“Our ties with Canada are historically close, our relations cordial, our people durable friends,” U.S. president Lyndon Johnson observed in his official statement after finalizing Canada-United States Automotive Products Agreement in October 1965. “This agreement, originating in our common interest, arrived at for our common benefit, will make those ties even closer and more fruitful for the future.”
The Auto Pact provided greater integration between the American and Canadian auto industries, helped turn automaking into one of Ontario’s major industries and, before its official demise in 2001, paved the way for future free trade agreements between the two countries. Those same trade deals, and the automotive sector itself, are now under fire from U.S. President Donald Trump.
While the deal faced blowback and continued criticism, especially in the U.S., it also proved the benefits of integration and set the stage for increased free trade in the 1980s. How did it come together?
Cartoon by Ben Wicks, Kitchener-Waterloo Record, October 13, 1965.
The Canadian auto industry was stagnating in the early 1960s. Productivity and wages were lower than in the United States. Trade preferences with the British Commonwealth had lost much of their worth due to the weakening of British power and decreased demand abroad for giant North American gas guzzlers. Vehicles were 50 per cent more expensive for Canadians than Americans, thanks to a combination of tariffs, a smaller market, and fewer choices. By 1964, Canada had racked up a $600 million trade deficit in automobiles with the United States.
In 1960, the federal government appointed University of Toronto economist and administrator Vincent Bladen to lead a royal commission on the auto industry. He discovered that General Motors was the only American firm turning a profit in Canada. Bladen noted that most American automakers were in favour of closer integration of production between the two countries. Ford Motor Company suggested that integration would benefit Canadian consumers through lower vehicle costs. Chrysler argued other countries should be brought into any deal. American Motors stated the importance of building bridges between manufacturers on both sides of the border.
Bladen felt Canadian industry wasn’t ready for free trade and that raising tariffs would be counterproductive. Instead, the federal government should reward firms for exports and allow them to import more parts without duties. He proposed that cars imported by Canadian producers should enter duty-free (with some caveats).
Change was on its way in October 1962. While a 25 per cent tariff on imported automatic transmissions that had been suspended was reimposed, a new program allowed automakers to offset some tariffs by increasing exports of parts produced in Canada.
After the Liberals won the 1963 federal election, the program was extended to include full remission of duties on vehicles and all original parts based on increased Canadian production levels — for every dollar of base production added over the previous year, a dollar’s worth of parts and vehicles was imported duty free.
Cartoon by Ben Wicks, Ottawa Journal, January 23, 1965.
Several American auto parts manufacturers objected and lobbied the U.S Treasury Department to determine if this qualified as a subsidy under U.S. law. Both countries used diplomatic channels to work out a new policy. While the Americans favoured free trade, the Canadians insisted on safeguards to grow the Canadian auto industry.
In the end, Canada promised more efficient protections, while the Americans agreed to exemptions on Canadian parts and vehicles. The agreement covered new vehicles and original parts, excluding batteries, tires, and aftermarket parts. Products required at least 50 per cent American or Canadian content. Two annexes inserted by Canada limited participation to automakers operating in Canada between August 1963 and July 1964, which included the “Big 3” (GM, Ford, Chrysler) along with American Motors, Studebaker, and Volvo.
The Windsor Star pointed out inconsistencies: a Detroit resident could go to Windsor and buy a Canadian-built car virtually duty-free but a Windsor resident who bought a car or parts in Detroit had to pay duties.
The agreement was signed at Johnson’s ranch in Johnson City, Texas on January 16, 1965. The signatories were Johnson, U.S. Secretary of State Dean Rusk, Prime Minister Lester Pearson and Canadian Minister for External Affairs Paul Martin Sr. “We faced a choice between the road of stroke and counterstroke and the road of understanding and co-operation.” Johnson told the press. “We have taken the road of understanding.”
Initial reaction was generally positive. Canadian Minister of Industry Charles Drury believed the deal increased efficiency, lowered costs for producers and consumers, and improved Canada’s industrial position globally. Pearson wondered if the negotiating techniques could be used for other industries. Ford’s Canadian president, Karl E. Scott, felt that “those who take the pragmatic view will agree that 50 years of economic curtsying between Canada and the United States had produced an exciting rapprochement.” The Windsor Star declared that the Auto Pact was “the biggest local news this community has ever had.”
Liberal ad defending the Auto Pact during the 1965 federal election campaign. Sault Star, October 23, 1965.
Among those less than pleased was Minister of Finance Walter Gordon, who feared the agreement would further consolidate American control of the Canadian auto industry. The Canadian branch of the United Auto Workers worried that its members would be harmed, but American union head Walter Reuther supported the deal. Ontario Minister of Economics Stanley Randall initially worried that a skilled labour shortage would prevent Canada from enjoying the full benefits of the deal, and was also irritated that the feds didn’t discuss the pact with the province.
