Canada and Mexico are looking for a compromise on auto-sector rules in Pacific Rim trade talks as they try to bridge differences with Japan over a major obstacle to a deal, seeking changes that would boost the proposed pact's domestic-content requirements for the most sophisticated of car parts.
In Canada's case, were it to succeed, this would mean under a Trans-Pacific Partnership deal, there would be higher Canadian-content requirements for more value-added vehicle parts, such as engines, transmissions and chassis.
The kind of components Canada is championing are made by the biggest players in the Canadian auto-parts sector, such as Linamar Corp. and Magna International Inc., and these are the companies most expected to thrive in the years ahead, particularly if there's an influx of foreign car parts under a TPP deal.
Twelve countries, including Canada, are huddled in Atlanta right now trying to finalize a wide-ranging TPP agreement that would comprise 40 per cent of global economic output. A deal, which would eclipse the North American free-trade agreement in importance, could reduce the level of domestically made auto parts in vehicles sold in Canada but also boost the access this country's businesses are granted to Japan, traditionally a closed market.
Canada and Mexico walked away from the table at the last meeting of trade ministers in Maui after learning Japan and the United States had struck a deal to lower domestic-content requirements for automobiles, to 30 per cent for parts and 45 per cent for vehicles. NAFTA rules stipulate more than 60 per cent domestic content, and Canada has been seeking at least 50 per cent in TPP talks.
In Atlanta, the Japanese have agreed to raise the floor to 35 per cent from 30 per cent when it comes to what portion of an auto part must be made locally under the TPP in order to avoid duties. The Canadians and Mexicans are seeking a higher threshold for more complex auto parts – as much as five percentage points higher than this floor.
The United States and Japan, as the biggest players in the TPP, are anxious to wrap up the overall deal after more than five years of negotiations.
In late September, U.S. Trade Representative Michael Froman even met with Canada's ambassador to the United States, Gary Doer, as part of this new push to complete an agreement in Atlanta, according to a U.S. source.
A Canadian federal election is less than three weeks away, though, and guidelines released by Ottawa's Privy Council Office in August show it "may be appropriate" for a caretaker government to consult opposition parties, "particularly where a major decision could be controversial or difficult for a new government to reverse."
International Trade Minister Ed Fast, in Atlanta for negotiations, said the Conservatives did not intend to consult the NDP or Liberals should a TPP pact be reached. He said Ottawa has already sought input from Canadians. "We have consulted broadly and the opposition parties – they are privy to information that is available to all Canadians."
Mr. Fast said he hasn't booked a flight home yet and he's ready to stay as long as necessary to cut a deal.
A senior Canadian official, speaking on condition of anonymity, said he put the chances of an agreement in principle in Atlanta at 80-20.
Sources familiar with the TPP talks say Ottawa, in negotiations, has secured the removal of tariffs of as high as 5 per cent that other TPP countries currently apply to Canadian aerospace goods, such as engine aircraft parts shipped to Australia or aircraft seats sold to New Zealand. Canada has also obtained a commitment by other TPP countries to strike tariffs, again of as much as 5 per cent, that are slapped on Canadian manufactured goods such as medical, surgical or laboratory machinery.
Canada is at the centre of two major obstacles that have prevented a TPP deal so far, including dairy and, most important, autos. An agreement will almost certainly expose the Canadian auto-parts sector, which employs 80,000 people, to far more foreign competition and erode the preferential position the industry enjoys under NAFTA.
It will also open up Canada's dairy industry, protected by high tariffs, to significantly more foreign imports. The Canadians were criticized in Maui for holding up a deal by not giving enough on dairy.
Australian farmers, however, on Wednesday were blaming the United States for holding up a deal, saying the Americans are offering Canberra far too little dairy access. "We don't believe the U.S. is in a position to be able to move on dairy because they are pivotal in allowing a deal to be done," said Noel Campbell, president of the Australian Dairy Farmers.
Canadian dairy farmers, who have sent a contingent to Atlanta to defend their sector, say they don't want more foreign milk producers given access to their market, especially after a Canada-European Union deal in 2014 gave Europeans quota-free import rights for an amount of cheese equivalent to more than 1.5 per cent of Canada's domestic dairy consumption.
Wally Smith, president of the Canadian Dairy Farmers, said Canada is far more generous than many of its peers, including the United States, when the level of foreign dairy imports already allowed into this country are measured against total domestic consumption.
As The Globe and Mail first reported in July, Ottawa is readying a compensation package for dairy producers who can prove they are hurt by a TPP deal. Agriculture Minister Gerry Ritz spoke publicly about this Wednesday, saying, "If there is any loss on your farm [or the processing side], you will be compensated."
Canadian beef, pork and canola producers are expected to be big winners in a TPP deal because the agreement as drafted would significantly lower barriers to selling products in Japan.