the trans-pacific partnership and the a utomotive ... · the countries that have signed the tpp...

2 automotive industries association of canada

the trans-Pacific PartnershiP and the automotive aftermarket: threats and oPPortunities

The Trans-Pacific Partnership and the Automotive Aftermarket: Threats and Opportunities

Prepared for the Automotive Industries Association of Canada

Authors:Dmitry LysenkoIndependent ResearcherEmail: [email protected]

Saul SchwartzSchool of Public Policy and AdministrationCarleton University Email: [email protected]

The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the Automotive Industries Association of Canada.

Automotive Industries Association of Canada 180 Elgin Street, Suite 1400 Ottawa, Ontario K2P 2K3 Ph: (800) 808-2920 Fax: (613) 728-6021 Email: [email protected] Website: www.aiacanada.com

Automotive Industries Association of Canada Copyright © January 2016

ISBN #: 978-0-9940072-1-6

3automotive industries association of canada


Table of Contents

Executive Summary .....................................................................................................................................4

1. Introduction ..........................................................................................................................................5

2. Potential Impacts of TPP on the Automotive Aftermarket .................................................................... 6

2.1 The TPP Agreement .....................................................................................................................62.2 Effects of TPP on Different Sectors within the Aftermarket .......................................................... 82.3 Other Challenges ........................................................................................................................10

3. Possible Government Assistance for Aftermarket Adjustment ........................................................... 11

3.1 Traditional Trade Adjustment Assistance Programs ................................................................... 113.2 Current Trade Adjustment Assistance Programs in the United States and European Union ...... 123.3 Thinking Forward: Ideas on Globalization Adjustment Assistance ............................................ 133.4 Key Federal Programs for Adjustment and Development of Aftermarket Companies ............... 15

4. Conclusion and Recommendations .................................................................................................... 16

Works Cited ................................................................................................................................................17

APPENDIXTable 1: Canadian Tariffs on Auto Parts, 2013 .................................................................................. 19Table 2: Tariffs that Canada currently faces in other TPP Countries ................................................. 20Table 3: Canadian Exports of Auto Parts, OE and non-OE, 2014 (millions of CAD) ......................... 21Table 4: Canadian Imports of Auto Parts, OE and non-OE, 2014 (millions of CAD) ......................... 22



The Trans-Pacific Partnership (TPP) is a yet-to-be-ratified trade agreement among twelve countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. China, however, is not a signatory. Although the Government of Canada has agreed to sign the TPP, there is no guarantee the agreement will be ratified. However, if the agreement is ratified, it will lower tariffs on imported auto parts coming into Canada, lower tariffs on Canadian auto parts being exported to TPP countries, and lower the North American content required in vehicles and parts.

TPP is not likely to have a great impact on the automotive aftermarket. The biggest employers in the industry, the parts distributors and service providers, may benefit slightly if imported parts become cheaper, and in the longer term, if sales of new vehicles increase because of cheaper imports and marginally higher income for Canadians. Most manufacturers of aftermarket parts have already moved their production to Asia, but those few that remain - perhaps 20 companies - could be hurt by increased import competition, but could also be helped by tariff-free access to TPP countries. Because the volume of Canadian trade in auto parts to countries other than the United States and Mexico (with whom Canada already has a free trade agreement) is currently quite small, these impacts are unlikely to be large.

In this context, government Trade Adjustment Assistance (TAA) to help aftermarket workers and companies adjust to TPP would not be easily justifiable. The following report provides a brief overview of such programs. The report reviews TAA programs that existed in Canada from the mid-1960s to the end of the 1980s, at which point they were deemed ineffective and eliminated. The report then summarizes modern versions of TAA that currently operate in the United States and the European Union. Importantly, the latter programs demonstrate a design involving customized assistance.

Ultimately the argument is that aftermarket companies, and especially the manufacturers, will be more affected by international forces such as technological innovation, exchange rate movements and climate change initiatives, than by TPP. For that reason, it is believed that structural adjustment will continue in the aftermarket. To help with that adjustment, Globalization Adjustment Assistance (GAA) is needed. GAA – an idea concerning government assistance aimed at structural adjustment – has two principal features: (1) assistance to help all companies and workers adjust to all of the forces affecting them, not just import competition, and (2) benefits tailored to individual circumstances.

Five recommendations are provided:

1. Request that Innovation, Science and Economic Development establish a pilot GAA-style program that would focus on the aftermarket, along with a number of other industrial sectors. The diversity of the aftermarket would be an argument in favour of its inclusion because of the range of effects that might be observed.

2. Persuade Innovation, Science and Economic Development to modify the policy surrounding the Automotive Suppliers Innovation Program (ASIP), to include small and medium enterprise aftermarket manufacturers.

3. Promote the use of the Industrial Research Assistance Program among AIA members. This program, run by the National Research Council, provides customized advice (as well as financial support) to companies seeking to adjust to structural change.

4. Get involved, to the extent possible, in the affairs of an international committee that will be formed as part of TPP. This committee will be devoted to the challenges and opportunities facing small and medium-sized companies.

5. Request that the Canadian government introduce auto parts technical standards for health and safety reasons.

Executive Summary



Introduction

All vehicles need to be serviced, and when necessary, repaired. Vehicles that are less than five years old are typically covered by a warranty from the manufacturer, and are most often serviced and repaired by dealerships; those that are more than five years old are serviced and repaired in the automotive aftermarket.1

The automotive aftermarket contains a wide array of companies, ranging from corner gas stations to manufacturers producing and exporting sophisticated auto parts. Nonetheless, the majority of companies in the aftermarket are either service providers or parts distributors. Service providers do the servicing and repair that is not done by dealerships, and includes many independent repair shops. Parts distributors include “warehouse distributors” who might stock hundreds of thousands of unique parts, smaller wholesale distributors who stock thousands of unique parts, and much smaller parts retailers.2

A small group of Canadian companies manufacture parts for the aftermarket in Canadian factories. This sector has been changing very quickly in recent decades as companies that previously manufactured parts in Canada moved their actual manufacturing operations to Asia (largely to China). The design and sales functions of these companies, however, often remained in Canada. Because of the relatively small size of the Canadian market, the majority of these parts are exported to the United States.

