August 3, 2017Meeting

Agenda

10:30 – 10:35 Welcome and IntroductionVictoria Stasiuk, Economic Development, Town of Oakville

10:35 – 10:45 Auto Mayors – Protecting the Auto SectorMayor Rob Burton, Town of Oakville, Chair of Ontario Auto Mayors

10:45 – 11:15 NAFTA from a US PerspectivePhilip English, Co-Chairman, Government Relations Practice Group, Arent Fox LLP

11:15 -11:45 NAFTA from a Canadian PerspectiveDr. John Holmes, Queen’s University

11:45 – noon Next Steps and Action ItemsMayor Rob Burton, Town of Oakville, Chair of Auto Mayors

Lunch

AUTO MAYORS:PROTECTING THE AUTO SECTOR

Mayor Rob Burton, Town of Oakville, Chair of Auto Mayors

NAFTA FROM A U.S. PERSPECTIVE

Philip English, Co-Chairman, Government Relations Practice Group, Arent Fox LLP

LA / NY / SF / DC / arentfox.com

NAFTA from a U.S.

Perspective

Presented by

Phil English, Arent Fox LLP

Key Atmospherics &

Objectives

Need for success for the Trump agenda

Long standing NAFTA issues invite review

Imperative for a WIN-WIN scenario to achieve conclusion

Forced march pace to achieve early conclusion

NAFTA as a blueprint for future FTA treaties

Key Constraints

Populist Political Environment

Political Fragmentation and Polarization

Looming Elections: U.S. Congressional Midterms, Mexican

Presidential

Competition Among U.S. Domestic Sectors: Auto, Agriculture, etc.

Elusive Definition of Success for U.S.-Canada-Mexico

U.S. Coalition for Renegotiated Agreement?

Key Issues

Rules of Origin

Dispute Settlement (ISDS )

State Owned Enterprises (SOE)

Intellectual Property Rights

Integration: Labor and Environmental Standards

Regulatory Cooperation

Currency Manipulation

Government Procurement

Labor Mobility

Wild Cards: Trump's Wall?

Key Players (US)

USTR (Bob Lighthizer); John Melle, Assistant USTR Western Hemisphere

Commerce (Wilbur Ross)

National Economic Council (Gary Cohn)

National Trade Council (Peter Navarro)

House Ways and Means Committee: Kevin Brady, Chairman/David Reichert, Trade Subcommittee

Senate Finance Committee: Orrin Hatch, Chairman

Congressional Democratic Caucuses

Business Community

Organized Labor

Ideological Networks

Philip S. English, Co-Chairman, Government

Relations Practice Group, Arent Fox LLP

T (202) 8576031

E philip.english@arentfox.com

Questions?

NAFTA FROM A CANADIAN PERSPECTIVE

Dr. John Holmes, Queen’s University

NAFTA and the Automotive Industry: A Canadian Perspective

John Holmes Queen’s University

Academic Partner, APRC

Ontario Auto Mayors Meeting

Oakville, August 3, 2017

Trump and the Auto Industry

Campaign tweets and speeches

• singled out the auto industry

• threatened to tax vehicle imports

• primary target Mexico - but sent a chill throughout the North American auto industry

Intention to renegotiate or withdraw from NAFTA

• populist appeal

• woeful lack of understanding the auto industry under NAFTA

Not Just About Trade ….

deeply embedded and interlinked auto supply chains

NAFTA countries interdependent in automotive production

high levels of integration, specialization, and intra-industry trade

keeps the North American auto industry globally competitive

significant changes to NAFTA could change the structure of the North American auto industry

Trump’s Trade Announcements

January 2017: US pulls out of the TPP

April 2017: US slaps duties on softwood lumber imports from Canada

April 2017: Trump issues Executive Orders directing Secretary of Commerce to investigate steel and aluminum imports and threats to national security (Section 232 of the 1962 Trade Expansion Act).

May 18 2017: NAFTA renegotiation set in motion

July 17 2017: USTR issues Summary of Objectives for NAFTA Renegotiation

USTR Objectives include …….

• Trade in Goods:

- Improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.

Rules of Origin:

• Update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.

• Ensure the rules of origin incentivize the sourcing of goods and materials from the United States and North America.

Automotive Trade Balances:USA and Canada: 2016

Exports Imports Balance

Vehicles Parts Vehicles Parts Vehicles Parts Total

USA 25.2 53.9 86.6 68.7 - 61.4 - 14.8 -76.2

Canada 46.3 17.0 26.5 30.4 +19.8 -13.4 +6.4

Exports Imports Balance

Vehicles Parts Vehicles Parts Vehicles Parts Total

USA 54.4 80.0 186.4 141.2 - 132.0 -61.2 - 193.2

Canada 47.8 17.7 36.0 39.0 + 11.8 - 21.3 - 9.5

A. ALL COUNTRIES ($US billions)

B. WITHIN NAFTA ($US billions)

Sources USA: http://www.trade.gov/td/otm/autostats.asp; Canada: Strategis Trade Data On-line

Vehicles: NAICS 33611. Parts: NAICS 3363, 32621, 33591, 326193, 326220, 336211.

