Order in Council, in terms of a change from the Auto Pact arrangements that were theretofore in effect?
Mr. Collins-Williams: The Order in Council provided duty-free importation of automotive parts. That was not a change in policy previous to 1995 when it was introduced but, rather, a response to a change in the conditions relating to duty remission and duty drawback which had been the instrument by which non-Auto Pact automotive manufacturers in Canada had been enjoying duty-free treatment for the import of their parts until the end of 1995. As a result of the NAFTA, we were obliged to do away with what are called performance-based duty remissions and duty drawback as of January 1, 1996. In order to be able to continue to provide duty-free entry for parts for those vehicle manufacturers in Canada, we put in place a new instrument, which was the Order in Council.
Senator Angus: That Order in Council had a sunset date of December 31. What was the policy consideration that led to putting that in, rather than leaving it open-ended? If everybody had their minds made up that this was the right thing for Canada, why put a 31 December 1997 date on it?
Mr. Collins-Williams: I will ask Mr. Le Blanc to reply.
Mr. Le Blanc: There is no policy significance to the December 31, 1997 date; it applied to thousands of special tariff codes or provisions respecting the input goods. That was done because, on January 1, 1998, we are going to have duty-free trade between Canada and the United States pursuant to the FTA. It was decided administratively that we would review the need to continue those before the FTA comes fully into effect. With duty-free trade with the United States, a lot of those provisions were no longer needed. It was decided that we would continue some and not others. Under the new tariff, basically, that review has taken place because a lot of those special tariff provisions have been eliminated and others have been converted to tariff provisions in the new single schedule. One of those codes that have been converted, because there is significant trade under them, is the code you have just mentioned. It used to have a different number, but now it is part of the schedule under Chapter 99.
Senator Angus: The particular tariff item I read out does not apply exclusively to trade with the U.S., does it?
Mr. Le Blanc: No.
Senator Angus: On the contrary; it is an exception to the rules.
Mr. Le Blanc: No, no. By way of background, with regard to those special provisions or codes that exist under the current tariff, if 100 per cent of the trade were from the United States, there would not be a need for a special provision as the goods will come in under the reqular tariff provisions duty-free form the U.S. in 1998. That particular provision applies across the board. It applies on a MFN basis.
For codes where trade was not coming only from the U.S., but was coming from elsewhere as well, they will be continued, but they have been converted to tariff provisions in the main body of the tariff.
Mr. Collins-Williams: If I could just add something to Mr. Le Blanc's response, for clarification. In 1995, we were working actively on this tariff simplification exercise and we anticipated the coincidence of the January 1, 1998 elimination of all tariffs with the United States. We were expecting that we would be able to put the new simplified tariff in place, on January 1, 1998, which would absorb all of these codes fully into the tariff schedule. That is why these codes were, if you like, running to December 31, 1997, as a part of this larger exercise.
Senator Tkachuk: I am neither a lawyer nor an expert in tariffs. Can you take me through the process for an automobile part made in, say, South Korea and one made in the United States, prior to the Order in Council and then following it?
Mr. Collins-Williams: I will ask Christine Wiecek to reply.
Ms Christine Wiecek, Domestic Tariff Affairs, International Trade Policy Division, Department of Finance: Previous to January 1, 1996, before the Order in Council, if an automobile part was, say, from Korea or Japan or Germany, under the Auto Pact, the Auto Pact companies would get that part duty-free. If the part was being imported by a non-Auto Pact company, Toyota or Honda, say, that company would get duty-free entry through two major programs. The first is duty drawback, where a duty is applied when a part comes in and is incorporated into a finished good, and once it is exported the duty is refunded. The second is a production-based remission program, where non-Auto Pact companies receive credits to offset the duty. So, in effect, there was no tariff on any parts for either Auto Pact or non-Auto Pact companies.
Senator Tkachuk: Previous to the Order in Council?
Ms Wiecek: Yes.
Senator Tkachuk: What happens when the Order in Council comes into effect?
Ms Wiecek: Duty-free treatment will continue to apply to all automotive parts, for both Auto Pact companies and non-Auto Pact companies. There is no change. As well, with tariff simplification there is still is no change because the parts will continue to come in free for both Auto Pact and non-Auto Pact companies.
Senator Tkachuk: What about tires and tubes?
Ms Wiecek: Tires and tubes are excluded.
Senator Tkachuk: Why?
Ms Wiecek: They have been excluded since 1965 under the Auto Pact. I guess there have been some sensitivities with tire manufacturers; they have always been subject to duty.
Senator Tkachuk: That is protectionist. I am just asking because it stands out: tires and tubes.
Ms Wiecek: Yes, but they have been excluded since 1965.
Senator Tkachuk: I do not understand. Will this mean they are now included?
Ms Wiecek: No. Duties are still applicable on tires and tubes.
Senator Stewart: What you are telling us is that what happened in 1995 is that the technique by which the non-Auto Pact companies could bring in parts was simply changed.
The naive person standing at a distance might say that, under the free trade agreement or the NAFTA, a decision was made that duty remission programs based on performance would be eliminated as of January 1, 1996, and that the drawbacks would be eliminated. Clearly, that had a purpose. The purpose was to ensure that these non-Auto Pact companies would not have, in effect, duty-free access to these imported parts.
The Governor in Council then brings in an Order in Council which does, by another technique, what was intended to be terminated under the free trade agreement or the NAFTA. How do you explain that the naive, distant observer is wrong?
Mr. Collins-Williams: To explain the situation you describe, senator, we have to explain the negotiating dynamic that occurred in the FTA and then in the NAFTA. It was a negotiating objective of the United States to remove performance-based duty remission and deferral programs from the Canadian system across the board, not related only to automotive trade. In the course of the negotiations, we accepted this discipline and obligation that we would remove performance-based remissions -- that is, that we give duty remission or special duty treatment in return for a Canadian company undertaking to do certain things, such as manufacture something in Canada. The Americans objected to that. They have objected to it for a long time.
One of their objectives in the FTA and subsequently the NAFTA was to get that out of our system. In the context of the negotiation, we agreed to that. We were not agreeing that we would necessarily change our tariff treatment. That was not part of the negotiation.
What we did, as you had first described, Senator Stewart, was change the instrument by which we allow duty-free entry of automotive parts, consistent with the long-standing policy to allow duty free entry.
Senator Stewart: You are saying that the U.S. wanted to accomplish the elimination of subsidies concealed in our Customs Tariff policy.
Mr. Collins-Williams: I would prefer to call them "performance-based remission programs".
Senator Stewart: The word "subsidies" would not be understood in the United States because there is no such thing as a subsidy in the United States.
Mr. Collins-Williams: I believe there are many subsidies in the United States. I would not apply the term "subsidy" to these programs because it might expose us to further forms of discipline under international trade law.
Senator Stewart: Whatever terminology one wishes to use, what the U.S. appears to have wanted to do was stop the Government of Canada using its Customs Tariffs to achieve industrial production goals in Canada.
Mr. Collins-Williams: Yes, to be able to impose certain conditions in return for special tariff treatment.
Senator Stewart: We agreed to that, but we made it perfectly clear that we retained our right to rate our import duty on automotive parts where, in the judgment of the Parliament of Canada, it ought to be set; is that correct?
Mr. Collins-Williams: That is exactly correct.