The aftermarket employs a large number of Canadians. According to the 2014 Outlook Study, just over 400,000 Canadians work in the industry including about 150,000 in “auto repair and maintenance”, and about 50,000 in “automotive parts and accessories and tire store retailers”.

Apart from its diversity, another feature that is especially salient in thinking about the impact of trade agreements on the aftermarket is that little of its economic activity involves the export of Canadian-made products to foreign countries, and few of its companies face import competition. Canadian service providers are neither exporting their services nor facing competition from foreign service providers; they operate in what trade economists call the “non-tradable” sector. The parts suppliers are deeply engaged in international trade but only because many of the parts they distribute are produced abroad and imported into Canada. As a result of TPP, they may benefit from lower import prices, but they will not likely face competition from foreign distributors. Only parts manufacturers – and there are only a small number of them – both have the opportunity to increase exports and face the threat of greater import competition.

TPP is the latest in a long series of trade agreements – including the 1965 Auto Pact with the United States, a number of multilateral agreements within General Agreement on Tariffs and Trade (GATT), World Trade Organization (WTO), and the North American Free Trade Agreement (NAFTA) – that have partially dismantled barriers to trade in auto parts and vehicles. Partly because of those previous agreements, TPP will likely have only a marginal impact on the aftermarket because the tariffs being eliminated are quite modest.

Trade is only one challenge faced by Canadian manufacturers, both in the automotive aftermarket and in other industries. One contemporary challenge, for example, comes from the rapid pace of technological change; for the aftermarket, the major change is in the nature of the vehicles being produced and sold. The technological changes have been accompanied by an increasing complexity that challenges service providers to stay on top of the latest service procedures and challenges manufacturers to innovate in order to maintain their markets. Exchange rate movements are another challenge for the industry because they affect the price competitiveness of aftermarket products on domestic and international markets.

1 Different definitions of the industry coexist. The 2014 AIA Outlook report defines the aftermarket as follows: “the term ‘aftermarket’ refers to the area of the automotive industry concerned with the manufacturing, remanufacturing, distribution and retailing of all vehicle parts, tools, equipment, accessories, chemicals and services. The aftermarket does not include products used as original equipment in the production of new vehicles” (Automotive Industries Association, 2015, p. 1). The table showing employment levels for the industry (Automotive Industries Association, 2015, p. 2), however, excludes parts manufacturers presumably because of the data availability.2 These numbers are derived from Statistics Canada’s Labour Force Survey and are the employment numbers associated with North American Industry Classification System (NAICS) categories 8111 and 4413, respectively. The other large employers are gas stations and general retailers.

1

TPP will likely

have only

a marginal

impact on the

aftermarket

because the

tariffs being

eliminated are

quite modest.



Potential Impacts of TPP on the Automotive AftermarketBecause the Canadian automotive aftermarket is quite diverse, it should not be surprising that the TPP agreement will affect the different sectors of the aftermarket differently. A quick summary is that parts distributors and service providers - the sectors that employ the vast majority of the workers in the aftermarket - will likely experience slight benefits from TPP. Manufacturers, representing a small but important part of the entire aftermarket, are most exposed to TPP, and may be hurt by greater competition from companies in TPP countries.

2.1 The TPP AgreementThe countries that have signed the TPP agreement, in alphabetical order are: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. Note that China, a major parts producer, is not among the signatories.

For the auto sector, TPP will: • lower Canadian tariffs on vehicles and parts coming from TPP countries;• lower the tariffs that TPP countries impose on vehicles and parts coming from Canada;• change the rules of origin so that vehicles and parts imported from TPP countries can contain a greater proportion of

components from non-TPP countries and still qualify for duty-free access to Canada.

Changes in TariffsCanada already has free trade agreements with all North and South American TPP signatories: the United States, Mexico, Chile, and Peru.3 Trade in auto parts and new vehicles between Canada and these countries are already duty free. Furthermore, Canada some years ago reduced tariffs on auto parts imported from Australia and New Zealand.4 Thus the reductions in Canadian tariffs will primarily affect auto sector imports from the remaining TPP countries, with Japan, Malaysia and Vietnam foremost among them.

Currently, the Canadian tariffs on auto parts imported from Asian TPP countries tend to be moderate, varying between 0 and 6 percent for some specific products.5 Canadian manufacturers currently face much higher tariffs when they try to export to Asian TPP countries and to Malaysia and Vietnam in particular (Table 2 in the Appendix). Notably, however, Japan does not charge tariffs on auto parts or new vehicles.

Change to rules of OriginSince the days of the Auto Pact, there have been “rules of origin” which specify, for vehicles intended to be imported under the agreement, a maximum proportion of the value of a vehicle that is allowed to arise from countries other than signatories to the agreement (e.g., the United States and Canada in the case of the Auto Pact). These rules are intended to prevent foreign-made vehicles imported into one country from passing duty-free to the other country.

3 These numbers are derived from Statistics Canada’s Labour Force Survey and are the employment numbers associated with North American Industry Classification System (NAICS) categories 8111 and 4413, respectively. The other large employers are gas stations and general retailers.4 Canada Customs Tariff, Section 44 (see http://lois-laws.justice.gc.ca/eng/acts/C-54.011/).5 Current levels of tariffs are shown in Table 1 in the Appendix, with the reported tariffs averaged across specific products within several categories of auto parts, For example, there are four specific products within the category “brakes”. These products are either brakes for different types of vehicles or different components of brake systems. Two of the four products are duty free and two are subject to a six percent tariff. The (unweighted) average tariff is thus three percent. This three percent average is indicated in the table for countries that Canada has not granted any preferences in the area of brakes. Also, it should be noted that the duty-free status of OE parts is not reflected in the tables.

