Conservatives rush to resolve TPP auto-parts impasse before election

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Stephen Harper finds himself in the toughest spot so far in negotiations to clinch a Pacific Rim trade deal, with Japan seemingly unwilling to bend on provisions that could sideswipe Canadian auto-sector jobs and with time running out for a deal before the Oct. 19 election.

Efforts to create a Trans-Pacific Partnership trade bloc stretching from Chile to Japan hit a wall in Hawaii this summer after Canada and Mexico balked at import rules for vehicle imports agreed to by Washington and Tokyo that could hit the NAFTA partners' auto sectors hard.

Even six weeks into the Canadian election campaign, though, Ottawa continues to try to resolve this impasse. The Conservatives are still looking for a way to sign a deal during the writ period, when federal party leaders are under intense pressure to demonstrate how they would create jobs and spur economic growth.

Sources say Canada is making plans to meet the United States, Japan and Mexico next week for what could be the last chance to resolve the deadlock on autos in time to wrap up an overall trade deal before the election. The location and exact dates of these negotiations are still being worked out, but the U.S. will play host to the meeting.

Japan, among the most influential players in the 12-country TPP talks, is right now pushing hard for a final meeting of negotiating countries to wrap up a deal, an accord that has been billed as the biggest free-trade deal in history and one that Mr. Harper warned Canada could not afford to pass up. It would lower trade barriers between countries comprising 40 per cent of annual global economic output.

Efforts to address Canadian and Mexican auto-sector concerns over the past few weeks have so far borne little fruit.

Negotiators for Canada, Mexico, Japan and the United States met in Washington last week, but sources say Tokyo's envoys displayed no willingness to compromise on the lower domestic- content rules for autos and auto parts reached by the Americans and Japanese.

The problem, as two Washington trade experts wrote this month, is the TPP as it stands would erode the preferential position enjoyed by Canadian and Mexican auto-parts makers under the North American free-trade agreement.

"The negotiated advantages that Canadian and Mexican auto-parts producers currently enjoy under NAFTA could be wiped away by a TPP agreement that would extend the same benefits to at least nine other countries," say David R. Hamill and Birgit Matthiesen with Washington-based Arent Fox LLP.

"Japan has made it clear that its primary goal within the TPP is to gain wider and deeper access for its auto-parts industry in the U.S. (and therefore North American) marketplace," the authors write. "If Japan succeeds, there will be cheaper auto-parts competition" from outside North America.

Better access to Japan's consumer market is the big prize in these TPP negotiations and signing trade deals that open up new opportunities for Canadian companies is a core concept in Mr. Harper's economic policy.

Now, however, the math works against Mr. Harper, who would want to brandish a TPP deal as evidence of his economic policy at work. And it threatens the jobs of more than 80,000 Canadians working in the auto-parts sector – a mainstay of Canada's value-added manufacturing sector.

Under existing NAFTA rules, a car can be sold in Canada, the United States or Mexico without facing tariffs as long as 62.5 per cent of it originates in one or more of these three countries.

But Japan has proposed – and the United States has provisionally agreed – that the rule for Trans-Pacific partner countries in a proposed TPP trade zone should be that a car with as little as 45-per-cent domestic content can be sold without tariffs. This same arrangement between Washington and Tokyo would allow the duty-free importation of auto parts with as little as 30-per-cent domestic content.

Canada's auto-parts industry has called for 50-per-cent domestic-content rules for both cars and parts and Trade Minister Ed Fast has said he shares this position.

Sources close to the Canada-U.S.-Mexico-Japan talks in Washington last week say residual resentment over how this has unfolded was evident during negotiations. "All the [other] parties still feel jilted by the Americans."

One of the major irritants both for Canada and Mexico, but also for Japan, is that Washington had assured Tokyo before Hawaii that it could sell this reduction in domestic-content rules to its NAFTA partners. "The anger against the Americans for hatching something they couldn't deliver on is still palpable," a source familiar with negotiations said of the Japanese.

Walking away from the table is one option for Canada. But a Canadian government official, who asked for anonymity because they wished to speak more bluntly than they could normally during an election period, said that's not in the cards.

"Negotiators continue to push for a strong agreement that will protect and respect the integrated structure of the automotive industry, but we can't understate the importance of Canada being a part of a final agreement. Walking away would be disastrous for our auto industry, and thousands of Canadian workers and their families."

The Canadian auto-parts sector, which has been sounding the alarm about the direction of TPP talks, warned that a quarter-century trade arrangement between Canada, the U.S. and Mexico is at stake.

"The NAFTA partnership is at an important historical crossroads. While Canada is holding strong, it is incumbent on all parties to continue to do the right thing and preserve the advantages we've developed together over the last 25 years," said Flavio Volpe, president of the Automotive Parts Manufacturers' Association.

NDP Leader Thomas Mulcair has waded into the TPP debate during the campaign, pledging an NDP government would fight for stronger rules in the Trans-Pacific Partnership accord to protect homegrown manufacturing. His staff later explained the NDP would seek to preserve the 60-per-cent-plus NAFTA content rules for autos.

Liberal Leader Justin Trudeau has said he supports a deal, but has criticized the Harper government for being too secretive about what was being negotiated.