Senator Stewart: We achieved that initially by the Order in Council, which of course was made under appropriate statutory authorization. Now you are coming here requesting parliamentary action to do what the Americans expected we would do back in 1995; is that correct? There is nothing sneaky about what the Government of Canada is doing.
Mr. Collins-Williams: No. What we are doing is perfectly transparent, and the Americans understand and know that.
Senator Stewart: They understood it at the time.
Mr. Collins-Williams: Yes. We are now encompassing this and many other duty-free entry provisions fully within the tariff, so they are fully transparent and immediately understood by importers.
Senator Angus: I believe, sir, you have had substantial representations and complaints from the Canadian Vehicle Manufacturers' Association about the particular item I quoted earlier. They said the new policy is changing the nature of the Auto Pact agreement, which has been in effect since 1965.
Mr. Le Blanc: Yes, they approached us, but only recently. That proposal dates back to March 1996. It has been in the public domain since then, and it was only in late September that we received representations with respect to that particular tariff item.
Senator Angus: You had no complaints from them before, and you are saying they were well aware.
Mr. Le Blanc: In fact, we received representations in the fall of 1996, but it did not bear on that.
Senator Angus: When you received these representations in September of 1997, what was the government's response?
Mr. Le Blanc: The government response was essentially that this is no change in policy; it is the continuation of the status quo -- that is to say, no manufacturers of cars in Canada have ever paid duty on the parts they require to manufacture cars or assemble cars in Canada.
Senator Oliver: What about Honda and Toyota?
Senator Angus: Are you suggesting to this committee that a duty remission process with criteria for performance, as your colleague mentioned a moment, ago is the same as a zero tariff?
Mr. Le Blanc: The fact of the matter is that no duties have been paid.
Senator Angus: No duties are paid when people are able to comply with the various conditions. In my 38 years of legal experience, to get a duty drawback through the remission process is a cumbersome task. You must establish that all the conditions have been complied with, which is different from having had to pay no duty at the outset.
Ms Wiecek: With respect to parts, both under the Auto Pact and the non-Auto Pact, the only condition is that they must be used in original equipment manufacturing. We are not talking about after-market parts. Neither Auto Pact companies, nor Toyota and Honda, can import an auto part duty free and sell it to Canadian Tire. The only condition is that they take it, use it, and manufacture a vehicle in this country.
Senator Callbeck: Mr. Chairman, the question I had regarding the duty has been answered.
However, I should like to know if the witness done an economic impact study. Has anyone done an economic impact study? Will there be any winners or losers as a result of passage of this bill?
Mr. Le Blanc: We have estimated, in terms of revenue forgone by the government or duty savings to industry, a figure in the order of $90 million for 1998.
Senator Callbeck: Do you anticipate that any Canadian companies will suffer because of this legislation?
Mr. Le Blanc: This bill was developed over a period of three years, after extensive consultations with stakeholders. The government has received not only letters of support for the bill from major industry associations but also letters asking that the bill be adopted in time for implementation on January 1, 1998.
We have been working closely with industry in elaborating and developing this legislation. The reception has been very positive. Even those who are to appear here later have indicated that the bill is a good bill, although they have some concerns with one particular provision. Based on those consultations, I feel that industry is anxious to see it implemented.
Senator Stewart: I want to explore this a little to determine whether the Auto Pact comes in to the picture. We all received a copy of a letter from Tayce A. Wakefield, Vice-President, Corporate Affairs, General Motors of Canada Limited, the second paragraph of which states:
The Auto Pact was established in 1965 as Canada's strategic automotive policy. It provided duty-free treatment to automotive manufacturers prepared to commit to production and sourcing requirements. In the 1980s, when transplant manufacturers invested in Canada, only CAMI Automotive --
I understand that to be Suzuki GM Canada. The letter continues:
...was willing to make the production and sourcing commitments to join the Auto Pact. Honda and Toyota were not prepared to make the necessary commitments and chose not to join the Auto Pact when they had the opportunity.
The letter then asks the members of the committee to seek to amend Bill C-11.
The implication is that Honda and Toyota, not having made certain commitments, should not be receiving the benefit of a zero-rated tariff as provided in this bill because they did not join the Auto Pact.
Is there some particular benefit to Canada under the Auto Pact such that Honda and Toyota, which declined to join the Auto Pact, should not be eligible for the free importation of original parts?
Mr. Collins-Williams: Extending duty-free treatment for the importation of original equipment parts to all vehicle manufacturers in Canada does not extend the benefits of the Auto Pact to all vehicle manufacturers in Canada. That is because the other condition and benefit of the Auto Pact concerns the duty-free entry of motor vehicles into Canada which only Auto Pact companies enjoy and which non-Auto Pact companies such as Honda and Toyota, even though they manufacture vehicles in Canada, do not enjoy.
Senator Stewart: When you say "duty-free entry of vehicles", what immediately comes to my mind is movement across the Canada-U.S. border. Would you amplify the conditions that prevail there? What are the conditions with regard to the duty-free movement of goods under the Auto Pact as affected by the Free Trade Agreement? What about vehicles produced, for example, by GM in far away places -- that is, if they do produce them in far away places?
Ms Wiecek: Under the Auto Pact, if Auto Pact companies meet two main conditions of a certain production-to-sales ratio and a certain Canadian content ratio, they have the right to import vehicles duty free from anywhere in the world -- that is, from the U.S., Japan and Mexico. Previously, under the duty remission programs, Toyota and Honda were able to import some of their vehicles duty free. Since these programs were terminated on January 1, 1996, Toyota and Honda must pay duty on every vehicle they import.
Senator Stewart: But not on parts, only for original manufacture?
Ms Wiecek: Exactly. There has been no duty collected on parts imported by either Auto Pact or non-Auto Pact companies since 1965 under the Auto Pact, and since the mid-1980s when Toyota and Honda set up their plants in Canada. The only condition relating to parts is that they must be used to assemble a vehicle in the country.
Senator Meighen: Is my information correct that the United States still has an effective tariff of 2.5 per cent on OEM automotive parts?
Mr. Collins-Williams: Yes. The United States applies a 2.5 per cent tariff on original equipment parts to all importers from all sources. They have no form of preferential or discriminatory tariff.
Senator Meighen: They apply it to everyone; and we propose to apply it to no one.
Mr. Collins-Williams: They apply a 2.5 per cent tariff to all importers into to the United States; we apply a zero per cent tariff on original equipment parts imported by all importers. We have a difference in the tariff level, but not in the treatment among importers within our two countries.
Senator Meighen: Is the rationale that, because an importer would not have to pay a 2.5 per cent tariff, such importer is encouraged to import into Canada?
Mr. Collins-Williams: The rationale is: That is the effective tariff treatment we have been providing since 1965, namely, 0 per cent for automotive parts for original equipment.
Senator Meighen: Are you saying, Mr. Collins-Williams, that, regardless of what our major trading partner does, if our rationale since 1965 has been no duty, Parliament will continue with that?
Mr. Collins-Williams: We see no reason to raise our tariff and change the treatment we have used since 1965.
Senator Meighen: Do you anticipate that this will give a competitive advantage to Canadian importers and manufacturers?
Mr. Collins-Williams: Conceivably, it could. It should make them more competitive in that it reduces their input costs for assembly in Canada as compared to the United States.
