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As NAFTA goes, Windsor goes: City at heart of Canada’s auto industry has most to lose if deal falls through

Windsor is already suffering from Trump’s steel and aluminum tariffs; auto tariffs in the wake of a NAFTA dissolution would devastate it

Alicja Siekierska – Financial Post
August 29, 2018

WINDSOR, ONT. — Radix Inc. once had ambitious plans lined up for this summer.

The Windsor, Ont.-based company, which specializes in automation technology largely for automotive manufacturers, was planning to double the size of its facility in the Canadian border city. Business had been booming, and construction was set to begin in August.

But nothing happened. Indeed, the project is now on hold due to U.S. President Donald Trump’s steel tariffs that added hundreds of thousands of dollars to Radix’s expansion plans.

“We had to say: this is going to have to wait,” said Shelley Fellows, vice-president of operations. “Our ability to expand, to hire more people in the region, to service more of our customers, to grow our business — that has been directly and measurably impacted by the steel tariffs.”

The Canadian auto industry has faced significant uncertainty in recent months due to those steel and aluminum tariffs, as well as the potential for tariffs on U.S. imports of vehicles and automotive parts and concerns about the future of the North American Free Trade Agreement.

These factors have left many businesses in Windsor waiting with bated breath as the Canadian government re-entered NAFTA negotiations this week, hoping a deal can be reached that will restore much-needed certainty to the region.

Reaching a new NAFTA deal has been on the minds of many in Windsor since negotiations first began more than a year ago. Business leaders and Windsor Mayor Drew Dilkens earlier in August stressed the importance of signing an agreement during discussions with Finance Minister Bill Morneau.

“There is obviously fear that comes with uncertainty and having a president who makes comments that you don’t know whether it’s rhetoric, whether it’s serious, or whether it’s going to change day to day,” Dilkens said. “It causes confusion and uncertainty and when that happens, you have investment that’s left on the sidelines until the picture becomes clear.”

That picture may finally clear up by week’s end.

On Monday, Trump announced the U.S. had reached a bilateral agreement with Mexico that he said would replace NAFTA, putting pressure on Canada to quickly return to the negotiating table and strike a deal by a Friday deadline.

The U.S. and Mexico even sorted out one of the most contentious aspects of the NAFTA negotiations: automotive rules of origin. Under the proposed deal, 75 per cent of a vehicle’s content will have to be sourced from the U.S. and Mexico (or Canada should it sign on), up from 62.5 per cent under the current NAFTA framework.

They also agreed that 40 to 45 per cent of an automobile’s content will have to be made by workers earning more than US$16 an hour, a move that should benefit Canada and the U.S.

But other issues remain, including Canada’s dairy supply management system. Canada’s Minister of Foreign Affairs Chrystia Freeland cancelled her trip to Europe this week and flew to Washington to resume bargaining talks.

Trump did not mince words on Monday when it came to what he sees as Canada’s option going forward.

“It’ll either be a tariff on cars, or a negotiated deal,” he said on Monday.

A tariff on vehicles and automotive parts would devastate the Canadian automotive industry. A TD Economics report said they would create permanent “scarring” and reduce Canada’s long-run economic capacity. One in five manufacturing jobs would be lost in Ontario.

Windsor would be hit especially hard.

“It’s the possibility of automotive tariffs that keeps me awake at night,” Fellows said.

Windsor is the epicentre of the Canadian automotive industry, something boasted about on the “Welcome to Windsor” signs surrounding the city of about 210,000 people, who can readily check out the Detroit skyline across the Detroit River.

Windsor is home to a Fiat Chrysler Automotive assembly plant that manufactures the Chrysler Pacifica, a minivan that is seemingly ubiquitous on the city’s roads.

It’s the possibility of automotive tariffs that keeps me awake at night
-Shelley Fellows

On one side of the FCA Windsor Assembly plant is a large sign that proudly proclaims: We are Windsor. The plant employs more than 6,000 people, which Morneau said he was surprised to learn about when he visited the plant in August.

