UNITED STATES-CANADIAN AUTOMOBILE AGREEMENT THURSDAY, SEPTEMBER 16, 1965 U. S. SENATE, COMMITTEE ON FINANCE, Washington, D.C. The committee met, pursuant to recess, at 10 a.m., in room 2221, New Senate Office Building, Senator Harry Flood Byrd (chairman) presiding. Present: Senators Byrd, Long, Douglas, Gore, Talmadge, Ribicoff, Williams, and Carlson. Also present: Elizabeth B. Springer, chief clerk, and Thomas Vail, professional staff member. The CHAIRMAN. The committee will come to order. STATEMENT OF HON. GAYLORD NELSON, A U.S. SENATOR FROM THE STATE OF WISCONSIN Senator NELSON. Mr. Chairman, I appreciate the opportunity to present my views on H.R. 9042, the Automotive Products Trade Act of 1965, and on the Automotive Products Agreement which it is designed to implement. It has been suggested that the bill and the agreement are really free trade measures. The House Committee on Ways and Means said the agreement would "remove the barriers to creation of a single North American industry," and intimated that the only respect in which the agreement fell short of complete free trade was that it did not cover replacement parts. The facts do not appear to support that contention. The agreement, along with the collateral commitments made privately by the Canadian auto producers to the Government of Canada, may actually prove to be a greater restraint on free trade than the high tariffs on autos and auto parts which existed before the agreement was signed. It would seem there are two respects in which the agreement falls short of free trade, in addition to the relatively minor matter of not including replacement parts. First, while all duties are removed on Canadian-made vehicles and parts for original equipment entering the United States, tariffs on goods entering Canada from the United States are removed only if the importer is an auto manufacturer who meets two criteria: he must maintain the ratio of the net sales value of the cars he produces in Canada to the net sales value of the cars he sells in Canada at a level at least as high as that which existed in the 1964 model year-for the major auto companies this is about 95 to 100, and the agreement sets a minimum ratio of 75 to 100; and he must 263 maintain the total Canadian value added in the cars he produces in Canada at a level at least as high as in the 1964 model year. If this were all there were to the agreement, it would certainly be far from free trade, and at least objectionable on that ground alone; particularly since Canada is reserving in advance its own share of any future increase in the Canadian market, while the United States is throwing its own market completely open to free competition between producers in the two countries; but it might have been argued that the inequities were more apparent than real, since the greater efficiency of the U.S. producers freed them of any need to fear competition; and it might have been maintained that Canada had a legitimate right to require that autos to be sold in Canada be largely produced there. However, there is another, and a far more restrictive side to the agreement the "letters of undertaking" submitted to the Government of Canada by the Canadian subsidiaries of each of the four major auto manufacturers. While these letters are not formally a part of the agreement, they constitute an important part of its provisions, for the Canadian Government refused to sign the agreement until after they had been obtained. These letters contain two important features: the companies promise to increase the total dollar value of their Canadian value added by at least 60 percent of the increase in their Canadian sales of automobiles, and 50 percent of the increase in their Canadian sales of the commercial vehicles specified in the agreement; and they further commit themselves to increase their total Canadian value added by an additional arbitrary amount, agreed upon between each company and the Government of Canada, from the 1964 to the 1968 model year. These latter amounts come to a total of $241 million. The U.S. Tariff Commission, in a report submitted to the House Committee on Ways and Means last April 23, calculated that the various provisions of the agreement and private commitments of the auto producers would require an increase of $390 million in Canadian auto production from 1964 to 1968. The Commission estimated that if Canadian production were protected by the previous tariffs alone, there would be only a $150 million increase in Canadian auto production in this period; even the Canadian duty-remission plan, which faced a threat of countervailing tariffs as a disguised export subsidy, would have increased Canadian auto production by only $310 million, the Commission said. These three figures are based on an assumed