Volume 36 Issue Supplement 1, April 2010, pp. S1-S29

In the 1980s, the Canadian automotive manufacturing industry grew from three significant players to eight, growth that was facilitated by public policy schemes that were bold, calculating, and provocative. The decision to introduce direct incentives was pivotal, generating anxiety at both the federal and provincial levels. However, the evolution of a series of additional policy tools, each holding tangible value, proved just as important. These included waiving Auto Pact liabilities, the introduction of targeted duty remission plans, adjustments to Voluntary Export Restraints, and manipulations of the Foreign Investment Review Agency. These elements were under the management of Canada's federal government, making it a far more active participant in automotive foreign direct investment (FDI) attraction than its US equivalent. While some observers believe that the approach that public policy-makers brought to automotive FDI attraction during the period this article explores might hold lessons for present day practitioners, the reality is that the evolution of global governance structures precludes access to many of the tools that were deployed with such effect in the 1980s. Despite the subsequent changes, the relevance of coherent, well-timed industrial policy endures.

Durant les années 1980, le nombre d'acteurs majeurs dans l'industrie manufacturière automobile canadienne est passé de trois à huit; cette croissance a été facilitée par des cadres de politiques publiques énergiques, habiles et stimulants. La mise en place d'incitatifs directs a été une décision cruciale, qui a provoqué de l'inquiétude aux niveaux fédéral et provincial. Toutefois, l'utilisation d'une série d'outils, ayant chacun une valeur réelle, s'est avérée tout aussi importante : ce sont, par exemple, la non-récupération de certaines dettes liées au Pacte de l'automobile, la mise en place de programmes ciblés de remise de droits de douane, des ajustements à l'Accord d'autolimitation des exportations, et des manipulations de l'Agence d'examen de l'investissement étranger. Tous ces outils étaient gérés par le gouvernement fédéral canadien, qui jouait ainsi un ro○le beaucoup plus actif que son équivalent américain pour attirer l'investissement automobile direct étranger. Certains observateurs croient que l'on pourrait aujourd'hui tirer des leçons de cette approche utilisée par les décideurs politiques pour attirer l'investissement automobile direct étranger; mais la réalité a évolué, et les structures de gouvernance mondiales empe○chent maintenant le recours à plusieurs des mesures appliquées à cette époque. Cependant, malgré ces changements, la nécessité d'une politique industrielle cohérente et adaptée à la période actuelle reste toujours pertinente.

From the outset, public policy practitioners have recognized the profound and positive role that automotive manufacturing can play in advancing a nation's aspirations. Indeed, Canadians have proven particularly adept, producing more vehicles than they have purchased every year since 1965. Today, despite the challenges confronting the Canadian automotive industry, approximately 120,000 Canadians remain directly employed in the assembly of vehicles or the manufacture of parts and components.

The origins of Canada's success in automotive manufacturing can be traced to the accretion of public policy levers dating as far back as the National Policy of the 1870s, which introduced a high tariff regime that shielded the industry during its earliest years. The Canada-US Auto Pact of 1965 is considered a landmark in automotive policy; although the World Trade Organization (WTO) struck it down in 1999, its influence persists. The Auto Pact's lingering effect has been to solidify a continental automotive industry (Anastakis 2005; Molot 1993) and position Canada as a relatively low-cost manufacturing alternative within it.

But the Auto Pact by no means represents the only significant example of the adeptness with which Canadian automotive policy-makers have approached their craft. In fact, this paper will demonstrate that it was during the 1980s when Canadian public policy practitioners appeared to have been most adroit, simultaneously seeking to extend Canada's low-cost position within a North American framework while widening the industry's base beyond the traditional North American-owned actors. Ultimately, Canada earned offshore-owned foreign direct investment (FDI) disproportionate to the size of the Canadian market, doing so in the face of stiff competition and strong international and domestic opposition.

At the start of the 1980s, final assembly production in Canada was dominated by the US-controlled Detroit Three: General Motors, Ford, and Chrysler. This article will demonstrate that the incumbents, including the automakers and the labour force, were anxious to maintain their position, drawing from a mix of intimidation, reason, and bluster to impede the competitiveness of any potential threat. Regardless, by the end of the decade five new final assembly plants had been attracted to Canada: Honda, AMC-Renault, Toyota, Hyundai, and CAMI, a conversion that has had a lingering and strengthening effect on the Canadian industry. For example, the four plants that remain in operation (the Hyundai plant closed in 1993) produced 1,002,160 vehicles in 2008, 49 percent of the total number of vehicles produced in Canada that year.

This paper will describe the range of tools devised and the skill with which they were exploited to support the transformation that occurred. It includes an examination of the intrigue associated with the introduction of direct, cash-oriented incentives and the evolution of various unique-to-Canada tools and techniques, referred to here as near cash elements. The term near cash is used because a dollar value was not assigned to these features when the projects were announced, but only to the direct cash incentives. These near cash levers included a series of duty remission schemes, Auto Pact liability waivers, manipulations of the Foreign Investment Review Agency (FIRA), and adjustments to a system of import ceilings known as Voluntary Export Restraints. The development and negotiation of each near cash tool was under the purview of the Canadian federal government. However, in many ways the equivalent financial impact of these tools has been overlooked, despite the fact these levers did have tangible value—an amount this article estimates was in excess of $350 million. Had the Canadian federal government adopted a more detached approach, in other words, one similar to that of the US federal government, such near cash tools would have been unavailable and it is possible that, in the end, significantly less impressive results would have been achieved. This article will reveal that direct cash incentives played a role in four of the five new vehicle assembly plants built in Canada in the 1980s, but near cash elements emerged in all. A more detailed case study will be provided for one: AMC-Renault. This case is particularly instructive because government involvement in it demonstrates first, how intra- and intergovernmental discussions ensued regarding direct cash incentives, and second, how the government of Canada simultaneously exploited several near cash tools to effect the desired outcome.

The research for this paper draws from a diversity of secondary sources, but a key feature is its reliance on primary sources, specifically, oral histories and government archives. For example, one-time industry actors were located and interviewed. They were generous with their time, interested in the material, and eager to share their story. Participant interviews at this stage—more than 20 years on—allowed for deeper exploration of the motivations and pressures they experienced. Although media sources were consulted, reliance on media and other secondary accounts from the period would not have facilitated understanding of these aspects. Further, had this research been conducted in closer temporal proximity to the actual events, participants would have been restricted in their ability to acknowledge fully the rationale for taking the positions they did as doing so would have exposed their intentions and potentially jeopardized their strategies. The separation of time also afforded participants the opportunity to more freely consider and critique their own actions as well as those of others.

Archival sources from the archives of the Government of Canada and the Province of Ontario were also accessed. Various briefing notes, notes to file, correspondence, and meeting minutes facilitated understanding of processes and personalities—and the conflicts, strategies, and debates—incumbent in policy development and political posturing. These documents also provided an inventory of key actors, many of whom were eventually interviewed. Differences between public pronouncements (such as those that might appear in media) and the true motivations of actors come to life when archival material and oral histories are triangulated with secondary sources.

In the current environment, where the Canadian automotive industry struggles to redefine its station, some may conclude that the tactics adopted and the tools deployed during the period this paper explores offer renewed relevance for policy-makers. The reality is, however, that the subsequent evolution of global governance structures and expectations precludes access to the full range of tools that were developed and exploited in the 1980s. But despite the attitudinal and structural adjustments that have evolved, overriding lessons about the importance of coherent, well-timed industrial policy do come into view. The words of David Girvin (2005), a senior government official in the 1980s, capture the essence of the time and the challenges of the present: “A window existed—part of which we created, part of which was just there—and we took full advantage of it.”

By the second half of the 1970s, Canadian policy-makers had concluded that the boost to the industry resulting from the Auto Pact of 1965 had begun to wane. Even so, it was with more than a little trepidation that Canada embarked on the path of offering investment incentives to elevate foreign direct investment. How would the United States respond? How would one-off incentives to individual companies align with the overriding goals of the government? Would direct cash incentives actually work?

Subsequent research has sought to answer some of those questions, often with conflicting results. For example, even though the practice of incentivization has become so prevalent it has been described as “essential” for those entering the arena of automotive FDI attraction (Canadian Automotive Partnership Council 2004), others rank such features as low on the list of factors influencing investment decisions (Rondinelli and Burpitt 2000). But apart from their effect on decision making, the fact is the price of incentives can be steep, sometimes outweighing the economic and social benefits that flow (Blomstrom and Kokko 2003; Spindler 1994). And because such bidding wars can distort the efficient allocation of resources, a global regime to constrain them may be necessary (Nov 2006; Organisation for Economic Co-operation and Development 1998; Raines 2000). Meanwhile, some argue that such inducements are entirely unnecessary. For example, Yu and Ito's (1988) study of the US tire industry reveals that, generally speaking, foreign firms simply match the leader's investments in foreign jurisdictions, thus calling into question the value of national governments engaging in programs to incentivize FDI following the leader's initial foray. Similarly, although he argues in favour of incentives, Stanford (2006) acknowledges that their impact can be overstated, arguing that the value of a subsidy, at least in the automotive sector, “is not that it creates jobs (since most Canadians will find work in any event), but rather that it creates good jobs.” Others argue, however, that as long as foreign companies are more productive than domestic, support from government for FDI is warranted (Chung 2001; Harris and Robinson 2003; Javorcik 2004).1 Regardless of the research that has subsequently emerged, during the late 1970s and early 1980s the practice of incentivizing FDI was relatively new territory for Canadian policy-makers. The paragraphs that follow portray the struggles, challenges, and debates that ensued within governments when the notion of introducing direct incentives was still quite unfamiliar.