Senator Meighen: Can you tell me whether any economic impact studies have been done by either government or private sector organizations to measure the impact of this proposal?
Ms Wiecek: I am not aware of studies. However, the level of manufacturing of vehicles and parts has been increasing quite strongly year over year.
Parts manufacturers had a record year in 1996. Their shipments were about $22 billion. For 1997, they are expecting $25 billion to $26 billion. Similarly, shipments of motor vehicles from Canada continue to rise year after year.
Senator Kelleher: At the time of the FTA negotiations, Industry Canada undertook studies of 25 Canadian sectors, one of which was the automobile sector. Those studies dealt partly with this issue.
Senator Meighen: I continue to be bedevilled by the fact that there is a group that is very strongly opposed to this proposal on the ground, among others, that it undermines the value of the Auto Pact and confers an unfair advantage on certain importers and manufacturers in Canada.
Your position, on the other hand, as I understand it, is that this is merely a continuation of what has existed since 1965, that there is no change and therefore no reason for anyone to be upset. Is that, however vulgar, a reasonable generalization of your position?
Mr. Collins-Williams: We can understand why the Canadian Vehicle Manufacturers' Association takes the position they do, in that they perceive an advantage to themselves if their competitors have to pay a tariff.
Senator Meighen: The competitors have never had to pay, at least not since 1965.
Mr. Collins-Williams: That is true. We do not believe that there is any change in circumstances which would justify imposing the tariff at this time.
Senator Meighen: Did you receive representations to that effect in the process leading up to the introduction of this legislation?
Mr. Le Blanc: Yes, in late September we received representations.
Senator Meighen: Not before that?
Mr. Le Blanc: No. That proposal, as I indicated earlier, has been in the public domain since March 1996.
Senator Stewart: Some of the analyses I read suggest that there is now considerable over-capacity around the world in automotive production, be it in Japan, South Korea, Europe, North America or South America. This suggests that questions of competitive edge take on a new importance.
Has there been an analysis of the origin of NAFTA-consumed automobiles? By "consumed", I mean the first purchase. Perhaps more important, has there been an analysis of where the parts -- be they motors, transmissions, or what have you -- come from? For example, how many GM motors are made in Brazil?
Has an analysis been made of what is really happening in the automotive industry, at a time when we are told that there is overproduction and when, with potential monetary devaluation in Europe, European-produced cars are likely to become less expensive in the North American market?
Mr. Collins-Williams: The Industry Canada analyses to which Senator Kelleher referred, which are sectoral competitiveness studies, have been updated, and the automotive sectoral competitiveness study has been updated and would contain a good deal of the type of analysis about which you ask, senator. I believe that we will have no difficulty in providing you with a copy of that sectoral analysis.
Senator Stewart: Thank you. That will be useful.
The Chairman: Is your argument essentially that the competitive marketplace has not changed? De facto, as opposed to de jure, I understand that so far we have had three different procedures: the procedure that preceded the Order in Council; the Order in Council; and now we are going to zero tariffs. There is a clear de jure difference but there is no de facto difference in terms of the competitive marketplace among companies manufacturing in Canada which, under all three regimes, through different legal means, have paid zero tariffs on parts. Is that essentially your position?
Mr. Collins-Williams: Yes.
The Chairman: Would it also be true that there is no reason you could not have put this in the simplified tariff and simply continued the Order in Council, in effect, past January 1, 1998; that that is not inconsistent with any of our other trade obligations?
Mr. Collins-Williams: We could have done that, although it would have been inconsistent with the thrust of this bill.
The Chairman: It would not have been as pretty or nice, but it would have been just as effective?
Mr. Collins-Williams: That is correct.
The Chairman: Is the schedule to the bill an integral part of the bill, in the sense that it can only be changed by legislation and not by regulation?
Mr. Le Blanc: Yes, the schedule is part of the legislation, but there is the power about which I spoke earlier that allows the rates to be reduced by Order in Council on inputs in order to assist Canadian manufacturers to become more competitive. That power is in the bill and it allows the government to reduce rates.
The Chairman: But not to increase them?
Mr. Le Blanc: It would allow them to be increased back to where they were, in situations where they were reduced, but not beyond the rate set by Parliament.
The Chairman: It cannot be moved from zero up?
Mr. Le Blanc: It could not go from 0 to 10 if it was five before and Parliament had set it at five.
Senator Tkachuk: Why were tires and tubes excluded, aside from the fact that, as you say, it was always there?
Mr. Collins-Williams: The tariff was left for tires and tubes to provide tariff protection to the Canadian producers of tires and tubes.
Senator Tkachuk: You say that the 2.5 per cent on importing parts is a duty drawback; in other words, the money came back and therefore the tariff was really removed by a credit. In fact, if you remove the tariff totally, you remove a potential hammer, do you not?
In other words, the Auto Pact argument is that because they did not fulfil their duties and obligations and become part of the Auto Pact, they were always faced with the fact that, even though you are giving a duty drawback, that 2.5 per cent could be imposed on them. In other words, they had no guarantee; is that not correct?
Mr. Collins-Williams: It could be imposed, yes.
Senator Tkachuk: By reducing it, you therefore remove any threat. In other words, they have less need to become part of the Auto Pact.
Mr. Collins-Williams: The reason for providing the duty-free entry, whether by remission and drawback, Order in Council, or under the tariff schedule as proposed now, was to enhance the conditions under which vehicle assemblers would assemble vehicles in Canada. We believe those conditions still exist and that duty-free entry for original equipment parts is still justified.
Senator Tkachuk: Why tires and tubes?
Mr. Collins-Williams: In that situation, a case has been made that a domestic industry requires a level of tariff protection.
The Chairman: Thank you for attending today. It would be useful if you stayed and heard the comments of the other witnesses.
I would invite the witnesses from the Canadian Vehicle Manufacturers' Association and the Automotive Parts Association to come to the table.
For the record, Mr. Adams, would you first introduce your colleagues and then proceed to give us a three or four minute opening statement?
Mr. David Adams, Director, Policy Development, Canadian Vehicle Manufacturers' Association: With me today are Ms Faye Roberts, Trade Policy Analyst, General Motors of Canada Limited; Mr. Michael Sheridan, Director of Government Relations, Ford Motor Company of Canada Limited; Mr. Ken MacDonald, Director of Policy Development, Automotive Parts Manufacturers Association; and Mr. Othmar Stein, Vice-President of Public Affairs, Chrysler Canada Limited.
You have already heard some of the background, probably more than you wanted to hear, on Bill C-11. However, today we want to address the particular issue that occupied the last part of the questioning related to parts. We do see this as a change in policy, contrary to what some of the representatives of the Department of Finance and Revenue Canada group mentioned earlier. We are concerned about the duty rate applicable to imported parts used in the manufacture of automobiles by non-auto parts manufacturers. The bill, as currently drafted, will reduce this duty to zero.
The CVMA has five concerns with this course of action which I will outline briefly.
First, the elimination of the auto parts tariff provides an incentive for transplant manufacturers to source parts from overseas as opposed to purchasing parts from Canadian suppliers. This is an important issue for the Automotive Parts Manufacturers Association, virtually all of whose members are also key suppliers to the Big Three.
Second, the bill undermines the value of the Auto Pact by conferring an Auto Pact benefit, namely, the right to import auto parts duty free, to manufacturers that have not made the commitment to Auto Pact production and sourcing requirements.