In Canada, the deal was enacted almost immediately via an order in council, but it wasn’t unanimous. New Democrat leader Tommy Douglas put forward a motion to debate the pact in the House of Commons in an attempt to bring down Pearson’s minority government. He didn’t condemn the principle of the deal, instead alleging the government was failing to secure lower consumer prices or adequately protect workers. The Progressive Conservatives were upset, as they had passed on their opportunity to do the same. The pact was endorsed by a 110-95 vote, with the Liberals propped up by Social Credit MPs.
The process took longer in the U.S. due to the need for congressional approval. In hearings and committees, the pact was called “piracy” and Americans were warned about “secret agreements” between American automakers and their Canadian subsidiaries to shift $260 million of production north. Republicans criticized the pact for violating the traditional multilateral approach of U.S. trade policy and for not securing more concessions from Canada.
Billboard for GM Acadian, April 1962. City of Toronto Archives, Fonds 1488, Series 1230, Item 9606.
As a Kitchener-Waterloo Record editorial observed, American opponents thought that any changes to the status quo were “akin to a Communist-inspired plot to blow up the White House.”
As the process dragged on in the U.S., there was plenty of activity in Canada. At least 20 new auto-related plants were planned, creating up to 5 million square feet of manufacturing space. Around 170 firms had undertaken or planned expansions. Canadian steelmakers envisioned production increases of up to 500,000 tons annually. American parts suppliers like Budd prepared to establish Canadian branches.
After further delays, Johnson gave his final signature to the Auto Pact on October 22, 1965, two days after returning to work following gall bladder surgery.
The effects were dramatic. In 1965 Canada had a $785 million automotive trade deficit and 7.1 per cent share of the North American market. By 1971 Canada held an 11.2 per cent share and a small trade surplus. Over the pact’s first decade, the number of Canadian-built vehicles exported to the U.S. grew from 48,000 in 1965 to 849,000 in 1975. The overall number of vehicles built in Canada grew from 390,000 in 1960 to 896,000 in 1966, to nearly 3 million in 2000. Between 1965 and 2000, the number of Canadian auto workers grew from 80,200 to 185,000.
During negotiations over the Canada-U.S. free trade deal in the 1980s and NAFTA in the 1990s, both sides agreed to phase out several remaining tariffs and duty remissions, especially tariffs on vehicles manufactured by automakers who weren’t part of the deal. This primarily affected Asian and European producers so long as they included 50 per cent North American content, which led to the rise of their production lines here.
When the Auto Pact was inaugurated, the Americans had gained a waiver from the General Agreement on Tariffs and Trade to allow preferential treatment towards Canada, a policy that contravened the GATT principle of non-discrimination. For many years, this went unchallenged by other countries. But in May 2000, the World Trade Organization ruled that the Auto Pact violated many of its regulations and effectively created an illegal export subsidy. A Canadian appeal was rejected that fall.
Lester Pearson and Lyndon Johnson, Detroit Free Press, January 16, 1965.
On February 19, 2001 the Auto Pact was allowed to fade into history. That day, the Canadian Auto Workers held a lunch-time demonstration at Chrysler’s Pillette Road plant in Windsor. Leaders linked the plant’s existence to the Auto Pact, noting it was built to help the automaker meet its production quota to avoid tariffs. It closed two years later.
The Auto Pact allowed Canada to create parts powerhouses like Magna and it paved the way for future free trade agreements. From the beginning, Johnson sensed the deal may have favoured Canada — he told Canadian diplomat Charles Ritchie that “You screwed us on the Auto Pact.”
When the Auto Pact turned 20, General Motors CEO Roger Smith observed that it was “assuredly the most successful trade policy in the history of our industry” and that, despite some faults, was “an excellent example of a rational and responsible way to resolve thorny trade issues between nations.”
Sources: the January 16, 1965, June 13, 1965, September 21, 1965, and October 1, 1965 editions of the Detroit Free Press; the September 18, 1965 edition of the Financial Post; the February 19, 2001 edition of the Hamilton Spectator; the January 18, 1965, and April 30, 1965 editions of the Kitchener-Waterloo Record; the February 16, 2001 edition of the Ottawa Citizen; the December 1, 2002 edition of Policy Options; the January 2, 2001 edition of the Toronto Star; and the January 16, 1965, January 18, 1965, January 20, 1965, February 15, 1965, April 1, 1965, May 11, 1965, May 12, 1965, July 3, 1965, October 2, 1965, and October 22, 1965 editions of the Windsor Star.