International Trade Committee on Dec. 11th, 2007

[Gerald Fedchun, President, Automotive Parts Manufacturers' Association]

Fedchun, as in Norman Bethune.

[The Chair, Conservative, Lee Richardson]

There you go. I know that one well.

Gerald Fedchun, from the Automotive Parts Manufacturers' Association, would you please start, and please keep it somewhere under 10 minutes? Thank you.

[Gerald Fedchun]

Very good. Thank you very much.

First of all, the automotive parts manufacturers are the suppliers of parts, goods, and services for new vehicles. We are not in the aftermarket. It's very important to understand that.

I myself have been in the industry since 1964. For some of us Neanderthals, that's prior to the Auto Pact. I lived through the implementation of the Auto Pact at General Motors and I lived through the implementation of the Canada-U.S. Free Trade Agreement and the North American Free Trade Agreement with ITT, and was very active in getting those. In fact, we say that those agreements, all of them, have been very good for the automotive industry in Canada.

But the Canada-Korea Free Trade Agreement will not be. So we are, by nature, promoters of free trade where there is fair trade, but we have to make sure that it is fair trade.

On the environmental assessment that was previously mentioned, we don't think it's a very good assessment. There's a lot of uncertainty in it and it cannot be relied on. As an example, on page 26, it says that the increase will displace other imports of similar-class vehicles. In fact, we don't believe this is the case. It's a very bold assessment and it's completely wrong. One of the CVMA studies, which my colleague put out, shows that Canada and Korea do make similar vehicles, so Korea will be replacing Canadian-made vehicles, not other vehicles.

Also, on page 11, 1990 data is being used. Now, auto parts at that time was a $12 billion industry; we're now over a $32 billion industry. And that was three generations of automotive cars ago. Vehicles were 13 times more polluting then than they are now. So this data from 1990 is absolutely useless.

On page 17, the report assumes that the Korean products will come from Korean operations in the U.S. As said previously, this would only be true if you maintained the duty. But if there's no duty, then you have a free hand regarding where it will come from. And the assumption is that the Korean companies are like the Japanese companies. This is an incredible lack of knowledge of the North American market. When the Japanese companies came here in 1980s, we had the big three with 80% of the market. Volkswagen was the biggest importer at the time. Today, we now have the big three with about 50%, Toyota as number two, and a completely, completely different market than there was then, with lots and lots of competition.

So what we do know, from our auto shows, is that the Koreans are designing bigger vehicles, more luxurious, and in fact the same kinds of vehicles as we make now in Canada. Eliminating the tariffs is going to be tremendously damaging to our domestic manufacturers.

The operations the Koreans have built are in the southeastern United States. We predict that their production is going to go from about a quarter of a million units to about three-quarters of a million units by 2012. There are no benefits to Canadian workers for these locations because they're too far. Some Canadian manufacturers will in fact benefit, but they will have to build plants down in the southeastern U.S. But again, the Canada-Korea Free Trade Agreement is irrelevant to this. This will happen because of NAFTA, not because of any deal with Korea.

Nothing in the assessment will impact on the automotive OE suppliers--that is us--it's only on vehicle manufacturers. But I can tell you, as goes the OEM, so goes the suppliers. A 10-hour truck drive is the magic number for us. If it's 10 hours away, we can supply, and that means we can supply Ohio, Kentucky--in other words, Honda, Toyota, and Nissan. We cannot supply the southeastern U.S.; we have to build new plants there.

In the past, the Koreans have proven that they have the ability to impose significant non-tariff barriers. Until they prove to us that they have removed non-tariff barriers, we should not be signing a free trade agreement with them.

It's time for Canada not to be boy scouts. The Canadian market is a market they want to get into. In order to get into the market, they're going to have to prove their worth and the fact that they can be fair and free traders, like we are. Until they prove it, we should not sign the agreement.

Thank you.

[The Chair, Conservative, Lee Richardson]

Thank you very much.

Now from the Canadian Vehicle Manufacturers' Association, Mark Nantais.

