Conservatives were sure Trans-Pacific Partnership deal would be signed

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The Conservative government was so confident in recent weeks it would sign a Trans-Pacific Partnership trade deal that it was asking business groups to loudly support the conclusion of an agreement, reasoning their voices would drown out those of unhappy milk producers – the one sector Ottawa expected would be sorely disappointed.

During a May meeting, a very senior Conservative government official encouraged representatives of a manufacturing association to "be vocal" in backing a Trans-Pacific agreement "because there's going to be one group that's going to be very disappointed by the time we're done here' – and [they] were talking about the dairy farmers," an official with the lobby group recalled.

But the turn these Pacific Rim trade talks took in Hawaii last week revealed that Canada's automotive sector is also facing possible risk from a deal.

It's a problem, given the economic heft of Canada's manufacturing sector, and the Harper government is now working furiously to fix it.

This comes as the Tories are fighting an election campaign in which the trade negotiations have become a flashpoint.

As The Globe and Mail has reported, Canada and Mexico only learned when they arrived at the Hawaii round of Trans-Pacific talks in late July that the United States and Japan had brokered a deal on vehicle imports that could hit the NAFTA partners' auto sectors hard. And, furthermore, Washington had assured Tokyo that its North American neighbours would accept this side deal.

Ottawa and Mexico City discovered in Hawaii that Japan and the United States had cut a side deal lowering the threshold for how much of an automobile would have to come from Trans-Pacific signatory countries in order for it to avoid hefty tariffs.

The remainder of the auto could come from low-cost suppliers outside Trans-Pacific countries, such as Thailand, and are a major source of parts for Japanese auto makers.

Under North American free-trade rules today, 62.5 per cent of a light-duty vehicle must be made in Canada, Mexico or the United States for it to enter these markets free of tariff.

The deal Japan and the United States cut between themselves lowered this threshold significantly. The side-deal details have not been confirmed, but Japan was reportedly seeking a Trans-Pacific country content threshold of 30 per cent and the Americans started out at 55 per cent but compromised at a much lower rate.

The biggest problem for Canada, however, is proposed exemptions within this formula that Washington hammered out with Tokyo – one that grants Japan the right to use some parts that contained even less content from Trans-Pacific countries, a source close to the talks said.

The ensuing disagreement regarding auto imports was a major factor in stalling a deal in Hawaii last week.

There is tremendous anger in Ottawa at how U.S. Trade Representative Michael Froman conducted himself at the Maui talks, particularly since Canada and the United States have been close partners in the auto industry for more than 50 years and both countries joined forces in 2009 to bail out two U.S. auto makers.

The Canadian government won't speak publicly to this, but a former senior adviser to Canadian Trade Minister Ed Fast gave voice to the frustration at how Washington has handled auto talks at the transpacific negotiations.

"To try and cut this side deal just poisons the well," said Adam Taylor, now a trade consultant at Ensight.

He described the United States as having a "tin ear" for the fact "there are other sovereign countries at the table" and the "North American production platform" that has existed for decades.

"To not preserve that in the TPP by cutting Canada out of the deal on content thresholds, after all we've done together, is complete abdication."

The price of entry for Canada to the Pacific Rim trade talks was long expected to include a significant opening of this country's protected dairy sector to more foreign imports. It's not something that would sit well with milk producers but Ottawa, as The Globe has reported, has prepared a compensation package for dairy farmers.

Now, Canada must grapple with autos, as well. Ottawa and Mexico are joining forces to renegotiate the content threshold with Tokyo and Washington as the Obama administration pushes for a deal as soon as possible.

This is an example of how Canada is fighting at Trans-Pacific Partnership talks to maintain its privileged commercial relationship with the United States at the same time as it girds itself for a new agreement that would grant 10 other countries even better access to U.S. markets than NAFTA.

Canadian auto-parts makers say they are worried about the prospect of Japan winning the right to sell cars duty-free inside a future Trans-Pacific Partnership trade zone when a majority of the vehicle content comes from low-cost countries that are not signatories to the commercial accord.

This would not just hurt the North American auto industry but also steel and plastics makers. It could also reduce the rationale for assembling cars within NAFTA countries.

"Reports indicating that some member countries are seeking to obtain lower country-of-origin thresholds that would advantage low-cost jurisdictions outside the TPP are of concern to Canadian suppliers," said Flavio Volpe, president of the Automotive Parts Manufacturers' Association.

Mr. Volpe lauded the Canadian government for refusing to accept the Washington-Tokyo deal.

"We fully support the government's defence of the sector's hard-fought gains and continue to applaud its effort to reject country-of-origin thresholds that unduly risk our future prospects in a very globally competitive market," the APMA president said.

A spokesman for Mr. Fast said Canada nevertheless has a "respectful and constructive working relationship with our NAFTA partners." Rick Roth said the government remains "confident that we can find a solution that is in the best interest of our respective countries."