2



Under NAFTA, the rules of origin required that 62.5% of the value of the vehicle be produced by NAFTA partners (the United States, Canada and Mexico). Under TPP, the group of partners will expand from the three NAFTA partners to the 12 TPP partners, and the proportion that must be produced by the partners will fall to 35% or 55% (depending on the part).6

The Timing of Tariff Changes According to the TPP agreement, Canada will eliminate its tariffs on auto parts coming from TPP countries on the date when the agreement comes into force. Gradually, over the course of the ensuing five years, Canada will then eliminate its 6.1 percent tariff on new passenger vehicles. In turn, Malaysia and Vietnam will gradually (in some cases over more than ten years) eliminate their tariffs on new vehicles. Malaysia will eliminate its tariffs on auto parts when the agreement comes into force,7 while Vietnam will do this gradually.

Committee to Aid Small and medium-sized EnterprisesChapter 24 of the TPP, entitled “Small and Medium-Sized Enterprises”, may be of interest to the aftermarket. Article 24.2 of the agreement requires the establishment of a committee to help small and medium-sized enterprises in TPP member countries benefit from the agreement. The agreement specifies that the committee members will be “government representatives.”

Increased Competition for Canadian manufacturers Exporting to the USTPP could negatively affect the competitiveness of Canadian manufacturers in the US market; they currently have duty-free access to that market, while Asian TPP countries do not. Under the TPP, the United States will eliminate tariffs on most auto parts as soon as the agreement enters into force, eliminating the advantage the Canadian manufacturers have relative to manufacturers in other TPP countries. The United States will also eliminate its 2.5 percent tariff on new vehicles as soon as the agreement enters into force.

Safety Standards and the TPP AgreementOne of the little-known features of the automotive aftermarket is that there are no accepted standards for aftermarket parts. As a result, parts that fail to meet government technical standards for OEM parts might be used in the aftermarket. Because the lack of standards allows potentially unsafe imported auto parts to enter Canada, there is a concern that TPP might increase such imports by decreasing the associated tariff levels. The need for standards to protect the health and safety of both drivers and repair staff is recognized by aftermarket businesses, as interviews showed, and by at least some Canadian politicians.8

Introducing new standards, however, is always a concern from the perspective of trade agreements because standards may be misused by governments to create obstacles for imported goods and services. The TPP agreement nonetheless recognizes that countries may need standards for important reasons, including environmental protection and human health or safety, even if they restrict trade (Article 8.4). Therefore, from the perspective of the TPP, introducing aftermarket auto parts standards by Canada would be acceptable.9

6 The text here is a rough approximation of the rules of origin in the auto sector. There are a variety of different methods for how the value of the vehicle or part is calculated and there are different rules for different parts (i.e., product-specific rules of origin or PSRs). See, for example, http://www.pwc.com/us/en/tax-services/publications/insights/assets/pwc-trans-pacific-partnership-and-the-automotive-industry.pdf7 There is an ambiguity in Malaysian’s tariff schedule with identification of timing of elimination of tariffs on auto parts (and some other products). It is believed that Malaysia is committed to eliminate tariffs on auto parts as soon as the agreement comes into force. This ambiguity will be eliminated after the legal review of the text.8 See http://www.theglobeandmail.com/report-on-business/imports-of-asbestos-products-rising-in-canada-despite-health-warnings/article23675154/ and http://www.cbc.ca/news/canada/asbestos-brake-pad-ban-proposed-1.12834409 The TPP (as well as the WTO) requires though that standards are not more restrictive than necessary to fulfill “legitimate objectives,” such as human health and safety, and that the same standards apply to domestic and imported products.



To reduce potential trade-restrictiveness of standards, TPP supports the harmonization of technical regulations across countries (Article 8.5). TPP, however, is not very authoritative in this area, encouraging only “regulatory dialogue and cooperation” (Article 8.9). Nevertheless, this aspiration is important for at least two reasons. First, Canadian aftermarket manufacturers would benefit from harmonized standards — they sell their products on both Canadian and US markets and would benefit from facing the same regulations in these markets as well as in other markets they might enter in future.

Second, because the standards currently differ across countries, TPP might be a favorable environment in which to initiate a discussion of harmonized non-OE auto parts standards. This could be done in line with the intentions of TPP and without being accused of protectionism. At the moment, some countries, like Canada, completely lack standards, and others like the US, have standards on some parts.

There is another provision of the TPP that is important from the perspective of standards. TPP requires countries to determine the scope of regulatory measures in regard to which each country will commit to apply “good regulatory practices” and make efforts to achieve regulatory cooperation with TPP partners (Chapter 25). This may include conducting regulatory impact assessments when developing proposed standards, transparency and information sharing, periodic reviews of the regulations, and efforts to achieve harmonization with other countries. For non-OE auto parts standards, inclusion in the list of “covered regulatory measures” may reduce concerns of protectionism, making them politically more viable. Canadian aftermarket participants would also benefit if other TPP countries included their non-OE auto parts in their lists of “covered regulatory measures.”

Overall, because the perspective of this research suggests that TPP will greatly increase imports of auto parts, safe or unsafe, the threat of a “flood” of substandard auto parts does not seem particularly worrisome. At the same time, the agreement would not restrict introduction of standards that are much needed in Canada. Rather it may facilitate introduction of standards harmonized among TPP partners.