annual growth of 5 percent in the Canadian market for North American style motor vehicles. This means, very simply, that the Automotive Products Agreement, according to the estimates of the U.S. Tariff Commission, would by 1968 result in $240 million worth of business each year being done by Canadian firms which would have been done by U.S. companies had neither the agreement nor the duty remission plan existed. This plainly would not be the result of free competition. It would, rather, be the result of the highly restrictive measures contained in the Automotive Products Agreement and the collateral letters of undertaking by the auto producers. Essentially, the agreement is a form of cartel. The auto companies, in specifying the amounts by which they will increase their Canadian production from now to 1968, have removed an element of free competition from the determination both of how the Canadian market is to be divided and of how production is to be divided between plants in the United States and those in Canada. One Member of the House, in the floor debate on this bill, said: There are two kinds of cartels-those trade agreements which benefit us are good cartels and those trade agreements which benefit others can be bad cartels, the latter are usually of European origin. That statement is wrong in two respects. First, while a cartel may be of benefit to an individual firm, I do not believe that it is ever of advantage to the general public to place restrictions on free competition, as this agreement certainly will do. Furthermore, while this cartel may not be of European origin, it makes no sense to say that an arrangement which takes jobs from the United States and moves them to Canada is any better than one which would move them to Europe instead. It was fully realized when this bill was drawn up that the effect of the Automotive Products Agreement would be to shift production and jobs from the United States to Canada. That is why there is a section in the bill to provide readjustment assistance. This section authorizes Federal assistance payments to firms which are forced to move their plants and to workers who lose their jobs because plants or production is shifted to Canada because of the agreement. If we must have this agreement, such assistance is vitally necessary; but no amount of readjustment assistance can make up for the fact that the total number of jobs available in the United States is being reduced because $390 million worth of annual production of autos and auto parts will be shifted to Canada. Some have argued that there will be no real loss of jobs from this agreement, because the agreement will make it possible to rationalize the auto industry to a greater extent, thus lowering prices and expanding the market, particularly in Canada. It seems unlikely that auto sales could be increased that rapidly, although it may be true. The fact is that we simply do not know. The most imperative need Congress has is for more information about the economic effects of the agreement. We have the Tariff Commission's estimate that it will mean an increase of $390 million in Canadian auto production; but that was based necessarily on a guess rather than a careful calculation about the increase in Canadian consumption. In fact, everything that has been said about the effect of this agreement is simply guesswork, made before adequate information was available. Before the Senate comes to a final decision on the Automotive Products Agreement, the U.S. Tariff Commission ought to be asked to make a further study, this time based on a study of what has happened in the auto industry since the agreement was signed last January, and submit it to this committee. The retroactive provision of the bill means there is no need to rush passage; and the detailed and exact information which such a report could provide would greatly increase the ability of the Senate to take wise and considered action. The CHAIRMAN. Thank you very much, Senator. We are always glad to see you. Senator NELSON. Thank you. The CHAIRMAN. The next witness is Mr. Alfred R. McCauley, Industrial Committee of Paducah, Ky. STATEMENT OF ALFRED R. MCCAULEY, ATTORNEY, REPRESENTING THE INDUSTRIAL COMMITTEE OF PADUCAH, KY. Mr. MCCAULEY. Mr. Chairman and members of the committee, my name is Alfred R. McCauley and I am with the Washington law firm of Graubard, Moskovitz & McCauley. We appear here today in behalf of the Industrial Committee of Paducah, Ky., a committee composed of representatives from the principal business, professional, and civic organizations in Paducah and its surrounding area. Mr. Chairman, I ask permission to have inserted at this point in the record the names of the members of the industrial committee and the organizations they represent. The