^{page 212 note 1} Report, Royal Commission on the Automotive Industry (Ottawa: The Queen's Printer, 04, 1961).Google Scholar

^{page 212 note 2} Bladen, V. W., “L'Industrie de l'automobile canadienne et son intégration dans l'économie mondiale,” Cahiers de l'Institut de Science Economique Appliquée, no. 128, HS, no. 7, aoùt, 1962, 121–35.Google Scholar

^{page 216 note 3} From the viewpoint of over-all Canadian welfare, the Canadian consumer might be either better or worse off as a result of such a compensating import duty. The taxation of imported cars would impose some loss of consumer's surplus on car consumption—a consumption cost—in offset to the production gain that would result from the replacement of higher real-cost British assembly of cars by lower real-cost Canadian assembly of cars.

^{page 217 note 4} An alternative analysis, worked out in terms of an arithmetical example, is presented in the Appendix. This example, which involves discrete alternatives rather than the marginal adjustments assumed in the main text, brings out some points not considered here.

^{page 218 note 5} Let a be the proportion of the value (measured at world prices) of a car produced domestically, c be the required domestic content as a proportion of factory cost of production, and t be the proportional tariff rate on imported cars and parts; and let x be the maximum proportion by which the domestic cost of the production included in a can exceed its world market cost. The value of x is to be derived from the equality of the cost of an imported car, 1 + t, with the cost of a car produced in conformity with the content requirement, 1 + xa, or x = t/a. The minimum value of a is derived from the content requirement (1 + x)a / (1 + x)a + (1 − a) = c; by substitution, a = c(1 + t) − t and x = t / c(1 + t) − t.

^{page 222 note 5} The mathematical formulas relating average content percentage to annual output in thousands of units (n) in the Commissioner's suggested scale are as follows:

A continuous progressive content requirement schedule fairly close to this could be obtained, for example, by using the formula c = (25 + 3√n) %; this formula would entail a content requirement of 31.71 per cent at 5,000, 38.42 per cent at 20,000, 46.21 per cent at 50,000, 55.00 per cent at 100,000, and 67.43 per cent at 200,000 annual production. A still closer fit could be obtained by adjusting the constant and the coefficient of the square root, or possibly by using log n rather than √n.

^{page 225 note 7} A further indication of the increase in the real cost of protection to the Canadian economy under the extended content plan is provided by Professor J. H. Young's estimates of the cost of protection in his Canadian Commercial Policy (Ottawa: The Queens' Printer, 1957).Google Scholar Young estimates the “cash cost” of the tariff for the automobile industry in 1955 as follows (p. 186): total cash cost $94–127 million, less duties collected $22 million, yielding net cash cost $72–105 million. Assuming that the extended content plan would have achieved the expected 10 per cent increase in Canadian production, and that all the lost tariff revenue would have been converted into cash cost, Young's figures imply that the 10 per cent increase in Canadian production would have been accompanied by an increase in net cash cost of between 21–31 per cent (approximately).

^{page 226 note 8} Either of these assumptions would suggest that a combination of tariff reduction and more vigorous combines administration would be a more appropriate remedy than increased protection combined with content requirement manipulation.

^{page 226 note 9} An alternative scheme for protecting Canadian production of automobiles and parts efficiently would be to subsidize production of cars and parts at a uniform rate, regardless of whether the product is sold in Canada or elsewhere. This scheme would be economically efficient, whereas the Commissioner's would not: that is, it would impose the cost of having an industry desired on socio-economic ground on the taxpayer, where it belongs, rather than on the consumers or the large-scale producers, and hence would involve no loss of consumers' surplus and no extra-budgetary progressive taxation of enterprise; and it would ensure that the maximum degree of protection on all items produced would be the same at the margin, instead of transferring protection from one part to another or between parts production and assembly or making the marginal cost of protected production different between producers, as content production does. Since the subsidy would apply to all consumption, the scheme would not be internationally objectionable as a form of dumping, as the Commissioner's scheme is. Incidentally, it should be noted that most of the efficiency-improving effects of the Commissioner's scheme could be achieved by making the tariff rate uniform on all parts and vehicles and allowing free entry to all parts not made in Canada. The remaining inefficiency mostly results from the fact that the tariff can only protect the domestic market.

^{page 228 note 1} The mere earning of profits in a country by foreign enterprise is frequently objected to by the economically illiterate as constituting a loss to the country. In fact, of course, provided such profits are competitively determined they constitute a payment for services rendered by foreign capital and enterprise. In addition, under present international tax arrangements, a country derives a net profit from foreign investment in it, since the taxes it collects on the profits earned by foreign enterprises are not added to the taxes those enterprises would have had to pay had they operated in their own countries (and so borne by the domestic consumer), but instead are offset against profit taxes otherwise due to the governments of those countries, and so in effect are collected from the foreign taxpayers. American corporation tax law benefits other countries in which American companies conduct business not only in this way but in a number of others, notably through the subsidization of oil exploration by depletion allowances.

The point at issue here is the quite different one that in so far as the tariff creates opportunities for abnormal profits, that is, profits above the competitive level, and these profits accrue to foreign capitalists, only the taxes on these profits represent an internal income transfer (from the consumer to the taxpayer), the remaining untaxed portion representing a transfer to foreigners and therefore a cost to the country. It should be noted that what matters here is foreign ownership, not foreign enterprise; to the extent that domestic residents own stock in the foreign enterprise (or its parent company), abnormal profits earned by that foreign enterprise still involve only a transfer of income between residents.

^{page 230 note 2} Competitive pricing would be more likely to benefit the consumer the greater the proportion of excess profits that would accrue to foreigners (here assumed to be 100 per cent), the greater the elasticity of total demand for cars and the smaller the Canadian share in the market, and the smaller the cross-elasticity of demand for foreign cars with respect to the price of Canadian cars; whether the Canadian economy gained or lost on balance, by comparison with the competitive strategy assumed here, the excess cost per unit of Canadian content produced would be lower, because the excess production cost per car produced would be the same, the excess foreign profits would be eliminated, and the loss of consumers' surplus in car consumption would be smaller and averaged over a larger volume of Canadian car production; the total excess cost of protected production might therefore be lower, even if more cars were domestically produced. Non-price competition would be likely to increase the total cost of protected production by increasing the production volume, though there would be some reduction in the excess cost per car owing to the spreading of the loss of consumers' surplus over more units.

^{page 232 note 3} These ratios would be 35 per cent and 26% per cent if half the increases in excess-cost-cum-profit (from $60 to $180 in the one case and to $140 in the other) were recaptured in taxes and dividends.

^{page 232 note 4} There is an interesting parallel between content protection and the regulation of broadcasting by private enterprise: broadcasting regulation attempts to force private broadcasters to spend part of the profits of a natural monopoly on socially desired program content; content protection seeks to force the manufacturer to spend part of the profits of an artificial monopoly created by the tariff on socially desired domestic production.

^{page 233 note 5} These ratios would be 30 per cent and 26% per cent if half the advance in excess-cost-cum-profit from the initial level were recaptured.

^{page 236 note 6} With 50 per cent recapture of the advance in excess-cost-cum-profit, these ratios would be 32½ per cent and 28⅔ per cent.

^{page 236 note 7} The excess cost ratio for small-volume Canadian production would be 50 per cent, or 37½ per cent with 50 per cent recapture of increased profits.

^{page 237 note 8} With 50 per cent recapture of increased profits, 48⅓ per cent.

^{page 237 note 9} With 50 per cent recapture of increased profits, 26.79 per cent.

^{page 237 note 10} With 50 per cent recapture of increased profits, 27.86 per cent.