The debate in Canada can be traced to September 1976 when Volkswagen was enticed to build an assembly plant in Pennsylvania with a financial package worth US$51.7 million. Shortly thereafter, Ohio secured a Ford transmission plant with an incentive of US$45.2 million. Significantly, neither deal directly involved the US federal government. Both schemes were supported exclusively by state and local governments.

In Canada, anxiety about this new trend was articulated in a 1977 Ontario government cabinet paper. Concerns included the direct costs, sensitivities surrounding the use of taxpayer funds to assist foreign companies, and “the maturity of the [automotive] industry and the likelihood of a relative decline in its importance in the long term” (Ministry of Industry and Tourism 1977, 44). An intense debate ensued within government about the role of the public sector in industrial strategy. One side, which included Treasurer Darcy McKeough, railed against any form of intervention, instead supporting tariff reductions under the Tokyo round of the General Agreement on Tariffs and Trade (GATT). Brock Smith, an official with the Ministry of Industry and Tourism (MIT), described McKeough's attitude in a 1980 internal government document: “If our gang was to slug it out with the big boys of international commerce, there was no room for losers.” He observed, “McKeough's unequivocal embrace of the free trade option clearly threatened MIT's clientele and it undermined the whole notion of a government department geared to the care and feeding of industry” (MIT 1980, 15). The other camp was led by cabinet secretary Jim Fleck. Brock Smith's assessment of this group's position was: “With a limited amount of new investment to go around, governments simply had to ante up … climate was simply not enough” (MIT 1980, 19).

The debate in Ontario intensified in early 1978. It was then that, according to David Girvin and Michael Dube, who were then officials of the Ontario government, that Ford of Canada president Roy Bennett revealed to the province that Ford had been offered large incentives to build a new engine plant in the United States. Meanwhile, Ford of Canada convinced company chairman Henry Ford II that without further investment in Canada the company was in danger of missing its Auto Pact commitments (Weaver 1988).2 Bennett believed, however, that with a big government effort he might be able to persuade the Ford board to build in Canada, specifically in Essex County near Windsor, Ontario. Michael Dube recalls,

When he came to us, we were not dressed up to do these kinds of deals. We had the ODC [Ontario Development Corporation] only, which were lenders of last resort. We were not used to doing big stuff like what Ford was proposing and all of a sudden we got a positive client, not one who was on a deathbed. (Dube 2004)

Meanwhile, Bennett's revelation prompted further debate in Canadian federal circles. The federal government recognized that action was necessary, but that the consequences were unpredictable. A briefing note from 1978 for federal ministers warned that US interests might call for countervailing duties on imports. However, the same document advised that if it could be shown that the Canadian incentives did no more than offset those offered by American states and municipalities, no injury would be found and no duties could be assessed (Canada 1978a, 1 and 2).

Despite the anxiety over international reaction, the federal government was determined to proceed, and in late June 1978 it shared with the Ontario government the extent to which it was prepared to support the Ford proposal. Ontario Industry Minister John Rhodes telexed federal Industry Minister Jack Horner on 29 June 1978 stating, “the Ontario Government is extremely concerned about the possible loss to Canada of 2,600 potential new jobs … if our respective governments do not act promptly” (Canada 1978b, 1). Horner responded by acknowledging that the federal government had offered Ford a $30 million inducement four months previously (Canada 1978c, 1). Within days, the two sides put together an incentive package worth $68 million, with the federal government providing $40 million and Ontario $28 million.

Once that milestone decision had been made, sensitivities around US reactions intensified. Canada and the United States had previously agreed to consult closely with each other on any measures taken with respect to the automotive sector. However, rather than consulting with US federal officials, Horner's office was advised by the Canadian embassy in Washington to desist:

Premature passing of details to him [Assistant Secretary of State, Julius Katz] may make him feel obliged to take action or leave him open to domestic criticism if he does not move. Best time might be in conjunction with meeting of USA Board of Directors of Ford next week, either just before or at the same time. (Canada 1978d, 1)

In other words, the advice was to defer contacting the US administration until the deal was signed and sealed.

Once they had secured one large-scale investment, officials were eager to obtain more. Ontario Premier Bill Davis followed up with a letter to Prime Minister Trudeau in July 1978 recommending further collaborative ventures: “I had hoped that it would not be necessary to become involved in any ‘bidding war’ with states … On the other hand … Canada could be overlooked unless some incentives or offsets to supposed financial disadvantages are employed” (Canada 1978e, 4). However, the capacity of the federal government to positively engage was tested when the US administration reacted to the Ford deal in the way many Canadian officials had feared. Assistant treasury secretary Fred Bergsten and assistant secretary of state Julius Katz were dispatched to Ottawa to protest (Wall Street Journal 1978). A series of bilateral meetings were held, and at a meeting in Washington on 22 September 1978 the US side proposed that company-specific, tailor-made incentive packages should be avoided, suggesting that any support that governments might extend to private corporations should be limited to infrastructure and support in designated geographic areas only. It was also acknowledged that the discussion could, at some future point, be extended to a multilateral forum (Canada 1978f, 5).

In the midst of these discussions, Simon Reisman, the original architect of the 1965 Auto Pact, released his Royal Commission report on the automotive industry. Commissioner Reisman (1978, 245) supported the American position, concluding that “ad hoc grants to auto manufacturers to locate in prime industrial areas seriously undermine Canada's regional development objectives.” However, despite US pressure and Reisman's admonition, Canadian governments held firm. Ontario's position, expressed in a briefing note dealing with the Reisman report, was that “financial incentives do not necessarily conflict with regional development activities. A moderate incentive to neutralize or offset incentives offered by competing jurisdictions outside of Canada may be needed from time to time” (MIT 1979, 2). Likewise, the Government of Canada was undeterred. A briefing note of March 1979 to the Assistant Deputy Minister of Industry, A.M. Guerin, affirmed:

The government will not stand by and see investment lost to Canada because of subsidies available in the US … Special federal government assistance will be considered in those cases which do not meet the criteria of existing federal government programs … when the project would otherwise be lost to Canada. (Canada 1979a, 2)

Eventually, the cross-border tensions prompted by the Ford Essex package were eased by the shock wave caused by the second oil crisis in 1979. The challenges confounding the North American automotive industry were most acute at Chrysler. As the company teetered on the brink of bankruptcy, the resolve of the US federal government to avoid support for individual companies dissolved. For the first time, the US federal government became directly involved. A complex multijurisdiction package was constructed providing the wherewithal for Chrysler to survive. After the 1981 bailout of that company, no longer would governments in Canada feel inhibited about inserting themselves into negotiations if their involvement could bolster FDI. Further, no longer could the US federal government wave the stick of non-intervention at the Government of Canada.

However, even as ideological resistance to intervention melted away, prospects for significant FDI in Canada from outside the United States remained a distant prospect. In the highly politicized atmosphere that characterized automotive policy-setting in the early 1980s—a period of declining sales, rising imports, and reduced production by the Detroit Three—Canada seemed an unlikely point of entry into North America for overseas automotive companies, and the country was effectively sidelined. Offshore-based companies consistently announced investments in the United States prior to venturing north of the border. These included Honda,3 Nissan,4 Mazda,5 and Toyota.6 But once traction had been gained in the United States, Canada was the next port of call, and the groundwork prepared starting in the late 1970s was ready to yield dividends. Fresh opportunities did not emerge for six years after the Ford intervention and four years after the rescue of Chrysler, but the scene had been set for a major policy departure. To get there, Canadian governments had taken a hard policy turn, enabled in part by deliberately misleading their Auto Pact partner. However, they were now ready to emerge as active and generous supporters of automotive FDI.

Even though the size of the direct, cash-oriented incentives that governments in Canada extended to automotive investors were large,7 the full depth of involvement by Canadian authorities has been underreported, a result of the different roles the federal government played in Canada vis-à-vis the United States. There, with the exception of the Chrysler deal, direct negotiations with potential investors were left to individual states and municipalities, which typically offered cash inducements to investors in the form of loan guarantees, municipal bonds, grants, and local property tax deferrals. These are forms of assistance to which a present financial value may be assigned.8 Meanwhile, the Province of Ontario mandated a different approach, because the Ontario Municipal Act prohibited local government from providing any form of direct assistance to industrial or commercial enterprises. As a result, the Province of Ontario and the Government of Canada became the principal actors. Indeed, the federal government's involvement was critical. Certainly, because of the policy turn it adopted in the late 1970s, the federal government assisted with direct, cash-oriented incentives. However, the distinguishing characteristic of the Canadian approach was that the federal government was fully prepared to introduce and exploit additional non-cash policy levers. During the 1970s and 1980s, Dennis DesRosiers worked with both the Province of Ontario and the Automotive Parts Manufacturers' Association (APMA). He refers to these inducements as “near cash.” In discussing the role of the federal government, he explains what near cash meant in attracting automotive investment to Canada vis-à-vis the direct cash incentives offered by American states and municipalities:

We never played that game through the '70s, '80's and '90s with cash; we played it with near cash.… We always had these other tools that we were able to use that were cash equivalents. We can't give you the $100 million or $200 million, but here's what we can do for you. (DesRosiers 2004).

