Rebates protect Canada's auto industry from retaliatory tariffs

TORONTO - 16 July 2018: Canadian government customs provisions are expected to soften the blow on the country’s powerful automotive industry from retaliatory tariffs on U.S. steel, according to trade lawyers and industry leaders bracing for higher costs.

Decades-old programs reduce or refund import duties on supplies like steel when companies in Canada can show the material is used in export products. They could protect the auto industry’s supply contracts covering raw materials and parts, which often cross borders several times before a vehicle is finished.

While imposing tariffs against a long list of U.S. products this month, Canada clarified that “duties relief” and “duty drawback” programs would be available to Canadian exporters.

“That provision in the notice is overwhelmingly directed at the auto industry,” said Jesse Goldman, a trade lawyer at Borden Ladner Gervais. Without drawbacks, Goldman said, the Canadian retaliation would have “very significantly and very quickly” hurt the industry.

Some 85 percent of vehicles built in Canada in 2016 were exported, meaning duty relief programs could refund roughly 85 percent of retaliatory tariffs paid by automakers.

Canada has vowed to defend the steel and aluminum industries, but vehicle manufacturing employs some 136,000, according to Statistics Canada, whereas only about 22,000 work in the steel sector, giving the government an incentive to shelter vehicle and parts makers from rising costs.

“These existing programs continue to be in place and any changes would be done in consultation with the relevant stakeholders,” federal Finance Department spokesman Jack Aubry said when asked whether the programs would continue.

BIG OPERATORS

Automakers with operations in Canada include General Motors Co (GM.N), Ford Motor Co (F.N), Fiat Chrysler Automobiles (FCHA.MI), Toyota Motor Corp (7203.T) and Honda Motor Co (7267.T) which assemble vehicles, as well as parts makers Magna International (MG.TO) and Linamar Corp (LNR.TO).

Linamar Chief Executive Linda Hasenfratz said in an emailed statement the drawback programs are of particular benefit to her company, Canada’s second largest auto parts maker, since substantially all the steel that the company imports is later exported.

Honda said it was still assessing the impact of the tariffs. GM, Fiat Chrysler and Magna declined to comment. Ford and Toyota did not respond to requests for comment.

The Canadian Vehicle Manufacturers’ Association needs to do more analysis before commenting on whether drawbacks could protect his industry, President Mark Nantais said. “There are various options that could be used - that would be one of them,” he added.

But any relief would be temporary if U.S. President Donald Trump imposes tariffs on Canadian-made vehicles after the administration’s Section 232 national security probe into autos wraps up. The rebate programs limit the impact of tariffs on raw materials, not finished products.

Flavio Volpe, president of the Automotive Parts Manufacturers’ Association, said some companies that make stainless steel parts or hardened steel tools in Canada could benefit.

Volpe said just over half of Canadian-made auto parts are exported.

John Boscariol, who leads McCarthy Tetrault’s international trade and investment law group, said access to the duty relief programs had not been a foregone conclusion before the government’s notice, because Canada’s retaliation is technically a “surtax,” not a normal duty.

Some uncertainty remains as companies must apply individually for the refunds, and carefully document how imports are used, he added.

“It introduces costs and complications, and it introduces a likelihood that you might not get that relief,” Boscariol said. “That’s not without cost.”