Assignment #1 Canada has had a long history of making cars. It is still an important part of the economy. In 1904, there were 500 cars registered in Canada, by 1918 there were more than 300,000, and by 1929, there were almost 2 million. But how we got here is an interesting story of politics, primarily the use of tariffs, and personalities. Two major government policy initiatives helped the establishment of the industry. The first was the National Policy, established by Sir John A. Macdonald in the late 1870s. This was a system of high tariffs designed to protect new Canadian industries from foreign, primarily American and British, competition. The other was the imperial preference established by Sir Wilfred Laurier in the late 1890s. The imperial preference gave countries that were part of the British Empire preferential trade arrangements. Other countries that were part of the British Empire included India, Australia, New Zealand, and, of course, Great Britain. Throughout the 20th century, there were changes in tariffs that largely benefited the automobile industry. A tariff is a charge put on imported goods to make those goods more expensive and comparable in price to domestic goods. The federal government collects the tariffs. By 2004, Ontario became North America's largest producer of automobiles. It has been pointed out that Ontario has some competitive advantages compared to many states. One advantage that is often pointed out is a cost of medicare. In 2004, the cost of medicare was funded entirely by the province, with some help from the federal government. By comparison, Americans had to buy private health insurance. In 2004, General Motors spent $1,400 per vehicle just to cover the cost of private health insurance. This was more than the cost of the steel that went into making that car. But this argument is not entirely correct, as the automotive industry was established long before then. And Ontario was a significant manufacturer for decades before 2004. In 1904 Gordon McGregor met with Henry Ford to get a license to build Ford cars in Canada. McGregor owned Walkerville Wagon Works of Walkerville, Ontario. Walkerville is now part of Windsor. They agreed to the licensing because the National Policy was still in effect and high tariffs of 35% were still in place. By 1920, the Canadian subsidiary of Ford became the largest automotive company in the British Empire. The high tariffs of the National Policy also led to the establishment of another automobile company. In Oshawa, Sam McLachlan was also considering establishing an automobile company. He was a co-owner, with his brother, George, of a carriage manufacturer that their father, Robert, established. Because Robert was such a good carpenter, the carriage company had a good reputation. In 1901, Sam and George Assignment #1 Page 2 of 5 experienced a ride in an automobile and were immediately taken with its potential. They tried to convince Robert to consider setting up an automobile company, but their father dismissed it as a passing fad. Despite that, Sam approached Bill Durant, also a carriage manufacturer, who had just bought the Buick Motor Company based in Flint, Michigan. They met and Durant agreed to let Sam build Buicks in Oshawa. The resulting company was the McLachlan Motor Car Company. The car's body was Canadian designed, but it had American-built Buick engines. There were a couple of reasons why both Ford and Durant agreed to the arrangements with McGregor and McLachlan, respectively. Both Canadian firms were building carriages and buggies. Both Ford and Durant realized it would be comparatively inexpensive to retool these facilities to make cars. In the United States, banks viewed new car companies as being risky and were reluctant to lend them money. This meant that the American firms used all the cash they had to make and sell cars domestically. Canadian companies could take care of financing themselves. So, licensing the two Canadian manufacturers was an obvious choice to help the Americans grow their business. Manufacturing automobiles requires parts. Initially, American manufacturers outsourced a lot of their parts manufacture. Canadian manufacturers also needed parts. But to prevent Americans from providing a partially built car for final assembly in Canada, the federal government lowered the 35% tariff on automobiles down to 30% for parts. This level of tariffs made it uneconomical for American manufacturers to ship partially completed cars to Canada. As a result, Canadian parts manufacturers started to be developed. Ford, in particular, sourced parts locally because it had the aim of producing many low-cost cars that could be sold to most people. In order to get the high volume, low cost manufacturing going, Ford the limited the number of models that were available in Canada. In 1897, the imperial preference started to take on greater importance. It coincided with increased patriotism reflecting Queen Victoria's Golden Jubilee. The Golden Jubilee was the 50th anniversary of Queen Victoria's reign. Canada was in a very favourable position, because it was close to the United States and a member of the British Empire, both of which led to trade. The imperial preference gave Canada an advantage over the United States when it came to trading with countries that made up the British Empire. One advantage that are provided the Canadian manufacturers was economies of scale, which lowered the cost of manufacturing, something that would ordinarily be difficult to achieve with Canada small population. So successful was this reliance on the imperial preference that the Canadian operation of Ford opened manufacturing Assignment #1 Page 3 of 5 facilities in Australia, India, Malaya, and South Africa. Malaya is a peninsula that is on the south side of Thailand which, at the time, included Singapore. In the 1911 election, the topic of free trade arose again. Canada and the United States had been through periods of free trade and periods of high tariffs. Laurier was advocating free trade during that election. His argument was that Canadians