One of the near cash weapons in the Canadian federal government's automotive investment attraction arsenal was an expanded duty remission scheme. Initially designed to assist parts makers make global sales, it was later adapted to become a primary tool in efforts to lure offshore-based assemblers to Canada. By the late 1970s, the Canadian government had in place a General Remission Order. If, for example, a part was exported to Japan and it eventually found its way back into Canada in a completed vehicle, the remission order allowed the importer of the vehicle to receive a rebate equal to the duty value of the part. However, because Canadian parts makers sold virtually nothing to Japanese carmakers, the General Remission Order was almost meaningless. The APMA was anxious to see an expansion of the program and suggested the manufacturer should receive a reduction in value for duty on vehicles imported into Canada to the full extent of that company's purchases of Canadian-made original equipment, not just on imported vehicles incorporating Canadian-made parts. Former APMA president Pat Lavelle (2004) recalls,

We were trying to encourage the growth of the domestic parts industry whichever way we could … but we didn't have any vehicle really to encourage or to incentivize anybody outside the country to buy parts from Canada. That was the difficulty … so remission orders were seen as a way that that could be done.

Lavelle (2004) recalls receiving a less than enthusiastic initial response from the federal government: “Everything was a tough sell with the federal government because the so-called domestic producers were consistently negative on doing anything that would alter their preferred position in the Canadian market.” Indeed, a cabinet document of 1977 from the Province of Ontario warned that an expanded remission plan would make “imports of assembled vehicles more competitive with our own production” (MIT 1977, 28). Despite its reservations, the Province of Ontario eventually backed the proposal, and consistent with his anti-tariff convictions, the minister of Treasury, Economics and Intergovernmental Affairs, Darcy McKeough, became the strongest advocate. The turning point came when McKeough caught the attention of his federal counterpart, finance minister Donald Macdonald. In February 1977, not long after Volkswagen had announced its intention to build a 200,000 capacity assembly facility in Pennsylvania, McKeough wrote to Macdonald recommending “the Canadian government should approach Volkswagen with some firm proposals … to see if they are interested in rationalizing their vehicle market and parts production in North America.” He specifically recommended that “expanding the Duty Remission Order would be an excellent first step towards obtaining a share of this market” (Canada 1977a, 2). McKeough's overture prompted a positive response from Macdonald, who asked his colleague, then federal Industry minister Jean Chretien, to investigate further. In June 1977, Chretien reported to Macdonald that his officials had met with Volkswagen and were “seeking to develop, in detail, a tariff remission program along the lines of that suggested by the Automotive Parts Manufacturers' Association” (Canada 1977b, 1).

The new program was ready for implementation in January 1978. Remission orders were to be negotiated with individual companies and reflective of the unique circumstances of those companies. However, initial enrolment was low and by early 1979, a full year after the federal Cabinet had approved the program, most companies had yet to gain expanded remission agreements. Nissan and Toyota, for example, argued that the minimum threshold levels sought by government were too high (Canada 1979b). In the case of Toyota, Industry Department officials suggested a tiered program that required a minimum Canadian Value Added (CVA) of $4.7 million before any duties would be remitted at all, and then only at a rate of 25 percent of the paid amount, climbing to 75 percent when the CVA reached 12 percent of sales, which in 1978 were anticipated to be $14.1 million (Canada 1978g, 1). Toyota was reluctant to accept the proposal, explaining that the process of qualifying new suppliers was slow and that adjusting relationships with existing Japanese suppliers would be difficult.

As late as December 1980, only Volkswagen had taken full advantage of the scheme, purchasing $80 million worth of Canadian parts in that year. Nissan and Honda eventually signed on, but purchased just $6.7 million from Canadian producers in 1980, equal to just 1.5 percent of the value of their sales in Canada that year (MIT 1981a, 4).

In spite of the modest take-up rate, the North American assemblers were highly critical. In March 1980, GM Canada president Alan Smith charged: “It is an unnecessary program. It provides favourable treatment to overseas manufacturers and thus provides a competitive advantage, without any obligation to invest in Canada as a condition of the program” (Romain 1980). In fact, some claimed the program actually discouraged Canadian investment. For example, shortly after Volkswagen announced its intention to build a second assembly plant in the United States in 1980,9 the Canadian Motor Vehicle Manufacturers' Association (CVMA) president, James Dykes, speculated that Canada's duty remission program could have been a factor in that plant not coming to Canada. His rationale was that, through duty remission, offshore-based carmakers could gain many of the benefits of tariff reduction without making the same production guarantees to which Auto Pact members had to commit (Cheveldayoff 1980).

The aggravation of the US-owned automakers over the expanded remission program was soon transmitted to US policy-makers. The US administration's agitation coincided with discussions initiated by the new Canadian Industry, Trade and Commerce minister, Herb Gray. Gray's Liberal Party had vowed during the 1980 election campaign to reopen the Auto Pact, an option the original 1965 agreement had afforded. Thus, Canada was offering the United States and its automakers a forum to elevate the issue. US Special Trade Representative Reuben Askew first raised concerns about duty remissions during a meeting with Minister Gray in Ottawa in April 1980, and further representations were made in Washington in June. The Ontario Ministry of Treasury, Economics and Intergovernmental Affairs was also quietly concerned about the scheme, as a June 1980 briefing note observed: “The Tokyo Round … includes a flat prohibition on export subsidies on all non-primary products, while production subsidies are permitted provided that the governments using them ‘seek to avoid’ causing injury to other countries” (Ministry of Treasury, Economics and Intergovernmental Affairs 1980, 3). Reflecting on the Canadian situation more than two decades later, Japan Automobile Manufacturers Association of Canada executive director David Worts (2004) mused, “At what point do they cross the line? When do they stop being simply export-based remission programs and when do they become actual subsidies?” A memorandum issued in 1981 to Ontario Industry minister Larry Grossman by Rodney Grey, a former Canadian negotiator during the Tokyo Round of GATT, was less ambiguous: “The duty remission scheme is an export subsidy which we long ago agreed to prohibit under the GATT, and reaffirmed in the Tokyo Round” (MIT 1981b, 6). In addition to potential problems with GATT, policy-makers were also cognizant of the fact that under Section 301 of the 1974 US Trade Act, the US government could challenge any policy of a foreign government that resulted in a reduction in US exports (Ministry of Industry and Trade 1983a, 4).

Eventually, though, an industry-wide recession effectively shifted attention from cross-border trade irritations to more global concerns and threats. Canadian policy-makers abandoned any attempt to review the Auto Pact, and US opposition to the duty remission program effectively subsided under the weight of the pressures confounding the North American auto industry in the early 1980s. For the next few years, rather than tussling with each other over obscure trade policy rules, policy-makers on both sides of the border were fixed on combatting the challenges of offshore imports. In fact, in 1981 both countries invoked parallel restraints on Japanese automotive imports.10 In this environment, Canada was able to maintain, and then broaden, its duty remission program without serious objections from the United States. John Tennant, who was in the Canadian embassy in Tokyo at the time, recalls: “Public servants were able to devise quite creative ways in which the duty remissions could be aligned to work for the companies … All of this occurred in an environment where there wasn't a lot of political scrutiny by committees in the House of Commons or the public” (Tennant 2004).

By 1984, a first wave of North American manufacturing investment by Japanese automotive firms had committed to US locations, and Canadian policy-makers were shifting their attention to gain a share of subsequent opportunities. To support the evolving initiative, Canada's duty remission scheme would likewise evolve. Two types of benefits emerged. The first was a 70 percent reduction in the duty value of automobile imports for every dollar of CVA in automotive parts exported anywhere in the world. For that, no direct investment in Canada was required. The second benefit was the complete elimination of duties provided a substantial direct investment was made in Canada. This second benefit would be offered on a case-by-case basis and became a common element in each new Canadian manufacturing facility negotiated.11 Later, it will be shown that the value of the new entrants' remission orders was no less than $50 million each.

Similar to its earlier expansion of the General Remission Order in the late 1970s, Canada's even broader remission scheme eventually attracted significant opposition from policy-makers south of the border. The opposition peaked in 1986–87 during the run-up to the Canada-US free trade agreement. John Tennant (2004) recalls,

When it came down to the free trade negotiations, the US clearly had an agenda to do away with the duty remission schemes. As long as the US saw there was a free trade negotiation coming—so long as they saw there would be an opportunity to put remission within the broader context of free trade negotiations—they weren't going to get too preoccupied.… But any time that you are seen as taking undue advantage, of course, the Americans would be unhappy.

The State of Michigan led the outcry, a strategy played out in support of Mazda, which had already invested in that state. Michigan was concerned that Canada's scheme would encourage potential Mazda suppliers to locate in Ontario. Marc Santucci (2005), who headed the state's international investment attraction efforts, recalls:

We in Michigan felt it was very likely that … because we were the closest industrial auto-parts-producing state to Ontario, where the Canadian industry is located, that we were going to be the most significantly affected. We thought our supplier base would be impacted by what was going on in Ontario, much more so than anyone who was in Kentucky or North Carolina.

