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Employees at work assembling engines at Honda's third manufacturing facility in Canada, Honda of Canada Mfg's (HCM's) Engine Plant in Alliston, Ontario.Deborah Baic/The Globe and Mail

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.

The Automotive Parts Manufacturers' Association (APMA) predicts that this would end up hurting Canadian auto-sector firms.

As The Globe and Mail reported on Wednesday, Japan has been pushing for the right to sell vehicles within the 12 Trans-Pacific trade zones that have a significant portion of their content from outside TPP signatory countries.

A successful conclusion to the talks could mean countries such as the United States will slash their duty on Japanese automobile imports, and Tokyo wants its car companies to be able to draw on parts suppliers such as Thailand, which are not part of the TPP talks, in order to keep its costs low.

"Current 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 APMA.

Canadian auto part manufacturers, part of Canada's massive auto sector, have flourished under the North American Free Trade Agreement, under which cars made in all three countries are sold duty-free as long as 62.5 per cent of their content comes from Canada, Mexico or the United States.

"The Canadian supplier sector has maintained a very competitive position vis-à-vis our NAFTA partners and demonstrated a high comparative resilience throughout the global recession and recovery," Mr. Volpe said.

As The Globe reported, Canada and Mexico balked at a deal cut between the Americans and Japanese that would have lowered the threshold for Trans-Pacific Partnership content sold duty-free. Other media have said Japan was seeking a threshold of 30 per cent TPP content, but that the Americans started out at 55 per cent and compromised at a lower rate.

The auto-content conflict was one of a handful of issues, including access to countries' dairy markets, that thwarted a deal in Hawaii last week.

A source familiar with the talks said Canadian negotiators showed up in Maui to find that the United States had already cut a deal with Japan on how much vehicle content needs to come from TPP countries.

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

"The makeup of the rules of origin would have had certain exemptions which would have hurt the Canadian supply chain," the source said, referring to parts makers in Canada that sell into the North American market.

For instance, if a part exempted from content rules was also one that was made in Canada, it would mean that Japan could import lower-priced parts from countries outside the TPP region, such as Thailand, at the expense of Canadian suppliers.

Canada is, in fact, at the centre of both major obstacles to a TPP deal that were cited by negotiators last Friday: the future of auto and dairy trade. The Canadian government has so far balked at significantly opening its sheltered dairy market to greater foreign imports, while the United States is seeking new customers for its milk as it anticipates that a deal would mean more New Zealand shipments aimed at American consumers.

For its part, the Japanese government was surprised to learn that Canada and Mexico had not been consulted on the auto-content deal brokered between Tokyo and Washington. "Japan was understandably caught off guard that a matter they felt they'd finalized with the Americans had not been vetted or endorsed by all three NAFTA partners," the source said.

After balking at the Japan-U.S. proposal on autos in Hawaii, Canada and Mexico are now are preparing their own suggestion for vehicle-content rules.

"Mexico and Canada have to bring a proposal to the Japanese. … We have to come forth with counterproposals that will be acceptable to all four of us," the source said, referring to Canada, the United States, Mexico and Japan.

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.

"The continued prosperity of 85,000 Canadian employees depends on our ability to get access to important markets in Asia while continuing to protect our comparative market position in North America."

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