Vehicles and Auto Parts Exportation to Canada
Vehicles and Auto Parts Exportation to Canada
Introduction
The products to be exported are vehicles and auto parts. They are being exported to Canada. A large percentage of imports in Canada come from the automotive imports originating from the United States. Canada spends an estimated 19 billion dollars on importing automotive from the United States (Transport Canada, 2016). Also, three quarters of the cars being used in Canada are imported from the United States. It means that Canada has a large market for the automotives. A larger percentage of the companies in the automotive industry comprise of assembling firms. The assembly firms import their parts from large foreign car companies like Toyota. There is a ready market for the auto parts too. The availability of a ready market serves as an attracting factor. It makes exportation of automotives and auto parts from the United States to Canada a lucrative business to venture in.
The United States is currently the second largest manufacturer by volume of automobile. Automotive exports from the United States to Canada are key inputs into the Canadian automotive production and exports. The United States has a large automotive industry. Some of the companies manufacture finished vehicles while other firms deal with production of the auto parts. Assembling firms are available too (Türkcan & Ates 2011). Some of the large cars manufacturing companies in the United States include Toyota, Ford, Chrysler, General Motors, and Honda. Car sales projects increased by 58% (from 10.4 million to 16.5 million) in the post-recession period and are estimated to be hit 17 million in 2016.
Automakers and suppliers are the biggest exporters in the United States. It is estimated that around 1 million cars are exported from the United States to over 100 foreign markets (United States Customs and Border Protection, 2016). More than 5600 auto supplier exist in the market. The automotive industry is highly invested in due to the high returns that the investors get.
Automotive Industry in Canada
Automotive production is one of the greatest component of Canada’s manufacturing sector. Canada’s automotive industry consists of assembly plants of foreign automakers. The assembly for the light vehicles is usually done for the mass consumer market. It is undertaken by five original equipment manufacturers (OEMs) that are foreign-based. They include General Motors, Ford, Chrysler, Honda, and Toyota. All of the plants are wholly owned subsidiaries of the foreign based OEMs. The automotive parts and supply industry extensively manufactures inputs for the vehicles. The parts are assembled either in Canada or in some other country. Some of the companies that makes the parts are firms owned by the Canadians or subsidiary firms. The subsidiary firms import automotive parts from their main or mother companies (Fergusson 2011).
80% of the vehicles manufactured in Canada are exported to other countries. Almost two thirds of the manufactured auto parts are also exported outside the country. At the same time, 80% of the vehicles purchased in Canada are imported, most of them from the United States (Cachon & Olivares, 2010). US being the greatest import source, some finished vehicles come from countries like Mexico, Japan, Europe and Korea.
The automotive industry rebounded back in the post-recession period due to increased demand for new motor vehicles. The manufacturing of motor vehicles, motor vehicles parts, and motor vehicle bodies and trailers has expanded in the country. There is a greater demand and market for motor vehicles and motor vehicle parts. Between the years 2009-2012, the automotive industries sales had increased by 67.3% (Cachon & Olivares, 2010).
Basic Export Requirements (United States)
According to the United States Customs and Border Protection (2016), “A person attempting to export a used self-propelled vehicle shall present to Customs, at the port of exportation, both the vehicle and the required documentation describing the vehicle to include the VIN”. If the vehicle is exported by vessels or aircraft, the documents that are required should be made available 72 hours before the exportation. The documentation must also be submitted 72 hours before exportation if the vehicle is being exported at land border crossing points (that is by railway or highway or any other means). The vehicle must also be present at the time of exportation. The exporter must also present ownership documents to the customs if the car was previously owned and used. For newly manufactured automobiles, the exporter must present to the customs an original manufacturers statement of origin or certificate of origin at the time of exportation.
The exportation of the auto parts has no stringent restrictions. However, the owner must prove ownership of the exports. If they are new, he or she must provide documents from the respective manufacturing company showing that he or she acquired the merchandise legally and that he or she is the legal owner as per the time of exportation. The auto parts are also inspected before being allowed across the borders.
Imports Requirement (Canada)
Before importing vehicles to Canada, the vehicles must be admissible into Canada. It should meet the requirements of the Canada Border Service Agency, Transport Canada, and Canadian Food Inspection Agency (Transport Canada, 2016). The Registrar of Imported Vehicles (RIV) should be involved before the process of importation begins. RIV has the mandate of guaranteeing the cars are in line with Canada’s safety standards. For a vehicle to be admissible, it should be titled in the United States. If it is new, it should have a Manufacturers Statement of Origin or a Certificate of Origin (Transport Canada, 2016).