The US opposition eventually aligned a variety of powerful US interests. Foremost among them were Michigan congressman John Dingell, Michigan governor James Blanchard, and US Trade representative Clayton Yeutter. Yeutter charged that the program was inconsistent with the objectives of the Auto Pact; specifically Article I c, which committed both countries to “the development of conditions in which market forces may operate effectively to attain the most economic pattern of investment, production and trade” (San Francisco Chronicle 1986). It was also disclosed that Yeutter's staff were advising that the practice appeared to be an export subsidy, a position subsequently endorsed and pursued by House Banking Subcommittee chairman John LaFalce:

These schemes are currently being used as investment incentives by the Canadian government with non-Auto Pact countries such as Japan and Korea and are eroding the benefits of pact membership for US firms. In addition, they may be encouraging auto parts suppliers to locate in Canada and encouraging Japanese plants in the US to source their parts from Canada. (Benac 1986)

Meanwhile, in Canada, the North American-owned manufacturers had also renewed their fight against duty remission. The CVMA's Norm Clark (1986), for example, warned: “Duty remission will be viewed by the US as a subsidy and therefore subject to countervail duty.” But despite the threats, Canadian policy-makers remained determined to maintain their advantage. In September 1986, Ontario Premier Peterson wrote Canadian Prime Minister Mulroney imploring him to join the fray:

Action should be taken now to counter this threat to Canada's automotive policies and programs … the duty remission programs are the only mechanisms which currently exist to enable and encourage foreign manufacturers to buy Canadian-made parts in Canada … they do not take existing business away from United States companies and they do not provide a subsidy for those who wish to export from Canada to the United States. (Ministry of Industry, Trade and Technology 1986, 1-2)

Several months later, Prime Minister Mulroney responded, assuring Premier Peterson that he shared his concerns. He acknowledged that duty remission and related issues would be discussed as part of the free trade negotiations, “given the interest the US side has expressed in these issues,” but he also requested the support of Ontario:

One of the key objectives of our trade negotiations with the United States is to gain relief from the harassment we have experienced.… Canadians speaking with one voice for an agreement that disciplines our bilateral trade and commerce will be more effective in securing the real solution against US protectionism. (Ministry of Industry, Trade and Technology 1987a, 2)

The Michigan-led offensive persisted throughout the period leading to the agreement reached in October 1987 on Canada-US free trade. In September of that year, as the negotiations were reaching their climax, Michigan governor Blanchard orchestrated the governors of seven mid-west states to collectively urge the US government to overhaul the Auto Pact, including removing the Canadian safeguards, limiting Auto Pact benefits to US-owned manufacturers only, and eliminating Canada's duty remission program. The fact that one of the outcomes of the 1987 agreement was the eventual elimination of duty remission was to many observers inevitable.12 “If it wasn't removed in the free trade agreement, duty remission almost definitely would have been the subject of a US trade action,” reflected Julius Katz, former Carter administration Assistant Secretary of State (Gherson 1987).

It was only after the duty remission program's cancellation was announced that Slawek Skorupinski, then director of the automotive branch of the Canadian Department of Industry, revealed an estimate of its actual value. He forecast that by the time the program died in 1996, Honda, Toyota, and Hyundai would have gained benefits of $227 million (Hallman 1989). Based on production estimates available to Skorupinski in 1989 when his assessment was offered, it can be calculated that the duty remissions were worth $140.12 per vehicle (see Table 1).

Based on an average per vehicle sales price in 1990 of $16,863 (Statistics Canada n.d., CANSIM Table 079-0002), duty remission can be estimated to have had a value of less than 1 percent of the value of each vehicle. It should be noted, however, that this amount was not inconsequential to manufacturers. Perspective is gained by placing the program in the context of value added. In 1990, value added in final assembly in Canada was $4.7 billion (Statistics Canada n.d., CANSIM Table 379-0001), and total vehicle production in the country was 1.95 million. Therefore, value added per vehicle in 1990 can be estimated as $2,410 per vehicle. On that basis Canada's duty remission program could be estimated to have had a value equivalent to 5.8 percent of final assembly value added—far from inconsequential.

The evolution of Canada's duty remission program, like the introduction of direct incentives, demonstrates how Canada's policy-makers introduced, then adjusted, tools to support the investment attraction and retention process. However, a third tool, one that was originally conceived and subsequently perceived as a tool to scrutinize, control, and effectively impede FDI, was used with opposite effect. That tool was Canada's Foreign Investment Review Agency (FIRA). Like duty remission and direct incentives, FIRA would emerge as a key tool in Canada's automotive FDI attraction effort. And like duty remission and cash incentives, its use demonstrates the level of resolve with which the era's policy-makers exercised their craft: resistant to the warnings of influential domestic actors and ambivalent to conventions of global governance.

Concerns over the challenge to Canadian economic sovereignty posed by American firms became the subject of two formal inquiries in the late 1960s and early 1970s (Canada. Task Force on the Structure of Canadian Industry 1968; Gray 1972). In the second report, then backbench Liberal Member of Parliament Herb Gray recommended a monitoring agency to review the FDI process, a proposal that ultimately led to the creation of FIRA in 1974.

FIRA has long been regarded as a mechanism for turning away potential foreign investors in order to reduce the influence of foreign interests over the Canadian economy. However, it is suggested here that, insofar as the Canadian automotive industry's expansion during the 1980s is concerned, FIRA was a positive force. The explanation is related to Section 2(1) of FIRA's enabling legislation, which restricts foreign corporations' participation in Canada unless government determined it would provide a “significant benefit to Canada.” This section will describe how this phrase was levered to encourage automotive FDI. Following that, a case study will reveal how FIRA, in conjunction with other tools at governments' disposal, was utilized. Before that, however, it is necessary to share the more conventional thinking on FIRA.

Throughout FIRA's 11-year existence, what constituted a so-called significant benefit was never explicitly specified. The federal government, however, learned to take advantage of the ambiguity. In a background note to its foreign missions, the government defended its imprecision:

The great diversity of industries, investors and regions involved means that no two investment proposals are the same or lend themselves to precisely the same treatment. The application of the assessment criteria is thus flexible in that the weight attached to each of the criteria depends on the nature of the investment proposal. (MIT 1981c, 3)

The Province of Ontario, in which about 40 percent of the approximately 800 FIRA applications made each year were located, on several occasions raised concerns over administrative ambiguity, including issues relating to a lack of consistent treatment across industries and provinces, and variations in the speed and depth with which assessments were conducted (Ministry of Treasury and Economics 1981, 2-4). International investors and their home countries shared these concerns. Because of its proximity, the United States was particularly aggrieved, charging that FIRA's procedures were in conflict with the provisions of the GATT. The imposition of requirements on foreign investors was said to give an unfair advantage to domestic producers (MIT 1982a, 2).

Canada could rightfully respond to criticisms of FIRA by pointing out that 93 percent of all applications were eventually approved. However, as Globerman and Shapiro (1999) noted, the rejection rate of 7 percent was a lower bound estimate of the deterrent effect of FIRA on FDI. Ontario Minister of Treasury and Economics Frank Miller expressed similar concerns during a speech about FIRA in 1981:

Regulation can lead to unforeseen consequences and FIRA, in my view, may have inadvertently withdrawn a powerful incentive to create a new business.… It is indicative of a temptation that government far too often succumbs to – over regulating: the feeling that if only we have legislation, then an agency, and finally, a bureaucracy, we will be able to control this awful thing called foreign ownership. (MIT 1981d, 5)

Over the years, antipathy to FIRA grew. One of the most common criticisms was that the agency limited foreign investment and hence economic growth (Crookell 1983; Rugman 1983, 1990). Indeed, the new Progressive Conservative government of Prime Minister Brian Mulroney justified its replacement of FIRA in 1985 with a new agency known as Investment Canada largely on the grounds that FIRA impaired much-needed FDI. However, insofar as the automotive industry is concerned, this research rejects such claims. The antipathy of academic critics and the statistical evidence brought forward (Globerman and Shapiro 1999) has masked what was happening behind the scenes. Deigan (1991) reminds us that successive ministers consistently utilized the legislation to exact requirements from investors and potential investors that in the words of the legislation represented a “significant benefit to Canada.” Before a case could be disallowed, an applicant had a number of options. One was to withdraw. Alternatively, the applicant might accept undertakings to satisfy government aspirations. Herb Gray (2004), who crafted the original report which led to the creation of FIRA in 1974, observes: “The idea was never to ban investment; it was to get a better deal and in effect prevent takeovers resulting in the Canadian entities being reduced to warehouses … so a better deal was involved in such things as R&D and head offices.”

The proposition offered here is that FIRA may have been a hurdle for foreign investors, but not a barrier. In fact, as far as the automotive industry is concerned, it served as a positive force in bringing overseas manufacturers to Canada. Those who disparage FIRA overlook the likelihood that some investors would have adjusted their business plans either at the point of their submission to FIRA or during subsequent negotiations with FIRA administrators. Based on Globerman and Shapiro's (1999) contention that FIRA's rejection rate of 7 percent represented prima facie evidence of its discouraging effect, the main question is this: Did the investors who gained approval increase their investment by more than the 7 percent lost by those failing the significant benefit test? That question, of course, is impossible to answer definitively. However, as far as the automotive industry is concerned, there is significant evidence to suggest that had the agency not existed, the largest of the new automotive assembly investments that came to Canada in the 1980s—a $764 million AMC-Renault investment in Bramalea, Ontario—may not have happened. The role of FIRA and other “near cash” and direct cash elements is given emphasis through the case study that follows.

