International Trade Committee on Dec. 11th, 2007

[Mark Nantais]

That would have quite a significant and detrimental impact on new vehicle sales, for one. These are vehicles that are relatively new.

It would also be contrary, actually, to some of the environmental objectives we as an industry are being asked to meet--that is, reduce pollution, reduce greenhouse gas emissions.

So we conceivably would have, as happened in New Zealand a number of years ago, a flood of nearly new vehicles into the country, which would really detract from the ability to turn over the fleet and gain the otherwise environmental benefits and other fuel-saving technology, for instance, from new vehicles.

In essence, you would be contributing to the environmental problems we face. One could even say it's equivalent to environmental dumping of used vehicles into this country, which would actually detract from what we're really trying to accomplish.

That's one very significant downside to opening up our market to used vehicles. The other one, of course, is the impact it would have on residual values of vehicles that people already own. It would greatly diminish those residual values for consumers.

So the many different implications of allowing these used vehicles into this country were not studied, in any adequate way, in terms of any part of the environmental assessment or the economic analysis.

In terms of investment decisions, obviously if we cannot get access to markets like Korea.... We spent roughly 85% of the $10 billion by my member companies to improve the productivity of our plants--to improve quality and bring forward some of the most advanced flexible manufacturing systems that exist--not just to continue to export vehicles to our main market, which is the United States, but really to capitalize on what's going on around the world. In Canada, unlike the rest of the world, we're part of a North American market that is a mature market, where growth is very limited, and yet when we look abroad to these other markets, Korea, China, India, and so forth, we're into double-digit growth. Why wouldn't we be considering ways to capitalize on what we have here and produce vehicles here for those markets?

If we can't maximize utility of our plants here in Canada, that has investment decision implications. It's conceivable that if we can't maximize utility of these plants, then these plants will no longer get world or global mandates for these products, which means there won't be any more investment.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Thank you.

[The Chair, Conservative, Lee Richardson]

Thank you, Mr. Bains.

I'm going to ask the witnesses again, and our committee, if we could try to keep to under seven minutes. We were at about ten that time.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

I stopped at seven.

[The Chair, Conservative, Lee Richardson]

I know you did.

In any event, we are going to proceed.

Monsieur Cardin, pour sept minutes, s'il vous plaît.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chairman.

Gentlemen, good afternoon and welcome to the committee.

Ever since we've been hearing about a possible free trade agreement with Korea, it's mainly the automobile and auto parts industries that have been giving rise to debates and controversy.

I'd like to come back to certain points. I will start with Mr. Stanford.

You talked about it quickly, and I wasn't able to understand what you were alluding to when you talked about wage equality. Do you mean that the wages paid in Korea, in the auto industry, are comparable to wages paid here, in America and in Canada?

[Dr. Jim Stanford]

No, that's not the assumption made by the economic model.

The assumption was twofold. First of all, they assumed that wages within Canada were perfectly equal across every sector of the economy. The importance of this is that it underestimates the importance of losing a well-paid job in the auto industry. We all know that a displaced auto worker may indeed find work again some day--at Wal-Mart or at Tim Hortons--but it's the decline in their income that really matters. The economic model from the government has assumed that this cannot happen because everyone is paid the same.

Second, the model makes the assumption that the whole country is one big household that shares equally in all of the income that all the different industries generate. The distributional effects of a free trade agreement are also ignored.

Those are the two very strange assumptions made by the model.

[Serge Cardin, Bloc, Sherbrooke, QC]

Since this didn't deal with the wages paid in the auto industry in Korea compared to wages paid here, there's therefore no potential dumping based on wage conditions.

[Dr. Jim Stanford]

In Korea today, wages in the auto industry are about half as high as ours in Canada. Now, I would not call Korea a low-wage economy; it has developed very quickly and wages have grown quickly there. I think there are still some issues around human rights and labour rights in Korea. Some of the Korean trade union leaders have been arrested for opposing the free trade agreement. But for the most part, it's not unfair low wages that will be their source of advantage. It will be this very effective industry that they have built in Korea with so much government assistance--subsidized capital, protections on imports, and promotion for exports. Those are the things that have allowed Korea to become so successful globally, while strictly limiting their imports into their own market.

[Serge Cardin, Bloc, Sherbrooke, QC]

Mr. Nantais, I'd like to get back to what you call a myth.

