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Cablegate: Canadian Government Announces Plan to Eliminate Tariffs On

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STATE PASS USTR (SULLIVAN)

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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

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