The AMC-Renault investment (now occupied by Chrysler) in Bramalea, Ontario, was announced in June 1984. Its genesis was in 1978 when AMC recognized that the most expedient method of gaining the technological capabilities it required was through an alliance with a strong overseas competitor (American Motors Corporation 1982). AMC entered discussions with Renault in March 1978. In January 1979, Renault took its first equity stake in AMC, and AMC became the exclusive importer and distributor of Renault vehicles in North America. Throughout 1979 and 1980 Renault increased its interest in AMC. A FIRA review was prompted in December 1980 when Renault gained effective control of AMC with 46.4 percent of its common stock. But as the FIRA process commenced, the new AMC-Renault organization became embroiled in a range of added problems related to production, sales, and Auto Pact shortfalls. Ultimately, governments leveraged this situation to manufacture the conditions from which the Bramalea investment emerged.

In the early 1980s, the North American auto industry was under serious threat from the combination of a rising import market share and a sharp drop in overall demand. AMC-Renault had seen its North American sales drop by 32.5 percent between 1979 and 1981 (American Motors Corporation 1982). After earning a profit of US$61.1 million in 1979, the company lost US$200.1 million in 1980 and another US$136.6 million in 1981 (American Motors Corporation 1982). In Canada, AMC-Renault sales dropped from 38,381 in 1979 to 29,710 in 1981 (American Motors Corporation 1982). Meanwhile, production at its only Canadian assembly operation, a small plant in Brampton, Ontario, plunged from 51,598 vehicles in 1979 to 30,043 in 1980 and 20,790 in 1981— in an industry where world-scale plants are generally in the range 250,000 units annually. Falling production in Canada meant that the company failed to meet the Auto Pact's production to sales ratio of 1:1 in both 1980 and 1981, and default meant that the company could be liable to pay tariffs on all vehicles and parts imported into Canada in those years. Furthermore, documents from the Province of Ontario reveal that AMC-Renault anticipated missing its Auto Pact commitments in 1984 and 1985 as well (MIT 1982b, 1).

On top of these Auto Pact challenges, the president of AMC-Renault in the United States, Jose Dedeurwaerder, had become critical of the company's Canadian labour force, a result of the Canadian arm of United Autoworkers' (UAW) resolve to reject the kinds of concessions to which US-based UAW members had succumbed.13 According to Dedeurwaerder, the rigidity of Canadian labour threatened the company's operations in Canada; he charged that it was “difficult to work in Canada [and] … the attitude of the union in Canada is not as constructive as the union in the US” (J. Hunter 1982).

In the early 1980s, therefore, the structural challenges facing AMC-Renault in Canada were considerable. The company operated a small, inefficient plant that was tooled to make vehicles that the North American market was turning against, and it was doing so with a labour force its leadership had labelled inflexible. Meanwhile, although AMC and Renault were operating as a single company, the Government of Canada delayed approval of its FIRA application for endorsement of the 1980 takeover. Further, the FIRA process became tangled with another manifestation of AMC's marketplace woes: Auto Pact insufficiencies.

AMC-Renault managers met with FIRA officials in January 1981 with the intention of discovering what would be necessary to demonstrate “significant benefit to Canada.” Company officials described initial meetings as cold, unfriendly, and disappointing (MIT 1981e, 1-2). According to a company spokesperson, Renault officials consistently thought their agreement to become involved in AMC should have been sufficient to satisfy the regulator: “There would be no AMC Canada if it had not been for Renault's involvement” (N. Hunter 1982). Not surprisingly, such positioning proved insufficient, and by 14 April 1981 the company had reluctantly formulated a detailed set of proposals in return for the agency's approval. These included ensuring continued production in Brampton, providing a North American mandate for two Brampton-made vehicles, promising a new Renault vehicle for Brampton in 1985, committing to maintain operations at the company's CANFAB (Stratford, Ontario) and Holmes Foundry (Sarnia, Ontario) subsidiaries, making pledges as to Canadian hiring and board members, guaranteeing new capital investments totalling $82 million, and building a cold weather testing facility in Ontario (MIT 1981f, 1-5). A response to the proposals from the deputy commissioner of FIRA, J.J. Tennier, provides a glimpse into the motivations and tactics of the agency. In May 1981, Tennier advised AMC Canada president Maurice Fertey to “include as undertakings all the items included in the April 14 draft letter … but, in addition, we would urge you to include any other undertakings/plans which you can identify.” He also suggested both sides should refrain from discussing matters in public (MIT 1981g, 1). After that, media attention regarding the AMC-Renault FIRA application virtually disappeared.

Given the paucity of publicly available information, the steps leading to the AMC-Renault announcement can only be retraced through interviews with participants and the archival record. Ontario Industry ministry documents reveal that AMC-Renault was insistent that its FIRA application and Auto Pact shortfall negotiations be conducted concurrently (Ministry of Industry and Trade 1983b, 1). The company believed it might be at a disadvantage if it allowed the two issues to become separated. For its part, the Canadian government was reluctant to accede to the AMC-Renault request that its Auto Pact commitments should be treated on a rolling multiyear basis for fear of establishing a precedent that would lead to claims from other manufacturers (MIT 1982b, 1). Prior shortfalls by Chrysler Canada and Ford of Canada had been handled after the fact on a quid pro quo basis,14 and the federal government was content to handle the AMC situation in a similar manner. But so committed was AMC-Renault to a prospective agreement on Auto Pact shortfalls that government documents show that in January 1983, when federal Industry minister Ed Lumley signalled his intention to absolve AMC-Renault of its Auto Pact debts because the company had overperformed in 1982, AMC-Renault declined, continuing to insist that its performance be assessed on a controlled five- to six-year moving average basis. The fact that AMC-Renault operated just one assembly facility in Canada with very limited capacity meant that it had virtually no room to manoeuvre. Each time the plant was shut down for a model changeover, it was likely to default on its Auto Pact commitment. Based on the average sales price of new passenger cars and light and heavy duty trucks in 1984 (the year the Bramalea investment decision was announced) of $11,292 (Statistics Canada n.d., CANSIM Table 079-0002), the company's Auto Pact shortfalls could create tariff liabilities of $51 million on imported vehicle sales.15

Therefore, AMC-Renault was seeking from the Government of Canada a release from past Auto Pact shortfalls, some degree of certainty regarding a formula for potential future Auto Pact deficiencies and, through FIRA, assurance that it could operate lawfully in Canada. Meanwhile, even though it was aware of the power it held, the Government of Canada recognized that a lack of flexibility on its part might severely damage AMC-Renault and hasten its exit from Canada. The Government of Ontario anticipated that AMC-Renault might suspend production at Brampton altogether and negotiate a duty remission scheme similar to the one Volkswagen had bargained (Ministry of Industry and Trade 1983b, 2).16

It was not until AMC-Renault saw the need for additional capacity for North American production of a new line of intermediate-sized passenger cars17 that the two parties could be reconciled. Recognizing that an opportunity existed for Canada to secure the new investment, federal Industry minister Ed Lumley (2005) approached AMC-Renault officials directly:

I said, “When you commit yourself to Canada, then I'll consider approving the FIRA application. Now, I hear that you're thinking of building a new plant. It's just a rumour, but I want you to build it in Canada….” In the meantime, Bill [Ontario premier, Bill Davis] said, “You've got to approve it; you can't let them swing.” I said, “Billy, you asked me to negotiate … you gave me free reign to negotiate on your behalf as well as ours. Let me do what I do best.”

Davis was anxious to secure the investment. The plant would be located in his home constituency, and he had been courting Renault for years. Indeed, Pat Lavelle (2004) allows that one of the primary reasons for his appointment as the province's Agent General to Paris in 1980 was to work with Renault. As the negotiations progressed, Davis pressed Lumley to enhance the package to AMC-Renault, suggesting he offer Renault $200 million to seal the investment. Lumley (2005) recalls telling Premier Davis: “Bill, I'm going to get this for $100 million split 50/50 with you and me. Never mind your $200 million, Bill. You don't need to do this.” Lumley was concerned about the precedent a large package might set for other negotiations he was also conducting. As shall be seen, Lumley and his team found other, less visible and potentially more generous ways to entice AMC-Renault.

When the $764 million, 150,000-unit capacity plant was announced in June 1984, government incentives for the Bramalea investment were announced as $121 million, split equally between the federal and provincial governments. The package, however, was not a straightforward grant. Through a royalty payment system, the company agreed to repay the government loan over seven and a half years (Partridge 1984). What the official figures do not reveal, and what has never been disclosed or probed previously, is that the Bramalea investment was also accompanied by assurances that the federal government would forego expectations that AMC-Renault would make good on tariffs owing due to Auto Pact shortfalls in 1980 and 1981, an amount estimated at $68.5 million (see Table 2).

Besides waiving these financial penalties as an inducement to invest, the ongoing saga of the FIRA application ended in approval without fanfare. No connection between FIRA and the Brampton investment has ever been publicly acknowledged. However, exactly one week after the 11 June 1984 announcement, FIRA quietly released a list of 27 investment proposals, 26 of which were accepted, including that of AMC-Renault (Globe and Mail 1984).

