International Trade Committee on June 18th, 2019

[Flavio Volpe]

You know, I make that pitch all over the world. I make it from a private sector standpoint, but I make it. The global automakers—not David's group, but small-g global—have moved to a trend, especially in the last couple of decades, of building where they sell. The Canadian market is saturated. The American market is the real target. The American market is 17 million sales a year, but they make 12 million vehicles a year. The real pitch is “Come to Canada to sell to Americans.” Especially if you're in a volume business, not premium vehicles, you're operating in a single-digit EBITDA. You could eat up that single-digit margin by then having to export across the Atlantic and the Pacific.

To clarify the question—and I think we have similar ones—of why not in Canada, I think the USMCA, or CUSMA, whatever we're calling it, will help to answer that question a little bit if the U.S. does that second step, which is to do fortress North America, their tariff threat to make it more expensive to import into the U.S. Canada could be the best place, considering what this agreement has done to weaken the prospects of Mexico, to fill that five million U.S. demand gap.

I do know that we are in very serious long-term discussions with OEMs from Europe and Asia, and my expectation is that once this gets ratified, we're going to see one or two new ones show up here. There are all kinds of other issues of competitiveness, some under provincial jurisdiction. We have a government in Ontario that is transactional in that space, and I think working together with the industry, you might see some positive results.

[Randy Hoback, Conservative, Prince Albert, SK]

[Inaudible—Editor] and rationalized their domestic production to one facility in the U.S., and then they went to Asia. Why didn't we grab that second facility and say that they can still export to Asia, and they're only three hours away?

[The Chair, Liberal, Mark Eyking]

Mr. Hoback, I don't know if you have a clock over there, but my clock reads almost seven minutes.

[Randy Hoback, Conservative, Prince Albert, SK]

Really?

[The Chair, Liberal, Mark Eyking]

They were really good questions and answers, but I think we have to—

[Flavio Volpe]

I think it's a very complicated negotiation with a publicly traded company that has ticker symbol issues and distribution issues—

[Randy Hoback, Conservative, Prince Albert, SK]

There's more to the equation.

[Flavio Volpe]

Yes, there's way more to it.

[The Chair, Liberal, Mark Eyking]

Just as a comment, I think when we had the Japanese automakers in for lunch, one of the things they were looking at was that Canada was also a stepping stone not just for the United States but with our new European agreement. We would hope that would also bode well. I know it's a bigger leap across the pond, but is there some thinking that way also?

[Flavio Volpe]

In the CETA, there is tariff-free export of vehicles under a quota, and it's 100,000 a year shared with everybody. So what does CETA represent? Is it necessarily a singular business case to manufacture or export? It is an opportunity for current manufactures to diversify where their current plant's business is. It may strengthen Honda's business in Alliston. But the quota is over by the time you get to three months' worth of production in one plant and we have 10.

[The Chair, Liberal, Mark Eyking]

Thank you.

We're going to the Liberals now.

Mr. Fonseca, you have the floor.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

Thank you, Chair.

I want to thank the witnesses for highlighting how integrated our economies are, and also highlighting the need to get this deal done and get it done as quickly as possible.

This doesn't always happen, but we've received comments from along the political spectrum as well as business and the people whom we represent in all of our ridings. I just want to read these out to you.

The Business Council of Canada said, “We applaud the government's success in negotiating a comprehensive and high-standard agreement on North American...”. People like Jerry Dias are saying, “The auto industry should be absolutely thrilled. This framework delivers significant improvements in auto. Unifor called for increased rules of origin” etc. They're very, very supportive.

Also, we have a quote from Hassan Yussuff, the president of the Canadian Labour Congress, saying the new NAFTA “gets it right on labour provisions”.

From right across the spectrum, what we're hearing is support. I think that support is to bring that access to the North American market, that certainty, understanding what that translates into is more business, more jobs and a better quality of life here for all of us in Canada.

I want to go to the rules of origin and auto parts. It's changed so much when it comes to auto. It seems now that we're on four wheels and a computer. Can you highlight for us a little bit about what's happened in terms of the parts? You said they added 50% more in terms of parts for the cars.

[Flavio Volpe]

The challenge of getting the rules of origin in autos is recognizing that the current rules of origin were written in 1994 when the maximum amount of electronics in a car might be the trip computer where you press the button and reset. Now about 30% of the value of a vehicle—not the weight but the value—is in electronics, hard and soft. There are more lines of code in a Chevy Cruze than there are in a Boeing Dreamliner.

The rules that said 62.5% of a vehicle has to be locally sourced to sell tariff-free only told half the story. They missed all this new content. The effective rate was probably around 52% or 53%. The debate around the new rules is how we capture all those high added value pieces, both from a Canadian perspective and I know the Americans were after that as well, and not always chase those commoditized pieces that follow the lowest labour wage rate of pieces that went to Mexico. I think we've achieved that balance. It is a balance because if people such as David's members didn't commit to meeting those new standards because they were too high and the tariff penalty was too low, then my members wouldn't get anything out of it.

There's a balance struck across North America between the auto makers and the legislators and the suppliers that we are going to make a real effort to get there, and we're going to see some higher added value stuff come our way.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

This would be like positioning ourselves as a global centre for AI and what that means in terms of future autos.

