¹ Report of the Royal Commission on the Automotive Industry (Ottawa, 04, 1961)Google Scholar, hereafter referred to as the Bladen Report. The tariff changes are specified in PC 1962–1/1536 of October 26, 1962, and PC 1963–1/1544 of October 22, 1963. This paper does not deal with the effects of the changes announced in January 1965.

For further discussion, see Johnson, Harry G., “The Bladen Plan for Increased Protection of the Canadian Automotive Industry,” this Journal (05, 1963), 212-38Google Scholar, reprinted in Johnson, , The Canadian Quandary (Toronto, 1963), 133-66.Google Scholar See also MacDonald, Neil B., “A Comment: The Bladen Plan for Increased Protection for the Canadian Automotive Industry,” this Journal (11 1963), 505-15Google Scholar; Johnson, “Reply,” ibid., 515-18; Johnson, , “The New Tariff Policy for the Automotive Industry,” Business Quarterly (spring, 1964), 43–57.Google Scholar

² Strictly speaking, the costs of protection are not simply the excess production costs attributable to tariffs. The loss of consumers' surplus should be added to the costs, and the increase in producers' surplus (quasi-rents ) should be subtracted. See, e.g., Johnson, Harry G., “The Cost of Protection and the Scientific Tariff,” Journal of Political Economy (08 1960), 327-45.CrossRefGoogle Scholar The excess costs may, however, be treated as a first approximation to the costs of protection; they will be so considered in this paper.

³ Items 438d, 438e, 438h, and 438i give the tariffs on trucks, ambulances, motor cycles, etc., and are not dealt with in this paper. Items 438k to 438w specify temporary duties on a number of parts, ranging from free to 7½ per cent for most favoured nations.

⁴ The Volvo entry into Canada is attributable not only to the smaller content requirement for small-scale producers, but also to the five-year graduated duty moratorium on imported parts which was granted to Volvo. Similar concessions are expected to result in the establishment of Canadian assembly lines for Renault and Peugot automobiles. Since the graduated content requirement and the duty moratorium increase the attractiveness of the Canadian market to new entrants, they tend to fragment the Canadian market, thus increasing the barriers to efficient production. Doubts may therefore be entertained regarding the priority granted to the efficiency objective in the determination of automobile tariff policy.

⁵ Because of the regulations regarding the calculation of the content base, the inclusion of engines would tend to lead to a small increase in the Canadian dollar value of Canadian parts production per automobile. This follows from the increase in the “factory cost of production” of Canadian automobiles which would result from domestic engine production. This small increase in the (Canadian dollar) production of parts in Canada would be directly attributable to relative Canadian inefficiency; any extra employment might as well be provided by raking leaves.

In so far as higher Canadian costs lead to higher automobile prices and hence to lower sales in Canada, the increase in Canadian parts per automobile might be offset, or more than offset, by a decline in sales. Thus, total parts production (in Canadian dollars) might either be increased or decreased by these specific duties. Canadian parts production in real terms (i.e., measured at world prices) would decline.

⁶ Other difficulties introduced by the specific duties may be illustrated by reference to the procedure followed by one of the producers in the past when dealing with an automobile component on which such duties were imposed. Although the component itself was subject to specific duties, the parts from which it was made were not. As a result, the automated American production line for this component was periodically stopped so that a number of the unassembled parts could be removed and shipped to Canada, for assembly here. Since the automated US line then continued with empty spaces, nothing (except the payment of duty) was saved by not having the assembly of the component completed in the US. There were, however, considerable costs in the procedure followed. First, there were the costs of interrupting the automated US line; second, there were the costs of assembling the parts in Canada.

⁷ Since exports and imports of parts influence the Canadian cost of production of automobiles, they also influence the net volume of imports permissible under the 60 per cent Canadian content requirement. Hence, the US tariff of 8½ per cent is not a precise measure of the difference in excess Canadian parts costs necessary to make exports and imports advantageous under the extended content plan.