2.2 Effects of TPP On different Sectors within the Aftermarket

Although service providers and parts distributors form the bulk of the Canadian aftermarket, the following section begins with a discussion on the implication of the TPP for parts manufacturers-for whom the potential impact of TPP is greater.

manufacturing CompaniesBased on interviews with several executives from aftermarket manufacturers, it is believed that there are approximately 20 companies that manufacture aftermarket parts in Canada. These companies have survived a very long period in which most Canadian manufacturers either went out of business or stopped producing in Canada.10 The business model employed by other manufacturers headquartered in Canada (but not producing parts in Canada) is based on geographically dispersed supply chains with innovation and product design activities taking place in Canada and production taking place in Asia, predominantly in China. Canadian manufacturers are highly export oriented with almost all exports, both Original Equipment and non-Original Equipment, going to the United States and, to a lesser extent, to Mexico (Table 3 in the Appendix). Unfortunately, existing data on international trade does not distinguish between Original Equipment and non-Original Equipment parts, and therefore the extent of import competition in the aftermarket cannot be effectively evaluated. Table 4

10 One of the interviewees for this report guessed that there were more than 100 Canadian manufacturers in the mid-1980s and that Canadian companies were North American leaders in certain market segments, such as the manufacture of brake systems.

TPP will have

either no effect

or a small

positive effect

over the long

term for most

manufacturers.



in the Appendix demonstrates that besides the United States and Mexico - with whom rules of trade will not change - Japan is the only TPP signatory that currently exports a significant amount of auto parts to Canada. Most of these Japanese parts are likely Original Equipment parts but those executives that were interviewed for this report noted that Japanese producers are also important competitors in the Canadian aftermarket for some specific products. Overall, the findings suggest that TPP is a threat for only some Canadian aftermarket manufacturing companies; it will have either no effect or a small positive effect over the long term for most manufacturers. This judgement is based on the following three observations:

Import competition will not increase significantly: The elimination of tariffs by Canada will hurt only the few Canadian manufactures that face competition on Canadian or US markets from Asian TPP countries such as Japan, Malaysia or Vietnam. This negative effect is unlikely to be significant because current Canadian tariffs are quite modest (and some specific parts are in fact duty free for all countries). At the same time, the negative effects may be magnified if governments in TPP countries pursue active export promotion policies. In addition, the absence of Canadian industry standards on particular auto parts (e.g., brake pads) might allow lower quality products to compete with higher quality Canadian products.

Exporters will not be much helped by tariff reductions by TPP signatories: Tariffs paid by exporting Canadian manufacturers will not change very much under TPP. Currently, almost all such exports from Canada go to the United States and Mexico, and these exports already enter those countries duty free. If the parts produced by Canadian companies have been manufactured in China or Taiwan, they are subject to US tariffs (and tariffs in other TPP countries); TPP will not change that situation.

TPP’s lower tariffs may lead to a slight expansion of the Canadian market for new vehicles and eventually a greater demand for non-Original Equipment auto parts. The expansion will likely occur because of the elimination by Canadian and United States tariffs on new vehicles (which will eventually be serviced in the aftermarket) and because of an overall positive effect of TPP on Canadian and United States economies that would further increase the demand for new vehicles.11 However, this positive impact will occur only over the long term.

distributors and Service ProvidersRepair and maintenance services are not tradable and therefore changes in tariffs under TPP will not affect service providers directly. To the extent that they buy parts from TPP countries, either directly or through Canadian distributors, they will be helped by the lower prices. The possible expansion of the overall Canadian vehicle market may increase the demand for their services in the long term. Wholesale and retail distributors may benefit marginally from TPP because some of the parts they distribute will become cheaper.

11 The Canadian government has estimated that TPP will have a very modest impact on the Canadian economy; specifically, it will increase GDP by 0.36% in the long term, as compared to the pre-TPP GDP level (Foreign Affairs, Trade and Development Canada, “Trans-Pacific Partnership (TPP) Free Trade Negotiations: Initial Environmental Assessment.” http://www.international.gc.ca/trade-agreements-accords-commerci aux/agr-acc/tpp-ptp/env-ea.aspx?lang=eng#a06)

Wholesale and

retail distributors

may benefit

marginally from

TPP because

some of the

parts they

distribute will

become cheaper.



2.3 Other ChallengesResearch for this report suggested that factors other than the changes wrought by the TPP agreement will have a far greater impact on the automotive aftermarket. In this section, three of these suggested factors, including, exchange rate fluctuations, technological advance, and climate change are discussed.

Exchange rate fluctuationsManufacturing companies are vulnerable to exchange rate movements because their supply chains are geographically dispersed across country borders and also because, according to those interviewed for this report, they compete on the basis of prices, not on the basis of brands or quality. In fact, interviewees indicated that exchange rate fluctuations have been much more important for their companies than the likely effects of any changes in tariffs under TPP. Parts distributors are also greatly affected by exchange rate changes because those changes affect the Canadian dollar prices of many of the products that they distribute.

As of early January 2016, the exchange rate is low, with one Canadian dollar worth only 72 cents US, after being at parity as recently as January 2013. This larger-than-expected fall in the exchange rate works to the advantage of Canadian exporters because it makes their products cheaper for US customers. Nonetheless, the Canadian dollar has historically experienced very sharp exchange rate fluctuations in response to changes in oil prices, changes in the monetary policies of Canada and the major world economies, and more broadly, changes in the expectations of investors about the economic prospects of the world’s economies. Accordingly, there is recognition among exporters that these favorable days will likely be followed by more challenging days.

Technological AdvanceInterviewees who participated in this report also indicated that innovation activities are a very important part of their companies. These companies have a strong interest in product innovation and maintain Canadian-based staffs who are engaged full-time in designing parts that incorporate the rapid technological changes occurring in the automotive industry. They also indicated that there will likely be sharp technological changes in the near future that will pose additional challenges for them. Small and medium-sized manufacturing companies have traditionally had trouble keeping up with technological change because they lack the resources to maintain large-scale innovation centers.

On the side of the service providers, rapid technological change requires that repair staff be constantly retraining to keep up with the changes. As vehicles become more and more complex, the skills required of Automotive Service Professionals rise accordingly.

