Historically, Canada relied on import tariffs to support growth in the automotive sector. Over time,these tariffs have been reduced considerably, such that today Canada is characterized as an open economy.
The foundation of Canada’s automotive industry is the Canada-United States Automotive Products Trade Agreement, or Auto Pact, which was established in 1965 and integrated the automotive markets in Canada and the U.S. Under the Auto Pact, Canada provided specified vehicle manufacturers with duty relief in exchange for maintaining a Canadian production to sales ratio. It is often argued that for most established manufacturers the Auto Pact was non-binding, since manufacturers routinely exceeded production to sales ratios by a significant margin.
For manufacturers not yet located in Canada, however, the Auto Pact acted as a strong incentive to begin production in Canada to save on tariffs. In order to extend the Auto Pact to new manufacturers, from 1975 to 1989, the government managed a system of special remission orders applying duty reductions to manufacturers not covered under the original agreements.
In 1989, the Canada-U.S. Free Trade Agreement (FTA) provided for the phasing out of duty remissions, in addition to closing Auto Pact membership (later incorporated into NAFTA). Under the FTA, vehicles and parts were exempt from duty if they met a 50% rule of origin for content.
With the transition to NAFTA, vehicles and major parts faced a content requirement of 56.5% commencing in 1998, rising to 62.5% on January 1, 2002. For all other components, the requirement is 55% as of 1998, increasing to 60% in 2002.
In October 1999, the World Trade Organization (WTO) ruled that the Auto Pact constituted a barrier to trade. As a result, Canada has commenced, as of February 2001, phasing out all remaining facets of the Auto Pact. Notwithstanding its initial importance to the industry, the end of the agreement is expected to have little impact on the sector, given the Canadian industry’s general competitiveness and favorable access to North American markets through NAFTA.
Going forward, Canada’s automotive sector is faced with a new set of challenges, including the globalization of production, supplier and assembler consolidation, and a mature North American market. The competitiveness of Canada’s automotive industry relative to other regions, both in the Americas and worldwide, will be a key determinant of Canada’s success in adapting to these challenges.