Third, unilaterally giving away the OEM automotive parts tariff, as the bill proposes, provides no benefit to Canada but rather takes away a negotiating chip that Canada should be using in talks with other countries to secure foreign market access for Canadian-built vehicles and parts.
Fourth, the elimination of the parts tariff puts Canada out of step with our major trading partner, the United States, which imposes an effective tariff rate on OEM automotive parts of 2.5 per cent.
Finally, this policy change is being implemented while Industry Canada -- you already heard mention of the study being undertaken -- is in the midst of a comprehensive review of the automotive sector in Canada which should be completed in the first half of 1998 and which explicitly includes a review of the trade policies applicable to this sector.
I wish to provide some historical context which I believe is important in light of the discussion around the table. There seemed to be some suggestion that no policy change had taken place. In fact, we believe a significant policy change has taken place.
Since 1965, Canada's fundamental automotive trade policy has been the Canada-US Automotive Products Trade Agreement, better known as the Auto Pact. Through this agreement, duty-free access to Canada was granted to companies that took on the obligation to build vehicles in Canada and, perhaps more importantly, to source parts here as well. In other words, companies were given the trade benefit, namely, duty-free access to Canada for their products, but only at the cost of an obligation in the form of production and Canadian value-added requirements.
Canada has benefited enormously from this regime. Not only did the Auto Pact member companies massively expanded their assembly capacity in Canada, but a whole new automotive parts industry sprang up to supply assembly plants located in Canada and the United States. Today, in fact, the auto parts manufacturers employ over 90,000 people; more than our own assemblers.
In the mid 1980s, however, the government began taking a path which is undermining the future of this extremely successful trading arrangement. At that time, both Honda and Toyota chose to set up operations in Canada. Neither company could immediately meet the Auto Pact requirements, however, so they asked the Canadian government for transition assistance in the form of an exemption from import duties. Rather than take a hard line with the new investors, as was urged by the members of the Auto Pact at that time, the Canadian government chose to grant both of these companies duty remission orders and drawbacks. Essentially, Honda and Toyota were granted the benefits of the Auto Pact without being forced to live up to its obligations. The only saving grace is that this policy was explicitly intended to be temporary. The Canadian government urged both companies to quickly aim for Auto Pact status, so that the remission orders could be ended.
In the 1987 Free Trade Agreement between Canada and the United States the Auto Pact membership was closed with the 1989 model year. Honda and Toyota were both already established in Canada at that point and were given the clear option of increasing their Canadian production in part sourcing or accept that they would be permanently excluded from the Auto Pact. Both companies made the business decision to remain outside of the Auto Pact and, instead, chose to rely on their duty remission agreements with the Canadian government, knowing full well that these duty exemptions were time limited and would eventually expire.
In fact, these duty remission orders finally expired on December 31, 1995. At this point, Honda and Toyota would have been required to pay duty on all parts imported into Canada. In the meantime, however, through fierce lobbying, the federal government provided them with further exemptions to import duties. They claimed, and continue to claim in documentation which we understand was forwarded to this committee, that it is unfair for duties to be charged on their parts imports when these duties are not charged to the members of the Auto Pact.
The Big Three, as members of the Auto Pact, vehemently opposed granting any further concessions to these companies in 1995. Auto Pact manufacturers have been granted privileges only at the expense of obligations, whereas Honda and Toyota chose not to accept the Auto Pact obligations when they had the opportunity to do so.
Nevertheless, the Canadian government chose to grant Honda and Toyota a further two years of exemption from duties on imported automotive parts. This was accomplished through an Order in Council which expires at the end of this year. Now, two years later, we find that this exemption from import duties, which had been granted as a temporary measure to Honda and Toyota in the mid 1980s and which was extended by Order in Council, is to be made a permanent fixture of the Canadian policy through its inclusion in Bill C-11.
I would now welcome any questions you may have.
Mr. Ken MacDonald, Director, Policy Development, Automotive Parts Manufacturers Association: Honourable senators, our industry represents the original equipment manufacturers in Canada, about $25 billion in sales in the most recent year, and about 95,000 employees across Canada, mainly in Ontario.
We have three basic points. Most important, Bill C-11 would mean the loss of a key bargaining chip that is used by Canada in negotiations for market access to countries including Europe and Japan. These countries have been mentioned in the study by the Department of Foreign Affairs and International Trade on Canada's priorities for market access.
Putting the zero tariff into the statute makes it permanent. On the other hand, if the tariff were set by an Order in Council, a signal would be sent to all concerned that this rate is an interim rate, not to be counted upon. In the latter scenario, a bargaining chip is still in place.
Our second point, the direct investment aspect, is that a 2.5 per cent tariff in Canada would give some comfort to companies looking at establishing facilities in Canada. They would be less vulnerable to competition from outside Canada, particularly from the countries that are importing under this tariff.
Our last point relates to the loss of revenue occasioned by the elimination of the tariff.
These points were made as early as September 1995 in letters to the Minister of Industry John Manley. Our position is not protectionism. We are saying only that free trade is not free if our concessions are not reciprocated.
The Chairman: Mr. Adams, in your presentation you focused on what you called a change in policy. You heard the evidence earlier; there has clearly been a change in the legal mechanism by which foreign manufacturers were treated. No one would argue there has not been a de jure difference but I am wondering what you mean by "policy".
Let me express that in a different way. There have been three mechanisms. One started in the early to mid-1980s. Then there was the Order in Council, and now we have this change. Have those changes had any impact on the competitive marketplace since, in fact, no duty has been charged on parts from the inception of the foreign manufacturers producing in Canada?
Mr. Adams: It will be clear from the testimony of the people who will be appearing after us that they recognize that the remission orders were put in place as a stepping stone to achieve full Auto Pact status. The Auto Pact has been the foundation, the fundamental trade policy operative in Canada since 1965, going forward. That has been substantiated in various studies up until 1992-93.
It should be clear to everyone around the table that that was the framework for which automotive policy was developed in Canada. With respect to whether it represents any competitive change, I would throw that one over to my colleague Mr. Sheridan.
Mr. Michael Sheridan, Director, Government Relations, Ford Motor Company of Canada Limited: The elimination of the parts tariff, from its current rate of roughly 6 per cent, which is the bound rate for the parts tariff, down to zero, would have an impact of about $700 for every vehicle produced in Canada.
The Chairman: That is in spite of the evidence that the tariff has not in fact been paid by anyone.
Mr. Sheridan: We recognize that the Auto Pact was the basis for our investment in the country, the basis for investment by all of the Big Three. We have lived up to the Auto Pact commitments. In doing so, we reaped the benefits of duty-free access for finished vehicles, as well as duty-free access for OEM parts.
We are now saying that we will confer this benefit to Toyota and Honda, who in 1989 chose not to own up to the commitments of the Auto Pact.
The Chairman: You have indirectly answered by not answering it. I asked whether there would be any change in the current marketplace if you put something in at zero which has de facto been zero since the mid-1980s.
Mr. Sheridan: We fully expected that this tariff which they were not paying was a temporary measure.
The Chairman: I am right that there is no change. However, there is a change in the sense that your expectation was that the tariff would go up.
Mr. Sheridan: We expected it to go up to 2.5 per cent.