Climate Change Change in the automotive sector is also being driven by the decarbonisation thought necessary to confront the threat of climate change. One short-term implication is the introduction of government-mandated fuel efficiency standards that have led to changes in the nature of vehicles; those changes will in turn require service providers to continually train and retrain their employees. For example, the use of aluminum and carbon fibre in the production of cars and trucks will mean that repair shops will have to adopt new techniques to fix damaged parts (Automotive Industries Association, 2015, p. 73). In the longer term, decarbonisation likely means the widespread introduction of electric vehicles. The servicing and repair of electric vehicles will certainly be quite different than the service and repair of internal combustion vehicles.

Exchange rate

fluctuations,

technological

advance and

climate change

are more likely

to impact the

industry than

the TPP.



The situation facing manufacturers in the automotive aftermarket illustrates the need for the stronger set of adjustment programs to help companies and workers adjust to a fast changing world. While TPP may have negative effects on particular companies, the other international forces discussed above - exchange rate fluctuations, technological change, climate change - threaten those companies and others.

Explicit government Trade Adjustment Assistance (TAA) to help workers and companies first appeared in 1960s in response to postwar trade liberalization. More recently, several authors have argued in favour of creating a stronger set of labour and industry adjustment programs that would help all workers and companies adjust to all contemporary international forces. This new approach might be called Globalization Adjustment Assistance (GAA). We believe that GAA is the most promising path for future government programming. Because a stronger set of labour and industry adjustment programs is not likely to appear at any time in the near future, however, we recommend the creation of GAA for the aftermarket as a pilot for a wider reform.

3.1 Traditional Trade Adjustment Assistance Programs

The first Canadian TAA program for workers was known as Transitional Assistance Benefits and was introduced in the context of the 1965 Auto Pact. Few workers were eligible for the benefits of the program, however, and it operated essentially as a low-cost top-up to unemployment insurance. A second TAA program was implemented in the wake of the Kennedy Round of the General Agreement on Tariffs and Trade (GATT) negotiations, largely to provide assistance to the declining Canadian textile, clothing and footwear industries. In the early 1980s, that program evolved into the Labour Adjustment Benefits (LAB) program, which provided pre-retirement benefits to vulnerable older workers.

In the mid-1960s, Canada also introduced the Automotive Manufacturing Assistance Regulations, a program for companies affected by the Auto Pact. A business in the auto sector was eligible for loans if its production was reduced because of the Auto Pact or if it needed capital to increase its scale of production to become viable in the new environment. By the program’s end in 1973, the Canadian government had provided considerable aid to the sector. About 92 companies had received around $100 million in loans (between $550 million and $750 million in today’s prices).

By the end of the 1980s, as Canada negotiated and then signed a free trade agreement with the United States, TAA had been rejected as a way to help workers and companies adjust to trade agreements. In the middle of the decade, the influential Macdonald Commission had come out in favour of freer trade with the United States, to be accompanied by a transitional assistance program to help workers adjust. The program the Commission suggested, however, was targeted at workers displaced for a variety of reasons, not just because of freer trade. Indeed, the Commission held a dim view of the TAA programs of the 1970s because they had been designed, “in large measure, to postpone, rather than to facilitate, adjustment” (Royal Commission on the Economic Union and Development Prospects for Canada, 1985, p. 241). The Labour Adjustment Benefits program, the last Canadian TAA program, ended in 1988 and no federal program has existed since that time.

Possible government assistance for aftermarket adjustment 3



3.2 Current Trade Adjustment Assistance Programs in the United States and European Union

The United States TAA ProgramIn contrast to the situation in Canada, the United States TAA program was recently re-authorized and remains a large and important social program. For trade-affected workers, the US program includes income support, wage insurance, allowances for training and relocation, job search assistance and a health-coverage tax credit, all at an annual cost of US$600 million. Lysenko (2013) attributes the differences in the evolution of TAA in the United States and Canada largely to the need for the US President to obtain the permission of the US Congress to negotiate trade agreements. For a long time, the implicit price of that permission was the maintenance of the TAA program. In Canada, the Prime Minister has the authority to negotiate trade agreements without needing the permission of Parliament to do so.

The first United States TAA program, like its Canadian counterpart, was quite narrow in its application, with strict eligibility criteria and relatively low benefits. Over time, however, it has expanded in scope and generosity. As national economies around the world have become increasingly integrated, the American TAA program has altered its form in order to deal with more complicated issues such as outsourcing, offshoring, directly and indirectly affected workers and the geographical dispersion of production across different regions in the U.S. and across the world.

The US TAA-for-firms (TAAF) offers aid to “trade-impacted” firms. No direct financial assistance, however, is provided to firms. Instead, one of 11 federally-funded regional Trade Adjustment Assistance Centers help the firms: (1) certify their eligibility for the program; (2) develop a plan to adjust to the challenges they face; and (3) to implement the adjustment plan. Essentially, the Trade Adjustment Assistance Center staff act as “consultants who specialize in business turnaround strategies specifically designed to meet the needs of individual firms that often face adjustments in many areas to compete with lower-priced imports.”12 The firms must pay at least 25% of the cost of the intervention with the percentage rising to 50% as the project gets larger; the government share is capped at US$75,000. The funds cannot be used for capital expenditures such as purchases of machinery and equipment. Rather, the interventions funded under the program touch on various functional areas including marketing, management, engineering, information technology systems, quality improvement and new product development.13 The whole process, from the point at which a firm petitions to be deemed eligible for the program until the final completion of the recovery project can take upwards of six or seven years with up to two years devoted to developing the adjustment plan and up to five years to implementing that plan.