[Mark Nantais, President, Canadian Vehicle Manufacturers' Association]

Thank you very much, Mr. Chairman and the members of the committee, for today's invitation to appear before you on this important subject.

For 80 years, the CVMA has represented Canada's leading manufacturers of light and heavy-duty vehicles, which include Chrysler, Ford, General Motors, and International Truck and Engine Corporation. Since signing the Auto Pact of 1965, Canada's auto industry has really been built around free trade, and fortunately for Canada, that agreement has resulted in huge jobs created in our industry and--

[Serge Cardin, Bloc, Sherbrooke, QC]

The interpreter is asking that the witness speak a little bit more slowly.

[The Chair, Conservative, Lee Richardson]

I'm sorry, Mr. Nantais, it's simply a matter of catching up with the translators. You're speaking a little quickly. I appreciate you're trying to get through in the allotted time, but we want to let the translators catch up.

Thank you.

[Mark Nantais]

To the point where, today for instance, as a result of the free trade agreement in Canada, we build one and a half vehicles for every one we sell here. That's a pretty significant fact.

The CVMA and our member companies have fully and publicly supported all of the free trade agreements that Canada has signed, but knowing what we know at this time, we cannot support the one currently being negotiated with South Korea, primarily for one reason. The Korean market remains closed to foreign competition for manufactured goods. Since lifting a complete ban on imported finished vehicles, the Korean government has used a series of very complex and reoccurring non-tariff barriers to keep their market closed.

Here in Canada, unlike South Korea, access to the North American market is not restricted to those companies that manufacture domestically. Vehicle imports from Europe, Japan, and Korea continue at near-record levels of nearly four million units as of 2006. As a result, North America is in a unique position as a major auto-producing region in that there are significantly more vehicles sold within our market than are produced here. Compare that to Korea and Japan, which export over two million and five million new vehicles, respectively, each year.

As North America continues to accept increasing levels of imported vehicles into a flat or decreasing sales market, which is what we have right now, local production will be impacted if foreign markets cannot be found to offset sales of domestically produced vehicles.

Given the extreme pressures on the auto industry within North America, our members are continually looking for new avenues to increase sales and production at existing facilities. Unfortunately, Canada's opportunities in the wealthy and vibrant South Korean market are limited by government protectionist actions.

The actions of the Korean government to restrict foreign competition in vehicles directly led to two memoranda of understanding during the 1990s signed with the United States. Under each of those agreements, the Korean government agreed to eliminate specifically identified non-tariff barriers and to encourage two-way trade.

The Korean government responded with only minimal progress in removing some of the identified NTBs, but then introduced a new series of barriers that ensured that the market remained closed to imported products. Following a similar path under the proposed Canada-South Korea free trade agreement, we are going to have a very similar result.

All too often the Canadian position on trade with Korea has been oversimplified, ignored, and downplayed to try to undermine the significant concerns that the auto sector has raised. Our concerns were developed as a result of 20 frustrating years of experience, trying to gain access to the Korean auto market by our member companies.

I'd also like to brief you on some of the myths that have been perpetuated with respect to the CVMA and the auto industry's position.

Myth number one is that there will be no negative economic impact from the proposed FTA, because Korean-branded vehicles will be sourced locally.

You heard this statement directly from Minister Emerson and the lead trade negotiators just last week. This is based on poor information and an alarmingly incomplete analysis. The government's analysis states that there will be no increase in Korean-branded vehicle import sales in Canada and that the actual volume of vehicle imports from Korea will decrease substantially as a result of the U.S. assembly.

It is true that Hyundai has a U.S. plant that has been in operation for roughly two years and that there is a Kia plant now under construction in Georgia. While fully operational, Hyundai's plant can only produce one-quarter of their vehicle lineup, and as a result they continue to import near record levels of Korean-built vehicles into the Canadian marketplace. Other Korean manufacturers, such as Kia, will be no different.

As a result, the CVMA along with other private sector companies expect that the import levels from South Korea will not decrease with the introduction of Korean-brand vehicle assembly plants in the U.S., and with an FTA the levels of imports will actually increase.

