The United States–Canada Auto Pact (1965), formally entitled the Agreement Concerning Automotive Products between the Government of Canada and the Government of the United States, was a bilateral agreement liberalizing trade in automobiles and original equipment (OEM) parts. The Auto Pact was an important precursor to the Canadian-U.S. Free Trade Agreement (CFTA, 1989), which, in turn, was the “blueprint” for the North American Free Trade Agreement (NAFTA).
Prior to the Auto Pact, Canada used British Commonwealth “content requirements” to impose significant tariffs against non-Commonwealth automobiles and parts. The “Big Three” U.S. automakers (DaimlerChrysler, Ford, and General Motors) manufactured cars and parts in Canada on this basis for the small Canadian market. This significantly reduced the ability of U.S. automobile manufacturers’ ability to take advantage of economics of scale based on U.S. manufacturing, but it also protected Canada’s small manufacturing industry.
During the 1960s, Canadian tariff refunds linked the degree of Canadian content of its automobiles and OEM parts to exports. U.S. manufacturers perceived this as an unfair trade subsidy and filed a complaint seeking the imposition of countervailing duties. With a trade war threatening this important industry, the Auto Pact was negotiated.
Under the Auto Pact, U.S. manufacturers could import on a duty-free basis regardless of origin only if 75 percent of their sales in Canada were manufactured there. In addition, each existing or subsequent automobile manufacturer had to meet “Canadian value-added content requirements,” generally 60 percent. Manufacturers meeting these requirements attained Auto Pact status. The result of these requirements was expanded production of automobiles and OEM parts in Canada.
In the Auto Pact, the United States’ criteria for duty-free entry were different. The United States required 50-percent American-Canadian content, meaning Canadian vehicles and OEM parts could enter the United States without tariff if 50 percent of their appraised value was of Canadian or American origin (or both). The U.S. standard was based on fears of Japanese or other foreign automobile manufacturers using Canada as a production platform for entry into the U.S. market.
Generally, the Auto Pact was a successful industryspecific, bilateral trade agreement with the United States’ largest trading partner. Under CFTA, the 50-percent appraised value was replaced with a 50-percent value based on value of materials plus direct processing costs, a more demanding standard.