An example might help to understand the process,14 The Great Lakes Trade Adjustment Assistance Center provided assistance to a firm that specialized in designing, manufacturing and installing assembly line systems. The firm had revenues between $25-30 million and employed more than 100 people. Like similar firms, it faced strong import competition and, in 2004, suffered a 25% decline in sales and lost 10% of its employees. With the cost-shared help of the Great Lakes TAA Center, the firm developed an adjustment plan that would reduce its costs through productivity improvements, increase its sales with better marketing, and implement a new enterprise resource planning (ERP) system. After getting approval to implement the

12 Implementation of the adjustment plans may involve hiring third-party consultants with specific expertise (Bolle, 2015, p. 7).13 U.S. Department of Commerce. Trade Adjustment Assistance for Firms Programs: Annual Report to Congress, Fiscal Year 2014. Available at http://www.eda.gov/pdf/annual-reports/taaf/FY14-TAAF-Annual-Report-to-Congress.pdf14 See http://www.gltaac.org/projects-we-fund/an-indiana-machine-maker/ for a fuller description of the project.



plan, the firm revamped its marketing strategy, implemented lean manufacturing (with its own resources) and set up the new ERP system. The result was that sales doubled, at least until the onset of the 2008 recession, and employment increased as well. This is a “success story” and clearly not all efforts are successful. Nonetheless, the story, and others that are available on the websites of the TAA Centers, illustrates the process by which TAA for firms is intended to work.

The legislation under which TAAF operates requires that serious efforts be made to evaluate the overall success of the program. The most recent evaluation was undertaken in 2012 by the US Government Accountability Office (GAO).15 While GAO noted a number of evaluation challenges (e.g., there was no obvious control group to which the trade-impacted firms helped by TAAF could be compared) the evaluation concluded that participation led to a small but statistically significant increase in sales (5-6%) for program participants but no statistically significant increase in employment. The evaluation found that participants were in fact trade-affected (i.e., the certification process was working properly) and that more than 90% of participants were satisfied with the services they had received.

The European Union Globalisation Adjustment fundAt the start of 2007, prior to the global recession of 2008, the European Union created a Globalisation Adjustment Fund (EGF), which initially aimed to help workers laid off “as a result of major structural changes in world trade patterns due to globalisation” (European Commission, n.d.). After the financial crisis began, the EGF’s mandate was extended to include workers laid off as a result of the crisis. EGF funds are generally restricted to specific mass layoffs in which at least 500 workers have been laid off. Projects run for two years, and are managed by national or regional governments. Sixty percent of the funding is provided by the European Commission, with the remainder provided by the member state. A key provision is that the aid is customized to the worker and to the context of the layoff, in contrast to support from broader social programs such as unemployment insurance or pension plans.

3.3 Thinking forward: Ideas On Globalization Adjustment Assistance

The idea of Globalization Adjustment Assistance extends that of Trade Adjustment Assistance, updating it to capture modern realities. GAA aims to help all companies and workers located in an open economy adjust to structural changes caused by any factor that the economy may experience.

This idea has recently appeared in publications by several authors criticizing current US labour programs, including its TAA programs. Richardson (2010) argues that global integration is happening along many lines — trade, technology, business organization, supply chains — and it is therefore not reasonable to try to isolate trade from other forms of integration, as US TAA programs currently do. From a similar perspective, Rosen (2008) calls for a “ [US] national strategy for responding to economic dislocation” that would serve as an umbrella for state-specific unemployment insurance programs. Lysenko and Schwartz (2015) also call for a more comprehensive approach to adjustment assistance in Canada, as opposed to the reintroduction of trade adjustment assistance or the creation of ad hoc trade adjustment assistance programs such as those promised by the Conservative government in connection to the TPP and CETA agreements.

15 United States Government Accountability Office (2012). “Trade Adjustment Assistance: Commerce Program Has Helped Manufacturing and Services Firms, but Measures, Data, and Funding Formula Could Improve.” Available at http://www.gao.gov/assets/650/648213.pdf

Globalization

Adjustment

Assistance

help ALL

companies and

workers adjust

to structural

changes

caused by any

factor that the

economy may

experience.



Perhaps more importantly, GAA seems to be consistent with the intentions of new Liberal government. For example, the Mandate Letter to the new Minister of Innovation, Science and Economic Development asks that he make “strategic investments in [the] clean energy sector”, as well helping Canadian companies to “adjust to, take advantage of, and prepare for, the implementation of new trade agreements.”16 The letter notes that, “[c]ommunities that have relied on traditional manufacturing are likely to require specific strategies to support economic growth.” To us, this letter shows an awareness that a wide range of structural changes may affect the Canadian economy and that new programs are necessary to help Canadians adjust to those changes. Moreover, the mandate letter specifically asks the Minister to develop programs for the auto sector.

The four principal features of GAA include:

Not just import competition. Because of the interwoven international forces discussed in the last section, adjustment policies aimed to help businesses should not attempt to isolate the effects of trade agreements from the effects of these other international factors.17

Comprehensiveness for fairness. All firms and workers are now affected, directly or indirectly, by these international forces. An example is an engineering firm that provides its services to an aftermarket manufacturer. If the latter is hurt by technological change or exchange rate fluctuations, the former will be hurt too because the demand for its services will drop. Hence, all firms and all workers have to be covered by adjustment programs.

Compensation for those who can’t adjust. Assistance should aim to help firms and workers succeed in a changing environment. It is clear though that not all firms and not all workers will be able to adjust. In this case, laid off workers may need long-term income support; arguably, firms may also need compensation in some cases (for example, if they are forced out of business because of a trade agreement signed by the Canadian government).

Tailoring benefits to individual circumstances. Because GAA recognizes that many different firms and workers may be affected by many different international forces, a one-size-fits-all package of benefits may not be effective. Therefore, government assistance should be tailored to individual circumstances of workers and firms.

The relevance of the GAA idea is emphasized by the realities of Canadian aftermarket. It has experienced the internationalization of manufacturers’ supply chains, competition from Asian manufacturers, the effects of environmental regulations and the effects of exchange rate changes. Soon it will experience the effects of the new international trade agreements (TPP, CETA, and the Canada-Korea FTA). Each company is exposed to these factors and the experience of each company with each of these different factors will likely be different.

16 See http://pm.gc.ca/eng/minister-innovation-science-and-economic-development-mandate-letter17 Exchange rate movements do not necessarily result in structural changes in the economy. Nonetheless they have been included within the ambit of GAA because they may cause structural changes in the economy.



