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Vehicle Manufacturers in the North American Environment Security and Prosperity Partnership of North America Canadian Automotive Partnership Council June 2005 Security and Prosperity Partnership Consultation Vehicle Manufacturers in the North American Environment The Security and Prosperity Partnership of North America i) Secure North America from External Threats and Prevent and Respond to Threats Within North America 3. Prosperity Agenda - Regulatory Cooperation to Promote Growth: i) Vehicle Safety Standards: 4. Future planning and next steps The Security and Prosperity Partnership announced between the US, Canada and Mexico in March 2005 identifies the important role that borders and regulatory frameworks play in ensuring secure economic growth for North America. Border efficiency and regulatory consistency also rank among the most pressing priorities for action as identified by the Canadian Automotive Partnership Council (CAPC) following more than two years of consultation and study by all members and stakeholders in the Canadian auto industry. Canada's automotive industry, through CAPC, and consistent with the industry in the US is pleased to present its consensus on priorities for action by the three governments working together on the Security and Prosperity Partnership (SPP). Background: The North American Integrated Auto Industry: For over 100 years the automotive industry has been one of the most important contributors to Canada's economy. Over the years our industry has grown from a few small operations that employed hundreds of Canadians producing and selling a few hundred vehicles to an industry that directly employs half a million Canadians producing and selling millions of vehicles annually. Hundreds of thousands of additional jobs depend on the auto industry across Canada, both in industries that supply the auto industry and in consumer industries which would not exist without the purchasing power of the auto industry and its employees. Today, our industry is represented in virtually every community across the country by hundreds of thousands of Canadians working in vehicle assembly plants, parts manufacturing plants, distribution centres, head offices, and automobile dealerships. During the first 100 years, traditional Canadian strengths, combined with strategic government policy, such as the 1965 Auto Pact, allowed Canada's automobile manufacturing industry to take advantage of economies of scale and grow into a large, modern, efficient and productive engine of economic strength. Today there are over 550 Original Equipment Manufacturer (OEM) parts/component manufacturers supplying not only the 11 light duty vehicle assembly plants in Canada and the major component manufacturing facilities (those making engines and transmissions), but also vehicle assembly facilities in the United States and beyond. At a retail level, cars and trucks are sold across Canada through 3950 independently owned and operated new car dealersdealerships. The auto industry has an enormous impact on the Canadian Economy. Led by vehicle manufacturers, the industry comprises nearly 12% of manufacturing GDP, represents 22% of Canada's merchandise trade (¼ of total trade in goods with the U.S.), generates an annual trade surplus of $13 billion (20% of Canada's total); and procures over $30 billion annually from Canadian parts and service suppliers (roughly 3 times the amount of procurement for the federal government including defense spending). Within North America, Canada's new vehicle sales are roughly 1.5 million units annually (approximately 8% of the N.A. total sales), while production averages around 2.6 million units (about 16% of the N.A. total production). By growing together as an integrated industry, the auto sector has created a North American sales market of nearly 20 million units with production around 16.5 million units annually. These economies of scale have an enormous positive economic impact in Canada and also allow consumers' access to the highest quality, lowest cost and most diverse product lineup available globally. Borders and Regulations are Key Barriers Like many Canadian industries, the auto marketplace for production is heavily weighted towards the United States, with over 85% of all vehicles produced being exported to that market. However, unlike many industries in Canada, the automotive industry does not merely rely on access to the U.S. market for sales - the U.S. is also the major source of parts for vehicle production. Within the integrated auto industry, many parts cross the US/Canada border multiple times before they are transformed or built into larger assemblies that ultimately are sent to Canadian and US based assembly plants. Sub-assemblies are transported 24 hours a day to assembly plants on a "just-in-time" basis. The industry is therefore highly dependant on effective borders to complete their products in an efficient and competitive manner. When border delays slow parts deliveries, entire assembly plants can be affected resulting in with very high resulting costs. Border delays also contribute to general inefficiencies and cost. The Ontario Chamber of Commerce has estimated the annual cost of border delays to be C$13.6 billion annually for the Canadian and US Economies ("Cost of Border Delays to Ontario," May 2004, page 7). While the auto industry has evolved dramatically, inconsistent regulations between Canada and the US also drive unnecessary inefficiencies and increased costs into a globally integrated industry in terms of vehicle design, production and sales, government policy with respect to auto-related regulations has not evolved at the same speed. The automotive industry, like most other large businesses, conducts its planning and business development in a global environment in order to remain competitive. While efforts are made by Canadian regulating departments to consider the North American market realities, government regulatory policy generally continues to be developed in traditional ways, looking primarily inwards to develop standards and programs, as opposed to conducting a pan-national approach. This regulatory approach is inconsistent with today's international business realities and negatively impacts the industry's competitiveness. The automotive industry therefore seeks greater government regulatory coordination, both within North America, and