According to the first myth that you mentioned, the free trade agreement will have no negative economic consequences, because the Korean vehicles will be assembled here.

How many Korean auto assembly plants will there be in Canada?

[Mark Nantais]

Assembly units? In other words, assembled in Canada? Is that the question, Monsieur Cardin?

[Serge Cardin, Bloc, Sherbrooke, QC]

Both: assembled and built in Canada.

[Mark Nantais]

I think we have to look at assembled and built in North America. There are no Korean plants in Canada. There is, as I mentioned, one plant, a Hyundai plant, in the southern United States and there is a Kia plant being constructed in Georgia. At this time, the best estimates are that we probably don't see that any more than 25% of what those Koreans sell in the Canadian market would be supplied by those North American plants.

That was, again, one of the real problems associated with the economic analysis, that it overestimates the number of vehicles that would actually be produced in North America for the North American or Canadian market.

[Serge Cardin, Bloc, Sherbrooke, QC]

There was a Korean plant in Quebec, which never produced anything, as a matter of fact.

In a free trade agreement with Korea, why shouldn't there be a condition stating that vehicles sold in Canada should be manufactured in Canada?

[Mark Nantais]

That's a very interesting question. Certainly that was, in essence, the results of the Auto Pact of 1965, that if you sell here, you shall produce here and you shall source from here. And that's what literally brought about, into Canada, many tens of thousands of job over decades, and it was a huge benefit to Canada's economy.

That is something that is not on the table. Our best intelligence, as I mentioned, indicates that we don't anticipate any Korean investment into Canada at this particular time.

[Serge Cardin, Bloc, Sherbrooke, QC]

A supplementary point might be to plead in favour of the manufacture or building in Canada of vehicles sold here.

From an environmental standpoint, you mentioned the fact that the transportation of Korean vehicles here would be a negative point. However, if we want to open up markets in Korea to sell American vehicles there, the problem of the environment would also be a factor, because we have to send them over there.

Wouldn't the solution to this problem be the manufacturing and building of Korean vehicles on Canadian and Quebec territory?

[Mark Nantais]

Well, that would certainly reduce the emissions that would otherwise be associated with the transportation of both new and used vehicles from Korea into Canada. Certainly if we want to gain access to that market, we would have to transport vehicles to their market. Yes, that does have an environmental cost associated with it. But the point with used vehicles coming to Canada is not only the environmental issues associated with the transportation costs, but also the fact that we're adding to the older part of the fleet on the roads of Canada. The older part of the fleet is one that contributes a disproportionate amount to smog-related emissions as well as greenhouse gas emissions.

So take for instance, as I mentioned, New Zealand. When New Zealand lifted their ban on used imported vehicles a number of years ago, they received a flood of those vehicles into their market from Japan, which actually resulted in the demise of a well-established automotive industry.

So we have both economic implications and environmental issues here that would detract from the very thing that we were trying to accomplish in Canada, which is to reduce smog-related emissions and improve our air quality and also reduce greenhouse gas emissions. The best way we can do that is through two things. One is technology, which is what we do best in reducing greenhouse gas emissions. And in Canada, we have adopted the most stringent national emissions standards for smog-related emissions in the world. These vehicles would come nowhere close to that level of stringency, so we would be contributing to the very problems we're trying to resolve.

Does that answer your question, monsieur?

[The Chair, Conservative, Lee Richardson]

Thank you again, Mr. Nantais, Monsieur Cardin.

We'll now move to Mr. Cannan.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Thank you, Mr. Chair.

And thank you to our guests. I appreciate your sharing your perspective on this very important trade agreement.

To start off with Professor Stanford, when Mr. Bains was talking, you referred to two different studies. Could you clarify which study? There was an Industry Canada study and also a U of T study.

[Dr. Jim Stanford]

When I was referring to Mr. Bains' question?

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Yes.

[Dr. Jim Stanford]

I think I was referring to the DFAIT study and the unrealistic assumptions that they made, but I could refer to the Industry Canada one and the U of T study as well. I am familiar with those.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

I just wanted to clarify which one.

You're a doctor of economics. Is that correct?

[Dr. Jim Stanford]

I have PhD, yes. I'm not a professor yet, so I appreciate the flattery in your initial comment, but not just yet. I am a PhD in economics.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Where did you get your doctorate from?