This has several economic impacts. Tariff elimination will provide an additional cost advantage to importers, roughly $1,300 to $1,600 on every vehicle, and likely leading to the acceleration of imports. Vehicles built in South Korea and sold in Canada compete directly with Canadian-made products, which will reduce domestic production of vehicles, parts, and components.

In addition, if there is no direct Canadian-produced competition, which is today unusual, it will compete directly with vehicles produced in either the United States or Mexico and that have significant Canadian content.

Without access to Korea's closed market and with reduced domestic production, Canada will lose out on investment decisions, and the best intelligence we have at this time is that there is no Korean assembler investment anticipated in Canada to offset these losses. You may recall that Hyundai closed its only plant in Canada, in Quebec, in 1994.

Unfortunately, the government's economic analysis failed to study these long-term economic impacts, which is why we have had such difficulty accepting claims that there will be no economic downside to Canada's auto industry and economy as a whole as a result of the proposed free trade agreement.

Myth number two is that Korean manufacturers only import small vehicles that do not compete against Canadian-produced models.

While Korean brands are well known for their traditional small-car base, today their Canadian sales of SUVs and crossover utility vehicles match their sales of small cars. Despite the production in the U.S. of one of their SUVs, the Sante Fe, Hyundai and Kia will import five different Korean-built small SUVs and crossover utilities that compete directly with several Canadian-built vehicles. This is in addition to the minivans and small cars imported from South Korea.

Soon--and contrary to what our negotiators seem to be aware of--it is anticipated that they will be introducing pickup trucks and diesels to further fill out their product lines, and will be in a position to directly compete against all Canadian-produced vehicles.

Myth number three is that Canadian manufacturers are looking for protection because domestic facilities are globally uncompetitive and build poor-quality vehicles.

The CVMA can proudly state that we represent companies with facilities in Canada that consistently win awards for the highest quality and productivity, according to third parties like J.D. Power and Harbour Consulting. On a broader scale, the vehicles sold by CVMA member companies consistently rank near the top in vehicle quality surveys, equal to or better than Korean competition. Our member companies are not looking for protection; however, we are looking for support in eliminating the protectionist actions of other governments in order to create a free and fair trade agreement.

Myth number four is that Japanese and European automakers are doing quite well in Korea, and only the North American automakers have a problem.

The reality is that no foreign automakers from any country around the world have access to the Korean auto market, as its market is the most closed of the overall OECD countries. In 2006, imported vehicle sales in Korea from all manufacturers from all countries, including Europe, Japan, and North America combined, hit at roughly 4%, yet Canada sits at roughly 85% in terms of imports, and the OECD average is well above that, at 48%. By any comparison or use of statistics, Korea is a closed market for all automakers, which is why right now the EU is having such a difficult time in their FTA negotiations with Korea as well.

Myth number five is that Korean consumers prefer different kinds of vehicles than those produced and sold by North American automakers.

The reality is that Korea's automotive market is nearly identical to Canada's auto market, where small and medium vehicles, minivans, and small and medium utilities and crossover utility vehicles combine to capture over 75% of the sales market. Koreans actually purchase more large cars and medium utilities and crossover utilities than Canadians. While many vehicle models in these segments are produced in Canada, they are only sold in Korea in very limited quantities. In Canada, North American brands hold 55% of the market. In Korea, those same companies have less than 2% of the market, regardless of where that product is produced.

Why does all this matter for Canada's negotiations with Korea for an FTA? The answer is simple. It impacts investment decisions in Canada, and therefore impacts Canadian jobs. In today's global auto industry, companies attempt to maximize plant utilization at each of their global assembly plants to maintain a competitive position. In most cases, products can be built anywhere within the corporate global enterprise and sold in markets around the world.

Most of our companies build products in other markets and import them into Canada for sale. Likewise, their Canadian operations build most of their products for sale outside of Canada. All of these Canadian-built products are currently sold in the many markets around the world, including South Korea. However, because of market restrictions they're only sold in small numbers.

If Canadian manufacturers cannot access foreign markets, then production mandates will be placed in other jurisdictions--it's as simple as that. An FTA with Korea will not create free and fair trade with unfettered access, and it will result in a continued increase in imports with no foreign market to offset those domestic losses in sales.

