Why the TPP trade deal may disrupt — but not shrink— the auto sector

The CEO of Ford Motor Company's Canadian operations didn't mince words in summing up the Pacific Rim trade deal Canada signed two weeks ago.

"Right now, as the TPP stands, there will be no positive outcome for Canadian manufacturing," Dianne Craig said at the Canadian International Auto Show in Toronto last Thursday.

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When negotiations concluded for the 12-country Trans-Pacific Partnership last October, labour leaders warned of up to 20,000 lost jobs.

Why? Several reasons, but chief among them: the United States had negotiated a longer tariff phase-out for finished vehicle imports — 30 years, compared with a five-year period for Canada.

Automotive industry analyst Dennis DesRosiers finds the imbalance "unconscionable," and contrary to North American integration. 

"I have no concept why Canada didn't fight like hell.… It makes no sense," he said.

And so, the TPP adds to a long list of competitive challenges making Canada's 11 automotive assembly plants vulnerable to closure — including some of the highest energy costs in the world and uncertain labour negotiations on the horizon.

"Will it have a devastating impact? You could build that case," DesRosiers said.

But also, "You could build the opposite."

A closer analysis across the entire sector has DesRosiers seeing "more smoke than fire" rising from this trade agreement.

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Disruptive? Yes. Totally destructive? No.

'Likely a wash'

The threat from the TPP deal is being "overplayed," DesRosiers said, particularly for the parts sector.

Canada has allowed duty-free entry of auto parts from any country since 1998 as part of deals reached in the last two decades to land new Honda and Toyota plants in Ontario.

A complicated mix of opportunities and threats makes TPP "likely a wash" for parts suppliers, DesRosiers estimated.

But it won't be easy.

"These are wrenchingly difficult restructurings that have to happen in order for our industry to compete," he said.

"TPP may force it quicker on to a lot of companies who may not be able to adjust … so from that perspective, it's negative. The ones that embrace it potentially end up with a bigger win."

Remember that the Auto Pact in the '60s cost jobs initially, he said. But more jobs were created later.

Two leading companies, Magna International and Linamar, were founded by entrepreneurs in its wake.

New Japanese investment?

Flavio Volpe, the president of the Automotive Parts Manufacturers' Association, said the companies he represents fall into two camps, each employing about the same number of workers.

Larger companies headquartered in Canada see chances to expand abroad. They're open to the deal. 

Smaller businesses focused only on North America face more competition from lower-cost Asian countries. They're wary.

Then there are the surprises, including something counterintuitive: new investment coming into Canada, as Japan hedges against its own vulnerability to Chinese competition.

The Japanese supply chain model "looks at Ontario and says, 'Is this an opportunity now to put some capital into play?'" Volpe said.

We don't care what flag the Chinese fly as long as they're employing Canadians and using Canadian parts.— Jonathan Azzopardi

The ownership of some small and medium-sized businesses may change, but if the Japanese boost efficiency and keep the doors open, "that's a good thing."

Then there's the low loonie. 

It doesn't do much for existing suppliers who already have contracts in U.S. dollars, he said. 

"But if you're setting up new capacity — you're buying land, you're setting up a plant and you're equipping that plant, and you're purchasing that new equipment … it's a great time to consider a new capital investment here, assuming you have the orders."

Shifting focus

Jonathan Azzopardi remembers his father thinking Canada would lose all its automotive jobs to Mexico when the North American Free Trade Agreement came in.

Instead, his family business in Tecumseh, Ont., pivoted: where once it sold just in Canada, today only about 10 per cent of LAVAL International's compression mould-making business is domestic, with roughly half in Mexico and the rest in the U.S.

"We figured out how to take what we thought was a threat and turn it into a positive," he said.

What Ford's CEO fears will only come to pass if the industry doesn't change, Azzopardi said. "They're forgetting about the resilience of the entrepreneurship of Canadians."

Although he identifies as a Conservative, he was frustrated by the previous government's lack of focus on his industry.

It's better now, he said Friday, after consulting with government officials at Toronto's auto show.

"It's not as complicated as they think," he said.

His suggestion? Land a new plant. The rest will come.

Whether he has a supply contract for it or not, any large new assembly or top-tier parts facility would reinforce Ontario as a high-value manufacturing hub.

Businesses like Azzopardi's rely on the technical, engineering expertise that creates.

"There have been five [plants] that have come to Mexico and none to Canada. And we need to start to analyze why," he said.

'Roll out the red carpet'

Renewing the automotive innovation fund, or other tax incentives like Ford is lobbying for, help too, Azzopardi said. But ultimately these are just a "drop in the bucket."

"You need to roll out the red carpet and throw everything you can at the next [auto maker] that you know will be setting up a factory, because that changes the tides," he said. 

Yes, the government is "buying jobs," he said. "But those jobs make you money" — and if you don't buy them, "everybody else will."

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Even though China's not part of the TPP (yet), both Volpe and Azzopardi think Canada should pursue a strategic resources-for-auto investment deal with China's state-owned industry.

"We don't care what flag the Chinese fly as long as they're employing Canadians and using Canadian parts," Azzopardi said.

"[The Chinese] are going to have to put a plant in North America," Volpe said. "If they want your petroleum and potash, then make the deal now."

"Imagine what a plant in St. Thomas [Ont.] looks like: it's like a phoenix rising from the ashes."