The vehicle should have the required documentation for importation. The documents are then submitted to the Canada Border Service Agency and the vehicle is inspected. The vehicle should be inspected and certified by the Registrar of Imported Vehicles (Fergusson, 2011). A vehicle that fails RIV inspection cannot be allowed to stay in Canada regardless of whether the taxes and duties have already been paid. Vehicles that are exempted from RIV may include vehicles that are 15years old or older (from the date of manufacture). A vehicle that has also been modified from its original state is not allowed for importation (Transport Canada, 2016). Vehicles might also be modified to be in line with Canada Motor Vehicle Safety Standards.
RIV registration fees should be paid. The fees vary depending on the type of car being imported and the borders through which they are being imported from. They range from time to time and are non-refundable. The import fee is processed at the Canadian Boarder Service Agency after the car is inspected and cleared by the RIV (Transport Canada, 2016). The import duties and taxes include the air conditioning excise tax, excise tax on fuel inefficient cars, and goods and services tax. The imported auto parts are not inspected thoroughly. However, they must meet the requirements of the Canada Border Service Agency before they are allowed into the country.
North American Free Trade Agreement
The North American free trade agreement was an agreement signed by Canada, Mexico, and the United States to create a trade bloc in North America (Cooper, 2014). The goal of NAFTA was to eliminate barriers to trade and investment between the US, Mexico, and Canada. The agreement reduced tariffs on some products and completely eliminated tariffs on other products. The agreement was a proof that the three countries were ready to trade.
Automotive Products Trade Agreement (Auto Pact)
In 1965, Canada and the United States signed the Auto Pact (Automotive Products Trade Agreement). The agreement removed tariffs on automotive parts, cars, tracks, tyres, and buses. It mainly benefited the big car makers in the United States. In exchange, the large car makers agreed not to let automobile production in Canada to fall below the levels in 1964 and that they would ensure the same production to sales ratio in Canada. The agreement aimed at creating a unified auto industry. It restricted foreign companies from setting up their car manufacturing companies in the areas
There was also a side deal between the three large car companies and Ottawa. The manufacturers agreed to increase their investment in the Canada automotive industry. Sixty percent of their sales were also to be spent in Canadian operations. In the mid-90s, forty percent of the cars sold in Canada were produced in the United States (Cooper, 2014). The main goal of Auto Pact was to reduce production costs in the automotive industry in Canada. It also reduced the cost of motor vehicles for the consumers. The agreement also increased production in Canada; thus, also increasing job opportunities in the region.
The Auto Pact agreement provided market in Canada for the automotive products and vehicles from the USA. Although the export for the country is expected to grow as a result of the agreement, the imports for the automotive vehicles and auto parts grew at a higher rate than the exports. It means that Canada imports more of the automobiles than it exports. The Auto Pact created a hybrid form of conditional free trade. Although the shipment is not completely free, the shipment cost has been subsidized (Cachon & Olivares, 2010).
Market for the Vehicles and Auto Parts
United States is still the greatest exporters of vehicles and automotives parts to Canada. It means that there is a ready market for the vehicles and its parts. The United States accounts for 73.9% of Canada’s automotive trade. In 1965, Canada signed the Auto Pact (Automotive Products Trade Agreement) (Fergusson, 2011). Auto Pact facilitated a highly integrated nature of automotive production. Canada’s import of automotive parts, however, varies in relation to the volume of assembled vehicles that are exported.
Most of the vehicles purchased in Canada are imported. It means that there is a large market for the exported automotives and the auto parts. The living standards of the people in Canada are high. The rates of poverty are minimal. Most people are able to afford the basic stuffs for the basic needs. Most of them can also afford luxury. It means that the possibility of one person in a family of four to afford a car is high (Cooper, 2014). With that ratio, it implies that the demand for the vehicles is not likely to go down. In the recent past, there has also been increased demand for new model vehicles in the country.
There is a ready market for the auto parts. Most of the firms in the automotive industry in Canada deal with assembling of body parts of the automotive. It means that the exporter will not have huge piles of unsold auto parts. With the increased exportation of automotive from Canada to other regions mans that there is increased automotive production in the country (Cooper, 2014). Increased productions mean increased importation thus leading to increased profitability.
Exportation Costs
Firstly, there is no import duty on vehicles from NAFTA countries (Caliendo & Parro 2014). The vehicle is free of duties, taxes or tariffs if it is sold in USA, Canada or Mexico. Let take an example of an automobile import (into Canada) from the US.
