The Multinational Monitor

WINTER 19878-79 - VOLUME 1 - NUMBER 1

A U T O   I N D U S T R Y

Ford Goes to Canada:

U.S.-Canada Auto Pact Threatened by Bidding War

by George Riley

A bidding war over the location of a $480 million Ford engine plant has touched off a series of attacks and counterattacks between the governments of Canada and the United States. These exchanges have centered on the terms of the 1965 U.S.-Canada auto pact that provides for duty-free trade of Canadian and American made automobiles and parts.

Criticism of the U.S.-Canada auto pact historically has shifted with the sectoral balance of trade between the two countries. When one country experiences a prolonged balance of trade deficit - imports of automobiles and parts exceed exports - political pressure develops around the domestic jobs endangered by the influx of foreign products. This pressure usually results in threats of protective trade barriers. For example, when the U.S. had an automotive trade deficit seven years ago, President Nixon charged the Canadian government with unfair trade policies and intimated that he would take action to correct the imbalance. When the deficit disappeared, so did Nixon's threats.

Since 1973, Canada has faced a trade deficit in the automotive sec tor. In 1976, the deficit was about $1 billion, representing a surplus of $1.5 billion in assembled vehicles and a deficit of about $2.5 billion in auto parts. In 1977, the deficit rose to over $1.09 billion. These figures have a special meaning for the people of Ontario, where one out of six jobs is tied to the auto industry. The auto industry is not only the province's largest employer, but it is also a major market for industries such as steel, glass, carpeting, and rubber.

The key players in the trade dispute pute are the U.S.-based "multinationals. Each of the "Big Four" automobile companies, General Motors Corp., Ford Motor Co., Chrysler Corp., and American Motors Corp., has a major subsidiary in Canada. Together these companies dominate the three major areas of the auto industry: the manufacture of machine tools, the manufacture of parts and components, and the assembly of vehicles. The Big Four intend to spend more than $55 billion by 1985 to produce smaller and more energy efficient cars. The Canadian government naturally hopes to attract some of this investment.

However, the desire to preserve existing jobs or create new employment in the auto industry is not all that is behind the Canadian government's campaign to attract automotive investment. Canadian capital is leaving the country at an unprecedented rate. This trend is especially ominous in the manufacturing sectors; during 1976 and 1977 there were 110 new Canadian manufacturing investments in the U.S., twice as many as during the previous two-year period. According to the Conference Board, a business research group, Canada imports about 30% of its finished goods - more per person than any other industrialized country. Because job-creating capital is fleeing the country, the unemployment rate totals 8.6%, the highest since the depression.

The recent round in the bidding war between Canadian provinces and U.S. states began in May when Ford announced plans to locate a $450 million transmission plant near Cincinnati, Ohio. The Ohio state government enticed Ford with major tax incentives and a 348 acre site with built-in roads and utilities. The Ontario press blasted the provincial government for "not believing in offering incentives to companies planning expansion" while 345,000 workers are unemployed in Ontario.

While the debate over Ford's decision to invest in Ohio continued in the Canadian press, Canadian federal and provincial officials were quietly negotiating with Ford over another investment. This venture, a $480 million investment, would create 2,600 jobs. Initially, Ford sought $27 million in subsidies to build the plant in Canada, but the company later increased the request to $67.5 million. Ford justified the request on the grounds that the expansion of an existing plant in Lima, Ohio, would cost $67 million less than a new investment in Canada.

After Ford raised its subsidy request, the Ontario provincial government in Queen's Park and the federal capital in Ottawa began a bitter debate over the deal. Queen's Park offered to supply 25% of the $68 million incentive, but Ottawa wanted to split the amount 50-50. Finally the two governments arrived at a compromise; Ottawa promised to provide about 60%, and the province pledged to provide the remainder.

When news of Canada's offer to Ford reached Washington, Assistant Secretary of the Treasury, Fred Bergsten, called for "urgent consultations" with the Canadian government. Bergsten told a congressional committee on August 1 that "we cannot simply sit by while these interventionist practices are escalated to the federal level." On August 4, Bergsten and Assistant Secretary of State Julius Katz left for Ottawa to meet with officials in the finance ministry.

However, when Bergsten and Katz reached Ottawa, they were presented with a fait accompli. Just hours before the American officials met with their Canadian counterparts, Ford announced its decision to accept the Canadian offer and to build the engine plant in southern Ontario rather than Ohio. After six hours of discussion, Katz stated that both governments "regret" the practice of attracting healthy corporations with taxpayers' money. The participants agreed to hold future discussions about possibilities of discouraging the bidding competition.

Although U.S. officials called the August 4 talks "extremely productive", events after the meeting only served to strain further trade relations between the two nations. The U.S. Treasury Department began to pressure General Motors to refuse a $72 million Quebec-Ottawa offer. One Treasury Department official commented in the Canadian Financial Post "We're fighting like hell against that plant." The U.S. government also threatened action to counter an agreement between Volkswagen and the Canadian government. The agreement would reduce duties on imports of Volkswagen vehicles into Canada if Volkswagen purchases more auto parts manufactured in Canada.

Although the fighting may have stopped for the moment, this high-stakes war is hardly over. With billions of dollars to invest in the next few years, the automobile companies are in a commanding position to demand the best possible terms from governments concerned with high unemployment. However, the losses may not only be calculated in taxpayers' dollars; continued competition may ultimately destroy the auto pact.

Table of Contents