Industry Committee on Oct. 5th, 2006

[The Chair, Conservative, James Rajotte]

Okay, Mr. Fisher, we're going to move on.

Monsieur Crête is next.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Mr. Chairman, I will be brief, as there are only a few minutes left.

In your brief, it says: “There are also vast, largely untapped export markets in countries such as China, which could and should be pursued proactively.”

I would like you to explain that for us. Would you like a delocalised market to be developed so that we can keep design and development? Is the Chinese market—with, for example, the train between Beijing and Tibet—an important market in your opinion?

I would like you to explain your openness to that and to tell us what you would like to see the government do in that regard.

[Glen Fisher]

It would be hard to spell it out that quickly.

One of the things that is surprising to most Canadians is that Chinese railways are North American railways. It was designed by an American engineer in 1907. You could take a Canadian freight car off the tracks here and put it on the tracks in China, and the air brakes would work and the couplers would mate with the Chinese couplers; we have a lot in common. We have an advantage over the Europeans. Also, China is a very big country, geographically.

Canadian companies have done well in China. I think the major thing the government could do for us is assist Canadian industry with sales promotion in China. That's the most important thing. Yes, they do buy our products and technology. Yes, they do like to manufacture our products there once they find out how good they are, but it's a two-way street. It's not all in their favour; it helps us too.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Do you think that the solution lies in joint ventures for parts that are not made in China? I think that we would have a difficult time today competing with Chinese cost of production for renewable parts. Is that what you would like?

I would also like you to talk about additional efforts the government could undertake. What shape should they take in terms of promotion? The train between Beijing and Tibet is a significant example of technology.

What would you like to see the Canadian government do about traditional parts that you talked about and to keep that place on the market?

[Glen Fisher]

I think we would like some help in trade missions, whereby the cost of the trade mission would be covered to a greater extent by government. It used to be that some of those costs were either entirely or largely covered. This would help a lot, because it costs a lot of money--a large proportion of their marketing budget--for a medium-sized business to buy air tickets to China.

Obviously it has to be done so that it's not a lavish investment. On the other hand, there also needs to be some financial incentive to help Canadian companies become more familiar with the market there, and it's very real; I've been there many times.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Do you know enough about China to know if there are fairs where presentations can be made? Would it take the shape of a mission or of an objective with a series of missions specific to the railway sector?

[Glen Fisher]

I think organized missions would be the best, along with some financial assistance to participate in those organized missions. From a cultural and linguistic point of view, it's not an easy thing to jump into, but having done it myself, I can say that neither the language nor the culture is that daunting. It's not that hard.

The Chinese do not like to deal with an agent. They like to deal with the principal in the business, so people running around saying they're agents, they have good connections, and they will do all kinds of good things for them doesn't work in China. They're much more sophisticated than that.

Trade missions, whereby the Canadian government can help Canadian manufacturers to actually sit down one on one with Chinese railway companies, would be good. There are a number of private railway companies. There's a big government ministry of railways, but there are a lot of smaller ones too, some privately owned by the state governments and some owned by industry. Government missions could bring the people there and acquaint these people, for the first time, with the fact that doing business with China is not as daunting or as difficult as it may seem.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

In closing, the Canada-China Parliamentary Association and Senator Austin— who has very good connections in China—could serve as a link for you and enable the government to get special attention.

[Glen Fisher]

That's an interesting idea.

[The Chair, Conservative, James Rajotte]

I think this clock is a little fast, so we have about two minutes left. We are going to go to Monsieur Arthur, for two minutes.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

Mr. Fisher, a few years ago the Canadian government and VIA Rail decided to buy totally finished British railroad cars and rebuild them for a cost of nearly $1 million each.

Do you have any notion of how much this disaster cost your image and the image of Canadian railways?

[Glen Fisher]

I think that is a good question. You're asking the right person.

VIA sued me for speaking up about that, and I finally won $17,500 in legal fees from VIA as a result of it.