Purchase price (including US TAXES) – 45,000 Dollars
US duty value (price converted to Canadian currency at the current exchange rate) - (45000*1.27) 57,150
Duty at 0%-$0
Excise tax on air conditioner: 100 dollars
Excise tax on excess weight over 0 0ver $ 100- 100 dollars
Value for tax (value + duty+ excise tax) - 59,150
Tax on Goods and Services (59150*5%) 2955
Total duties and taxes paid -3055
Total cost-62,205
That is just an example for exporting a vehicle that is worth 45,000 dollars in the United States. The cost may vary if an exporter chooses to use a shipment agency. Different shipment companies charge different fees for their shipment services. It depends on the heaviness of the automotives or the number of vehicles being exported.
Canada has a 6% tariff on imported vehicles but has no tariff on imported auto parts (Transport Canada, 2016). The exportation of the auto parts is almost free except for the little fees that the exporter may need to pay. Any exporter would love to exports their products at the most possible minimum cost. The minimized costs means increased profits margins for the exporters.
Funding
An exporter could possibly apply for a loan to finance the exporting business. Exporting automotives can be quite expensive. The chances of a person having such capital personally or from their personal savings are very minimal. Financial loans should be able to give the exporter the much needed capital to start the business. He or she could also ask for help from the relatives that are willing to help.
Another option is for the exporter to approach investors with his or her business plan. The plan should entail the costs of importation, the scope of the market, and the rates of profitability. The business plan should be able to convince the investors to invest in the business.
Advantages of exporting Automotives to Canada
The existence of the North American Free Trade Agreement is a positive thing to the exporters. The agreement allows for easy and efficient trade between the United States and Canada. Most barriers that may be faced during the exportation process are eliminated making the process easier. Many countries have many regulations when it comes to exporting automotives through their borders. The regulations might be at the customs or in documentation process. Some do not allow vehicles if they have been in use for a certain number of years. It might limit exportation to only newly manufactured cars or those that have not been in use for a long time. However with NAFTA, all these regulations are minimized for the NAFTA countries. The agreement also provides for a wider market for the exported automotives (Caliendo & Parro, 2014).
The subsidization of the tariffs on the imported vehicles also benefits the exporter. It means that the exportation expenses are reduced; thus, high chances of increased profitability. The chances of the exporters making loss due to high cost of shipments, taxes or duties are very low (Cachon & Olivares, 2010). It encourages more investments into the business since the returns are likely to be high. The auto parts have no tariffs at all. It also means minimized exportation costs for the exporters.
The Auto Pact provided conditional free trade. It created unified automotive industry. It meant that automotive exports from one country can never lack market in another country. This provides a ready market for the exported vehicles and vehicle parts. With the ready market, the exporter is sure of sales. He or she does not have to gamble on the possibility of lacking market for his or her exported goods (Cachon & Olivares, 2010). The availability of markets makes the exportation of the automotive and auto parts a very liable and reliable business. There is assurance of returns on the money invested.
Conclusion
Exporting vehicles and auto parts to Canada can be quite lucrative. First of all, with the existence of the trade agreements (NAFTA and Auto Pact), the costs of exportations are reduced. NAFTA was signed by Canada, Mexico, and United States to reduce the trade barriers between the three countries. The auto pact was signed between Canada and United States in relation to the automotive industry. The agreements provide for reduction or total elimination of tariffs on some products that are being exported or imported by the NAFTA countries. The reduced costs of exportation attract an exporter to invest into the business. Reduced costs of exportation increases the possibility of high profitability in the business. The agreements also formed a unified automotive industry between the countries.
The market for the automotives and the auto parts is readily available. Canada has increased its production for the automotives in the recent years. It means increased demands for the auto parts by the assembling firms. A high percentage of the vehicles being used in Canada are imported. It also suggests that the demand for the automotives in the country is high. The demand for new model vehicles in the country has risen. Exporters will definitely benefit from this.
References
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United States Customs and Border Protection. (2016). U.S. Customs and Border Protection | Securing America's Borders. Cbp.gov. Retrieved 23 April 2016, from http://www.cbp.gov/
Cooper, W. H. (2014). Free trade agreements: impact on us trade and implications for us trade policy. Current Politics and Economics of the United States, Canada and Mexico, 16(3), 425.
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Transport Canada. (2016). Transport Canada. Tc.gc.ca. Retrieved 23 April 2016, from http://www.tc.gc.ca/eng/menu.htm
Türkcan, K., & Ates, A. (2011). Vertical intra‐industry trade and fragmentation: An empirical examination of the US auto‐parts industry. The World Economy, 34(1), 154-172.
