Good morning, Mr. Chair, and thank you for allowing Iafrate Machine Works to provide input into this study of how tariffs are affecting Canadian businesses and workers.
First of all, we are one of the companies that were successful in their remission request.
The topics I will cover are the custom machining industry, the market for machined products and the impact of the 25% surtax on our business.
We are a custom machine shop. We do not manufacture our own line of products. Instead we invest in sophisticated computer-controlled lathes and mills that are operated by semi-skilled operators and skilled tradesmen to produce products designed by our customers. Typically, customers will specify the type of steel, based on specific chemical properties required to meet industry standards; the melting practice, which could be electric arc, open hearth or basic oxygen; the forming practice, which could be wrought using hot-working or forged; whether heat-treating is required, and if so, the industry standard that must be met; whether test coupons are required to confirm that the raw steel meets the hardness, mechanical and impact test requirements; the industry quality standards, in our case, the American Petroleum Institute's API 6A; how the material is allowed to be marked for identification; and the minimum disclosure requirements contained in a material test report. I think you can see how compliance-driven the oil and gas industry is.
Now I will talk about our markets. A significant percentage of our business is driven by an Alberta-based company that provides flow-control products to the oil and gas industry in both Alberta and the U.S., specifically Texas, Colorado, North Dakota and Pennsylvania. Therefore, any oil and gas product produced for export to the States must meet the standards specified by the American Petroleum Institute, which is the list that I just went through. The products that we machine for this customer are incorporated into complete systems that are assembled in Alberta and shipped into the States. Please note there are no steel mills in Canada that provide steel that meets the American Petroleum Institute standards that this customer must meet. This is also the case for the specialty steel that we purchase from the States for the dies that we machine. When these dies are finished, they are used in a forging process to make product that will then be machined for the oil and gas industry.
Furthermore, our customers will not accept steel from China and Ukraine. As a result the 25% surtax, charged by the Government of Canada on all steel that we purchase to serve this customer, artificially increases our selling price to them and puts them at a significant disadvantage when they incorporate our components into their system, and then export that to their distributors in the States. We have already experienced a significant reduction in our sales to this customer, which directly provides employment for over 25 full-time manufacturing jobs at our facility in Thorold, Ontario. Our U.S.-based competitors are not subject to any of the American tariffs on Canadian steel because there are no suppliers of these API grades of steel in Canada.
To conclude, if the intent of the 25% surtax on U.S.-source steel designed for the oil and gas industry is to encourage the purchase of Canadian-source steel, it won't work, because no Canadian mill produces American Petroleum Institute-grade steel. Furthermore, the failure to apply a tariff on imported industrial product that our customers compete against automatically puts at a significant disadvantage Canadian manufacturers that must purchase U.S.-source steel.
We strongly advocate for the removal of the 25% surtax because removing it will level the playing field with our American competitors, and in doing so it will protect good-quality, high-paying technical and skilled jobs in Canada. This will also discourage the potential relocation to the States of Canadian businesses that support the oil and gas industry.
We recommend that any consideration to use retaliatory tariffs or surtaxes in the future not target industrial raw material purchased by Canadian manufacturers from free-market economies, because this automatically increases production costs, reduces competitiveness in the marketplace, and risks potential layoffs due to lost market share.
If the Government of Canada wants to use tariffs to change purchasing behaviour, it should only target foreign-finished goods with tariffs. This will encourage Canadian consumers to purchase Canadian goods, without distorting Canadian production costs, which puts Canadian businesses and jobs at risk.
Thank you for your time.