3.4 Key federal Programs for Adjustment and development of Aftermarket Companies The Canadian government currently offers at least two programs that could help aftermarket manufacturing companies. There are no targeted programs for aftermarket service providers and distributors.

First, Innovation, Science and Economic Development Canada (formerly known as Industry Canada) offer the Automotive Supplier Innovation Program18 that aims to help small and medium-sized automotive suppliers develop innovative products and processes. Although, limited projects have been publicly announced to receive funding, the program is intended to provide funding up to $10 million for a company to cover up to 50 percent of project costs. Total program funding is $100 million over the 2015/16-2020/21 period. There are certain restrictions that specify eligible activities and costs. One is that funding is provided for projects only at a particular stage of readiness. Another is the ambiguous statement that “eligible activities are those … that would not proceed without federal funding.”

Second, the Industrial Research Assistance Program run by the National Research Council Canada provides a wide range of services, focused on small and medium-sized companies, in the area of innovation:

(a) financial support for innovative products, services and processes; (b) financial support for R&D projects undertaken by Canadian companies in partnership with foreign companies

located in Brazil, China, India, Israel or South Korea; (c) support of firms with international interests, including financial support and support of technology partnering; (d) technical consultations provided by Industrial Technology Advisors on any aspect of innovation process; (e) funding for consultations with learning institutions and research organizations; (f) partial coverage of the cost of hiring post-secondary graduates to work on innovation projects; and (g) one-on-one assistance provided by “concierge advisors” who have industry experience and who help to identify

programs and services that support innovation activities.

Two observations about these programs are in order.

First, the focus of the government assistance is clearly on the development and commercialization of innovative products. This indicates that the government believes that keeping up with technological change is the key challenge and the key way for the Canadian automobile sector to adjust and prosper.

Second, the Industrial Research Assistance Program provides GAA-style tailored assistance through consultations with Industrial Technology Advisors and concierge advisors.

18 See https://www.ic.gc.ca/eic/site/auto-auto.nsf/eng/am02257.html



Conclusion and recommendations4Based on the analysis provided throughout this report, five key recommendations are offered:

recommendation 1: Ask that an adjustment program based on GAA principles be piloted with companies in the automotive aftermarket involved as a participating sector. The government could include the aftermarket among a small group of well-defined sectors of the economy who could be part of a pilot program that offered customized adjustment assistance to companies and workers harmed by any serious and permanent development. Another alternative would be to pilot a GAA-style program for the aftermarket alone, given the intention of the new government to create specific programs for the auto sector.

recommendation 2: Ensure that non-OE manufacturers are eligible for the Automotive Supplier Innovation Program (ASIP). Aftermarket companies who have continued to manufacture in Canada, despite good reasons to move production to Asia, should be eligible for the Automotive Supplier Innovation Fund. Adding them to the list of eligible companies would not expand the scope of the program in any major way. They are not demonstrably different than OE manufacturers. Some are major employers in the towns where they operate and are already investing in innovative products and production techniques.

recommendation 3: Promote the use of the Industrial Research Assistance Program among AIA members. Mentioned in the mandate letter sent to the Minister of Innovation, Science and Economic Development, this program provides a range of services that are not available through other programs.

recommendation 4: Work with the Committee of Small and Medium-Sized Enterprises, proposed in Chapter 24 of the TPP agreement. The TPP agreement requires the establishment of this committee within one year of TPP’s entry into force. Because the aftermarket is dominated by SMEs, being involved with this committee in a yet-to-be-determined way may advance the interests of AIA members interests.

recommendation 5:Ask that the Canadian government introduce auto parts technical standards for health and safety reasons. The government should introduce the standards as part of the proposed harmonization of standards among TPP partners in order to reduce concerns of protectionism, facilitate trade and comply with aspirations of TPP. The standards may also need to be included in the list of regulatory measures under Chapter 25 of the TPP agreement. AIA may also collaborate with aftermarket industry organizations in other countries to push foreign governments to cooperate in this area.



Automotive Industries Association. (2015). 2014 Outlook Study: A Comprehensive Review of the Canadian Automotive Aftermarket Industry. Ottawa.

DesRosiers, D. (2015). TPP - Implications for the Canadian Automotive Sector. Observations, 29(12).

European Commission, Employment, Social Affairs & Inclusion. (n.d.). European Globalisation Adjustment Fund (EGF). Retrieved May 28, 2014, from http://ec.europa.eu/social/main.jsp?catId=326&langId=en

Lysenko, D. (2013). More trade, more pressure : some effects of real exchange rate and an adjustment policy. Carleton University, Ottawa, ON.

Lysenko, D., & Schwartz, S. (2015). Does Canada Need Trade Adjustment Assistance? Institute for Research on Public Policy. Retrieved from http://www.cappa.ca/images/resources/2015/Lysenko_Schwartz__Does_Canada_Need_Trade_Adjustment.pdf

Richardson, D. J. (2010). Notes on American Adjustment Policies for Global-integration Pressures. In G. Porto & B. M. Hoekman (Eds.), Trade Adjustment Costs in Developing Countries: Impacts, Determinants and Policy Responses (pp. 345–359). Washington, DC: The International Bank for Reconstruction and Development/The World Bank.

Rosen, H. (2008). Designing a National Strategy for Responding to Economic Dislocation. Testimony before the Subcommittee on Investigation and Oversight House Science and Technology Committee.