Certainly, the direct and publicly announced incentives were important ingredients enticing AMC-Renault to make a substantial commitment to Canada. However, as has been demonstrated, there were other matters at play that make an examination of the transaction of even greater value. These concerned the Canadian federal government's management of a range of indirect, near cash tools that were obscured at the time and have never been exposed since. The AMC-Renault deal was groundbreaking. It reveals how the Government of Canada was far more willing than the US federal government to engage in the FDI attraction process. Near cash tools were used to help secure the government's objectives, making the Canadian investment attraction packages significantly richer than previously disclosed.

There are several reasons why the true value of the incentive packages used to attract automotive FDI to Canada significantly exceeded the publicly announced figures revealed at the time. Foremost was the desire of officials to operate outside the glare of potential US detractors. Any publicity might raise the ire of detractors. Next, both governments and companies wished not to be seen as being overly generous with public funds. Finally, the fact that Canada's federal government was prepared to immerse itself in individual projects meant that many arrangements could be orchestrated without the direct outlay of cash and could therefore operate beyond public scrutiny. These near cash elements were the main source of the discrepancies, and until now the size of the inconsistencies has been unexamined.

When AMC-Renault announced its intention to invest in Bramalea, Ontario, in 1984, the Government of Canada suspended its threat to collect Auto Pact liabilities for the years 1980 and 1981. Outstanding liabilities of approximately $68.5 million were swept away. By 1984, with compound interest for three years at 11 percent, this liability would have grown to $93.7 million. Therefore, even though the royalty payback scheme was generally misrepresented as a grant and was therefore worth less than reported, Table 3 shows the effect of adding the release from AMC-Renault's previous Auto Pact liabilities means that the total package had a value more than $9 million higher than reported when the company announced its decision to invest.

Similarly, as Table 4 indicates, the incentives offered to Hyundai in 1985 were underrepresented by $120.6 million. The main discrepancy related to the estimated cost to government of federal Industry minister Sinclair Stevens' decision to disregard a FIRA commitment made by Hyundai two years prior regarding the export of Canadian goods, the result of the company's decision to invest in a Canadian assembly operation.18

Of course, it is difficult to place an accurate value on the abandonment of the 1983 FIRA provision. However, by considering a range of data, it may be possible to estimate the cost to government of its retreat from the 1983 deal. The formula in Table 5 attaches an annual cost to government by considering the costs associated with its Employment Insurance program. Assuming deficient export sales of $225 million annually, it is estimated that 1,663 direct jobs were lost as a result of abandoning the 1983 deal, which, with a weekly employment insurance payout rate of $154.29 (in 1984), would translate into $13.3 million annually. The discounted cash flow, then, would have a value of $120.6 million using an 11 percent discount rate: the same rate attached to Hyundai's interest-free loan.

In like fashion, the negotiated levels of assistance to Toyota and Honda have previously been understated because no acknowledgement was made of the duty remission schemes granted by the Government of Canada. Present values that might have been forecast at the time of the announcements are reflected in Tables 6 and 7 and demonstrate the incentive packages that accompanied these investments were understated by at least $50 million each.19

The last offshore-based final assembly operation announced during the period came in August 1986 when General Motors and Suzuki announced a $500 million facility in Ingersoll, Ontario. Just before the announcement General Motors threatened to pull out unless Suzuki was allowed to increase its annual export allocation under Canada's Voluntary Export Restraint (VER) program. “It's a deal breaker. It's absolutely essential to the transaction,” declared General Motors of Canada vice president of finance Louis Hughes (Daw 1986). The facility, known as CAMI, was announced only after Japanese authorities decided to provide Suzuki with an export allocation of 20,000 units annually (Berkowitz 1986; Toronto Star 1986), up from 3,000 previously. It is estimated that the profit from the allocation of the 17,000 additional vehicles had a present value of approximately $28.3 million for an indefinite period (see Table 8).

Clearly, the Canadian message to potential automotive manufacturers in the 1980s was amplified by near cash levers. Indeed, based on information available at the time individual projects were announced, their total value was $356.6 million.20 By assigning tangible value to these near cash aspects, the critical role of the Canadian federal government has been brought more sharply into focus.

By tracing the origin and evolution of a variety of systems and schemes employed in the 1970s and 1980s to attract automotive FDI, this investigation has confirmed the essential role of Canadian federal and provincial governments. It has been shown that, in many cases, near cash instruments had greater value than direct cash outlays. These near cash incentives included Auto Pact liability waivers, duty remission plans, VER manoeuvrings, and FIRA manipulations: all under the management of Canada's federal government, making the Canadian federal government far more proactive than its US counterpart in the attraction of automotive FDI. Unlike American states or Canadian provinces, federal governments could attract FDI by a wide variety of means. The fact that the Canadian government was prepared to utilize such tools—and apply them with greater subtlety than the direct incentives offered by municipal, provincial, or state levels of government in either Canada or the United States—proved indispensable. But while these actions certainly helped expand the constituency of the Canadian industry (from three significant manufacturers to as many as eight), the basis for their participation did not alter. The Canadian approach was to extend and leverage its position as the low-cost alternative in a continental structure.

But what are the lessons for present day practitioners? Many of the near cash tools used with such effect in the 1980s no longer exist. For example, Canada's FIRA was dismantled in 1985; by the mid-1980s three Japanese-owned manufacturers had announced major investments in Canada, effectively dissolving the justification for VERs; duty remission disappeared in 1996, a result of the North American Free Trade negotiations of 1987; duties on automotive parts dropped to zero in 1996, a concession for the cost increases arising from the disappearance of duty remission; and the Auto Pact was struck down by the World Trade Organization in 1999.

Current day challenges are compounded by the fact that the continental framework upon which the Canadian industry has evolved is transitioning to a more globalized model. In a global framework, Canada may no longer represent a low-cost alternative. Thus, while many observers may dismiss the Canadian industry's current malaise as cyclical—the result of a short-term reduction in North American sales—it is possible that the weakness has become structural: a function of the declining competitiveness of the Canadian manufacturing base.

Regardless of whether the present challenges are cyclical or structural, some maintain that answers can be found by reverting to policies comparable to those that characterized the period this article has explored. The CAW, for example, advocates “Buy-Canadian” policies and calls for limits on imported vehicles. The reality, however, is that such instruments are considered impractical, having been prohibited by statute, rejected by conventions of global governance, or simply negotiated away. Thus, the industrial policy tools that were created and leveraged in the 1980s cannot be recommissioned in the twenty-first century. So, certainly, the transformation that occurred during that period offers lessons, but those lessons cannot, as some suggest, arise directly from the instruments deployed. Nor does a lesson overtly emerge from the goal that was ultimately pursued—attracting overseas-owned final assembly investment—as vast overcapacity will restrict opportunities in that regard for a significant period. Rather, the message would appear to come from two sources. First, directed industrial policy does indeed have implications and second, those industrial policies may manifest themselves in outcomes that are dramatically different than originally anticipated. In 1978, for example, when Canada's parts makers began advocating for an expanded duty remission scheme to help sell more parts abroad, it is certain that they did not anticipate that the scheme would ultimately evolve to help lure offshore-based assembly investment to Canada. Similarly, when FIRA was established in 1974, primarily as a tool to curb foreign influences on the Canadian economy, its creators certainly did not anticipate that it would eventually be leveraged to increase the inward FDI of manufacturing capacity in Canada.

Notwithstanding the present day limitations on industrial policy, current practices suggest that Canadian automotive policy-makers retain the notion that intervention remains a necessary, viable alternative—an approach consistent with that demonstrated by automotive policy-makers a generation earlier. In that vein, it would appear that Canadian governments are currently pursuing a two-pronged approach, at once both reactive and proactive: one bent on wringing a little more from the old model, and another looking for the next big thing. The reactive, old model aspect is demonstrated in the Canadian governments' unprecedented support to faltering auto companies, an approach based on a desire to maintain Canada's share of North American employment on a company-by-company basis. This represents an extension of Canada's traditional role, one based in the continental approach to automotive policy cemented by the Auto Pact of 1965. For that only direct cash incentive is available. But while squeezing a little more from the long-held and generally successful model may extend traditional, assembly-oriented employment, it does little to support the transition to a higher value-added model. The question, therefore, is this: Is this strategy sustainable in a post-Auto Pact world, an environment where Canada may not represent the relatively low-cost alternative?