globally. Taking Action Together Recognizing the important linkage between our mutual security and shared prosperity, we are pleased that the Government of Canada has committed to participate in the "Security and Prosperity Partnership" announced by Prime Minister Paul Martin, President George Bush and President Vicente Fox. The automobile manufacturing industry wishes to play a strong role in the development of the new approach and framework that will evolve from this commitment. We believe that the Partnership offers a unique opportunity to reform our regulatory development process and ensure that a "smart regulatory approach" is implemented both for existing and future regulations together with the US and Mexico. A more innovative and responsive regulatory environment should, in turn, assist Canada in capturing its fair share of foreign direct investment. The Partnership also offers an opportunity to ensure that our security-based programs are effective and efficient and that low-risk trade into and within North America can be facilitated, assisting our economies by making doing business in North America as competitive as possible. This paper outlines specific and detailed areas the automotive industry has identified as the most significant impediments to North American trade and ultimately global competitiveness. It is by no means an exhaustive list of challenges that we face, rather it should be seen more as a starting point for priority action items. The auto industry fully supports the efforts of the three governments to secure North America from external threats. The industry is in favour of focusing attention on common external borders to exclude prevent threats from entering the North American space and at the same time, enhancing the secure movement of low-risk traffic across our shared borders. ii) Further Streamline the Secure Movement of Low-risk Traffic across our Shared Borders The auto industry is the country's largest trader, accounting for over 20% of Canada's total merchandise trade and roughly one quarter of the value of goods traded with the U.S., or roughly $150 billion annually. Most Canadian-based vehicle manufacturers are fully approved in the Free and Secure Trade (FAST) program in Canada and the U.S. with over 80% of their cross border shipments processed using this program. The reason is quite simple; pre-approved, low-risk programs, such as FAST require minimal documentation to be presented when the shipment arrives at the border crossing, which speeds up processing times and removes complexity and uncertainty. However, as successful as these programs have been, they face significant hurdles moving forward. Efforts must be accelerated in both Canada and the U.S. to ensure a multiplicity of requirements do not undo the positive steps for both facilitation and security achieved to date. One of the biggest challenges we face in this regard is the layering of requirements by various government agencies. Despite the creation of the Department of Homeland Security (DHS) in the U.S. and the Ministry of Public Safety and Emergency Preparedness (PSEP) in Canada, at least 44 agencies between our countries have some level of jurisdiction over our shared border. These include transportation agencies, food inspectors, immigration agents, police and security forces, environmental agencies, and consumer protection agencies, all of whom have a role in regulating who and what comes into or out of each of our countries. Since September 11th, 2001, these agencies and departments have been examining their mandates and determining if their regulations are strong enough to avoid any and all possible future security threats. Generally, this has been done in a "stovepipe" fashion without looking across the board to other government departments and programs for coordinated solutions. This regulatory environment has added complexity and layering of border processes, rather than pushing border processing away from the physical border as was envisioned when both countries signed the Smart Border Declaration in 2001. The end result has been increased processing time for shipments when they arrive at the border crossing. It is estimated that processing time entering the U.S. has increased from 45 seconds per truck in 2000 to over 2 minutes and 15 seconds by the end of 2004. This creates inefficiencies and adds expenses to business which in the end costs both countries in terms of economic growth and job creation. While FAST shipments are generally exempt from new requirements that have been introduced, FAST approved commercial vehicles must wait in queue with all other traffic to get to the front of the line, due to aging infrastructure and capacity/roadbed limitations either leading to or at the majority of these crossings. This has led to lower than expected participation levels and decreased program benefits. As noted above, the North American market is integrated from a sales and manufacturing perspective. In such a tightly integrated industry, border delays and uncertainty add unnecessary cost into the system now estimated at up to C$13.6 billion annually in Canada and the U.S. as cited earlier. These are costs that are heavily absorbed by the automotive manufacturing industry as part of business operations but may also have a substantial impact on the competitiveness of each country's economy as well as the overall North American economy and our ability to attract investment and jobs. Below is a list of regulatory impacts/issues at the border that can lengthen processing time and limit the effectiveness of programs such as FAST as well as our recommendations for short and longer term actions. (1) Canada/U.S. and International Cooperation: Issue: Canada/U.S and international cooperation on border processing and security should be intensified to eliminate duplicative and overlapping requirements to better facilitate low-risk trade and travellers. Recommendations:
(2) FAST: Issue: The FAST program is the cornerstone of the Shared Border Accord (SBA) between Canada and the U.S. Our governments' need to focus on the original intent of the SBA and truly create a smart border for the 21st century - by moving border processing further away from the border, simplifying communication, reporting between government and industry, and facilitating low risk trade. Recommendations:
