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NAFTA’s auto rules must be negotiated on fact, not fiction

October 3, 2017

Flavio Volpe is president of the Automotive Parts Manufacturers’ Association of Canada.

Trade negotiations are always a mix of politics and commercial reality. Those affected in the negotiations sometimes overstate their potential injury. In the end, negotiators usually back up their rhetoric with statistics as a means to identify their national interests and focus on the priorities identified by their respective governments.

Recently, U.S. Commerce Secretary Wilbur Ross spoke about the relationship between the Canadian, U.S. and Mexican automotive sectors using arguments focused on trade deficits, which he pointed out were not in the United States’ favour. Lately, to some, this is an important metric in judging bilateral and trilateral relationships. Others have countered this new argument by pointing out that those deficits are offset by a lot of embedded U.S. content coming back the other way. Unbowed, Mr. Ross’s department produced a new report that argues that the United States is getting a continuously diminishing portion of this coming from the other two countries since the signing of the North American free-trade agreement.

The data, which he noted ended in 2011, was presented as the key metric in establishing why NAFTA in his mind was bad for the U.S. automotive industry. The only problem with the argument was that the figures were wrong.

Canadian-based manufacturers know that a tremendous amount of content in the goods we produce originates in the United States. Mr. Ross quoted a figure of 15 per cent U.S. content in Canadian-manufactured automotive goods, down from 21 per cent at the signing of NAFTA. However, a recent Scotiabank Economics report put that figure at almost 60 per cent. Furthermore, since the restructuring of the industry after the global crisis in 2010, auto makers operating in North America have increasingly centralized their purchasing functions in the United States. The result is that, since 2011, Canadian suppliers have faced increasing pressure to supply their customers from their U.S. footprints or face additional scrutiny to demonstrate the competitiveness of their Canadian-based manufacturing facilities.

The pressure to supply from the United States has undoubtedly resulted in an increase in U.S. content in Canadian goods since 2011. The picture is equally accretive to the U.S.-content level in goods sourced from Mexico. According to Michigan’s Center for Automotive Research, U.S.-content in Mexican manufactured automotive goods has risen from 5 per cent before NAFTA to 40 per cent in 2014. In both cases, the U.S.-based automotive sector has increased its share of the pie, and that pie is bigger than the way the U.S. Commerce Department reports it.

In 1999, the peak year for automotive production in Canada, our industry manufactured 3.05 million vehicles while the United States produced 13 million. Ensuing years have witnessed an incredible globalization of automotive origin, design and manufacturing that has featured the dramatic rise of China, South Korea and Eastern Europe. Canada has sought to hold its own, but by 2016, that annual production figure had declined by 29 per cent. Over that same period, the U.S. production number has stayed relatively stable with a decrease of less than 8 per cent. Far from taking business away from U.S. industry, the Canadian automotive industry has looked at the relative American success with envy.

The North American automotive sector has benefited from the rise of skills, infrastructure and commercial activity in Mexico. This has resulted in a third global automotive manufacturing power in the NAFTA region. The emergence of Mexico has allowed for U.S. and Canadian manufacturers to count on Mexico’s competitiveness as their lower-cost jurisdiction to help bolster their fortunes against the rise of other global threats that boast such a partner. With Canadian firms operating 120 factories with more than 43,000 employees in Mexico, the future of our automotive industry is increasingly as interwoven with that country’s as it is with the United States.

As we move through the coming rounds of NAFTA negotiations, it is very important that all parties seek accurate counsel and up-to-date research to best serve the interests of the people and industries they represent. Canada, the United States and Mexico make great cars together. The industry in all three countries have supported this argument by making investments that know no borders and have strengthened their common value proposition against common external threats. It serves no one in any of the three countries to ignore the facts as we chart the next generation of success and prosperity. We are stronger together.

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