If the traditional model does, in fact, prove unsustainable, the second approach—the one seeking the next big thing—might represent a reasonable counterbalance. This approach is evidenced in the Canadian government's extensive funding for automotive-related research, an apparent effort to shake off the Canadian industry's low value-added, cheap labour mould. Peter Frise, leader of a Canadian federal-government-funded automotive research network,21 has acknowledged that “R&D efforts will not fix the industry in the short term … but they are a crucial part of positioning our industry for success in the long term” (Auto21 2009). But despite his caution, one group has set the lofty goal of fuelling the next Research in Motion (Green Automotive Research Cluster 2008). In this vein, no fewer than six federal agencies are dispensing funds for automotive research with hundreds of researchers pursuing dozens of projects.22

Clearly, short-term prospects for the Canadian automotive industry are unsettled. However, as actors seek a path forward, the experience of the 1980s offers parallels with present day methods. First is the role that directed industrial policy has played—and which public policy practitioners are seeking for it to continue to play—in shaping the Canadian automotive industry. The second is a reminder of the unanticipated consequences industrial policy often produces. Will the provision of direct cash support to old line manufacturers lead to a rebirth of those companies and in so doing sustain final assembly employment in Canada disproportionate to Canadian sales, or will other unanticipated outcomes emerge? Will widely spread spending on automotive-related research provide the spark for the next automotive Research in Motion? The way in which the tools of the 1980s evolved and the manner in which they were deployed demonstrates the pivotal role that industrial policy can play in influencing and sometimes advancing a nation's economic self-interest. Can policy-makers find enough space in the current environment to have influence on a similar scale? Will the investments generate positive outcomes or merely prolong the inevitable? These are the preoccupations that will absorb automotive industrial policy-makers in the years ahead.

Notes

1 The cost and productivity gap besieging the North American automotive industry during the early 1980s was well documented (Abernathy, Harbour, and Henn 1981; MacDonald 1980; Perry 1982).

2 The Auto Pact provided for a managed form of sectoral free trade between Canada and the United States. It was to be of unlimited duration, but could be terminated by either the Canadian federal government through an Order in Council or the US Congress on 12 months notice. Under the agreement, which was in place from 1965 to 1999, licensed manufacturers were allowed to import into Canada assembled vehicles and parts for Original Equipment Manufacturers free of duty, provided

  • the ratio of net factory sales value of any class of vehicle produced in Canada to the net factory sales value of vehicles of the same class sold in Canada remained equal to the ratio in the base year of 1964 or 75 percent, whichever was higher; and

  • Canadian in-vehicle value added was at least as great in absolute terms as the Canadian Value Added (CVA) in the base year of 1964. (Note that inflation was not factored into this second safeguard. As a result, this feature became increasingly meaningless over time.)

3 Honda had commenced motorcycle production in Marysville, Ohio, in 1979. Its first North American automotive assembly investment was announced in 1980 and started production in Marysville in November 1982. Between 1977 and 1988, Honda received US$27 million in direct financial incentives from the State of Ohio. Meanwhile, another US$64 million was spent to improve the interstate highway in the Marysville area (Automotive News 2004).

4 In November 1980, Nissan announced the construction of an assembly plant for pick-up trucks in Smyrna, Tennessee. The plant entered production in May 1983 and was supported by a commitment from the State of Tennessee to spend US$40 million on a four-lane expressway to the plant.

5 Mazda entered the North American manufacturing environment in November 1984 with the announcement of a 240,000 vehicle capacity final assembly plant in Flat Rock, Michigan. The plant represented an investment of US$450 million and was scheduled to enter production in September 1987. It was supported by a US$120 million incentive package (Edid, Treece, and Weiner 1985).

6 The announcement of Toyota's first final-assembly facility in Canada was preceded by just one day by the announcement of a 200,000 vehicle capacity plant in Georgetown, Kentucky. The Georgetown plant was supported by state and local incentives valued at between US$125 and $150 million, including land acquisition, site preparation, training, highway improvements, gas lines, and a wastewater facility (Barlett and Steele 1998; Behr 1995; Haywood 1994).

7 Of the major automotive investments announced for Canada in the 1980s, Honda was the only one that did not attract a generous package of direct (i.e., cash) financial incentives. The AMC-Renault announcement, made just a week after the Honda announcement in June 1984, was secured by an incentive package with an announced value of $121 million. When in 1985 Hyundai announced a $300 million investment in Bromont, Quebec, incentives valued at $111.5 million were declared. Likewise, when the Toyota investment in Cambridge, Ontario, was announced later in 1985, a government support package of $50 million was revealed. Finally, the $500 million GM-Suzuki investment (CAMI) announced in August 1986 was seen to have been secured through the issue of a forgivable $45 million government loan and a $40 million training grant.

8 Insofar as the attraction of inward FDI is concerned, the US federal government has avoided direct incentives; instead, it has boasted such benefits as low and predictable taxes, access to the world's largest consumer market, and the existence of transparent legal and political systems. Indeed, until 2007 when the US Department of Commerce launched “Invest in America,” the US policy on inward investment was one of neutrality: neither for nor against inward FDI. Even today, the US federal government remains neutral in any interstate competition for investment.

9 Volkswagen abandoned that plan and plant in 1982, and sold it to Chrysler.

10 As the 1980s began, North American manufacturers were confronting a poisonous combination of slow market growth overall, falling sales for their products in particular, and rising imports. Chrysler, for example, narrowly escaped bankruptcy and was being supported by government loan guarantees. The Big Three saw profits of C$3.5 billion in 1979 turn to losses of more than $6.2 billion over the years 1980 and 1981. Meanwhile, the market share of imported vehicles in the United States climbed from 13 percent in 1970 to more than 25 percent by 1980. Imports from Japan now occupied more than 20 percent of the market. This combination of factors convinced policy-makers in both the United States and Canada to seek restrictions on Japanese vehicle imports. In April 1981, Japanese manufacturers agreed to reduce exports to the United States by 7.7 percent compared with the previous 12-month period. Then, in June 1981, an agreement was struck to cut exports to Canada by 6 percent for a one-year period effective 1 April 1981.

11 The following Remission Orders were reviewed:

Volkswagen: 5 April 1984; revoking the Remission Order of 19 May 1983

Jaguar: 14 March 1985; revoking the Remission Order of 19 August 1981

Mazda: 14 March 1985; revoking the Remission Order of 6 May 1982

Mercedes Benz: 14 March 1985; revoking the Remission Order of 8 February 1980

Nissan: 14 March 1985; revoking the Remission Order of 8 February 1980

Peugeot: 14 March 1985; revoking the Remission Order of 17 March 1983

Subaru: 14 March 1985; revoking the Remission Order of 29 July 1982

Toyota: 14 March 1985; revoking the Remission Order of 19 August 1981

BMW: 14 March 1985; revoking the Remission Order of 8 February 1980

Honda: 13 March 1986; revoking the Remission Order of 14 March 1984

12 The ultimate impact of the Canada-US Free Trade Agreement, then the North American Free Trade Agreement, was the elimination of production- and export-based duty remission programs by 1 January 1996 and 1 January 1998, respectively. To compensate for the loss of these programs, the Government of Canada eliminated duties on automotive parts effective 1 January 1996.

13 During this time frame, the main automakers in the United States, including AMC-Renault, negotiated concessions with the UAW. The Canadian arm of the UAW, however, remained steadfastly opposed to concessions.

14 Chrysler Canada failed to meet the production-to-sales ratio for trucks in 1973, 1974, and 1975. However, rather than pay duties the federal government estimated at $17 million, Chrysler agreed to invest $40 million to construct a new van plant in Windsor, Ontario. Chrysler failed to meet CVA standards again in 1980 and 1981, and $245 million in unpaid duties loomed. However, a report prepared for the Ontario Ministry of Industry, Trade and Technology acknowledged that no serious attempt was made to collect the $245 million owing, because the company was in dire financial straits at the time and would likely have been driven into bankruptcy had it been forced to pay the penalty (Ministry of Industry, Trade and Technology 1987b, 25-26).

15 The annual liability was estimated as follows:

(average vehicle price x annual imported units) x tariff rate

= ($11,292 x 40,000) x 11.4%

= $51,491,520

16 The potential for a Volkswagen-like agreement was high given that AMC had extensive operations through two large subsidiaries: the Holmes Foundry in Sarnia with 301 employees, and CANFAB in Stratford with 610 employees (Ministry of Industry and Trade 1983b, 2).

17 AMC had concentrated on smaller cars and had discontinued sales of intermediate and larger cars in 1978.

18 In 1983, just prior to Hyundai's entry into the Canadian market, Hyundai sought and received approval from FIRA to enter into the automotive distribution business in Canada. However, as part of the FIRA deal, Hyundai pledged to purchase and export Canadian products valued at 50 percent of the company's imports, at least 20 percent of which were agreed to be manufactured goods. When Hyundai received FIRA approval to operate a sales organization in 1983, it anticipated that its sales would be approximately 5,000 units per year. However, sales exploded. In 1985 and 1986, for example, Hyundai imported 138,000 of its Pony and Stellar models into Canada, which at an average cost of approximately $6,500, would represent $897 million or almost $450 million per year. Under the FIRA agreement then, Hyundai should have been exporting $225 million worth of goods annually, including manufactured goods valued at $45 million. In 1985, the 1983 Hyundai-FIRA agreement was waived as the result of negotiations surrounding the company's investment in Bromont, Quebec. A memorandum from Investment Canada president Paul Labbe advised: “We believe that this continued commitment to develop Canadian exports, along with the capital investment program is an equitable substitution for the existing import-export undertaking.” On 20 August 1985 Industry minister Sinclair Stevens replied saying, “I agree with your recommendation” (Bird 1986).

19 The actual value of the duty remission schemes were, in practice, much higher than estimated because between the times they were negotiated and when the program ended in 1996 both companies significantly outperformed initial estimates.