⁸ Bladen Report, 59, 70-1.

⁹ Ibid.

¹⁰ Ibid., recommendation 7b, p. 58.

¹¹ The abolition of the “class or kind” provision of item 438c, as suggested by Bladen, would also clear the way for Canadian companies to choose the lowest cost combination to meet content requirements; such an abolition might therefore be approved. (However, the situation becomes less clear if account is taken not only of the extended content plan but also of the other proposals by Bladen, including the suggestion to modify the content schedule to make it more progressive.)

For a different conclusion, see Johnson, , “The Bladen Plan,” 161–5Google Scholar, where Bladen's proposal to remove the class or kind provision is attacked. Johnson argues that such a removal would be discriminatory against the large producers even if the present content schedule were retained. (See the last complete sentence on p. 163 and its context.) This, it would seem to me, either attaches undue significance to the 2 or 3 per cent of the market occupied by Studebaker and Volvo, or uses the term “discriminate” in a rather strange sense. In so far as manufacturers other than Studebaker and Volvo are concerned, the present content schedule is non-discriminatory, i.e., is 60 per cent for each. The “class or kind” provision discriminates against the smaller producers in the sense that they are penalized if they do not make as broad a product mix as the largest company. Thus, the removal of the “class or kind” provision would remove a discrimination against the smaller producers rather than create discrimination in their favour. Excluding the Studebaker and Volvo cases, the proposition that the abolition of the “class or kind” provision would be discriminatory may be accepted only if it is assumed that large producers should be given an advantage compared to small producers, over and above any advantage they gain from their greater efficiency.

¹² General Motors announced that it would set up a transmission plant; this decision was presumably a result of the changes of October 1962. The plant did not actually begin operation during the October 1962–October 1963 period.

¹³ Canadian imports of automatic transmissions (item 5649):

¹⁴ In explaining the engine regulation, the Department of Finance press release of Oct. 29, 1962 stated (p. 3):

“Automobile engines also carry a statutory Most-Favoured-Nation rate of 25 per cent. There has been no temporary free entry provision. The large companies produce most of the engines required for their own use, but import some for particular purposes. They do not produce any for sale to other automobile companies. The smaller companies have had no choice but to import all their engines.

“The Government has concluded that a provision similar to that for automatic transmissions should be made for engines, but there should be a limit on the number which can be imported by each company under these arrangements for refund of duties. Such a provision should be of particular benefit to the smaller companies, in that it will make possible a considerable easement of the duties which they now have to pay. It will also enable the larger companies to secure duty free entry of those types of engines which it is not economical for them to make in Canada, providing, of course, they export an equivalent value of Canadian automobile parts.”

¹⁵ The double compensation for new imports is required only in the case of parts imports. Since imported automobiles are not included in the content base, additional imports can take place duty-free with only one compensating move, namely, an equivalent increase in the Canadian content of exports.

¹⁶ Strictly speaking, all duties at rates of 17½ per cent and higher. Tariff items 438k to 438w, mentioned in footnote 3 above, raise complications; these are, however, unimportant and will be ignored.

¹⁷ Excluding imports from European producers not directly affected by the program.

¹⁸ See Hood, Wm. C., “Recent Federal Economic Policy in Canada,” Queen's Quarterly (spring 1964).Google Scholar

¹⁹ Two Canadian objections are heard regarding section 303 of the US tariff Act of 1930, under which US countervailing duties are presently being considered. First, the act applies where bounties or grants are made “directly or indirectly.” Second, the act does not require that material injury be proven.

On the first point, the US law is in line with GATT regulations, which recognize the validity of countervailing duties to offset indirect as well as direct export subsidies. On the second point, the US law meets the Canadian criterion of injury; that is, the product is of a “class or kind” made domestically. See the Canadian replies to the GATT questionnaire, in Anti-Dumping and Countervailing Duties (Sales no. GATT/1958–1952), 53.Google Scholar