The Chairman: In contrast to Mr. MacDonald, who was content to leave the Order in Council in place, you would not even have been happy leaving the Order in Council in place?
Mr. Sheridan: We agree with Mr. MacDonald. We view this as a tremendous opportunity for Canada to use this 2.5 per cent bargaining chip to open up foreign markets not only to automotive parts but also to finished vehicles.
The Chairman: Let me try again to get a direct answer to this question: Would you have been content to leave the Order in Council in place, which is what Mr. MacDonald said he would have preferred?
Mr. Sheridan: We asked that the tariff be reinstated at 2.5 per cent, which would make it equal to the U.S. at 2.5 per cent.
The Chairman: It would be equal to the U.S. 2.5 per cent for imported, but the U.S. has a 2.5 per cent on everybody. You wanted 2.5 per cent levied on some players.
Mr. Sheridan: We wanted 2.5 per cent on the non-Auto Pact participants.
The Chairman: That is in contrast to the U.S. where the 2.5 per cent is on both Auto Pact and non-Auto Pact manufacturers.
Mr. Sheridan: That is correct. We produce two vehicles for every one we sell in Canada. We also purchase from Canadian parts suppliers $5 billion worth of parts. We have invested $6 billion in Canada over the last six years as a result of making those commitments to Canada and owning up to the responsibilities and commitments of the Auto Pact.
The Chairman: Forget about this bill; you are seeking a change in the current situation which would in fact increase the cost of manufacture to the non-Auto Pact companies, regardless of whether this bill was around. Correct?
Mr. Sheridan: We viewed the Order in Council as a temporary measure which would conclude at the end of this year and we expected that tariff to be reinstated. In concert with the automotive parts manufacturers, we are asking that the parts tariff be reinstated at 2.5 per cent, although the bound rate in Canada is 6 per cent.
Mr. MacDonald: We asked that you change the tariff to an Order in Council, rather than a part of the statute, and also to return to the 2.5 per cent.
Senator Angus: Following on the Chairman's comments, I am pleased that Mr. MacDonald did not allow the Chairman to put too many words in his mouth there.
We have a fundamental difference, between the officials and yourselves, on this issue of whether there has been a policy change.
I understand your position to be that the Order in Council was introduced as a temporary measure and that you expected an implementation of the 2.5 per cent tariff as read out earlier this morning.
Can you explain on what evidence you understand that the zero tariff would be temporary in nature? As a supplement to that, you heard the officials say that you never really complained, to any degree, about this until September 1997. You have mentioned some letter sent in 1996.
Mr. Othmar Stein, Vice-President, Public Affairs, Chrysler Canada Limited.: To put this into context, you must remember that Honda negotiated its duty remission order with the Canadian government back in 1983, and Toyota shortly thereafter. The Canadian government at the time told them that the duty remission scheme was temporary -- that is the point we want to stress here -- and that they should move toward Auto Pact.
Senator Angus: That is important; it speaks directly to my question. It is hearsay. Is that in writing? Do you have evidence that the government said that at that time?
Mr. Stein: I believe so. I do not have the documentation with me, but I could certainly get that for you. Some of our people were involved in the NAFTA negotiations, at which time the matter was raised.
The closing of the Auto Pact was announced in the fall of 1987 and did not take effect until 1989. They had a full six years to meet the Auto Pact standards but did not even bother to try. Instead, they chose to rely on their duty remission. That is one of the key elements that we wanted to make clear.
The federal government has always maintained that this was a temporary measure and that they would re-evaluate it at certain times based on different trade negotiations.
Senator Meighen: I find it important that you say you were given assurances that it would be temporary. Could you give us some documentation in that respect?
Mr. Stein: I sit on the AAC, the Automotive Advisory Committee, which advises Mr. Manley and, when the Order in Council came in two years ago regarding this new status we were vociferous in our opposition to it. We did not like the way it had been implement. It seemed that, overnight, the Order in Council came in without any prior consultation. We certainly sent letters at the time. This was not raised for the first time this past September.
Mr. Adams: We have volumes of documentation that we can supply showing that we complained about this issue two or three years in advance, and most recently in September, as Mr. Le Blanc mentioned. We would be pleased to provide that to you, if you wish.
Mr. MacDonald: Our letter to John Manley was in September, 1995.
Senator Angus: Did you inquire whether this was a temporary measure or did you protest it as a policy change that violated your status under the Auto Pact?
Mr. MacDonald: Our letter in 1995 was to express our opinion that this was an ill-advised downward move for the reasons that I mentioned a few moments ago.
Senator Angus: There is a difference, in my view, between what is ill-advised and what is not ill-advised; and what is a bargaining chip and what is not. It might be a good bargaining chip that Canada could use. However, that is a matter of strategy.
On the matter of whether there was a clear understanding between the government and yourselves, I gather there were no discussions on the Order in Council and that, in effect, they blind-sided you.
Mr. Stein: Exactly.
Senator Angus: You were given to understand by the minister that it would be removed at this time, and that is why, in your view, a sunset date was included.
Mr. Stein: Yes.
Senator Angus: I now understand from the officials that the Order in Council in question contained many other items, not just this particular one.
Mr. Stein: This certainly was the one that affected our industry, and that is what I was getting at earlier. We were very surprised at the way it was implemented. As I said, we are a member of the Automotive Advisory Committee and, if anyone should have been informed of what was coming down the pipeline at the time, it certainly should have been our group. By the way, everyone in this room has representation on that committee. It was certainly not implemented in that way.
Mr. Adams: If I could follow up on that, it seems to me that what we are talking about is, to a large extent, a time continuum problem. If we were having this discussion in, for instance, 1989 or earlier, I think it would be fairly clear that we are talking about a policy shift from the parameters of the Auto Pact to allowing a duty remission scheme to continue for 10 or 12 years. The automotive policy of the time is documented in the 1983 Lumley Report, "An Automotive Strategy for Canada". It is documented in the U.S.-Canada Automotive Select Panel on the Competitiveness of the North American Auto Industry. It is also documented in the Automotive Advisory Committee 1992 report to Minister Wilson as part of the prosperity initiative. In each of those documents, the Auto Pact is set out as the framework from which automotive trade policy should move forward for Canada. We are making a policy shift.
Senator Angus: There appears, then, to be a fundamental disagreement between yourselves and the officials. Your testimony is that, once you protested the Order in Council in 1995, assurances were given to you and that, once you had outlined the reasons for your concern and so forth, there would be a change and that this was temporary. I want to characterize it correctly. I do not want to oversimplify the matter.
Mr. Adams: It goes back farther than that. It goes back to 1993 when the first stage of tariff reduction for parts actually took place. At that time, an Order in Council was put in place setting up two separate tariff codes, 6227 and 6228, which embodied a number of different parts. Tariff items under 6228 were immediately reduced to zero; and tariffs under 6227 stayed at 2.5 per cent when the current tariff level on automotive parts was 9.2 per cent. That was the first stage which had the tiered reduction. In 1995, those items under code 6227, which still had the 2.5 per cent tariff, had the tariff removed.
The Chairman: Do you know when in 1993 that was?
Mr. Adams: Late December, 1993, effective January 1, 1994.
I should like to read a letter to you dated January 11, 1994, from Industry Canada, regarding the first step.
Senator Angus: A letter to whom?
