Layoffs Remind Us: We Need an Active Auto Strategy


Layoffs Remind Us: We Need an Active Auto Strategy

by Jim Stanford

Economist, Canadian Auto Workers

After years of record output and employment levels, Canada's auto industry is rapidly coming back down to earth. New vehicle sales in the U.S. began to slow dramatically late last year, and are expected to fall by about 10 percent for 2001 as a whole-to about 16 million cars and light trucks. Canada's new vehicle market may actually improve a bit this year. But since close to 90 percent of our automotive production is exported to the U.S., it is the market trend south of the border that will dominate our industry.

One of the hardest-hit companies has been DaimlerChrysler, which this week announced the elimination of 20 percent of its continental workforce-affecting some 2800 workers in Canada. The situation of other automakers is not as serious, but there is little doubt that coming months will see more temporary plant shutdowns and layoffs throughout the industry.

In this age of just-in-time inventory systems, the ripple effects for auto parts makers and other suppliers will be felt immediately. In many cases, auto parts plants will be idled exactly the same day as the assembly plants go down. And since the financial status of many auto parts makers was relatively precarious even before the current downturn, we will likely see several bankruptices and plant closures in that sector.

Despite the pain of the current downturn for laid-off workers, Canada still possesses one of the strongest auto industries in the world. Even after the current layoffs, Canada will still assemble almost two vehicles for every one that is sold here. A combination of low production costs, huge savings from our Medicare system, and impressive productivity performance means that Canada will continue to be a favoured location for new auto investment in the next few years.

The suddenness of the current downturn, however, provides a sobering lesson for industry analysts who might have been too sanguine about the future prospects for our auto industry. We are being reminded of a hard lesson we should have learned long ago. The future evolution of this industry, and the livelihood of hundreds of thousands of Canadians, depends on crucial decisions that are made in a handful of corporate boardrooms in Detroit, Stuttgart, or Tokyo. These decisions are not made in Canada. Given the importance of the auto industry to our trade performance, our labour market, and our productivity, we must preserve some ability to influence those decisions, and protect the industry's presence in Canada.

For decades, the Canada-U.S. Auto Pact gave us an important policy lever to attract and protect investment in Canada. Companies were allowed to sell their products tariff-free in Canada, but only if they met certain targets for investment and employment here. This policy was crucial in assisting our industry develop a critical mass. However, the unelected trade bureaucrats of the World Trade Organization decided that this policy was "illegal"-and, worse yet, our own government has accepted the WTO's questionable mandate to issue this type of order. Effective February 19, the Auto Pact will be abolished.

Many analysts argued that the strong state of Canada's auto industry was ample proof that we no longer needed the Auto Pact. The shocking news of the past several months should warn us, however, that favourable market conditions can evaporate with devastating speed. Yes, our current cost advantages will help to maintain auto investment and employment as the industry moves past its current downturn. But we can't blithely assume that the industry will be invulnerable to future threats-ranging from currency fluctuations to low-cost imports from Mexico to environmental issues like global warming. The auto industry is simply too important to Canadians, to be left up to the automakers alone.

The federal government needs to move quickly to design and implement a new auto strategy for Canada, in the wake of the WTO's anti-democratic Auto Pact decision. We need policy tools which make access to the Canadian marketplace contingent on a company's contribution to our overall transportation infrastructure, which stimulate future investments (including all-important R&D activity), and which prepare the industry for future challenges (like the growing need for "green" vehicles). Only by keeping an active seat at a table dominated by multinational executives, can we ever hope that the good times will roll once again for Canada's auto industry.

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