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Flavio Volpe
View Flavio Volpe Profile
Flavio Volpe
2019-06-18 10:13
Thank you. It's good to be here.
As most of you know, APMA is Canada's national association of original equipment automotive suppliers. I represent about 300 companies that employ about 100,000 people in this country. Notably for the NAFTA negotiations, Canadian supplier firms employ 43,000 people in the U.S. in 120 plants and about 43,500 people in Mexico in 150 plants.
Throughout the NAFTA negotiations, as some of you know, we were present for every round. In addition to meetings with Canadian officials on a very regular basis, we had time at the White House, the USTR, the Palacio Nacional and all spots in between. Our Canadian positions and Canadian interests found voice on the front page of the Wall Street Journal, the New York Times, the Washington Post, the Economist and so on. We were very active and we were very vocal. I think the agreement is a positive reflection of what we were looking for.
This is a negotiation that no one asked for, from a party that cared only about headlines and Twitter. After four rounds, we finally got the American proposal. It was a self-destructive one. In automotive the proposal was that every vehicle manufactured in North America should have 50% U.S. domestic content.
Canada, importantly, with Mexico, stayed at the table, spent time over the next two rounds highlighting self-harm. Industry associations and stakeholders like ours spent time at the USTR and in Mexico talking about the American self-harm. They countered themselves twice, in March 2018 and then again in April 2018. Our strategy for staying at the table produced the fruit we wanted. They backed off their 50% U.S. domestic content. They came up with other tough terms, but they were negotiable terms.
This current government made a conscious effort and a decision on the NAFTA negotiations to consult openly and frequently with industry. We didn't do it altruistically. Industry was quite vocal about the fact that the Mexicans had an advantage because they took their industry with them in a model they call the “room next door”. The first meeting with this new government was actually at the APMA office with a trade minister, a chief negotiator, an ISED minister and his deputy minister. I thought that was a good step. That's how it is supposed to be done. We saw TPP with both the outgoing government and the incoming government done mostly in the dark; for suppliers, at least, I think the results reflect that.
The new CUSMA is the first increase in regional value content ever in a Canadian trade agreement. For automotive rules of origin, that means an increase in supplier volumes for Canadian plants and footprints of about 25% in shipments. That's $6 billion to $8 billion a year in new purchases, incremental purchases, of an industry that ships about $35 billion a year. To put that in context, that's the equivalent of landing two new greenfield investments in Canada. The last greenfield investment in Canada by a major automaker was in 2007. The upside is unprecedented. This deal for automotive suppliers, from our perspective, must be ratified. I spent time all over the continent during and after; I have spent a great deal of time since in Germany and Japan especially, as well as China. Current suppliers will see the most benefit of this new agreement and its terms, but we are of the opinion, shared by our American equivalent, that the current North American supply base does not have the capacity to meet the requirements for automakers to meet the compliance of 75% North American domestic content.
What it means is that we're also looking at an opportunity that we've been selling very plainly to the Japanese and the Germans especially: We're expecting a great deal of new capital investment in this country from new suppliers who will help their current automakers meet that 75% quotient. This deal has a regional value content level that goes to 75% from 62.5%; on parts, that number is 65% to 70% from 60%, and 70% of those core parts, if they are made with steel and aluminum, must be sourced in North America. In NAFTA we had 29 parts categories that were tracked for compliance. Essentially, we've doubled that.
There is an immediate transition to rules of origin post-ratification. We're hoping that ratification happens in all three countries this year, and there's a three-year phase-in for the RVC levels.
Please ratify this deal without delay. That's been our message in Washington. That's our message in Mexico City.
I'm happy to take questions.
View Kyle Peterson Profile
Lib. (ON)
Not as well as Mr. Volpe, but thank you, Mr. Chair, and thank you, everyone, for being here today.
I am going to pick up on the auto theme based on the number of auto parts jobs that are based in my riding and rely on a strong auto sector, of course.
I want to take a step back. When President Trump threatened to rip up NAFTA, that was an existential threat, I think, to the auto industry. I'm not sure, Mr. Volpe, if you want to elaborate on that. Mr. Adams, you can too, because I think we needed to put the new deal in that context.
Flavio Volpe
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Flavio Volpe
2019-06-18 10:27
On his way into office, he said he was looking for a border tax on all goods coming in. He then turned around and threatened very specific companies like Ford and BMW, putting a tax specifically on.... Whether he could do it or not was not the question. The markets reacted to the fact that the President of the United States was threatening some type of action.
