International Trade Committee on May 10th, 2012

[Kathleen Sullivan]

Japan does seem to have a protectionist approach to its agriculture sectors. I think the fact that the Japanese government indicated that they need to focus on trade markets, and that they'll have to take a look at some domestic reforms in order to do that, is an incredibly positive signal not just to us but I think to a lot of economies here in Canada.

Agriculture, fisheries, and forestry are quite protected in Japan. Those are probably the sectors that could benefit the most from the trade deal, so it's quite positive for us that we're seeing those signals.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move to Mr. Easter.

[Wayne Easter, Liberal, Malpeque, PE]

Thank you, Mr. Chair.

Thank you to both witnesses for their presentations.

Turning first to the Japan Automobile Manufacturers Association, I guess especially in the Ontario economy—and I don't think we often see or understand this from the rest of the country—the automobile industry is the number one generator of economic growth, or has been. It's been bouncing back and forth between agriculture and the auto industry in the last number of years.

How do you see this proposed trade agreement growing that auto industry even more in Canada? You went through the job numbers. I think there were some concerns in the beginning about displacing Canadian jobs with Japanese cars, but we are a staging ground for export to other countries, as I understand it, on Japanese models.

How do you see this trade agreement in fact building and growing on that?

[David Worts]

As I mentioned, I think we will have the ability to bring in vehicles that would attract a 6.1% tariff, particularly higher-cost advanced technology vehicles, which are typically sourced at this point in Japan. The usual process, I think, is to establish a market for the vehicles and at some point build a business case for local production. I'm encouraged by the fact that more sophisticated platforms are now appearing in Canada with the RAV4 EV going to be manufactured in Woodstock. I think that would help the process. That would certainly be one of them.

Obviously, the value of the yen is a big issue for a lot of Japanese manufacturers and certainly for the automakers in Japan. There's a lot of pressure on them to co-locate production in export markets and to reduce their exposure to the currency. When you get assembly plants, as we've seen historically with the plants that have come here, you get a knock-on effect with supplier investment as well.

[Wayne Easter, Liberal, Malpeque, PE]

Thank you.

I'll turn now to CAFTA.

Kathleen, I know pretty well where you stand on trade agreements, but there are some other obstacles, especially in the export of agricultural goods from this country, whether value-added or raw materials but to a great extent raw materials, putting Canada at an extreme disadvantage. There's one in particular that the government has been failing dismally on, and that is the service review related to the railways. I'm wondering if CAFTA has a position on the service review and why the government has not acted on that.

I'll be blunt. My own view on Transport Canada is that it should be called the department of railways because it's always coming down on the railways' side. The government, for whatever reason, has failed to act on that service review, so I'm wondering where you're at on that and whether it puts us at a disadvantage.

[Kathleen Sullivan]

CAFTA doesn't take a position on the rail service review, partly because it's a domestic issue and also because not all of my members' products would be transported by rail primarily. Certainly, as you know, a lot of our members, particularly on the grain side, would have significant concerns about rail service in Canada. As we are opening up more markets in Asia, those concerns are likely to grow rather than fade away. There's not much I can say on the review itself because we don't engage ourselves in that, but certainly rail service is a concern on the grain and oil seeds side.

[Wayne Easter, Liberal, Malpeque, PE]

You talked about the TPP and about how it should certainly be given priority. It isn't a sure thing, as I understand it, that Japan will be a part of that package necessarily. Does that change the position any?

[Kathleen Sullivan]

It doesn't really. There are some additional export opportunities within the family of current TPP countries, albeit they're probably not hugely significant. Vietnam might be a good opportunity for some growth, but a lot of the TPP countries compete with us as it is.

From an agriculture standpoint, I think the real value of joining the TPP is the possibility of future growth if other countries are added in. But to me the real opportunity here is the possibility of being part of what I would call a regional supply chain. You have a group of countries dealing with SPS issues, minimum residue level issues, and rules of origin on a regional basis. That's really where, from an agriculture standpoint, you start to see some real advantages.

