Canadian Government announces plan to eliminate tariffs on

UNCLAS OTTAWA 000762 STATE FOR E, EB/DCT, WHA/CAN STATE PASS USTR (SULLIVAN) COMMERCE FOR ITA/MAC (WORD) TREASURY FOR IA (NEPHEW) SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV EIND PREL PGOV CA SUBJECT: Canadian Government announces plan to eliminate tariffs on a broad range of manufacturing inputs SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY ¶1. (SBU) Summary: Canada's plan to eliminate tariffs on a broad range of manufacturing should take effect in early 2010. GOC submits that the elimination of tariffs for inputs in key manufacturing sectors will help facilitate economic recovery and improve Canadian competitiveness. Critics in Canada argue that the unilateral move is more symbolic than substantive and offers an unfair advantage to protectionist economies that do not provide Canada with reciprocal market access. End summary. Tariff Elimination Plan -------------- ¶2. (U) As Canadian Prime Minister Stephen Harper prepared last week to meet with G-20 counterparts to discuss a range of subjects including trade protectionism, Finance Minister Jim Flaherty was unveiling a plan for tariff cuts that could save Canadian companies as much as C$300 million annually. Under the proposed plan, Canada would cut to zero the Most-Favored-Nation (MFN) tariff on an extensive list of manufacturing inputs, machinery and equipment. ¶3. (U) The government rolled out an initial slate of tariff reductions in January 2009 that covered machinery and equipment. The new list includes items from over thirty chapters of Canada's tariff schedule. Products subject to tariff elimination will be drawn from such areas as: minerals, metals, textiles and fibers, chemicals, organic compounds, inks and dyes, plastics, rubber, furs, hides, wood, stone, cement, glass, tools, and additional machinery. The full list can be viewed at http://www.gazette.gc.ca/rp-pr/p1/2009/2009-0 9- 19/html/notice-avis-eng.html#d101. Substance or Symbolism? -------------- ¶4. (U) The government is cutting tariffs on goods used in the production process in the hope that this will reduce production costs and improve the competitiveness of Canadian industry, particularly automotive parts manufacturers, sawmills, and printing companies. During the current period of consultation the government is encouraging industry to propose other tariff items, not currently listed, that should be considered for further tariff reduction. The consultative period ends in early November and the resulting tariff reductions are expected to take effect in early ¶2010. ¶5. (U) While Minister Flaherty has stated that he would consider retaining certain tariffs if the seven-week consultation period yields a compelling reason to do so, his larger intention is to create a "Canadian advantage" by clearing the way for companies to retool with cutting-edge equipment sourced from global suppliers on a duty-free basis. ¶6. (SBU) From a U.S. perspective, the Canadian move should increase demand for industrial inputs originating in the United States and reduce transaction costs related to customs administration. Canadian trade officials see the tariff reduction as delivering positive dividends on many levels. A senior Finance Ministry official enthused to EMIN recently that the unilateral tariff reductions served to renew Canada's commitment to the Doha Round of WTO talks and would encourage other industrialized democracies to emulate Canada's actions. ¶7. (SBU) On the other hand, critics of the policy here argue that bilateral trade in inputs and machinery between the United States Qbilateral trade in inputs and machinery between the United States and Canada is already relatively tariff-free and this move will reduce barriers to countries that have not provided Canada with reciprocal access to their own markets. A worst-case scenario is that Canada would lose hundreds of millions of dollars of tariff revenue on inputs that would not be offset by increased foreign demand for manufactured outputs. Canada's National Post newspaper calls this a case of symbolic politics by a government eager to show itself as a free-trader in the G-20 in spite of the domestic ramifications. BREESE