Yes, it hurt our image a lot. It should not have happened.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

And you don't build submarines either.

[Glen Fisher]

We don't build submarines either.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

It seems part of the same nasty deal.

[Glen Fisher]

You would have to say that a submarine that won't stand salt water is not much of a submarine. The same is true of that VIA equipment.

VIA could have bought Bombardier-made Canadian equipment for fewer dollars per seat than the original price, not counting the $1 million per car of upgrading. If you add that into it, it would have cost about 50¢ per seat to buy top-quality Canadian equipment. So that was a big mistake.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

Were you able to explain that mistake to yourself? Was there something fishy? Was there something dishonest? Was there some corruption there? How do you explain that?

[Glen Fisher]

I wouldn't know. You would have to ask the principals.

But there has to have been some misunderstanding that this equipment was somehow more valuable than it really was. I think that would be the fair way of explaining it. Whether there were other things involved, I don't know.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

Thank you, sir.

[The Chair, Conservative, James Rajotte]

Thank you, members. Thank you very much for being with us today. We appreciate the questions and comments and the give and take.

You've made some very specific recommendations. We appreciate that. If you have any further specific recommendations you'd like to make and that you'd like us to recommend, particularly on the four programs you mentioned, please forward that to us. Thank you for being with us here today.

Members, we will suspend for about two minutes in order to allow these witnesses to leave and allow the trade officials to come in.

We will suspend for two minutes.

[The Chair, Conservative, James Rajotte]

Let's regroup, members, and get back to the table.

For our second hour today, in the context of our study on the manufacturing sector, we have witnesses from the Department of Foreign Affairs and International Trade with respect to the prospective trade agreement between Canada and South Korea.

Because we did invite the witnesses on very short notice--and we do appreciate their being here today--I understand there isn't anything formal to hand out. But we do have, from Industry Canada, a report, Partial Equilibrium Analysis of the Impact of a Canada-Korea FTA on the Canadian Automotive Industry, in both English and French, which we can distribute to members. Obviously the presentation here today will be distributed to members once we are able to translate it.

I believe it will be Mr. Burney, the chief trade negotiator, who will be doing the presentation. I would ask him to keep that presentation to ten minutes.

Mr. Burney, please, and perhaps you would like to introduce your colleagues to members of the committee.

[Ian Burney, Chief Trade Negotiator, Bilateral and Regional, Department of Foreign Affairs and International Trade (International Trade)]

Thank you very much, Mr. Chairman.

We are certainly pleased to have this opportunity to brief you on the Canada-Korea free trade agreement negotiations, for which I lead Canada's negotiating team.

Joining me today are some colleagues from the Department of Foreign Affairs and International Trade: David Plunkett, the director general for bilateral and regional trade policy; Marvin Hildebrand, director of the bilateral market access division; Kendal Hembroff, deputy director of the bilateral market access division; and Cam MacKay, deputy director of the regional trade policy division and also the deputy chief negotiator for the Canada-Korea talks.

Before going into greater detail about the Canada-Korea Free Trade Agreement initiative, allow me to give you some background.

Committee members are well aware of the importance of trade for the Canadian economy. In fact, almost one job out of every five in Canada is trade-dependent. To maintain job growth in the country and to ensure prosperity, we must open our markets and create more opportunities for Canadians to do business abroad. Unfortunately, all WTO negotiations were suspended in the summer, and we still do not know when they will resume.

At the same time, Canada's key competitors are now accelerating the already aggressive pace of their bilateral negotiations. They are seeking, and obtaining, preferential access to dynamic markets around the world, putting Canadian firms at a competitive disadvantage.

As Minister Emerson said on a number of occasions, Canada has not been keeping pace on this front. For example, since the WTO negotiating round was launched in late 2001, the United States has concluded FTAs with 15 countries while Canada has concluded none. In fact, we're the only significant trading nation that has not concluded a single FTA in five years.