As I have said, the Korean government historically has created and used NTBs to block foreign products into their market. We fully expect this strategy will continue unless there is a meaningful incentive to open up their market.

With this mind we are requesting the Canadian negotiators to focus on three core priorities for the auto sector:

Do not trade off accelerated tariff phase-out for promises of market access in Korea or for any other FTA provision;

Put the onus on the Korean government to permanently eliminate existing NTBs, ensure the new NTBs are not introduced, and take other steps necessary to meaningfully open their market to foreign competition;

Maintain the prohibition on the import of used vehicles, because removing the ban would have significant environmental, safety, and economic impacts for Canada that have not been studied.

It has been claimed, though, on several occasions, that Canada should be copying the draft U.S.-Korea free trade agreement, which is very troubling for our sector in both Canada and the United States. Given the political signals out of the U.S., we are uncertain when this deal will be ratified. But furthermore, following the pattern of tariff elimination set by KORUS, the immediate elimination of tariffs on small vehicles would have a very significant and disproportionate impact on our industry in Canada, due to the makeup of our domestic production and sales segmentation.

In closing, Mr. Chairman, I want to remind everyone of the highly challenged position our sector is in right now in Canada. In November, Canadian sales dropped 5% compared to 2006. It is expected that 2008 sales will be even lower yet. In the U.S., a similar pattern has emerged with the ongoing housing and credit crisis. Sales this year are off 2.5% from 2006 levels and they are not expected to rebound in 2008. Production cuts have been announced for the first quarter of 2008 that will impact Canadian assembly and parts manufacturers. This is in addition to already-announced production cuts in 2008, which in Canada has resulted in two lost shifts at our most productive, highest-quality plants, as well as a significant reduction in OEM parts and components output and a commensurate drop in Canadian employment levels.

Mr. Chairman, I'd be pleased to answer any questions the committee may have. Thank you.

[The Chair, Conservative, Lee Richardson]

Thank you, Mr. Nantais.

Before we proceed to questions, I want to remind the committee we have with us in committee Mark Nantais from the Canadian Vehicle Manufacturers' Association, Gerald Fedchun from the Automotive Parts Manufacturers' Association, and via conferencing--I should mention again, Mr. Stanford, we are getting you live on video with the telephone conferencing, so it's almost perfect.

[Dr. Jim Stanford]

It's working fine at my end. Thank you, Mr. Chair.

[The Chair, Conservative, Lee Richardson]

Great.

To remind our witnesses as well as the committee, we have established a questioning procedure whereby each of the parties will lead off with a seven-minute question and answer period. So if the question gets a little long, I'm going to ask the witnesses to keep their answers short, because we're going to have to cut them off at seven minutes on the first round. We'll proceed with additional rounds of five minutes each.

For the first round, I'm going to begin with Mr. Bains.

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

Thank you very much, Chair.

I'd like to thank the witnesses again for coming before the committee.

There are some problems with one of the witnesses coming, but I think it's working out really well, and I appreciate your presentation, Jim.

I want to understand something. Today we have the parts association representative, the manufacturing association representative, and the workers' representative. All share a similar position on the Canada-Korea free trade agreement.

From your perspective, are there other stakeholders? Jim, you mentioned a long list of people who have similar concerns. Do you have a list of those people who share similar concerns, who have expressed a similar viewpoint with respect to this potential free trade agreement with South Korea?

[Dr. Jim Stanford]

Yes, I'd be happy to present the committee with some of the names of other industry associations who've expressed concerns about this. I think the auto industry has taken a lot of attention in this debate, partly because of the importance of the auto industry to our overall economic situation in Canada, and partly because we have more well-organized stakeholder groups like the CAW to help advance the cause.

But if anything, frankly, I think other industries will be hit even harder. The machinery industry, for example. Machinery is a very valuable industry because it's very technology intensive. It's very innovative. The machinery sector has to be constantly innovating the types of products it makes. Machinery, by our estimates, will be hit at least as hard as the auto industry, and it's the same with computer electronics. The tool, die, and mould industry has an association that's expressed concerns about the FTA as well.