Mr. Adams: It is to my president Mr. Mark Nantais from Mr. Slawek Skorupinski, Director General, Automotive, Urban Transit & Rail Branch, and it states:
In arriving at the new tariff structure, we took into account the comments by all stakeholders, including your representatives on the AAC International Subcommittee, where the subject was discussed in detail. We were particularly sensitive to concerns about the impact on Auto Pact safeguards. Consequently, not all parts tariffs were reduced.
As the letter states, not all parts tariffs were reduced. They were sensitive to the safeguards in 1993 but, apparently, a policy shift took place in 1995 when that tariff was removed as well.
Senator Angus: Could you make available to us a copy of that letter at the end of the meeting today?
Mr. Adams: Yes.
Senator Angus: I understand you are appearing before our committee to ask that we, in our report, move an amendment to Bill C-11.What would you like us to do?
Mr. Adams: I have a copy of a suggested amendment which I would be pleased to pass around. You spoke earlier, Senator Angus, about item 9958 in the schedule. We are suggesting that an amendment be added to the tail-end of the description of the tariff item. I will read it to you, if I may:
...therefor, only if imported in accordance with the conditions of the Motor Vehicle Tariff Order, 1988.
That would effectively allow Auto Pact members the benefit but not non-Auto Pact members.
Senator Angus: Since September of this year, you have asked the government to make that amendment?
Mr. Adams: Yes.
Senator Angus: Am I correct in assuming that they did not like that idea?
Mr. Adams: Yes.
Senator Meighen: For my own clarification, did I hear you say that the American 2.5 per cent applies to all vehicles and parts imported into the United States?
Mr. Adams: Not all vehicles are imported at the 2.5 per cent level into the United States. The United States also has a tariff on trucks of 25 per cent.
Senator Meighen: What about vehicles manufactured in Canada under the Auto Pact and imported into the United States?
Mr. Adams: It would be zero.
Mr. Sheridan: That is the case for both Auto Pact and non-Auto Pact participants, so long as they meet the NAFTA requirements.
Senator Meighen: And vice versa?
Mr. Sheridan: Yes.
Senator Meighen: If this bill were to go through, what would be the difference for an Auto Pact manufacturer and a non-Auto Pact manufacturer, in terms of costs of production?
Mr. Adams: There would be no change for the Auto Pact manufacturer. The Auto Pact manufacturer would continue as it has for 30 years. The non-Auto Pact manufacturer would be paying duty on the parts it imported, not from the United States but from overseas.
Senator Meighen: They would not be paying duty if this bill goes through in its present form.
Mr. Adams: They would not be paying duty. Under the amendment we are asking for, they would be paying duty.
Senator Meighen: I want to concentrate on the bill as it is.
What would be the difference, if any, as it relates to an Auto Pact manufacturer and a non-Auto Pact manufacturer, if the bill goes through?
Senator Stewart: Do you mean in money?
Senator Meighen: No, in the cost of production. In other words, what is the incentive to be or not to be an Auto Pact manufacturer?
Mr. Sheridan: Under the Auto Pact, there is a requirement to build one vehicle for every one we sell in Canada and to maintain a 60 per cent Canadian value-added requirement. However, one of the benefits was not having to pay the parts tariff. The other benefit was that we were able to bring in vehicles from offshore at no duty. If you were not an Auto Pact member, you would have to pay duty on vehicles coming in from offshore.
This may be the tip of the iceberg. I suspect that in a year from now we may be back here discussing the elimination of the finished vehicle tariff as well.
Senator Meighen: There still is some advantage to being an Auto Pact manufacturer.
Mr. Sheridan: That is the ability to import offshore finished vehicles duty free.
Senator Whelan: Such as diesel trucks from Brazil.
Mr. Sheridan: If you meet the one-to-one production requirements in Canada, you would be able to import duty free vehicles from anywhere around the world.
Senator Meighen: Do currency fluctuations have an important role to play in your business?
Mr. Sheridan: They certainly do.
Mr. MacDonald talked about the bargaining chip. If we look around the world, overcapacity is an issue for our industry. Estimates are that by the end of the century, there will be 22 million units of overcapacity in the automotive world; that supply of our vehicles will outstrip demand by 88 assembly plants. Those estimates relate to the world-wide industry. There are many assembly plants in North America as well.
While overcapacity is increasing, certain countries around the world, such as Korea, are massively increasing their production capabilities. Last year, they passed us as the number six vehicle producer in the world. We are now number seven. The Koreans produced 2.5 million vehicles. That figure is expected to grow to 5 million units by the end of the century.
Over the last year, depreciation of the Korean currency has made the cost of building cars overseas tremendously lower than it is in Canada. We are saying that there is a bargaining chip here. Canada should be using a 2.5 per cent parts tariff to open up those markets overseas, such as the Japanese and the Korean markets, instead of giving it away. We view this as the tip of the iceberg. We suspect that in a year from now, as well, finished vehicle tariffs will be on the trading block. We foresee a flood of imports from offshore. That is the big issue in front of the industry today. Overcapacity, combined with the devaluation of currencies, puts at risk Canada's most strategic industry.
Senator Tkachuk: Toyota and Honda do not meet the one-to-one production requirements; is that correct?
Mr. Sheridan: They may well meet those requirements today. I am not sure if they will meet the Canadian value-added requirement going forward. However, in 1989, they had a choice to meet those requirements, to be held to those requirements under the Auto Pact, and they chose not to. They could have added an assembly plant or a major components facility, like an engine or transmission facility, or increased their parts purchases at that point in time -- they did not.
Senator Tkachuk: I remember the discussion that took place under the Auto Pact, that the Auto Pact itself was a fundamental policy that would not be changed under the free trade agreement and that it would be a policy that Canada would continue. I agree that there is a problem with respect to whether the 2.5 per cent should be reduced.
Departmental representatives indicated that they had not received any correspondence from you on the 2.5 per cent requirement. Had they informed you that they would be doing that, would there have been any reason for your not doing so? Did you expect that this would happen? There is a huge difference of opinion here.
Mr. Adams: It is fair to say that most of our correspondence occurred later, which gives you some indication of the level of consultation we were engaged in on the issue. Once the initial tiering down took place in 1993, there was substantial correspondence outlining our association's concern about the direction the government was headed with respect to the parts issue.
To go back to your point, senator, you are right -- the membership of the Auto Pact was closed under the free trade agreement. Other companies could not join the Auto Pact. That should not come as a surprise to Honda because they knew that was coming as well.
Paragraph 1 of NAFTA Appendix 300-A.1 actually incorporates the FTA Article 1001, which obliges Canada and the United States to endeavour to administer the Auto Pact in the best interests of employment and production in both countries. The Auto Pact is more or less enshrined both in the FTA and in the NAFTA.
Senator Whelan: With respect to the amendment you are suggesting, was it suggested to the House of Commons committee? Did you appear before the House of Commons committee?
Mr. Adams: Yes, we did.
Senator Whelan: Was the amendment suggested to them at that time?
Mr. Adams: Yes, it was.
Senator Whelan: When you refer to letters written in 1993 and an Order in Council, who was the minister in 1993? You said it became law in February 1994.
Mr. Stein: The minister of which department?
Senator Whelan: The department that you are concerned about. Who was the minister who wrote the letters; the minister who initiated the Order in Council?
