For the week of Monday January 13, 2020
On January 16, 1965, Canadian Prime Minister Lester B. Pearson and American President Lyndon B. Johnson signed the Automotive Products Trade Agreement (or Auto Pact), which represented the beginning of a new era of limited free trade between Canada and the United States.
In the early 1960s, Canada’s small, domestically-focused and US-owned auto sector faced a number of challenges. Canadian factories built as many cars as they could, but only did so in small, expensive batches. Most models were imported from their US parent firms, which led to a huge trade deficit. When new technologies, such as automatic transmissions, became popular, Canadian branch plants could not build these models, threatening the further erosion of the Canadian industry.
In 1960, the federal government tasked economist Vincent Bladen with studying the industry and proposing solutions. He rejected higher tariffs and opposed free trade with the United States, which he thought would virtually wipe out the automotive industry in Canada. Instead, he recommended duty-free importation of vehicles made almost entirely from Canadian auto parts, as a way to encourage Canadian manufacturing. The federal government implemented a tariff remission scheme, partially based on his plan, in 1962.
Auto parts manufacturers in the United States strongly opposed this scheme and threatened a trade conflict. This forced the US and Canadian governments to consider alternatives, including creating an integrated North American industry. After a year of tough negotiations, they agreed to the Auto Pact in January 1965.
The Auto Pact granted duty-free trade for the US auto companies that operated in Canada. In exchange, these companies were required to build as many cars and trucks in Canada as they sold. The Auto Pact also restricted duty-free importation to Canada to products with 50 percent Canadian and American materials. In addition, it required auto manufacturing firms in Canada, including General Motors and Studebaker, to invest hundreds of millions of dollars in the Canadian automotive industry.
Over the decade that followed, the Canadian industry was completely integrated into the US sector, with Canadian branch plants exporting 80% of the vehicles they produced to the US. Canadian exports of motor vehicles and parts increased dramatically, and the number of jobs supported by the automotive industry more than doubled, making it the largest export sector in the Canadian economy. Between the 1970s and the end of the Auto Pact in 2001, Canada generally had a surplus of vehicles and a deficit of parts exported to the United States.
Lester B. Pearson is a designated national historic person.