Really, half the problem for agriculture when it comes to trade is non-tariff barriers. Now, to the extent we deal with them, some are through the WTO or other international bodies, but a lot are on a bilateral basis, and you get a patchwork approach. If you can get an organization like the TPP that maybe then grows into a broader APEC initiative that starts to look at issues such as low-level presence of genetically modified material, for example—and you can do that on a regional basis—you can then really start to get to that rules-based trading system you were talking about with the earlier panel. I think, from an agriculture standpoint, there's a huge possibility here.

[The Chair, Conservative, Rob Merrifield]

Time is up, but I want to thank you for the questions.

We'll move to Mr. Shory, and Mr. Dechert.

Mr. Easter, I'll help you with the rail freight service review.

[Devinder Shory, Conservative, Calgary Northeast, AB]

Thank you, Mr. Chair. I'll be splitting my time with Mr. Dechert.

Thank you, witnesses, for being here.

Mr. Worts, you mentioned that there have not been any layoffs in the plants in North America. How many plants and workers are there in Canada presently?

[David Worts]

In the vehicle plants there are about 11,000, and there are about 15,000 in over 50 auto-related operations in Canada. Therefore, there are about 26,000 on the manufacturing side.

[Devinder Shory, Conservative, Calgary Northeast, AB]

If this agreement were implemented, do you think the elimination of tariffs would help you to expand your business, expand your manufacturing plants here, which would obviously create more jobs in Canada?

[David Worts]

As I mentioned earlier, the 6.1% tariff in terms of the costs that the Japanese automakers are facing is not that significant in terms of their production. It's more on the market side that we're looking at the impact of the 6.1% tariff.

In a sense, there are two industries in Canada; it's kind of bifurcated. The production side is largely export based. Even our operations in Canada would not be the size they are without access to the larger U.S. market. While we keep a lot more of the production here in Canada because we build small vehicles that Canadians prefer, the U.S. market is still a critical part of that.

During the recession when the U.S. market took a big dive, the production side was the biggest side of the industry that was hurt in Canada. It wasn't so much the market, but that the production plants were seriously affected by that. Then with the tsunami and other disasters last year, our production was down about 50%, I think, through a number of months before the supply chain started to get repaired.

We're supporting the trade deal for the benefits that would come obviously from lower tariffs, but we think there are also opportunities for many other sectors that we think would be beneficial for both countries.

[Devinder Shory, Conservative, Calgary Northeast, AB]

It was suggested earlier that North American companies, for some reason, are not successful in Japan's market.

The elimination of tariffs, once the agreement with Japan was signed and implemented, I believe would open the market, or it would work as a gateway to some other Asian countries. Would that not give an opportunity to these manufacturers, if they work toward that, to have a platform to get into other markets as well?

[David Worts]

Absolutely.

There are no tariffs into the Japanese automobile market, either on the vehicle side or the parts side. We have seen some Canadian investment in Japan to connect with Japanese, either major suppliers or OEMs, not just for business in Japan, but for business in other global markets.

To the extent that we re-engage with Japan, I think will have synergies that will impact the industry as well.

[The Chair, Conservative, Rob Merrifield]

Thank you.

Mr. Dechert.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Thank you, Mr. Chair.

Thank you very much, Ms. Sullivan, and Mr. Worts, for sharing your important information with us today.

Mr. Worts, I come from Mississauga, which is where the headquarters of a couple of Japanese auto manufacturers in Canada are located. A lot of the auto parts that are used in those plants are manufactured in the Mississauga area and the greater Toronto area. It's a very important part of our economy.

You mentioned in your opening remarks that Japan is a challenging market for domestic Canadian and U.S. auto manufacturers, and that Canada and U.S. manufacturers do best in the larger engine vehicle markets.

I was wondering if you could tell us what the Japanese consumer is looking for in autos. How could Canadian and U.S. domestic auto manufacturers better access the Japanese consumer market for autos?

[David Worts]

I certainly will try. I'm not an expert on the Japanese market, but Japan, as you may know, is a small car market. About 88% of the vehicles have engines that are under 2 litres. In that particular segment, according to the JAMA Tokyo document I have here, two U.S. automakers have models that compete in that particular segment, whereas European automakers have about 81 models.