So I'd be happy to provide the committee with a list of some of the other industry groups that are just as concerned, and with good reason, as the auto industry.

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

Again, that also goes to the parts manufacturer.

[Gerald Fedchun]

Yes, informally I canvassed all the other associations I'm familiar with, the Canadian Manufacturers & Exporters, the foundry association, all the other people I'm familiar with. I couldn't find a single person who was in favour of this free trade agreement. So I think if you canvass them, you'll find exactly the same thing.

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

If you could provide a list of people--at least the ones you're comfortable with providing--that would be greatly appreciated.

[Gerald Fedchun]

Jim will do that, Mr. Chair.

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

It would help the committee with future business as well.

The second question I have--and this is an issue I discussed when the minister and department officials were here--is with respect to the analysis around job losses. To my understanding there have been four official studies done with respect to the potential free trade agreement. One has been done by Industry Canada, one by U of T, and one by the CAW. There has also been an economic analysis done by the department, which was alluded to, and then there have been submissions by various stakeholders.

Of those reports, Industry Canada mentions a projection of job losses of between 5,000 to 35,000; CAW has projected 33,000 job losses. I know the department officials refute this number from the CAW.

Jim, based on their critique, have you had a chance to re-evaluate your number? Are you still comfortable with your methodology? And can you comment--this speaks to CVMA and the parts manufacturers as well--as to why there is a hesitation to put out numbers? For many Canadians I think it boils down to how this impacts potential job losses.

[Dr. Jim Stanford]

That is a good question, Mr. Bains.

The DFAIT study you referred to, which was prepared as part of the environmental assessment process but is the only official economy-wide study the government has conducted so far, assumes there are no job impacts as a result of the FTA. But remember, the model assumes there is full employment. It's a computerized general equilibrium model that assumes there is full employment of all resources, including all willing workers in the country. You can't prove there are not going to be job effects with an economic model that assumes workers will always be fully employed.

We have reviewed the critique of our study. Remember, our study is based on the actual experience we've had with the past five free trade agreements we've signed and the impact of those free trade agreements on both exports and imports. In almost every case our imports grew much faster than our exports. Interestingly, the DFAIT study assumes exactly the opposite. They expect Canada's exports to Korea to grow at a rate that is two or three times as fast as our imports from Korea, which is completely at odds with historical experience, both our historical experience with Korea and with other free trade agreements.

I still believe the CAW's approach is the most rooted in actual numbers, rather than unrealistic assumptions.

[Mark Nantais]

We would certainly agree that this is an alarmingly incomplete analysis. I fully agree with Mr. Stanford on the shortcomings of the economic analysis, as well as the environmental analysis. Even when you take the data that was used by the government, it shows we're going to be locked into a roughly $2 billion annual trade deficit.

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

There are two types of data that they used. In the U of T and Industry Canada studies they used 2005 numbers, and for the recent economic and environmental analysis they used 1990 numbers.

Can you comment on that as well?

[Mark Nantais]

Exactly. The 1990 data, for instance, does not recognize much of the transition that has taken place in the industry. You can well imagine that much has taken place between 1990 and now as it relates to the structural changes within the automotive industry--structural changes that are absolutely key to understanding the ramifications and implications for jobs in the auto industry in Canada.

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

I have a quick question, again, to follow up; I know how tight the time is.

With respect to the impact, one area I think has been overlooked is the impact on the used car market. Could I get your thoughts on how this potential free trade agreement would impact that?

As well, could I have a comment with respect to investments. We know we're currently facing a productivity challenge in this country. There were comments made by the Ford CEO saying that if negotiations were to continue and we were to sign a free trade agreement there could be a lack of investment by large companies, and that could have an impact on our productivity and jobs. Can you comment on that part of the analysis as well, please?

[Mark Nantais]

As it relates to used vehicles, we understand from last week's testimony that the Koreans have put the possibility...or are at least requesting that the prohibition on used vehicles into Canada be eliminated, as part of their demands.

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

Correct.