(3) Advance Electronic Commercial Information: Issue: The ability to fully report all government required information electronically in advance of arrival at the border will dramatically alter current realities along the Canada/U.S. border. These programs should increase the processing rate of all shipments arriving at the border by streamlining processing and diverting shipments that are unprepared. Recommendations:
3. Prosperity Agenda: Regulatory Cooperation to Generate Growth New motor vehicles are sophisticated and technologically complex products composed of over 8,000 individual parts. The state-of-the-art technology in vehicles represents more than 100 years of development, improvement and refinement. The manufacture of new motor vehicles is a complex, carefully orchestrated sequence of operations that provide consistently high quality product in high volumes. Because North America's vehicle market is considered a single market with largely shared driving conditions and environment, coordinated product regulations make business sense and represent good public policy. Like the vehicle itself, the regulatory regime is mature, having developed over many decades, and is highly technical in nature. Historically, there has been considerable cooperation between Canadian and U.S. government departments on technical issues that drive regulatory development. In Canada, product standards are defined by the federal government with in-use requirements being defined by provincial governments. There has also been considerable cooperation between industry and government in both Canada and the U.S. on these technical regulatory issues. While the motor vehicle is a highly regulated product, much advancement in both safety technology and emissions controls have has been voluntarily introduced in Canada through memoranda of understanding agreements with manufacturers. While all these processes have been useful in bringing issues of common concern forward in an attempt to simplify the regulatory burden it has not always been successful and unwarranted regulatory differences exist and continue to emerge. While there is no technological reason for unique Canadian standards, regulatory differences without justification have emerged, that separate our market from the major auto markets. Unique Canadian regulations should only be considered in justified exceptions where rigorous cost benefit analysis shows material public benefit. Due to the relatively small size of the Canadian market, combined with the massive costs associated with the design, development and implementation of new vehicle programs (hundreds of millions of dollars), designing vehicles for unique-to-Canada standards is unrealistic. Unique to Canada standards typically only increase the cost of a new vehicle or limit the product offerings made available to Canadian consumers. Increased cost to consumers resulting from unique-to-Canada standards usually decreases the rate of the vehicle fleet turnover, thus limiting the net benefit of the regulations. Unique Canadian standards can also limit vehicle production opportunities for Canada. Iif a vehicle cannot be sold in a marketplace it typically will not be produced in that jurisdiction. Canadians are much more cost conscious than American consumers, in part due to lower disposable income, and as such they are less able and/or more reluctant to absorb cost increases driven by unique regulatory requirements. In 2002, the price of a new vehicle as a percentage of personal disposable income in Canada was 136%, while in the U.S. it was 93%. The increasing fleet age in Canada further undermines the ability of unique to Canada regulations to have the positive societal impact for which they are designed. A coordinated regulatory approach should seek to review specific automotive regulations which differ between Canada and its NAFTA trading partners; make U.S. and Canadian regulations consistent; create a product standard environment that respects self-certification to one set of regulatory requirements across North America (and ultimately globally), and satisfy societal needs efficiently. Perhaps most importantly, governments need to recognize the highly integrated nature of North America's automobile industry. As we move forward, we must ensure that mechanisms are established to ensure that consistent regulations are promulgated to avoid unwarranted differences in standards and regulatory requirements. The regulatory framework must be driven at the highest levels of government. We recommend the establishment of guidelines for the development of regulations that are recognized and supported across all government departments having any responsibility for the automotive sector. Background: In general, Canadian safety policy has a consistent structure with the U.S. policy. The Canadian Motor Vehicle Safety Standards (CMVSS) are largely similar to, and patterned after, the American Federal Motor Vehicle Safety Standards (FMVSS), and flows naturally from the high level of integration in the industry. However, exceptions between the two nations' safety standards do exist with additional exceptions being contemplated. In addition to the actual standards, differences exist between Canadian and American authorities with respect to how vehicle certification is undertaken to show compliance with those standards. Significant differences exist between government and industry regarding the extent to which engineering judgment and electronic simulation should be accommodated for vehicle certification and the level of documentation necessary to demonstrate full compliance. Transport Canada's position would appear to be significantly different than that of the U.S. NHTSA (National Highway Traffic Safety Administration) and is viewed by industry as an impediment to innovative practices to the testing and early commercialization of advanced technologies. (1) CMVSS 208 - Frontal impact occupant protection standards Issue:
Current Status:
(2) Vehicle Safety Electronic Certification Issue:
Issue:
Issue:
(5) CMVSS 102 - Transmission Controls (Brake shift and clutch starter interlocks) Issue:
Current Status:
(6) Additional list of unique Canadian requirements:
