(b) "subsidiary wholly-owned corporation" and "subsidiary controlled corporation" have the meanings assigned to those expressions by the Income Tax Act.

4. For the purpose of subparagraph (vi) of paragraph (a) of section 2, the amount of depreciation in respect of production machinery and permanent plant equipment for any twelve month period ending on the 31st day of July is,

(a) in the case of machinery and equipment acquired before August 1, 1964 and within the one hundred and twenty months ending on the last day of the period, ten per cent of either (i) the aggregate of

(A) the capital cost to the manufacturer of any such machinery and equipment that was manufactured in Canada, and

(B) the part of the capital cost to the manufacturer of any such machinery and equipment that was manufactured outside Canada that is reasonably attributable to the cost of installing that machinery and equipment, minus

(C) the part of the cost referred to in clauses (A) and (B) that was incurred in respect of machinery and equipment that has been disposed of before the beginning of the period, or

(ii) one-half of

(A) the capital cost to the manufacturer of all such machinery and equipment whether manufactured in Canada or elsewhere,

minus

(B) the part of the cost referred to in clause (A) that was incurred in respect of machinery and equipment that has been disposed of before the beginning of the period; and

(b) in the case of machinery and equipment acquired after July 31, 1964 and within the one hundred and twenty months ending on the last day of the period, ten percent of

(i) the capital cost to the manufacturer of any such machinery and equipment that was manufactured in Canada. and

(ii) the part of the capital cost to the manufacturer of any such machinery and equipment that was manufactured outside Canada that is attributable to the cost of installing that machinery and equipment,

minus

(iii) the part of the costs referred to in subparagraphs (i) and (ii) that was incurred in respect of machinery and equipment that has been disposed of before the beginning of the period.

Declaration

5. Every manufacturer that intends to enter vehicles under Tariff Item 950 during any twelve month period ending on the 31st day of July shall, before making its first entry during the period, send to the

Minister a declaration in the form set out in the Schedule in respect of each class of vehicle it intends so to enter.

Reports

6. Every manufacturer that imports vehicles pursuant to the Order shall submit to the Minister and the Minister of Industry every three months commencing April 1, 1965, such reports as may be required by those Ministers respecting the production and sale by the manufacturer of vehicles and parts thereof.

Canada, a manufacturer of vehicles of the class referred to in paragraph of Tariff Item 950 and that it is the intention of our company to qualify for entry of vehicles referred to in that paragraph under that Tariff Item.

I further declare that

(a) our company produced vehicles of that class in Canada during each of the four consecutive periods in the base year; (b) our company intends to produce in Canada in the period August 1, 196-, to July 31, 196-, vehicles of that class;

(c) the ratio of the net sales value of the vehicles of that class that are to be produced in Canada by our company to the total net sales value of all vehicles of that class to be sold for consumption in Canada by our company in the period August 1, 196-, to July 31, 196-, will be equal to or higher than the ratio achieved by our company in the base year; and

(d) the vehicles of that class that are to be produced in Canada in the period August 1, 196- to July 31, 196-, will have a Canadian value added that is equal to or greater than the Canadian value added of all vehicles of that class that were produced by our company in Canada during the base year.

BACKGROUND INFORMATION ON AGREEMENT

The United States and Canada have arrived at an agreement which provides for the elimination of customs duties by both countries on motor vehicles (passenger cars, trucks and buses) and original parts for production of new vehicles. This paper presents background on the structure of the automotive industry in the two countries, and a description of the benefits to the two countries which are foreseen from the agreement.

I

The Canadian market for automobiles is a natural extension of the U.S. market, the two parts forming what is in most respects a single North American market. Canadian consumers overwhelmingly choose automobiles of American design and make (91 percent of all cars purchased in Canada in 1963 were American models.) They prefer and they get a range of body types and models almost as wide as is available to American consumers.

Production in Canada is almost wholly in the hands of subsidiaries of the United States motor vehicle manufacturers: General Motors, Ford, Chrysler, American Motors, Studebaker, International Harvester, Kaiser, Jeep, and others. The value of Canadian automotive output in 1963 was $1.4 billion, the bulk of which was accounted for by United States subsidiaries.

Canada is now the world's sixth largest consumer of automobiles and other motor vehicles. Sales in 1963 amounted to about 600,000 units. In 1964, total sales probably exceeded 700,000 units. The Canadian market is growing rapidly, more rapidly than in the United States, and is likely to continue to do so since the number of automobiles in Canada per capita is relatively smaller than in the United States, and since Canadian incomes are growing at a faster rate than American incomes.

Canada is our major export market for automotive products. In 1963 the United States sold to Canada cars, trucks, and, most important, automobile parts valued at $560 million. In the first eight months of 1964 our exports were about $455 million, an increase of almost $90 million over the same period of 1963.

We are importing from Canada a smaller but growing volume of automotive equipment. Imports in 1963 were $33 million. In the first eight months of 1964, imports were $46 million, as compared with $16 million in 1963.

II

Although Canada produces and comsumes the same automobiles under much the same conditions as does the United States, costs and prices are significantly higher than in the United States. This is so even in the face of lower Canadian wages and certain other Canadian cost advantages.

In an

A principal reason is the lower volume of Canadian output. industry in which economies of scale are very important—that is, high costs of capital plant and equipment need to be spread over large numbers of units of output-Canadian manufacturers typically operate at levels too low to permit them to get the full advantage of such

41

economies. For example, the Ford Motor Co now makes some 60 different models of five distinct passenger car lines at its assembly plant in Canada. Just across the river on the U.S. side, Ford's great River Rouge assembly plant produces only three models of the Mustang line. Similar disparities exist for the other producers; in only a few auto parts and in none of the vehicles is the volume of Canadian output large enough to bring costs down to American levels.

This relatively high cost industry-and the word "relatively” should be emphasized because Canadian plants are for the most part modern and well-equipped-is protected by customs tariffs and by the so-called Commonwealth content requirement. Tariffs on finished vehicles are 17% percent and range from duty-free up to 25 percent on component parts. The content requirement calls for up to 60 percent of Canadian parts and labor and other costs in the finished automobile. These restrictive devices have helped to screen producers located in Canada from U.S. competition. They have served to maintain a Canadian automotive industry in being but they also have worked to perpetuate uneconomic production runs, higher costs in Canada, higher priced cars for Canadian consumers, and a smaller total North American market.

III

So long as there are tariff and other barriers to the automotive trade between Canada and the United States, there is no possibility of achieving the full potential of a North American automotive industry and automotive market. Our tariff duties are considerably lower than Canadian duties, at 61⁄2 percent on vehicles and 8 percent on most parts, but they of course also have been a burden on the flow of trade in the automotive sector. Together with the higher Canadian tariffs they have helped to shape a pattern of trade and production that falls far short of the efficient pattern that could otherwise be developed.

With tariffs and other restrictive devices eliminated, an American motor company having a Canadian subsidiary will be able gradually to concentrate in Canada on a limited number of models-and on those component parts which could be most efficiently produced in Canadawhile supplying the Canadian customer with a full range of other models from American plants. Canadian management naturally will work toward getting high volume production of specific components and models in Canada. The result, over time, will be to create a rationalized and integrated North American industry. With lower costs and prices, the Canadian market for automobiles will grow faster than before. The total of North American production and the total of United States-Canada trade similarly can be expected to expand.

IV

Canadian and American officials have worked together over several months to see whether the abstract concept of a North American market and industry, unimpeded by tariffs and other barriers, could be given substance and reality. Their talks took place against the background of serious differences between the two countries over a Canadian program, initiated in November 1962 and extended a year later, under which the automobile companies operating in Canada