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 summingupthe 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 theCanadian International AutoShow in Toronto last Thursday.

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

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

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

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

And so, the TPP adds to a long list of competitive challenges making Canada's 11 automotiveassembly plants vulnerable to closure includingsomeof thehighest energy costs in the world anduncertain labour negotiations on the horizon.

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

But also,"You could buildthe opposite."

A closer analysisacross the entire sector has DesRosiersseeing"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, DesRosiersestimated.

But it won't be easy.

"These are wrenchingly difficult restructurings that have to happen in order for our industry tocompete," 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 abigger win."

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

Twoleadingcompanies, Magna International and Linamar, were founded by entrepreneursin its wake.

New Japanese investment?

FlavioVolpe, the president of the Automotive Parts Manufacturers' Association,said the companies he represents fall into two camps, eachemploying about the same number of workers.

Larger companies headquartered in Canadasee chances to expand abroad.They're open tothe 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, asJapan hedgesagainst its own vulnerability toChinese competition.

TheJapanese 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 Canadianparts.JonathanAzzopardi

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

Then there's thelowloonie.

Itdoesn't do much for existing suppliers whoalready have contracts in U.S. dollars, hesaid.

"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 turnit into a positive," he said.

What Ford's CEOfearswill 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 asa Conservative, he was frustrated by the previous government's lack of focuson his industry.

It's better now, he said Friday, after consulting withgovernment officials at Toronto'sauto show.

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

His suggestion? Land a newplant.The rest will come.

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

Businesses like Azzopardi'srely 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 incentiveslike Fordis lobbying for,helptoo, Azzopardisaid. But ultimately thesearejust 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 besetting 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'snot part of the TPP (yet), both Volpe and Azzopardi think Canadashould pursue a strategic resources-for-auto investmentdeal with China's state-owned industry.

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

"[The Chinese] aregoing to have to put a plant in North America," Volpe said. "Ifthey want yourpetroleum and potash, then make the deal now."

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