Mr. Stein: I think it was Mr. Wilson.
Senator Whelan: Perhaps that is not necessary. We can find out afterwards.
Mr. Chairman, the witnesses continue to refer to the oversupply of automobile parts. I worked in automotive plants at one time, so I know a little bit about the industry. The goods are non-perishable. Oversupply can be foreseen. Why not include "management of supply"?
Mr. Adams: That is an interesting question. That is one of the things we are looking at because of the overcapacity. The fact is that if you cannot maintain a supply into your country, if imports start to flood certain markets, and if there are no controls, you face a problem from offshore, which concerns us.
We view that with serious concern. We see it as the thin edge of the wedge vis-à-vis the Auto Pact. At the beginning of this year, the new chairman of Toyota Canada called for the abrogation of the Auto Pact. They want the Auto Pact done away with because of the competitive advantage to us vis-à-vis their export markets and our domestic market.
Senator Whelan: We hear so much about free trade. Do you call the Auto Pact free trade?
Mr. Adams: It would be sectoral free trade between Canada and the United States.
Senator Stewart: Mr. Chairman, I asked a question earlier about overproduction, and these people have returned to that topic. I assume they have some statistics. Perhaps they could provide us with those statistics.
The Chairman: Thank you very much for your attendance here this morning.
The last group of witnesses this morning is from the Japan Automobile Manufacturers Association of Canada. Mr. David Worts, Executive Director, will make some comments to us.
Mr. Worts, because you have been sitting here throughout the proceedings this morning, and since we are scheduled to adjourn at 11:30, I am happy to extend the meeting for five or six minutes past 11:30. However, we cannot go beyond that because several members have another meeting to attend.
I would ask you to make a couple of quick comments, perhaps in rebuttal to some of the other comments that you have heard. But please make your case as quickly as you can, Mr. Worts.
Mr. David Worts, Executive Director, Japan Automobile Manufacturers Association of Canada: With me today from the Japan Automobile Manufacturers Association of Canada is Mr. Adriaan Korstanje, General Manager, Toyota Manufacturing Canada Inc.; also in attendance is Mr. Vaughn Hibbits, Senior Vice-President, Administration, Honda of Canada Manufacturing.
We appreciate the opportunity to appear before this committee. You have already heard a lot this morning. We will try to keep our remarks brief so that we will have time to answer some questions.
We are here to support the bill and the government's policy. We think it is, as you heard earlier, a continuation of the policy -- through, perhaps, a different instrument -- that has been in existence since 1965. There is the expectation that this will continue, certainly on behalf of Honda and Toyota.
On the specific issue they have raised, in particular the sourcing of parts from overseas, when the tariff went to zero through the Order in Council in the beginning of 1996, auto parts from Japan that were imported by non-Auto Pact companies -- namely, Honda and Toyota -- declined by 15 per cent whereas imports of parts from Japan by Auto Pact companies increased by 50 per cent during that year. The contention that zero tariff will lead to more sourcing of parts from overseas by those companies who would be affected by that directly is lacking.
There was also the point about the unilateral reduction of the tariff, giving up a bargaining chip. The fact that duty remission has been a policy of the Canadian government since 1965 certainly suggests that this is a bargaining chip that has not been given up; in fact, it has been used to attract investment into Canada.
A feature of the industry in Canada is that 80 to 85 per cent of all production in Canada is exported. You must look at the trade flows in and out of the country in order to get a clear sense of the industry. I do not believe that we are out of step with the United States. They have applied a 2.5 per cent tariff across the board; Canada chooses to implement a zero tariff across the board.
Finally, I wish to address the point about the Order in Council that was implemented in late-1995. It did, in fact, include consultations. I was a member of the international committee of the AAC in which we discussed this issue. It was discussed for several months prior to that, in the fall of 1995, with all participants from the industry. I do not believe it was either an abrupt or a blind-sided measure.
Perhaps I might ask if my colleagues have any specific comments at this time, and then we will be happy to take your questions.
Mr. Adriaan Korstanje, General Manager, Toyota Manufacturing Canada Inc.: Currently, we have invested more than $2.2 billion in Canada. When our current expansion is complete this year, we will meet requirements for the Auto Pact such as those involving a one-to-one ratio for production and sales. We will build two cars in Canada for every one we sell here and we will meet 60 per cent CVA.
The confirmation that duty remission and duty drawback would continue was the main basis of our original investment, and a basis for our continuing investment. When the original FTA precluded additional companies from obtaining Auto Pact membership, there was no decision on our part not to join the Auto Pact. It was not that we decided not to join but that the opportunity to join was taken away by the FTA. Our expectation, indeed the reason for our continuing investment, is that the duty conditions that existed when we invested would continue. I think the Government of Canada has, quite rightly, decided to continue that.
Companies, including the Big Three, make investment decisions based on their own cost structure, not on the cost structure of their competitors. Their cost structure is not affected by Bill C-11. Everything stays the same for them; everything stays the same for us.
Unlike the CMVMA, we are not asking you to give us competitive advantage. We are asking you to maintain a level playing field and a fair and competitive auto policy.
Mr. Vaughn Hibbits, Vice-President, Administration, Honda of Canada Manufacturing: Since our start-up in November of 1986, we have grown to the point where we are producing 160,000 vehicles a year. This far exceeds our sales in Canada. In December of 1995, we announced a new light truck facility. It is the only one in Honda's global operation and we are very proud to have it in Canada. We feel that it has a very bright future. With that plant, our total production will be 280,000 vehicles a year. That is 30 per cent of Honda's combined Canada-U.S. production capacity. That is far beyond the industry average in Canada, including the Big Three.
The other point I should like to make concerns parts purchases. In every year since we started our operations in Canada, there has been an increase in parts purchases. On the other hand, parts purchases from Japan have declined dramatically.
Our company philosophy is to maximize localization. Our actions speak louder than our words. Total parts in Canada will more than double with our new plant. The good news story includes seven new parts suppliers that have announced they are locating in Canada and are currently under construction. We will also increase by 50 per cent the number of parts suppliers from whom we are buying in Canada.
In terms of the Auto Pact, we have made a growing and long-term commitment to Canada. It was our expectation that we would eventually qualify for membership in the Auto Pact. However, that opportunity has been precluded as a result of NAFTA negotiations.
As far as policy is concerned, Honda believes that a country's domestic policy environment is very important. The most important principle for us is fair and equal treatment, which was what we relied on when we invested and expanded in Canada. We have never viewed this fair and equal treatment as a temporary measure.
Senator Whelan: In your presentation, you spoke about making representations. To whom did you make those representations? Did you make them to any elected officials? Some of the people to whom I spoke said that they had never been approached by anyone from your association. Or did you just make representations to bureaucrats?
Senator Angus: These witnesses support the legislation.
Senator Kelleher: They made representations to me.
Senator Whelan: I want to know where they make their representations.
Mr. Worts: I am not sure to which representation you are referring, but we certainly met with elected officials as well as bureaucrats on this policy issue. We are a member of the automotive advisory committee to Mr. Manley. As well, our industry gets together to discuss these issues.
Senator Whelan: One of my colleagues stated, "These witnesses support the legislation." In order to have the legislation on the books, someone must make a representation to someone. I should like to know about your correspondence and to whom you wrote concerning this matter, and so on.