He threatened to pull out of NAFTA. Our industry knows no borders. Frankly, if you have an OEM customer, there are concentric geographic circles of supply and you have to be close to your customer. There are 10 OEM plants in Canada, but they're all selling goods to the U.S., so it's a big threat. This is the way the President likes to play. Frankly, Canada has had some big, crazy threats, which from a legislative point of view I'm not sure he could enact, but that's not the way capital flows and that's not the way customers pick their suppliers. It was a big threat.
David Adams
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David Adams
2019-06-18 10:28
Sure. I think you're right. I think it's a characterization of different companies, too, in terms of the President saying that the BMWs of the world.... BMW has their largest plant in Spartanburg and it's also the largest automotive exporter. I'm sure a lot of Flavio's members supply the plant in Spartanburg as well. This was a real concern for the entire automotive industry, especially when you consider that regardless of manufacturer, about 85% of the production coming out of any Canadian plant is going into the U.S. market. It's not going to Europe or elsewhere; it's going to that U.S. market, so it was a very problematic issue, for sure.
View Kyle Peterson Profile
Lib. (ON)
Based on that, how important were the auto side letters to remove that threat from the industry and then when it comes to investment flows?
Flavio Volpe
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Flavio Volpe
2019-06-18 10:28
The auto side letters are a funny instrument. On one hand, from a purely academic point of view, I would not like to see us in those types of discussions, whereby we concede some extra agreement against a threat that I thought was an improper use of legislation. Others have called it illegal.
The fact is that in our business, sometimes leverage is more important than the legislation. The leverage was we set quotas that, if they were to be reached, would mean that we would have to add three new OEM full capacity plants for us to get to those quotas. There is no prospect currently of seeing them in the future in this environment. Maybe one or two.... I offered to pay the tariff on every vehicle after the third one.
View Kyle Peterson Profile
Lib. (ON)
That's perfect.
Mr. Volpe, I think you were on the record as saying this achievement in the automotive sector benefits Canada immediately and directly. It's going to result in more investment, more volume purchases from existing investment, and underpins the kinds of jobs we want in this country. You elaborated on that. Right now you're saying we don't have the capacity to fully leverage this deal. Are you confident the investment will flow to get us to that capacity?
Flavio Volpe
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Flavio Volpe
2019-06-18 10:30
Suppliers don't build plants or lines on spec. Either you have the contract or you don't. Of course all my members are bidding very aggressively on the new volume. The fact is that volume will be a 25% addition writ large. It won't be spread. Everybody is under the 25%. The winners may get 26% or 50% more volume. You have to do it in three years. To do it in three years is a message I took to Japanese suppliers in Yokohama at a supplier show last week. I told them if they were supplying Mazda, Toyota, Honda, Subaru and these specific items on vehicles that are being assembled there, come to Canada because they make those cars in the U.S. and Canada, and we need them.
View Karen Ludwig Profile
Lib. (NB)
Thank you.
Mr. Adams, my question for you stems from Mr. Peterson's question on the threat of President Trump's ripping up NAFTA. What impact would that have not only on the Canadian auto sector, but also on the Canadian economy?
David Adams
View David Adams Profile
David Adams
2019-06-18 10:46
I think if you look at the automotive industry in Canada, it's an industry of hundreds of thousands of people, from Mr. Volpe's members through the whole vehicle assembly sector as well. I think that, if you don't have access to the United States, you really in effect don't have a Canadian automotive industry because the Canadian economy cannot absorb the production coming out of those plants.
As was referred to earlier, it is an existential threat not only to the automotive industry in Canada but also to the Canadian economy. The automotive industry comprises, if I'm not mistaken, bout 12% of Canadian GDP.
View Randy Hoback Profile
CPC (SK)
View Randy Hoback Profile
2019-06-18 10:47
Thank you, Mr. Chair.
Thank you, witnesses, for being here and for attending by video conference.
Mr. Volpe, you talked about wanting to have this ratified right away. I just want some clarification. When you say “right away”, do you mean in sync with the U.S., or do you want us to go ahead of the U.S. in the ratification process?
Flavio Volpe
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Flavio Volpe
2019-06-18 10:47
I'm not the member for Eglinton—Lawrence, so I have a different perspective here. I would say that it's very important for this government to show, especially the Democratic Congress, that we're serious about this deal and that we're independently going with a ratification process.
It's a delicate balance of economic diplomacy there, but I would like for our stance to be firmly and publicly saying that we're going to ratify, that we're expecting that they're going to ratify, that we support this deal, and that we all have common interests, but not suggest, by the way, that we'll wait for them and see how it goes.
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