The WTO Ruling on the Auto Pact

In mid-February the World Trade organization (WTO) ruled that the Canada-U.S. auto pact is in violation of international trade rules and must be scrapped. The auto pact required the big U.S. auto makers to build as many cars in Canada as they sell here. In return General Motors, Ford and Daimler-Chrysler are exempt from paying a 6.1 percent duty on cars imported into Canada. European and Japanese car makers have been complaining about the auto pact for some time and welcomed the decision.

The Canadian government has announced that it intends to appeal the WTO decision. Since such an appeal requires unanimous consent of all members of the WTO, including the members who filed the complaint, the chances of succeeding are essentially nil and the appeal is being filed merely to buy time for the government to figure out what to do.

The Big Three auto makers are supporting the appeal, as is the Canadian Auto Workers union. However, in anticipation that the WTO decision will be upheld, the Big Three have proposed that rather than scrapping the duty, it should be retained and applied to all imported cars, including those from the U.S.. The Big Three would then retain their competitive advantage over foreign importers because the Big Three export mainly luxury cars to Canada, which account for only a small fraction of Canadian sales. In addition, the North American Free Trade Agreement (NAFTA) provides them with much of the protection they are seeking from foreign competition.