20 Established from values in Tables 3 to 8.

Table

Table

AMC-Renault: Compounded value of the waiver ofestimated $68.5 million Auto Pact liability $93.7 million
Hyundai: Present value of FIRA waiver $120.6 million
Toyota: Present value of duty remission $63.3 million
Honda: Present value of duty remission $50.7 million
CAMI: Present value of incremental profits on14,000 additional imported vehiclesper year indefinitely $28.3 million
TOTAL $356.6 million

21 The AUTO21 Network of Centres of Excellence supports research in various automotive-related areas including safety and injury prevention, the automobile and society issues, materials and manufacturing design, powertrains, and intelligent systems and sensors. Its annual budget, including public and private sector sources, is $12 million.

22 These include Auto21 – approximately $6 million annually; National Research Council Canada – $30 million over five years; Canada Foundation for Innovation – $15 million over five years; Social Sciences and Humanities Research Council of Canada – $5 million over five years; and Canada Excellence Research Chairs program – $10 million over five years.

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Table

Table 1 Estimated Per Vehicle Value of Duty Remission Program

Table 1 Estimated Per Vehicle Value of Duty Remission Program

= Total Announced Estimated Value of Duty Remission Program: 1 January 1989–1 January 1996
Total Production Volume Pre-Duty Remission Cessation According to Public Information
= $227,000,000
1,620,000a
= $140.12
Note: aCalculated as follows:
 
 
Honda
Toyota
Hyundai
 
1987 80,000
1988 80,000
1989 80,000
1990 80,000 50,000 100,000
1991 80,000 50,000 100,000
1992 80,000 50,000 100,000
1993 80,000 50,000 100,000
1994 80,000 50,000 100,000
1995 80,000 50,000 100,000
TOTAL 720,000 300,000 600,000 1,620,000

Source: Author's calculations.

Table

Table 2 AMC-Renault Auto Pact Liability

Table 2 AMC-Renault Auto Pact Liability

= Tariff Rate x Value of Imported Sales in 1980 and 1981
= Tariff Rate x {(1980 and 1981 AMC-Renault Sales in Canada x Average Price of Passenger Car in Canada in 1981) x EstimatedFraction of Imported Vehicle Sales}
= .141 × {(65,031a × $9,334b) × .8}
= $68,469,527

Source: Author's calculations based on aAmerican Motors Corporation (1982) and bStatistics Canada (n.d.) CANSIM Table 079-0002.

Table

Table 3 AMC-Renault Incentives

Table 3 AMC-Renault Incentives

Amount Announced as Incentive
Funds advanced to AMC-Renault
 
$121 million
True Value of Incentive
One must assume that the federal and provincial governments, each of which pledged $60.5 million, would receive payment at the rate anticipated as per the announced capacity rate of 150,000. The royalty payback scheme was based on $50 per vehicle plus 1.5 percent of factory receiptsa $36.5 million
Compounded value of the waiver of AMC's estimated $68.5 million Auto Pact liability $93.7 million
Total $130.2 million

Notes:

aAnnual Payback

= (Per Vehicle Royalty Payback × Assumed Annual Production) + Royalty Payback Rate x (Estimated Factory Price of Vehicle

x Assumed Annual Production)

= ($50 × 150,000) + .015 ($10,000 x 150,000)

= $30,000,000

Assuming funds from the federal and provincial government flowed during height of construction (1985), it would have been assumed that the annual repayments of $30 million would have commenced in 1987 and continued until such time as the $121 million was repaid. Therefore, assuming an 11 percent cost of capital, the net present value of the government assistance would have been equal to the present value of the interest avoided. The 11 percent figure is utilized here and in subsequent calculations because that is the figure government assigned to the Hyundai deal in 1985.

Thus, the true value of the incentive

= Present value of interest on $121,000,000 that would have otherwise been paid after year one

+ Present value of interest on $121,000,000 that would have otherwise been paid after year two

+ Present value of interest on $91,000,000 that would have otherwise been paid after year three

+ Present value of interest on $61,000,000 that would have otherwise been paid after year four

+ Present value of interest on $31,000,000 that would have otherwise been paid after year five

+ Present value of interest on $1,000,000 that would have otherwise been paid after year six

= ($121m × .11) × .9009 + ($121m × .11) × .8116 + ($91m × .11) × .7312 + ($61m × .11) × .6587 + ($31m × .11) × .5935 + ($1m × .11) × .5346

= $11.99m + $10.80m + $7.32m + $4.42m + $1.82m + $59,000

= $36.51m

Source: Author's calculations.

Table

Table 4 Hyundai Incentives

Table 4 Hyundai Incentives

Amount Announced as Incentive
Interest free loan of $200 million for five years $110 million
Free land $1.5 million
Training grant $7.3 million
 
Total
$118.8 million
True Value of Incentive
Interest free loan of $200 million for five years $110 million
Free land $1.5 million
Training grant $7.3 million
Present value of FIRA waiver ($13,342,382 annually for an indefinite period) $120.6 million
Total $239.4 million

Source: Author's calculations.

Table

Table 5 Annual Cost of Waiving the FIRA-Hyundai Agreement

Table 5 Annual Cost of Waiving the FIRA-Hyundai Agreement

= Annual Cost of Incremental Employment Insurance Benefits = Total Foregone Jobs × Annual Employment Insurance Benefits Per Person Drawing Benefits = 1,663 × $8,023.08 = $13,342,382
Present Value of $13,342,382 for an indefinite perioda = 9.0417 × $13,342,382 = $120,637,820
Total Foregone Jobs = Annual Hyundai Export Commitment ÷ Average Goods Produced Per Employee in Manufacturing = ($225 million) ÷ ($230 billionb / 1.7 millionc) = 1,663
Annual Employment Insurance Benefits Per Person Drawing Benefits = (Weekly Employment Insurance Benefits) x 52 = $154.29d x 52 = $8,023.08

Notes: a Utilizes an 11 percent cost of capital rate, which was the figure government assigned to the Hyundai deal in 1985. b Represents the total value of manufacturing shipments in Canada in 1984 (Statistics Canada n.d., CANSIM Table 301-0001). c Represents the number of persons employed in manufacturing in 1984 (Statistics Canada n.d., CANSIM Table 301-0001). d This is the average weekly employment insurance benefit in 1984 (Statistics Canada n.d., CANSIM Table 276-0013).

Source: Author's calculations.

Table

Table 6 Toyota Incentives

Table 6 Toyota Incentives

Amount Announced as Incentive
Interest free loan of $35 million for five years $35 million
Training grant $15 million
 
Total
$50 million
True Value of Incentive
Present value of interest free loan of $35 million to be paid back over seven years commencing seven years after start of production a $22.4 million
Training grant $15 million
Present value of duty remissionb $63.3 million
Total $100.7 million

Notes:

aCalculated using present value tables and 11 percent cost of capital, the rate the government assigned to the Hyundai deal in 1985

= $5 million (1-.4817) + $5 million (1-.4339) + $5 million (1-.3909) + $5 million (1-.3522) + $5 million (1-.3173) + $5 million (1-.2858) + $5 million (1-.2575)

= $2,591,000 + $2,830,500 + $3,045,500 + $3,239,000 + $3,413,500 + $3,571,000 + $3,712,500

= $22,403,000

bBased on $140.12 per vehicle on 50,000 vehicles annually for an indefinite period

= (140.12 x 50,000) x 9.0417

= $63,346,150

Source: Author's calculations.

Table

Table 7 Honda Incentives

Table 7 Honda Incentives

Amount Announced as Incentive
No incentive acknowledged
 
0
True Value of Incentive
Present value of duty remissiona $50.7 million

Notes:

aBased on present value of $140.12 per vehicle on 40,000 vehicles annually for an indefinite period. A production level of 40,000 is used because that was the number Honda indicated when the investment was announced in June 1984. Honda's intention to increase production to 80,000 was not expressed until later.

= (140.12 × 40,000) × 9.0417

= $50,676,920

The calculation utilizes an 11 percent cost of capital rate, which was the figure government assigned to the Hyundai deal in 1985.

Source: Author's calculations.

Table

Table 8 CAMI Incentives

Table 8 CAMI Incentives

Amount Announced as Incentive
Forgivable loan (if production, investment, and job targets met) $45 million
Training grant $40 million
 
Total
$85 million
True Value of Incentive
Forgivable loan (if production, investment, and job targets met) $45 million
Training grant $40 million
Present value of annual incremental profit on 17,000 additional imported vehicles per year indefinitely (earned by pressuring  Japan to increase quota to GM under Voluntary Export Restraints)a $28.3 million
Total $113.3 million

Notes:

aPresent value of incremental profit for an indefinite period calculated as follows:

= Annual Incremental Profit × 9.0417

= $3,128,000 × 9.0417

= $28,282,438

Annual Incremental Profit

= (Return on Sales × Sales Price for Each Vehicle) × (Number of Incremental Vehicles Allocated to GM)

= (.023 × $8,000) × (17,000)

= $3,128,000

Per vehicle profit margins are not available, nor for that matter are profits for Canadian vehicle manufacturers in 1986, the year the CAMI investment was announced. Statistics Canada combines motor vehicles and parts so as not to betray confidentialities with respect to individual company balance sheets. As a proxy, therefore, Return on Sales for the motor vehicle and parts industry for the year 1988 is utilized (Statistic Canada n.d., CANSIM Table 180-0002).

Source: Author's calculations.