The Chairman: As Senator Kelleher points out, Senator Whelan, the presentations were made to him when he was Minister of International Trade.
Senator Whelan: But he is not a minister of trade now; he is my colleague in the Senate. We are the chamber of sober second thought. I should like to have the right to soberly read all the documentation that you presented and to know to whom it was presented.
Senator Kelleher: I merely wanted Senator Whelan to know that, during my tenure as president, they did in fact make representations to me.
Senator Whelan: Being a minister does not amount to a hill of beans if the members in the House of Commons have to vote on something on which the minister has already made a decision.
I understand that some people were invited to appear before the House of Commons committee and did not do so. I know the chairperson of the House of Commons committee very well.
The Chairman: It happens to be his daughter, in case you did not know.
Did you appear before the House of Commons committee?
Mr. Worts: We did.
Mr. Hibbits: We did.
Senator Angus: Gentlemen, the three of you heard the testimony of the previous witnesses this morning, and you heard me question them on the issue of this being a temporary measure. As I see it, this issue turns on that.
I heard one of you say there was no question of blind-siding. Are you surprised to hear that other folks felt blind-sided because there was open discussion about the terms of the Order in Council before it was enacted?
Mr. Worts: Yes.
Senator Angus: You all affirm that?
Mr. Korstanje: Yes.
Mr. Hibbits: Yes.
Senator Angus: Were these other gentlemen privy to the same information you were privy to?
Mr. Worts: I cannot comment on their communication network, but certainly we were advised through the consultation process of the automotive international subcommittee.
Senator Angus: The words used which would not be favourable to your case were that you people "lobbied fiercely" and, as a result of those fierce lobbying efforts, the Order in Council was enacted.
At that time, was it your sense that it would be permanent relief?
Mr. Worts: Certainly, that was the understanding. Despite the fact that the Order in Council had a termination date, there was an expectation that this would be rolled over into the Customs Act through Bill C-11.
Senator Angus: Was the possibility expressed to you by officials at that time that this tariff simplification law would be coming down the pike and that, at that time, they would this roll over?
Mr. Hibbits: I have nothing in writing on that point, but I have been told that was the plan. We certainly never saw it as temporary. As well, it is not a change but a continuation of the same regime -- although the tools may have changed -- under which we started operations in Canada.
Senator Angus: One could derive from your comments that, in a year or two, it will be totally irrelevant, that you will be making so many of these parts here in Canada that the issue of duty will be academic. Is that your hope and plan?
Mr. Worts: My understanding is that there is a continuing process of localization, that both Honda and Toyota are expanding their operations, doubling their capacity in Canada, and that that will bring with it a subsequent increase in the amount of parts. I think you heard the number of suppliers that are being sought to supply these operations.
The issue is one of principle in many respects. We know that all auto makers in Canada are foreign owned. We think it makes sense for Canada to treat all foreign auto makers equally.
Senator Angus: It is a level playing field argument?
Mr. Worts: That is right.
Senator Stewart: I am not so concerned about the situation that prevailed at the time the Order in Council was made, as I suspect the situation was that the terms of the Free Trade Agreement or the NAFTA had to be complied with and the Order in Council technique was a quick way of doing that, thus avoiding the basic problem for the time being.
The basic problem seems to go back to what happened in the 1980s. I get the impression that, in that decade, Toyota and Honda were given the remission and duty drawback on the basis of the old infant industry argument. What has happened is that the industries have grown up through their early teens and their late teens and we now see an example many of the "industry ever infant" argument. It goes on perpetually.
What is wrong with that analysis: that you want the perpetuation of the conditions which were given to you when you could validly argue that you were an infant industry in Canada? You are now admitting that you are pretty husky adults, however, you want those same conditions to continue because you got them when you were two years old. What is wrong with that?
Mr. Hibbits: There is nothing wrong with it other than we are adults. We will meet Auto Pact status, but we are frozen out of it. Now we are adults who should have the privileges of adulthood, but we cannot have them in terms of being a member of Auto Pact. There must be some other way to recognize that we have grown up.
Senator Stewart: You say you are frozen out.
Mr. Hibbits: Through NAFTA negotiations, yes.
Senator Stewart: Has the question of changing that situation been taken up?
Mr. Hibbits: As I understand it, that would reopen NAFTA.
Senator Stewart: We need not go into that now.
Senator Tkachuk: I have a question on the Auto Pact. My understanding from some of the witnesses from the Big Three who were here earlier is that you had an opportunity to become part of the Auto Pact and enjoy the same privileges as they did, and Honda and Toyota chose not to. Why was that choice made?
Is it still possible for you to meet all the conditions and become part of the Auto Pact which would make this provision irrelevant?
Mr. Korstanje: For Toyota, there was no decision not to join the Auto Pact. There was a period of time before the free trade agreement when that might have been an option and, during that time, we were investing more and more and building, to the point where we now can meet Auto Pact performance standards. The opportunity was taken away by the free trade agreement. That is not the same as saying that we decided not to join. It is simply now illegal for us to do so, but our original and continuing investments were made with the full expectation that the benefits of duty drawback and remission would either bring us into the Auto Pact eventually, or would give us some type of equivalency situation as we met the performance requirements, which we are now able to do.
Mr. Hibbits: I think the previous team has said it so often that it lends credibility to the idea of a formal offer being made to us to join Auto Pact and a decision being made not to do so. I do not think it really happened that way. We must look at the time frame, where operations were in terms of maturity, and when a company could reasonably be expected to meet Auto Pact status, which we will more than do with our expansion, as will Toyota.
Senator Tkachuk: You have an exemplary production facility in Canada. Why would you be in favour of the tariff? Why would you not be buying from the local supplier?
Mr. Hibbits: We do. We buy from suppliers in Canada and the United States. We also buy a few parts from Japan.
Senator Tkachuk: Then why are you concerned about the 2.5 per cent?
Mr. Hibbits: It is because we still import some parts, even though it is a small minority of parts, from Japan. It is a cost issue. It is also a matter of principle. It is a matter of not incurring a non-necessary and discriminatory cost in a competitive business environment.
Senator Tkachuk: Is it a matter of getting cheaper parts? Of your vehicles, what percentage of parts would be bought offshore?
Mr. Hibbits: It is a very small percentage, between 10 per cent and 15 per cent at the most.
Senator Tkachuk: What kind of difference would it make if you were paying the 2.5 per cent on the cost of a vehicle here in Canada?
Mr. Hibbits: I have not made the calculation in dollars per unit, but it would not matter if it were $100 or $400 per car, the fact is that it is a discriminatory penalty imposed on us when we are manufacturing in Canada.
Senator Tkachuk: As parliamentarians, our concern must be that of our nation. In other words, we would be most concerned that our parts and automobile manufacturers in North America have equal access and no tariffs to pay when they are exporting product to Japan, Korea and so on.
Mr. Worts: For the record, there are no tariffs on either parts or vehicles into Japan. Despite what you may hear in the popular press, we believe the Japanese market is open. You can look at the success the European automakers have had in Japan. Their market share in the Japanese market is higher than it is in the United States. It goes more to the kind of products and the effort that is being made in those markets, particularly in Japan, which is a very competitive market. However, there are no tariffs on parts or vehicles.
The Chairman: Gentlemen, thank you very much for appearing before the committee today.
The committee adjourned.