Senator HARTKE. Filed April 17, 1965. Secretary CONNOR. That is our information. Mr. MCNEILL. It was published in the Federal Register. Senator HARTKE. The Bureau of Customs man is here, and he might be able to answer that. Mr. BOYETT. Yes, sir. It definitely was dismissed, and I have the specific Federal Register with me if you would like to see it. Senator HARTKE. What has happened down at Paducah? Mr. BOYETT. I couldn't answer that, sir. Senator HARTKE. Let us come back to this cost matter a moment then. I do not know who wants to answer this. Do cars cost more in Canada than in the United States? Mr. MCNEILL. Yes, sir. Senator HARTKE. About how much more? Mr. MCNEILL. An average of 10 to 12 percent, I would say, sir. Senator HARTKE. Some people say 15. Mr. MCNEILL. It depends on your duty adjustment. If you leave your duty out you go up as high as 18, but I think taking into account the duty, 10 percent. Senator HARTKE. Ten to twelve percent, is that true? Mr. MCNEILL. Yes, sir. Senator HARTKE. Are labor costs there less expensive? Mr. MCNEILL. Yes, sir. About 75 percent of the cost of domestic labor in the auto industry. Senator HARTKE. Yes. In other words, in 1963 Mr. MCNEILL.. Wages, I am sorry. Secretary WIRTZ. Was it a question about labor costs? Senator HARTKE. Wages. Secretary WIRTZ. Wages are lower by 20 to 25 percent. Labor costs per unit are higher significantly. Senator HARTKE. That is on productivity. Secretary WIRTZ. Yes. Mr. MCNEILL. Yes. Senator HARTKE. But the wages are lower and the cars cost more; isn't that true? Mr. MCNEILL. Yes. Senator HARTKE. And is there any indication even in spite of what Senator Douglas has said here, is there any indication that we can expect that costs will come down at all? Secretary CONNOR. Senator Hartke, as I stated in my testimony, when you have short production runs your costs of production are much higher than when you have long production runs. So even though there is a lower labor cost per unit produced, the labor costs are higher in Canada than they are in the United States. That necessarily means that you are going to have a final price to the consumer that is higher. Now, the expectation, is as was stated in the text of the agreement, one of the main purposes will be the development of conditions in which market forces may operate effectively to attain the most economic pattern of investment, production, and trade. Over a period of time, a reasonable expectation is that the rationalization of production that is possible if this agreement is approved will enable production costs in Canada overall to be reduced and, therefore, as a result of the market forces the prices should come down. Senator HARTKE. This is a supposition and cannot be proved at the moment either way; is that true? Secretary CONNOR. It certainly can be proved, Senator Hartke, on the basis of past experience in this and other industries in many different countries of the world. This is what happens when you do have an integration of production facilities without these artificial trade barriers which are being removed as a result of this agreement. Senator HARTKE. How much artifical trade barrier is left? Secretary CONNOR. There are some with respect to the replacement parts situation. There are these requirements that the Canadian Government worked out with the automobile manufacturers for this transition period, but aside from those, the trade has been freed appreciably. Senator HARTKE. Now, these letters that you have referred to, those are by the American producers; is that true? Secretary CONNOR. They are the Canadian companies Secretary CONNOR. Well, they are subsidiaries of American companies, but they are Canadian corporations doing business in Canada, Subject to the jurisdiction of the Canadian Government. These four companies entered into agreements, and these are now in the record. Senator HARTKE. Have all of them been made public now? Secretary CONNOR. Yes, sir. They are all in the record from the House committee. Senator HARTKE. All of the letters? Secretary CONNOR. The letters of the major automobile assemblers have been made part of the House record which is before this committee. Senator HARTKE. If this agreement is carried into effect, and the collateral agreements or letters, what do you refer to them asMr. MCNEILL. Letters. Senator HARTKE. Letters of agreement? Mr. MCNEILL. Letters of intention. Senator HARTKE. Letters of intention are carried out, if this is done, what will be the result so far as Canadian production of automotive products is concerned? Will it increase between the period of the 1968 model year? Secretary CONNOR. Yes, sir. That would be the expectation that the production of automobiles in Canada would be increased and it would, therefore, amount to a