While some have suggested lately in the media that this does not matter and constitutes a poor rationale for pursuing FTAs, the reality is that our relative performance in negotiating FTAs can and does have a material impact on the competitiveness of our firms in foreign markets. This is not an academic concern to our exporters or investors. Canadian companies are already telling us they're losing markets, and they're losing sales in foreign markets, due to the FTAs of other countries. They're calling on the government to level the playing field.

Looking ahead, while we'll continue to strengthen our NAFTA ties and work to secure a successful outcome to the WTO talks, at the same time we have to put greater emphasis on our regional and bilateral agenda, including initiatives such as the Canada-Korea FTA negotiation, which I'll turn to specifically now.

With a population of 48 million and a GDP approaching $1 trillion, Korea is the largest of the four Asian tigers and already the world's eleventh largest economy. That makes this the most ambitious bilateral FTA negotiation that Canada has launched since NAFTA, more than ten years ago. What we're seeking is a comprehensive, high-quality agreement with Korea, modelled on NAFTA.

In the core area of market access for goods, services, and investment, we're seeking ambitious liberalization and comprehensive coverage. A particular area of emphasis with Korea continues to be on non-tariff barriers, such as regulatory and transparency issues, which have been identified by our stakeholders as important impediments in the Korean market. Fundamentally this initiative is about enhancing opportunities for Canadian business.

Why Korea specifically? For starters, Korea is a large, prosperous, and fast-growing market for Canada, strategically situated in one of the most dynamic economic regions of the world. Korea is already Canada's seventh largest export destination. In fact, we exported more to Korea last year than we did to Brazil, India, and Russia combined.

Korea is also becoming a major services market for Canada, with over $700 million in services exports last year, and two-way investments stand at $1.1 billion. An FTA with Korea could generate much more two-way business by dismantling the tariff, regulatory, and other barriers to commerce that limit opportunities.

Korea continues to maintain relatively high tariffs, 13% on average, versus only 4% for Canada. Therefore, the elimination of tariffs in an FTA would generate substantial opportunities for Canada and, one could argue, would have a disproportionately favourable impact on Canada.

The Korean market is particularly important for the agriculture- and resource-based segments of the economy, with an FTA expected to generate gains in areas such as agrifood, fisheries, metal and metal products, a wide range of forestry and wood products, and coal and other minerals.

In the agriculture sector alone, Korean tariffs average around 53%, substantially higher than Canadian tariff levels. In the fisheries sector, Korean tariffs average 18%, while ours are a little over 1%. So eliminating Korean tariffs would clearly provide major opportunities for Canadian exporters.

We also expect gains in a variety of industrial and manufacturing sectors, including chemicals, aerospace and urban transportation equipment, fertilizers, auto parts, pharmaceuticals, cosmetics, prefab buildings, environmental goods, and machinery and equipment, to name a few.

I believe these are some of the sectors that this committee has been looking at.

As well, we believe there are opportunities in the services sectors of the economy, where 80% of new jobs are created in Canada today. Some examples include financial, high-tech, and environmental services.

An FTA would also provide a more secure and predictable climate for Canadian investors in Korea and would assist in attracting Korean investment to Canada. That in turn would help open doors for Canadian businesses in neighbouring markets, such as China and Japan. Intraregional trade has been growing exponentially, so Korea could become an important entry point for Canadian companies.

As I said earlier, Canada's bilateral FTA program is also guided by the need to ensure that Canadian companies can face competition on an equal footing.

Korea is perhaps a newcomer in the world of free trade agreements, but it has already signed agreements with 15 countries in recent years and is actively attempting to negotiate others with several other countries. The free trade negotiations currently underway between Korea and the United States are of course of specific interest to Canada, given how integrated our industries are in certain sectors, like the automobile industry and our aggressive competition with the United States on world markets in agriculture for instance.

More recently, we have learned that Korea and the European Union are considering the possibility of negotiating a bilateral trade agreement. There is no doubt that that raises the stakes for us and highlights the importance of preserving Canada's competitiveness in this important market.