CHAIRMAN. Without objection. (The names referred to follow :) THE INDUSTRIAL COMMITTEE OF PADUCAH, KY. COMMITTEE REPRESENTATIVE AND ORGANIZATION Gus Hank III, American Legion Post 31. Edwin E. Ellis, Associated General Contractors. Virgil R. Harris, Automotive Trades Association. Ed Davis, Chamber of Commerce. Dick Fairhurst, Greater Paducah Industrial Development Association. Warren Eaton, Kiwanis Club. William H. Hicks, Kiwanis Club (South Side). Edward R. Hulett, Kiwanis Club (West Side). Wilfred Powers, Lions Club. Asa Long, McCracken Oil Men's Club. Joe Powell, Night Lions. Charles Record, Optimist Club. Lawrence Albritton, Paducah Association of Druggists. Floyd Beard, Paducah Association of Insurance Agents. John R. Anderson, Paducah Association of Life Underwriters. Leon Searles, Paducah Electric Plant Board. Jimmy Rieke, Paducah-McCracken County Growth Council. Morris McBride, West Kentucky Home Builders. Mr. MCCAULEY. The industrial committee's concern is with the economic well-being of the Paducah area which depends in large part on the continued operation in Paducah of a motor vehicle radiator plant operated by the Modine Manufacturing Co. This plant serves as Paducah's third largest employer with an annual payroll in excess of $2 million. The industrial committee sees in the whole program of which H.R. 9042 is a part a decided threat to the existing U.S. radiator markets of the Modine Manufacturing Co. and, accordingly, a grave threat to Paducah's economy. For this reason we are here today to voice our objection to passage of this bill. Paducah's citizens in the past have expressed to the Federal Government their concern about threats to Paducah's economy. In the summer of 1964, as the members of this committee know, 10,000 Paducah citizens almost one-third of the population-exercised their constitutional right of petition and asked the President and the Congress to use their good offices to see that the Paducah radiator plant was protected from a most unfair trade practice the subsidization of Canadian motor vehicle and motor vehicle parts production and exports by the Government of Canada. Paducah's citizenry as one asked their Government to take affirmative action on a formal petition filed by the Modine Manufacturing Co. in April of 1964 which asked that the Canadian subsidy scheme be neutralized and offset by the imposition of countervailing duties by the Secretary of the Treasury, as required by section 303 of the Tariff Act of 1930. This April 1964 petition, endorsed by thousands of Paducah's citizens, charged that Canada's subsidy scheme-started in 1962, enlarged in 1963 and in full bloom in 1964-constituted an unjustified, illegal economic invasion of the United States in violation of the provisions of section 303. The Treasury Department's investigation-triggered by this petition-clearly established that the Canadian Government's scheme of remitting duties paid on imports of certain automotive products into Canada, conditioned upon increased exports of Canadianmade automotive vehicles and parts, was in fact and in law the payment of a bounty or grant which section 303 required to be countervailed. Mr. Chairman, it is at this point-when the Executive found itself faced with a clear case calling for action under section 303 against Canadian subsidized exports-that the history of last January's agreement begins. As is quite proper and normal in such cases, the administration initially sought to persuade Canada to terminate the offensive subsidy program. The U.S. request was discussed at several conferences, most of which took place in Ottawa. But Canada adamantly refused to call off its raid on the U.S. market. It was reported that one reason given by Canada was the failure of the United States to react to Canada's 1962 trial subsidy scheme initiated in the fall of that year. Canada argued, in effect, that the U.S. silence on the 1962 scheme estopped our complaining about the full-bloom 1963-64 scheme. Canada's firm rebuke of the U.S. request for Canada to cease and desist its unfair subsidization left the issue squarely up to our officials. They had to decide whether or not section 303's mandate would be dutifully obeyed and Canada's unfair subsidy scheme neutralized by a countervailing duty order. It was in the course of this decision process that the idea of a free trade agreement with Canada was conceived. Our officials saw such an agreement as the complete answer. Senator GORE. Mr. Chairman, may I ask a question? Do you think "free trade agreement" is a proper description of this pending agreement? Mr. MCCAULEY. Senator Gore, I do not and if you will let me proceed for another few minutes you will see that I think that the present agreement is, in your words, the antithesis of free trade. |