larger percentage of Canadian consumption of automobiles than has been the case. Senator HARTKE. All right. The truth of it is this will occur not alone in the production of parts, but also in assembly, isn't that true? Secretary CONNOR. Yes, sir; it is. Senator HARTKE. And by 1968 then, that model year, the Canadian portion of the North American automotive production will be significantly higher in Canada and, therefore, as a corollary, significantly lower in the United States. Secretary CONNOR. The Canadian proportion would rise from a level of about 4.1 percent to 5 percent of the entire North American market. This will be due mainly to an increase in the Canadian market of Canadian production, but we think that the market will expand so that there will be no increase. On the contrary, there will be an increase in the number of units produced and sold by American manufacturers. Senator HARTKE. Well, Mr. Secretary, let us just come on back and take one step at a time without some conclusion if we can. We can go through these things leisurely. What I am saying is, the Canadian production and their share of the market will increase under this agreement. That is the plan, and that is what is anticipated. Secretary CONNOR. Yes, sir; that is the anticipation. Senator HARTKE. In the North American market. Is it true also that the U.S. production will decrease by an equal amount? Secretary CONNOR. Not in volume, no, but in percentage. Senator HARTKE. In percentage. What will happen to the socalled Canadian content which, I think, in the agreement is now called the Canadian value added, what will be the result of that as a result of this agreement? Will it be materially larger than before? Mr. CONNOR. Mr. McNeill is an expert in this. Senator HARTKE. Will it be larger with the tariff protection as it was under the remission scheme or will it be lower? Mr. MCNEILL. The fixed 60-percent requirement no longer exists and, as you have correctly stated it, there is a value added undertaking on the part of the companies. The undertakings are expressed in fixed terms, that is in dollar terms. As production continues to increase in Canada in dollar terms, over and above the minimum undertaking, the contents requirement will be diluted to the extent of the increased production above the floor, so that in the long run over the next years of this agreement, it is very likely and prospective that the contents will be diluted to the extent of increased production. Senator HARTKE. Is this opinion shared by all members of the Government, all departments? Mr. MCNEILL. Yes, sir. Senator HARTKE. Ánd if other testimony is developed here from other departments of the Government that that is not true, will you be willing to review their figures to see what is the occasion for the difference, if it would be materially larger or materially smaller? Mr. MCNEILL. I would certainly be willing to review their assumptions, their estimates, and match them against ours. Senator HARTKE. I think it will be shown before the hearings are over that the Canadian content will be materially larger than it was under the tariff plan but less than it would have been under the remission scheme, you understand. We are in agreement to this extent, that as far as the remission scheme is concerned that there would have been a reduction. Mr. MCNEILL. A reduction of what, sir? Senator HARTKE. In the value, the value content, what is it called, the Canadian value added? Mr. MCNEILL. No, sir. Senator HARTKE. You do not. Now, the agreement itself makes certain statements Mr. MCNEILL. Senator, if I may, the remission scheme had nothing to do with the 60-percent contents, it did not affect it. Senator HARTKE. I understand. But they were actually reducing it from 65 to 60 percent, isn't that correct? Mr. MCNEILL. No, sir. The Canadian contents has been for a number of years and was for a number of years 60 percent. Senator HARTKE. Under this agreement isn't it agreed in the letters that they have agreed to hold it at 60 percent? Mr. MCNEILL. The letters, sir, express undertakings that the companies will produce in the years, succeeding years, of the agreement through model year 1968 no less in absolute terms than they produced collectively in the model year 1964. Additionally they agreed to add value in Canada to the extent of 58 percent of the increased consumption of automobiles in Canada through model year 1968. The third factor we have been discussing is the $240 million. Senator HARTKE. In the Canadian annex to the agreement, which is annex A, the terms "Canadian value added" and "net sales value” are defined to have the meaning assigned by regulations made under section 273 of the Canadian Customs Act; is that right? Mr. MCNEILL. Yes, sir. Senator HARTKE. Is that