Not only is Japan a small car market, but about a third of the market is mini-vehicles. This seems to be a unique segment for Japan. It's a very small vehicle with a very small engine, so even the smart vehicle, which might qualify in terms of its size, doesn't because of the engine.

Also, of course, the consumer market in Japan differs from that in North America because a lot of Japanese consumers don't use their vehicles to drive to work. I have friends in Japan who have vehicles and who only use them to go to the golf course on the weekend. Certainly if you're in the major urban areas, you're going to be using public transit to get to work. Very few people are driving, so I think people look at their vehicles differently. They're very brand conscious. I think that's why European automakers do well in the particular segments they do: because European brands are highly valued.

I'm not sure about exactly how Japanese consumers view American brands. When the Detroit companies participated in the Tokyo motor show, typically they exhibited a Corvette, a Hummer, a Lincoln, or a Cadillac. These are premium exotic vehicles in terms of what sells in Japan.

It's a difficult market because there are eight domestic Japanese companies making vehicles in Japan.

[The Chair, Conservative, Rob Merrifield]

Thank you very much for that answer.

We'll go now to Madame Papillon.

The floor is yours.

[Annick Papillon, NDP, Québec, QC]

First off, Ms. Sullivan, I would like to thank you for being here.

I would like to know whether you did any research on the impact of this agreement in Japan or in Canada.

[Kathleen Sullivan]

From CAFTA's standpoint and what we've done, essentially whenever we take a look at an FTA with another country we do a review with our members of the issues they face in that market and what they think the potential could be. From our members, their estimate was about $350 million in additional trade, just for the beef and pork sectors. For the other industries, it really very much depends on what the negotiations are going to look like.

We are also working with Agriculture Canada on the possibility of doing some further analysis, a more specific industry analysis for agriculture, for this particular deal.

[Annick Papillon, NDP, Québec, QC]

And you, Mr. Worts?

[David Worts]

Thank you.

We surveyed our members. If I can put it in a slightly different context, our concern after the 2001 repealing of the Auto Pact was that Canada entered, I think, into negotiations with South Korea in 2006. South Korea is a major auto producer and exporter, and giving preferential treatment to some vehicles in Canada would be a big issue for our members, who have to compete in a very competitive market. Then adding the CETA, the agreement with the European Union, brought in not only Korean vehicles but also European vehicles, which really comprise the rest of the industry, for the most part. So what was missing there was a deal with Japan.

So we were saying, look, we're concerned about the implications this might have, not only for our members for the market here and for competing imports from Japan, but also in the longer term for how investment might be perceived in the Canadian market if the government is not prepared to give preferential treatment to Japanese vehicles as well.

So when the Canada-Japan trade deal was announced, I think that was a big step in the right direction as far as we were concerned.

[Annick Papillon, NDP, Québec, QC]

Can you assure me that, in light of all the impact studies you conducted, if we were to eliminate the 6% tariff, for instance, it would not necessarily be more attractive to build them in Japan? Was that something that came up in your studies?

[David Worts]

Not in the studies, per se. In fact the Department of Foreign Affairs and International Trade did a study with the onset of the Korea agreement that looked at the impact of free trade agreements with Korea, the EU, and Japan, and a sort of unilateral elimination. You might want to refer to that: I think it shows there's a very minimal impact on Canada overall.

We have some concerns about the impact it would have in the small car market in particular, where customers are very price-sensitive, where a small price difference can make a huge difference to whether or not a customer buys one vehicle versus another, particularly price on a monthly payment basis.

In terms of investment or production coming from Japan, my sense, just looking at what's happened recently, is that the value of the yen is really driving more co-location of production outside of Japan. We already see a number of investments that have been announced for North America. In Canada we've received the CR-V, a compact light vehicle, in Alliston, as well as the RAV4 in the last couple of years—again, a competitive small vehicle—for the Canadian market.

My sense is that the yen is driving a lot of that outward investment.