could keep the money that the government collected through tariffs. At the time, 60% of Canadian imports came from the United States. But a combination of renewed patriotism towards the British Empire and an alienation towards the United States made that argument difficult. In particular, Henry Ford tried to make the argument for reciprocity, suggesting that Canadian manufacturers have nothing to fear from competing with American ones. But Robert McLachlan was strongly opposed to free trade. Largely because of the distrust of Americans, the election was a resounding defeat for Laurier losing to the Conservative, Robert Borden. By 1914, the time World War I started, Ford had clear dominance in automotive manufacturer in Canada. It outproduced the McLachlan's ten to one. At the same time, the McLachlan's ended carriage manufacturing and focused solely on cars. However, Sam was concerned about the negotiations with General Motors because a contract renewal was to come up in 1923. Durant by this time had founded General Motors through an amalgamation of different existing companies including Chevrolet which was established by Louis Chevrolet. Sam felt that he would not get as beneficial a contract as he had with Durant in 1907. So, Sam decided to approach Durant about selling the company which was ultimately finalized in 1918 for a price of $5 million. During World War I, car manufacturing greatly increased. There are actually few automobiles used in World War I, the primary ones being ambulances. But there was strong manufacturing elsewhere which gave Canadians the money for which to buy cars. This led to a great expansion of the automotive manufacturing industry. But at the end of World War I, the country slid into depression. Hundreds of companies either became bankrupt or were bought by larger companies. By the end of the 1920s, there were no independent Canadian automobile manufacturers. All were subsidiaries of American firms. During that time, Walter Chrysler established a third automotive manufacturing company. Chrysler had successfully turned a failing automotive company, Maxwell Motors Company, which was subsequently named the Chrysler Corporation. By 1926, the National Policy became increasingly contentious. Canadians complained that they were paying significantly more for the same product that Americans paid. This led to a reduction in the tariffs from 35% to 20% for cars that sold less than $1,200 and from 35% to 27.5% for more expensive cars. An excise tax of 5% was abolished for Assignment #1 Page 4 of 5 cars that cost less than $1,200. The budget under which these tariff changes were tabled also allowed for rebate on the tariffs if at least 50% of the car was manufactured in the British Empire. The Dodge Brothers, the Studebaker Corporation, and Chrysler opposed this change because they did not meet the criteria for the rebate. Ford and General Motors, however, had more than 50% of their cars made in Canada. But for the criteria to be met, the 50% referred to an aggregate amount, not an amount for a particular model. Sam McLachlan opposed this criterion and threaten to close manufacturing facility in Oshawa, which he did in 1926. Alfred Sloan, who was then the head of General Motors saw this as an opportunity to dispose of both McLachlan and Durant as he disliked them both. But McLachlan disliked the moves of Sloan and reopened the Oshawa factory after three days of closure. But after the budget, there was still a significant difference between the cost of Canadian and American cars. This was a particularly troublesome point for rural western Canadians. It was pointed out that the difference in prices was about the same as the tariffs imposed on American cars. Mackenzie King, the Prime Minister, reduced tariffs and the criteria for the amount made in the British Empire. This meant that all automotive manufacturers in Canada would qualify for the rebate. Mackenzie King had a particular dislike for automotive manufacturers, and through this change he was able to satisfy the Western voters and make automotive manufacturing more competitive in Canada. In late 1929, the Great Depression occurred. Mackenzie King lost the election in 1930 to R.B. Bennett because of his callous attitude towards the unemployed. In the Great Depression, disposable income and, in particular, discretionary income fell dramatically. Among other things, people thought far fewer cars. In 1929 263,000 cars were made, but in 1932 only 61,000 cars were made. In 1937 car sales increased, but then dropped the following year. One of the actions governments everywhere took was to increase tariffs on the belief he would protect domestic manufacturing. In the United States, the Smoot-Hawley tariffs were put into law in 1930. In response Bennett increased the 27.5% tariff to 30% and placed a new tariff of 40% on imported cars valued at $2,100 or more. This new tariff also resulted in factories being built in Canada by Packard, Studebaker, and Hudson Motors. But it also had the effect of increasing the difference of the cost of American and Canadian cars, which led to resentment in Canada. But over time, there was the realization that high tariffs did not address the economic decline of the Great Depression. So, there was a push for free trade once again. As a result, there was an agreement between Canada and the United States to provide each other with the Most Favoured Nation Tariff. These lower tariffs also led to Packard, Studebaker, and the Hudson Motors leaving Canada. Assignment #1 Page 5 of 5 From: Martin, Joe (Ed.). (2010). The Role of Trade Policy in the Rise of the Canadian Automobile Industry. In Relentless change: A casebook for the study of Canadian business history. University of Toronto Press. Review this story and determine what you can gain from this. This can be items that you find personally interesting or useful. You need to explain fully why those items are interesting or useful. You could also discuss what governments or businesses can gain from this story. Again, you need to explain fully what they can gain.