ii. Environmental Regulations and Fuel Economy: Background: Current Canadian regulations require that new vehicles be certified to meet U.S. Environmental Protection Agency (EPA) Tier 2 emission standards. These Tier 2 standards are the most stringent emissions standards in the world. Through a phase in process that will be completed by 2009, both cars and light trucks, including Sport Utility Vehicles (SUVs), will be grouped for the first time into a common set of emissions requirements. Meeting these emission standards represents a challenge to reducing fuel consumption, and as a result reducing carbon dioxide (CO2) emissions which are directly related to the amount of fuel consumed. Consumption reducing technologies such as direct injection compression ignition (diesel) and direct injection (gasoline) engines are challenged by tight emissions standards. However, even with the introduction of new technologies and the common process with the U.S., Canada's ability to meet these requirements is still severely challenged because of differing fuel quality. Under the Tier 2 program, the in-use performance of emission control systems must be maintained for the useful life of the vehicle or 190,000 kilometers. Attaining this long life requirement is highly dependant on fuel quality, which in Canada, has been compromised by the addition of manganese-based fuel additives in most consumer purchased fuel. In general, fuel suppliers have temporarily suspended the use of manganese-based additives in gasoline refining pending the outcome of the Government's independent scientific third party review. Unfortunately this review continues to be delayed by the government and seriously risks the re-introduction of this metal-based fuel additive. Key Recommendations:
4. Future planning and next steps In conclusion, Canada's automotive industry commends the Government of Canada for launching the Security and Prosperity Partnership. Recognizing the highly integrated nature of our industry, we would like to play a strong role in the development of this new approach and framework that arises from the Partnership. This document is intended to outline a number of areas that the auto industry has identified as significant impediments to North American trade and ultimately global competitiveness. We look forward to working constructively and closely with the Government on priority issues that will improve our mutual security and shared prosperity. 5. Annex - Short-Term Priority Actions Security Agenda 1) Working with the private sector and all levels of government necessary, develop and implement contingency plans that will ensure that movement of low-risk, pre-approved travelers and goods; namely those in the Free and Secure Trade (FAST) and NEXUS programs, under all security conditions at critical border crossings, including those linking southern Ontario to the U.S. This would complement the original stated intention of the programs. This is a bilateral Canada and US initiative with a suggested timeframe of 120 days. 2) Expedite the Binational Commission reviewing the options for a new border crossing at Windsor-Detroit wherever possible. In the short-term, all parties on the Canadian side are urged to work together constructively to implement interim infrastructure improvements that will facilitate the flow of low-risk trade and travelers such as suggested in the Schwartz Report. This is a Canada-only initiative with a suggested timeframe of 12 months. Prosperity Agenda 1) Transport Canada should harmonize proposed amendments to CMVSS 208 with the equivalent belted requirements of US FMVSS 208. The estimated costs to the Canadian industry for product redesign work necessary to meet the unique Canadian requirements under the given scenario could amount to more than $200 million. Additionally, depending on the timing of potential regulatory changes and individual vehicle development timelines, there could be additional costs associated with the production of new tooling and equipment where necessary that could add to hundreds of millions of dollars of cost for the industry. This is a Canada-only initiative with a suggested timeline for plan development of 120 days. 2) Transport Canada should formally recognize electronic certification consistent with NHTSA and accept manufacturers' use of engineering judgement. Industry estimates that the costs avoided with using electronic certification instead of vehicle crash tests is approximately $110,000 to $150,000 per physical crash. The costs associated with physical crash tests are affected by the type of individual test performed. Currently, all manufacturers are using electronic certification for a portion of their testing but because of the variability in the costs of the different tests and the level of usage of electronic certification by each manufacturer, it is difficult to estimate the current amount of costs avoided as a result of using electronic certification. Under the current scenario, the amount of electronic certification is modest, but the industry plans to continue to increase its reliance on electronic certification. As a result, any change in the MVSA that would limit the use of electronic certification would lead to serious additional costs. Given industry expectations, in the coming years, it is safe to assume that any action to limit the use of electronic certification would lead to additional costs for the industry in vehicle crash tests potentially totaling hundreds of millions of dollars. This is a Canada-only initiative with a suggested timeline of 90 days. 3) Environment Canada should review plans to test vehicles being made available in Canada for in-use emissions compliance and work to rationalize testing with EPA. Canada's Tier 2 regulatory requirements are largely harmonized with the EPA Tier 2 regulatory framework for vehicle emissions. Given that almost all vehicles being sold in Canada comply with the Canadian Tier 2 regulatory requirements on the basis of having EPA Tier 2 certification approval, and EPA will already be conducting in-use emissions compliance testing, the work of the Canadian emission testing facility could be coordinated to ensure that testing is not duplicative. Where possible, Environment Canada and the EPA should share testing data. This is a bilateral initiative with a suggested timeline of 120 days. 4) Canadian and US federal regulatory agencies should establish protocols for early consultation between industry and regulators prior to pursuing vehicle regulations. This is a bilateral initiative with a suggested timeline calling for a plan to be developed by the end of 2005 with implementation thereafter. |
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