Royal Commission on the Economic Union and Development Prospects for Canada. (1985). Report - Royal Commission on the Economic Union and Development Prospects for Canada. Supply and Services Canada.

works Cited



APPENdIX



Table 1: Canadian Tariffs on Auto Parts, 2013

Product Australia Brunei Chile Japan Malaysia Mexico NZ Peru Singapore USViet Nam

Brakes 0.0 3.0 0.0 3.0 3.0 0.0 0.0 0.0 3.0 0.0 3.0

Bumpers 0.0 4.0 0.0 4.0 4.0 0.0 0.0 0.0 4.0 0.0 4.0

Clutches 3.0 3.0 0.0 3.0 3.0 0.0 3.0 0.0 3.0 0.0 3.0

Drive axles 3.0 3.0 0.0 3.0 3.0 0.0 3.0 0.0 3.0 0.0 3.0

Mufflers and exhaust pipes 3.0 3.0 0.0 3.0 3.0 0.0 3.0 0.0 3.0 0.0 3.0

Other 2.3 3.1 0.0 3.6 3.1 0.0 2.3 0.0 3.1 0.0 3.1

Radiators 3.0 3.0 0.0 3.0 3.0 0.0 3.0 0.0 3.0 0.0 3.0

Road wheels 0.0 3.0 0.0 3.0 3.0 0.0 0.0 0.0 3.0 0.0 3.0

Safety airbags 3.0 3.0 0.0 3.0 3.0 0.0 3.0 0.0 3.0 0.0 3.0

Safety seat belts 6.0 6.0 0.0 6.0 6.0 0.0 6.0 0.0 6.0 0.0 6.0

Shock absorbers 3.0 3.0 0.0 3.0 3.0 0.0 3.0 0.0 3.0 0.0 3.0

Steering wheels, columns, boxes 3.0 3.0 0.0 3.0 3.0 0.0 3.0 0.0 3.0 0.0 3.0

Transmissions 3.0 3.0 0.0 3.0 3.0 0.0 3.0 0.0 3.0 0.0 3.0

Notes:

1) The data refers to 2013 because this is the most recent year for which tariff data are available for bulk download.

2) Columns in bold are those that correspond to countries with which Canada currently has FTA agreements.

3) Duty-free status of OE parts is not reflected in the tables.

4) Source: Compiled by authors using data available in the Market Access Map database produced by the International Trade Center (http://www.intracen.org/).



Table 2: Tariffs that Canada currently faces in other TPP countries*

Product Australia Brunei Chile Japan Malaysia Mexico NZ Peru Singapore USViet Nam

Brakes 0.7 20.0 0.0 0.0 0.2 0.0 0.0 0.0 0.0 0.0 15.0

Bumpers 0.0 20.0 0.0 0.0 21.4 0.0 0.0 0.0 0.0 0.0 17.5

Clutches 0.0 20.0 0.0 0.0 20.0 0.0 0.0 0.0 0.0 0.0 13.8

Drive axles 0.0 20.0 6.0 0.0 18.8 0.0 0.0 0.0 0.0 0.0 11.8

Mufflers and exhaust pipes 0.0 20.0 0.0 0.0 20.0 0.0 0.6 0.0 0.0 0.0 16.3

Other 0.0 19.2 0.0 0.0 16.0 0.0 0.6 0.0 0.0 0.0 15.0

Radiators 0.7 20.0 0.0 0.0 20.0 0.0 0.0 0.0 0.0 0.0 12.1

Road wheels 0.0 20.0 0.0 0.0 25.0 0.0 0.7 0.0 0.0 0.0 21.1

Safety airbags 0.0 20.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 10.0

Safety seat belts 0.0 0.0 0.0 0.0 30.0 0.0 1.7 0.0 0.0 0.0 20.0

Shock absorbers 0.0 20.0 0.0 0.0 23.8 0.0 0.0 0.0 0.0 0.0 10.6

Steering wheels, columns, boxes 0.0 20.0 0.0 0.0 8.3 0.0 0.0 0.0 0.0 0.0 18.8

Transmission 0.0 20.0 0.0 0.0 18.8 0.0 0.0 0.0 0.0 0.0 13.5

*See notes to Table 1.

In this table, the tariffs of each country refer to the most recent year for which data are available in the International Trade Center’s database.



Table 3: Canadian exports of auto parts, OE and non-OE, 2014 (millions of CAd)

Product US Mexico Other TPP ROW Total

Other 6,178 460 42 412 7,092

Transmission 921 128 8 73 1,131

Shock absorbers 993 99 2 35 1,129

Brakes 500 93 4 51 648

Drive axles 533 19 2 37 590

Bumpers 349 51 1 28 428

Clutches 364 48 0 14 427

Steering wheels, columns and boxes 289 41 0 8 339

Road wheels 175 27 8 24 235

Safety airbags 104 96 0 1 201

Mufflers and exhaust pipes 127 6 1 17 150

Radiators 53 2 1 14 69

Safety seat belts 0 4 0 0 4

Total 10,586 1,075 68 714 12,443

Notes:

1) Existing international trade databases do not allow distinguishing between OE and non-OE auto parts. We also cannot distinguish imports of Canada that belongs to the Canadian companies that outsourced production to Asia.

2) Source: Compiled by authors using data available in the Trade Map database produced by the International Trade Center (http://www.intracen.org/).



Table 4: Canadian imports of auto parts, OE and non-OE, 2014 (millions of CAd)

ProductTPP countries

China Rest of World

TotalUS Mexico Japan Other

TPP

Other 7,655 532 657 14 447 629 9,933

Transmission 2,497 292 453 1 7 153 3,404

Brakes 1,103 182 33 1 311 265 1,896

Shock absorbers 1,110 113 56 8 114 197 1,598

Steering wheels, columns, boxes 1,023 198 40 1 34 86 1,382

Road wheels 684 51 20 3 377 120 1,254

Drive axles 723 54 129 2 30 139 1,076

Safety airbags 300 283 3 0 7 1 594

Mufflers and exhaust pipes 418 14 13 1 25 26 496

Bumpers 271 9 13 1 6 71 372

Radiators 254 14 9 1 30 18 325

Clutches 169 19 6 0 3 27 224

Safety seat belts 17 114 1 0 1 4 136

Total 16,224 1,874 1,432 34 1,391 1,735 22,690

*See notes to Table 3.

the trans-pacific partnership and the a utomotive ... · the countries that have signed the tpp...

Documents