Trade Barriers Harm the Auto Sector

The NDP recently announced that if they form government, they would increase barriers to importing auto parts from abroad. Not surprisingly, Unifor (representing approximately 30,000 motor vehicle manufacturing workers) agreed.

Is this a wise policy position for they and their supporters to take? Will higher barriers to auto parts imports help Canada's auto sector and its workers? No. It's a counterproductive policy that, as I detail below, is actually more likely to harm the auto sector as a whole and its workers (to say nothing of Canada's economy generally). Unifor and the NDP need to seriously rethink their position on this.

How can import barriers harm the sector they are meant to "protect"? By making it more costly to produce and thereby lowering its competitiveness. About 55 cents is spent on motor vehicle parts for each dollar of output of the motor vehicle manufacturing sector as a whole (see Canada's Input-Output Data). Cars need parts, not surprisingly. It turns out that most of these parts are imported. In fact, about 80% of all auto parts used by auto manufacturers are imported from abroad (two-thirds from the US and one-third the rest of the world).

We see this fact manifest itself in the trade data:

Canada's massive trade deficit in parts is surely cause for alarm. Not so. Access to cheap inputs make the end product more competitive. Conveniently, the OECD calculates just how important imported inputs are to the success of each of Canada's sectors. It's huge. Imported inputs are a critical part of for motor vehicle exports.

So, with so much of its imported imported from abroad, what would higher trade costs do to the sector? Trade economists have a wide variety of tools available to estimate the consequences of trade costs. One of the most recent workhorse models (details here or here) allows us to simulate how a change in trade costs will affect output, productivity, employment, exports, and a variety of other metrics for any of Canada's sectors.

The data used to set up this model unfortunately aggregates auto parts and auto manufacturing within a broader Transport Equipment sector. That's okay; presumably the NDP values auto manufacturing workers and auto parts manufacturing workers equally. Workers are also presumably highly mobile between these two sectors. The broad patterns described above for autos holds for this broader sector, with one third of transport equipment inputs used by the transport equipment sector imported from abroad.

So, does cheaper imports of transport equipment help or hurt Canada's transport equipment sector? Let's simulate a 1% decrease in the cost of importing into Canada but let's not change the cost of exporting. This is a unilateral liberalization of Canada's transport equipment trade -- not simulating a joint agreement between us and some other country out there.

What does the model predict? Well, cheaper access to transport equipment inputs abroad does indeed lower the share of those inputs sourced locally -- that is, auto manufacturers will source more of their inputs from abroad. This is not surprising. But, with cheaper access to inputs, production costs fall and productivity rises:

With lower production costs, the sector's output becomes more competitive. It exports more and hires more workers as a consequence! 

So, cheap imports of transport equipment goods into Canada actually helps the transport equipment sector broadly. It may seem counter intuitive at first, but this sector uses so many imported inputs it is in a unique position to itself benefit from free trade. Canada's auto sector is highly and successfully integrated globally. The NDP and Unifor should recognize this and support freer trade. After all, demanding trade barrers is tantamount to admitting Canada's auto sector lacks international competitiveness. It doesn't.