Canada's historic auto pact with the United States will die in February, about 35 years after it was signed, Industry Minister John Manley conceded Wednesday.
The federal government announced that it will comply with a World Trade Organization decision giving it until Feb. 19 to make changes in the pact that would eliminate the favourable treatment currently given to the Canadian subsidiaries of the automotive Big Three - General Motors of Canada Ltd., Ford Motor Co. of Canada Ltd. and DaimlerChrysler Canada Inc.
The three are now exempt from the 6.1-per-cent tariff Canada slaps on all imported vehicles, a concession that was granted in 1965 in exchange for the Big Three agreeing to do much of their manufacturing in Canada.
The WTO ruled this spring that the pact breaks numerous international trade regulations. The European Union and Japan, which filed a complaint against the pact, had argued that it should be dismantled within 90 days of the May ruling. Canada argued it needed up to 15 months.
Wednesday's decision effectively gave Canada eight months from the date of the ruling to comply.
While the deal is credited with jump-starting Canada's auto industry, Mr. Manley played down its loss Wednesday, saying Canada's auto industry had outgrown the pact.
"The importance of the auto pact has been significantly reduced over recent years. .5.5. I think the impact will be minimal," he told reporters. "What we've built is a sector that is very strong, and is far exceeding the auto pact minimums. The auto pact was based on the fundamental premise that we should produce one vehicle for every one that's sold in Canada, and we're now producing two for every one that's sold."
What's left to decide is whether Canada will simply apply the 6.1-per-cent tariff to Big Three imports, eliminate all tariffs, or find some middle ground. Most in the industry expect that Canada will make the 6.1-per-cent tariff universal.
"There's tariff changes that are being demanded, not tariff reductions," Mr. Manley noted Wednesday. "We'd like to see more investment [from the Japanese] but we also have to respect the fact we've had very strong investment on the part of General Motors, Ford and DaimlerChrysler."
International Trade Minister Pierre Pettigrew said he and Mr. Manley will hammer out a new regime in the coming weeks.
While the changes aren't expected to have an impact on auto prices in Canada, many in the Ontario Liberal caucus have been fighting to extend the auto pact as long as possible, with an eye to the timing of the next election. The auto industry supports tens of thousands of jobs in Southern Ontario.
Japanese and European auto manufacturers were quick to praise the WTO decision, and called on the federal government to reduce tariffs across the board.
As a nation that manufactures about twice as many cars as it sells and hence relies on export markets, Canada "has no right to have any import duties," said Hendrik von Kuenheim, president of BMW Canada Inc., which pays tariffs on cars imported from Germany, but not on cars or sport utility vehicles brought in from the United States.
The ideal solution, Mr. von Kuenheim said, would be to eliminate the tariff, but BMW would also approve of a compromise solution it suggested several months ago, which was to reduce the Canadian tariff to 2.5 per cent.
That would match the U.S. tariff on cars, but not the U.S. tariff on trucks. That stands at 25 per cent.
But the disagreements that divided Japan-based auto makers from the old Big Three of Chrysler Canada Ltd., Ford Motor Co. of Canada Ltd. and General Motors of Canada Ltd. remain, even though Chrysler Canada is now DaimlerChrysler Canada and a subsidiary of German-based DaimlerChrysler AG.
The Japan-based companies want the federal government to react to the WTO decision by reducing or eliminating the 6.1-per-cent duty on vehicles imported into Canada from outside North America.
"We think they should reduce tariffs. Ultimately that's the best thing for consumers," said David Worts, executive director of the Japan Automobile Manufacturers Association of Canada, whose members include Honda of Canada Manufacturing Inc. and Toyota Motor Manufacturing Canada Inc.
Ottawa should not reduce the tariff unilaterally, countered Michael Walker, director of government affairs for DaimlerChrysler Canada.
Instead, tariff reductions should come as part of multilateral talks, Mr. Walker said.
"It's a negotiation and that's what Canada has to be able to do, play poker with a full hand."
So DaimlerChrysler is urging the federal government to apply the tariff to all imports from outside of North America, even though that would affect Mercedes-Benz cars imported from Europe.
With Mercedes-Benz price levels of $40,000 and higher, the tariff will not be noticeable, he said.
About 2.5 per cent of the 1.5 million vehicles sold annually in Canada will be affected if Ottawa puts the tariff on vehicles now coming in duty-free, instead of eliminating it on those that now carry the 6.1-per-cent levy.
In addition to Mercedes-Benz cars, Saab and Isuzu cars imported by GM would be affected.