Automakers: U.S. X Factor in Canada-EU Trade Deal

BRUSSELS – The Canadian auto industry welcomes the Comprehensive Economic and Trade Agreement negotiated between the European Union and Canada, but it may become more significant if a trade deal is struck between the EU and the U.S.

“The biggest issues with CETA, and what we’re excited about, is the removal of the EU 10% tariff,” says Jeffrey Pierce, policy analyst at Canadian Manufacturers and Exporters, an industry association whose members include Canada-based automakers.

The trade agreement reached late last month will remove a 10% EU tariff on imported passenger vehicles and tariffs of up to 4.5% on Canadian automotive parts. This “gives Canadian automakers a comparable advantage over American or other regions,” Pierce says.

However, CETA has been relatively timid on harmonization, or mutual recognition, of EU and Canadian automotive technical standards.

Erik Jonnaert, secretary-general of Europe’s automotive industry association ACEA, welcomes the phasing out of Canada’s 6.1% tariff on cars under CETA but notes Canada has accepted only a handful of the UN Economic Commission for Europe’s international vehicle regulations, which he calls a symbolic move.

Jonnaert tells WardsAuto ACEA thinks a deal on mutually recognizing and harmonizing automotive regulations in the Trans-Atlantic Trade & Investment Partnership (TTIP) currently being negotiated between the EU and U.S. “must be much more ambitious.”

Should that happen, a European Commission official says, Canada and the EU have included a clause in CETA stating “if the EU and the U.S. conclude an agreement or an arrangement dealing with the harmonization of their respective technical regulations related to motor vehicles,” then the EU and Canada should decide whether the same deal should apply for vehicles traded between them.

Another difficulty facing the CETA negotiations by the integration of the U.S. and Canadian markets relates to the rules of origin, the EC official tells WardsAuto.

“We didn’t accept that they bring parts from no matter where and they put it together in Canada,” he says, meaning U.S.-owned automakers will be limited in their ability to ship parts from America or elsewhere for assembly in Canada and get duty-free access to the EU.

That said, the Canadian industry remains optimistic, with Pierce noting Canada will be the only region in the world with access to both the U.S. and EU markets through free-trade agreements once CETA is ratified by the Canadian and European parliaments, which may take until 2016.

The agreement sets an annual export quota of 100,000 Canadian vehicle units to the EU. These are considered “originating” from Canada if the value of all non-originating materials used is no more than 70% of the transaction value or ex-works price of the product, or 80% of its net cost.

CETA’s point-of-origin rules encourage “made-in-Canada vehicles,” giving those with higher Canadian content unlimited preferential treatment in being exported to the EU.

This could encourage manufacturers in the U.S. and elsewhere to produce in Canada, Pierce says: “Having your operations in Canada is a prerequisite to having preferential access to the EU, so there’s incentive to set up in Canada.”

However, Mark Nantais, president of the Canadian Vehicle Manufacturers’Assn., is more cautious about the benefits of CETA for his member companies, which include Chrysler Canada, Ford Canada and General Motors Canada.

“It remains to be seen the extent it will be beneficial to the automotive industry,” he said, but adds, “It’s an agreement that we support.”

Nantais notes one useful part of CETA is a “placeholder” with the potential to recognize the integration of the Canadian and U.S. auto industries in the future. “This is a key challenge for Canadian negotiators, to recognize how we’re actually structured,” he says.

The two countries source from both sides of the border and CETA notes this should be addressed; for instance, if the EU and U.S. sign a trade deal, this could allow for Canadian and American content to be counted together and that content “accumulated.”

Regarding the rules of origin agreed upon in CETA, Jonnaert says, “ACEA would like to stress that deal very much reflects the unique features of the Canadian automotive industry and therefore should not be used as a precedent for future EU FTAs.”

Peter Cooke, emeritus professor of automotive management at Buckingham University in the U.K., is not convinced U.S. manufacturers might switch production to Canada to take advantage of lower tariffs in Europe. “The U.S. and Canada de facto work as one unit already,” he says.

Negotiations between the U.S. and EU on the TTIP deal have been taking place for about a year. A senior EU official says an agreement may not be reached until early 2016.

– with Kitty So in Ottawa and Alan Osborn in London