right? Mr. MCNEILL. I am informed Secretary CONNOR. Annex A does state that, yes, sir. Senator HARTKE. Under the agreement are these terms fixed in their meaning or may the Canadians unilaterally change their regulations? Mr. MCNEILL. If they would change the substance, sir, of the regulations in light of this agreement, I am sure they would only do it after consultation with this Government. Senator HARTKE. I didn't ask you whether they would or would not. I asked you whether they could. Secretary CONNOR. I think a reasonable interpretation would be that this agreement has this definition as it existed at that time, at the time of the agreement, and this persists through he life of the agreement. It cannot be changed unilaterally. Mr. MCNEILL. That is correct, sir, they cannot. Senator HARTKE. I do not see that. If it is not true, why, the terms of the company undertakings and the agreement itself could end up in being detrimental to the U.S. interests without any prior consultation, without any agreement on our part; isn't that true? Mr. MCNEILL. No, sir. They could not change any features of annexes A or B which are an integral part of the agreement negotiated. Senator HARTKE. Did our negotiators take this up with them at all as to whether this could be changed? Mr. MCNEILL. Yes, we did discuss that with them. It is very clear they could not unilaterally by the terms of the agreement change it. Senator HARTKE. Why did not you put it into the agreement then? Or would you be willing to put it into the agreement or have it modified to more definitely spell out that these requirements and these definitions of terms are going to be in stated form rather than referring to the section of a Canadian Customs Act? Mr. TREZISE. Senator, the annex is an integral part of the agreement. The agreement stands as a whole. If the Canadians were to alter any part they would alter the entire agreement, and we would feel no longer obliged to be parties to the agreement. Senator HARTKE. Did we get any quid pro quo when we agreed to this section? Mr. TREZISE. Which section? Senator HARTKE. This section here regarding the definitions of terms. Mr. TREZISE. The agreement as a whole stands on its own feet. We think it was in the American interest, taken in its totality, and we will receive substantial benefit from it. Senator HARTKE. As I understand it, it is bound by section 273, isn't that it, of the Canadian Customs Act? Is that true? Mr. TREZISE. You have the document. Secretary CONNOR. I have it in front of me. It reads as follows: Net sales value. Has the meaning assigned under regulations by 273 of the Canadian Customs Act. Senator HARTKE. The regulations of 273 are then binding? Senator HARTKE. I understand that. Let me read from section 273 to you for your edification and information, and I want to know just exactly where we are. This is from the Customs Act of TRSC 1952, chapter 58 as amended in 1953 and 1954, chapter 3 in 1955, and chapter 32 and 1958 chapter 26. Let me read that first paragraph to you under section 273: The Governor in council may from time to time and in the manner hereafter provided in addition to the other purposes and matters in this act mentioned make regulations for or relating to the following purposes and matters. This gives the Governor in council complete authority for the Canadians, as the agreement is now written, to make modifications as long as they follow the procedures which are set forth in the sections. Mr. TREZISE. I would like to say we are dealing with the Government of Canada, a friendly government, not with an enemy government. We don't anticipate that the Canadians are going to use any power which may reside in the Governor generally to cheat us. This is not an expectation of reasonable probability. Senator HARTKE. You say this is a friendly government. Was it a friendly act when they put into effect a remissions scheme in violation of our own laws and which would have required us to come up with a counterstroke? Was that the action of a friendly government? Mr. TREZISE. I don't think the Canadians viewed this as a hostile act to us, and there never was a legal determination, that it was contrary to our laws. In addition, now we are speaking of a formal ment. I don't think their agree Senator HARTKE. I will guarantee there never was any determination. We tried to get the Treasury Department to act for 15 months, and they never did, and you finally came up with this agreement as a substitute. Mr. TREZISE. There is a substantial body of legal opinion that the countervailing duty act did not apply. Senator HARTKE. It has never been determined in the courts. The whole question about it was, there was substantial detriment at least to these people in the United States, who thought it was a detri |