Canada’s auto industry faces sweeping change with EU trade deal

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Canada's auto sector faces major changes as a result of a wide-ranging new free-trade deal with the European Union that will have an impact on virtually every aspect of the Canadian economy.

As expected, the agreement-in-principle announced Friday in Brussels contains concessions from Canada in areas including cheese imports and extended drug patents for brand-name drug manufacturers. The deal will also permit large increases in Canadian beef and pork exports to Europe and eliminates a wide range of tariffs. However, new details were announced Friday on how the deal will address the thorny issue of how Ontario's manufacturing sector is deeply linked with U.S. production lines.

Canada, which currently exports about 13,000 vehicles a year to the EU, will be allowed to export up to 100,000 vehicles annually, provided they are at least 20 per cent manufactured in Canada. Vehicles with at least 50 per cent Canadian content will enter duty free and would not be subject to the quota.

Under the agreement, both countries will phase out tariffs on vehicles and parts over seven years. Canada's tariff is 6.1 per cent on vehicles. Europe has a 10 per cent tariff on vehicles and a 4.5 per cent duty on parts. Canada has a large trade deficit in autos with Europe.

Cars made in Canada by the Detroit Three and Japanese auto makers typically contain a majority of imported parts. The arrangement is not limited to Chrysler, Ford Motor Co. and General Motors Co., but applies to all auto and parts manufacturers operating in Canada. Should the EU reach a similar Comprehensive Economic and Trade Agreement with the U.S., the distinctions between a Canadian and U.S.-made car would likely be erased for the purposes of European trade.

The agreement would also mean cheaper Volkswagens and Mercedes-Benz for Canadian consumers, provided they are assembled in Europe.

For Prime Minister Stephen Harper, the deal represents a signature accomplishment during his seven years in office. At a media briefing, Canadian reporters were told that all provinces have signalled they will support the deal.

Still, key details remain unclear. Government documents provided at a 5 a.m. media lockup in Ottawa only presented the deal's benefits for Canada, including supportive quotes from Canadian industry leaders. Some of the concessions offered by Canada were mentioned during the briefing, but since there is not yet a final text, it is not clear yet how much Canada has given up.

Information provided by the E.U. throughout the day Friday will shed further light on what the sticking points will be over the coming two years, as EU states, the EU and Canadian Parliaments and Canadian provinces must give their official approval to the deal.

One clear signal of where Canada expects some negative reaction is in its willingness to offer financial compensation in two cases. If dairy producers are negatively affected by a more than doubling of European cheese imports, Canada is prepared to offer compensation directly to producers. The government hopes, however, that Canadians will continue to consume more and more cheese, meaning the growth of the overall market would erase any potential losses.

The second area is in patent protection. Canada agreed to an EU request that brand-name pharmaceuticals be given up to two years more patent protection to compensate for the time it takes for regulators to approve their products. Should this lead to higher drug costs for provincial health systems, Ottawa is prepared to offer compensation.

Though Ottawa insists all provinces are on board, the reaction of three provinces will be watched closely. Quebec's response to the deal's provisions on cheese will be significant. Ontario will be closely watched for its response to both the dairy and auto sections. Meanwhile, Newfoundland and Labrador will have to phase out an existing rule that requires a minimum amount of seafood to be produced in the province. In exchange, the EU is offering greater access for Canadian seafood to its market.

Europe will continue to protect significant portions of its agriculture and agri-food markets. But over all, 95 per cent of products will enter duty-free, versus 18 per cent now. Beef exporters are getting an extra 50,000 metric tonne duty-free quota. Pork producers are getting 80,000 tonnes.

"Canadian farmers will benefit overwhelmingly from this agreement," said Mr. Harper.

From the first mention of an agreement in Wednesday's Speech from the Throne to Friday's tightly scripted release of positive information to the media, Mr. Harper's Conservative government has so far controlled the message on a deal that has been years in the making. Now, the debate moves to the 28 EU-member states, 13 provincial and territorial capitals and the floor of the House of Commons.

The federal government is also touting other benefits of the deal, including provisions to liberalize trade in services, allow easier movement of labour and work on mutual recognition of professionals, including architects and engineers.

Both sides will open most of their government purchasing market to foreign suppliers, with some exceptions. Canada, for example, is protecting its health care and education sectors, as well as keeping smaller contracts for domestic suppliers. For example, contracts worth less than about $630,000 for utilities and construction contracts worth less than $7.8-million will still be excluded from the agreement.

Editor's note: An earlier online version of this article incorrectly stated the percentage of products that are duty-free at present, in the fifth paragraph from the end. This has been corrected to 18 per cent.