[Flavio Volpe]

If you overlay the IT cluster map of North America with the automotive manufacturing cluster map of North America, the only place where the two overlap in a material way is in southwestern Ontario, with a real honourable mention to Montreal.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

That's great to hear. You talked about $6 billion to $8 billion in investment that you can see.

[Flavio Volpe]

It's $16 billion in incremental supply bridges annually.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

That's on the horizon, and would include many we just discussed.

[Flavio Volpe]

B.C., Ottawa to Windsor and Montreal area all will win that.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

Just to clarify, I know we're talking about CUSMA here, but also with TPP and CETA, how do you see Canada positioned now, in terms of an export country?

[Claire Citeau]

Today, we're the fifth-largest exporter of agri-food products in the world, and we are well positioned to continue to supply high-quality and safe products to the world's markets.

Our members are very pleased with the CPTPP ratification. We're starting to see some positive uptake and results, in particular in the beef and pork sectors. There are some really positive stories on the canola side as well. Hopefully, that is a sign of what's to come. Our members really want to see more of these expansions in Asia, which is where our members see future growth coming from.

We also did mark the entry into force of the CETA; however, 18 months later, our exports to the EU have dropped by close to 10%. I want to be careful, because there are many reasons that explain that number, including prices and demand coming from other markets. Essentially, the problem right now with the CETA is that although there are huge opportunities, there are also outstanding issues with respect to meat products and biotech approvals in this part of the world.

[The Chair, Liberal, Mark Eyking]

We're going to have to move on. We went over the time.

Mr. Carrie, you have the floor for five minutes.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much.

I think everybody around the table are concerned about jobs, Canadian jobs. Again, coming from a manufacturing community, there's a recognition that Canada in particular relies on trade. I take your comment quite well about coming to Canada to sell to the United States. Moving forward, for the immediate future, we have to position ourselves to be competitive internationally, as North Americans, and trade is just a part of that.

As Mr. Hoback said, if you're just looking at trade agreements, we should be the place to be, but we have to look at the big picture. I hear about the high cost of energy over and over in Ontario, because of bad policy, regulatory uncertainty, productivity, taxes and things along those lines.

According to LevaData, this deal will likely increase the cost of production in Canada. I think it was 41% of 100 U.S.-based auto executives said that the costs of manufacturing here will go up at least 10% and up to 25% over the next three years. That means higher costs for consumers. My worry is that tipping point. As I said earlier, it may get to a point where instead of building in North America, some manufacturers may just say that it's too complicated and too costly especially in Canada and they're just going to pay the 2.5% tariff.

What should the Canadian government do to make sure that we can use this agreement to its full potential, so that we remain competitive and don't get to that tipping point where we lose the supply chain jobs building those products here in North America?

Flavio, maybe you could start, and then Dave.

[Flavio Volpe]

There would be cost increases. I think organizations like the Center for Automotive Research in Michigan have articulated those to be around 5%. Five per cent is important to a consumer, for sure, but 5% is also important to the competitiveness of our sector.

To be clear, the cost increases are in the repatriation of purchases to manufacturing towns all over the Great Lakes region on both sides of the border, as opposed to where their trend has been to go to low-cost jurisdictions, like China, Vietnam and Malaysia, to build at a global level. I think that is one of the saw-offs that isn't as clearly negative as some people have made it to be. The fact of the matter is that there are structural issues that need to be addressed in terms of the cost structure. A lot of those are provincial, and I see real movement in some of those, including the cost of electricity, from a Canadian government point of view. It really is a coordination with the province on targeting new investment. You're not going to land Mitsubishi alone, so you can go and sell the trade deal, but you'd better go with the province.

I give the same advice to the province, and I've certainly given this advice to both stripes. Getting new investments, greenfield investments, is like bidding for a professional franchise or the Olympics. There is a distaste in the public to spend hundreds of millions of dollars to land a General Motors plant. However, you know in your riding that when you lose one, your mindset changes a bit. I think it's incumbent on this government to communicate the benefits of going out and bidding for plants. The plants that left Windsor...they don't come back. The ROI for some of these investments is three years, both through the personal tax base and through the corporate tax base.

Everybody kind of shies away. Everybody's party shies away from having to be the one to defend it, but frankly, we lost Hyundai and Kia to Georgia because it outbid us. We lost Toyota and Subaru to Mississippi because it outbid us. One of things that's important in government is not to worry about how sometimes we have to do the tough things and go out and sell it, that we're going to be very aggressive. Yes, we're going to work on the price of electricity. I want to see it. But, damn it, we have to go out there and bid on this stuff.

[Colin Carrie, Conservative, Oshawa, ON]

Mr. Volpe, you don't have to tell me that, because during the economic downturn, there was a lot of pressure, but we did work with the auto industry to save the auto industry, especially with regard to the impacts in southern Ontario. That's why it was such a big disappointment for me to lose a plant, General Motors in Oshawa. They will be making these once-in-a-generation investments, whether it's electric vehicles or autonomous vehicles. To see that go was something that was really, really disappointing and unfortunate for not just Oshawa, but all of Ontario.

Mr. Adams, could you please comment on that? What does the government have to do—