Manufacturing represents a third of the city’s total GDP, a quarter of its total employment and business has been booming.

Windsor’s GDP exceeded three per cent between 2014 and 2017, according to the Conference Board of Canada, marking the city’s strongest expansion since the late 1990s. More than 8,000 jobs were created during that time period, pushing the unemployment rate down to 5.6 per cent from 8.9 per cent.

However, the Conference Board of Canada this month warned the city’s economic growth is expected to slow in tandem with slowing vehicle sales in the U.S.

Flavio Volpe, president of the Automotive Parts Manufacturers’ Association, said Windsor stands to be the community most affected by changes to automotive rules within a renegotiated NAFTA agreement. As NAFTA goes, he said, Windsor goes.

“If the agreement in principle that is on the table is what Canada signs, Windsor will do fine with real potential for growth,” he said. “If we don’t have a deal, and we’re forced to deal with American tariffs on cars and parts, then Windsor more than any other town would have a real big problem.”

Aside from the potentially devastating impact of auto tariffs, Windsor is already suffering from the steel and aluminum tariffs imposed by the Trump administration earlier this year.

Fellows said margins at mould makers in Windsor, including Radix’s parent company, Active Industrial Solutions, have been drastically affected by those tariffs because they are unable to pass the extra costs down to their customers.

“In some cases, they are delivering on money-losing contracts. That’s just not a sustainable business model,” Fellows said. “We love to operate in Canada. There’s a lot of skill here, and lots of support for research and development in Canada. But that choice may be taken out of our hands in the future, with all of this uncertainty.”

At Laval International Tool and Mould, a manufacturer based in Windsor, the steel and aluminum tariffs resulted in a six-per-cent hit to the company’s bottom line.

“That’s big when you’re only making margins of between eight and 12 per cent. It’s substantial,” said Jonathon Azzopardi, Laval’s president.

Azzopardi, who is also president of the Canadian Association of Mold Makers (CAMM) said his immediate concern is that the uncertainty surrounding NAFTA is prolonged.

“The breaking point for us will be if this goes long term,” he said. “I believe that Canadian manufacturers will stay in Canada, but it’s a question of where their next investment is going to be. If this trade war goes a long time, or it is a renegotiated NAFTA that is one-sided, or restructured into a bilateral agreement, you’ll see investment moving out of Canada.”

Last time I checked, cows don’t pay income tax
-Jonathon Azzopardi

Morneau tried to ease the community’s concerns when he toured the FCA assembly plant and also met with the Windsor-Essex Regional Chamber of Commerce and concerned business leaders.

“We recognize that Canadians and Canadian businesses are impacted so it reinforces our resolve, which has always been strong to get a renewed and improved NAFTA,” he told reporters after the meeting.

But some in Windsor just want to get a deal done.

Azzopardi would like to see the government make concessions on steel and aluminum, as well as the dairy supply management system. He said Canada should tighten rules of origin to prevent low-cost producers from dumping steel into Canada and then gaining access to the U.S. market.

“Preservation of this commodity and industry is not fair and should not be the hill this agreement dies on, and it especially should not be the sector we sacrifice the Canadian auto and manufacturing sector for,” he said, pointing out that, according to CAMM, the personal income tax from autoworkers alone could purchase the dairy industry in less than two years.

“Last time I checked, cows don’t pay income tax,” Azzopardi said.

Fellows believes Canada doesn’t have a choice but to join the U.S.-Mexico agreement, even if it means making concessions in other areas.

“This is a position we’ve been backed into a corner on,” she said. “There may be some room to negotiate dairy supply management, but when you look at the stakes that are there with respect to the automotive industry, it would be a huge blow not to sign it.”

Prime Minister Justin Trudeau, who was in Ontario on Wednesday, said he understands the U.S. and Mexico want to get things done by Friday, but any deal has to be the right deal for Canada.

“No NAFTA deal is better than a bad NAFTA deal,” Trudeau told reporters.

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