Canada Automotive Trade Balances with All Countries: 1992-2016

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

mill

ion

s cu

rre

nt

$C

AN

Vehicle Trade Balance Parts Trade Balance Overall Balance

Source: Industry Canada: Strategis Online Trade Data

Percentage Shares (by value), Total Vehicle Trade, Canada: 2016

United States97%

Mexico1%

Rest of World

2%

United States71%Mexico

12%

Rest of World17%

VEHICLE EXPORTS: $62.87 billion

VEHICLE IMPORTS: $47.64 billion

Source: Industry Canada, Strategis Online Trade Database

Percentage Shares (by value), Total Automotive Parts Trade, Canada: 2016

United States90%

Mexico6%

Rest of World

4%

United States65%

Mexico13%

Rest of World22%

PARTS EXPORTS: $21.1 billion

PARTS IMPORTS: $47.8 billion

Source: Industry Canada, Strategis Online Trade Database

NAFTA Automotive Trade

hub and spoke arrangement:Canada ↔ US ↔ Mexico

within NAFTA, Canada runs small auto trade surplus (5% of total auto trade)• surplus with US: surplus in vehicles; deficit in

parts• deficit with Mexico in both vehicles and parts

highly integrated within Great Lakes Region

Canadian-owned suppliers in US and Mexico

Canada Automotive Trade Balances Within NAFTA: 1992-2016

-15,000.00

-10,000.00

-5,000.00

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Mill

ion

s C

$ (

curr

en

t)

United States Mexico NAFTA

Source: Industry Canada, Strategis Online Trade Data

NAFTA Vehicle Production and Trade Flows: 2016 (Units)

Share of Domestic Vehicle Production Sold in Home Market: 2015

Source: IHS|Markit reproduced in Dziczek CAR 2017

NAFTA Automotive Parts Trade Flows: 2016 ($US Billions)

Regional Percentage Shares, NAFTA Automotive Parts Exports and Imports, ON/QC: 2016

Great Lakes70%

U.S. Mid-South10%

South U.S.8%

Other U.S.6%

Mexico6%

Parts Exports 2016

Great Lakes56%

US Mid-South12%

South U.S.9%

Other U.S.6%

Mexico17%

Parts Imports 2016

Source: Industry Canada: Strategis Online Trade Data

What’s at Stake for Canada?

Future automotive investment and production commitments

Impact of a US border adjustment tax (BAT) or US tariff on automotive imports

Changes to NAFTA requirements

Rules of origin (ROO)

Regional content-value (RCV)

Tracing of non-RCV

US BAT or Tariff on Automotive Imports

Trump’s threat:

BAT of 15% (as part of broader tax reform)

20%-35% tariff on vehicles and parts imported into US from Mexico (and Canada?)

Impact:

seriously disrupt supply chains

undermine global competitiveness of North American auto industry

negatively impact ALL three countries

Impact of a BAT or Tariff

Modeling by CAR and by BCG for MEMA

Added vehicle production cost

o15% BAT $1,000; 35% tariff $1,200

Loss of US parts jobs (up to 50,000)

oUS parts content in imported vehicles from Mexico (40%) and Canada (25%)

Would it bring assembly jobs back to the United States?

o little unused assembly capacity in US

omulti-year project to build new capacity

o likely increased substitution of imports from other countries

Current NAFTA Automotive ROO and RCV

To qualify for preferential tariff treatment

Vehicle or part must “originate” in NAFTA region

To “originate” must contain a specified minimum RCV

62.5% for vehicles, engines and transmissions

60% for other automotive parts

Complex rules for calculation of RCV

Tracing list

for listed components, non-originating value must be tracked through all stages of assembly and included as non-originating when vehicle RCV is calculated

Possible Changes??

Increase NAFTA RCV

Require US content-value, in addition to NAFTA RCV

Improved documentation of RCV

Expand the tracing list to update and reduce non-originating content

Summary

High levels of integration, specialization, and intra-industry trade keeps the North American auto industry globally competitive

Allows automakers to take advantage of best cost production and manage supply chain risk

Any change to the automotive ROO/RCV rules must be sensitive to the complexity of existing supply chains and alert to possible unintended consequences

Heavy dependence on the US market makes Canada vulnerable to rule changes that would disproportionately favour the US

Thank you

John Holmesholmesj@queensu.ca

Presentation from ongoing research by John Holmes and Brendan Sweeney supported by the APRC

MODERATED Q AND A

Dr. Grieg Mordue, Associate Professor/Arcelor Mittal Chair in Advanced Manufacturing Policy, McMaster University

NEXT STEPS AND ACTION ITEMSMayor Rob Burton, Town of Oakville, Chair of Auto Mayors