Where are we now? Since launching negotiations in July 2005, we've held seven rounds of talks with Korea at roughly two-month intervals. The most recent round of negotiations was just last week here in Ottawa and the next is scheduled for the week of November 20 in Seoul.

We've made good progress to this point, but we're now touching on the key sensitivities on each side. Canada is pressing for improved access to Korea's highly protected agriculture, fish, and forestry markets, and Korea is seeking faster cuts to Canada's tariffs in sensitive manufacturing sectors such as autos. There's no deadline for concluding these talks, and Minister Emerson has made it clear that our emphasis is on seeking a good agreement with Korea, not a fast one.

Let me now turn, if I might, to the auto sector, the area of this negotiation that clearly has attracted the most attention here in Canada. Given the importance of the auto sector to the Canadian economy and to our overall trading relationship with Korea, the government has devoted particular attention to issues involving this sector and this negotiation.

We've set up a working group within the negotiating structure with Korea focused exclusively on automotive issues, and to support the negotiations at the table we've established a dedicated automotive consultative group here in Canada. The group meets regularly to ensure that industry views are well understood and reflected to the extent possible in our negotiations. The work of this group has been supplemented with additional meetings with industry at all levels.

Just this morning Minister Emerson had his most recent discussion with auto industry representatives on a range of trade issues, including the Korean FTA. Two weeks ago the minister had what I would characterize as a positive and constructive meeting with a delegation from the Canadian Auto Workers, led by its president, Mr. Buzz Hargrove.

So there's been no shortage of dialogue with the industry, and their views have played an important role in shaping our approach to this negotiation from the outset. For instance, Canada's automotive sector has expressed concerns regarding a range of non-tariff barriers in the Korean automotive market. That's why the government has made addressing non-tariff measures a key priority for us in the negotiations.

At the same time, Canada's domestic automotive industry has expressed concerns regarding the potential impact of eliminating Canada's automotive tariff in the context of a Canada-Korea FTA. Members of the committee may be aware that in September the government released two studies that conclude that any negative impact on the automotive sector from an FTA with Korea would be very limited.

The first study, mentioned by the chairman, was conducted by Industry Canada and estimates a decrease in Canadian production on average of less than 1,000 units per year, which represents 0.04% of the 2.6 million vehicles we produce in Canada each year.

The Industry Canada assessment is supported by a second study commissioned by Foreign Affairs and International Trade Canada and carried out by Dr. Johannes Van Biesebroeck from the University of Toronto, a respected academic who specializes in economic analysis of the automotive industry.

Like the Industry Canada study, Professor Van Biesebroeck concludes that a Canada-Korea FTA would have only a modest impact in terms of additional imports from Korea, less than 10%, and that this would come largely at the expense of other imports. The study therefore concludes that an FTA would result in only a fractional decrease in Canadian vehicle production of 2,137 vehicles, representing 0.08% of production.

At the same time, the study projects that Canadian automotive parts exports to Korea stand to benefit from tariff elimination and forecasts increased Canadian exports of between 8% and 12%. The central conclusion of both studies that there would be little impact on Canadian production reflects a variety of factors: the low tariff, 6.1%; the preponderance of imports in our market, which account for about three-quarters of sales; and the fact that Korea has only 8% of the market by volume.

[The Chair, Conservative, James Rajotte]

I would ask you to please conclude.

[Ian Burney]

Okay, I'll wrap up in one minute.

It's also worth mentioning that a significant share of Canadian production, about 30%, has no comparable competition from Korea. Then there's the fact that the vast majority of Canadian production, about 84%, is exported to the United States, which would obviously not be directly affected by an FTA with Korea.

Another factor not taken into account by other studies, but that would mitigate the impact of an FTA with Korea, concerns recent investment decisions by the Korean makers. Hyundai has opened a major new plant in Alabama, and both it and its subsidiary, Kia, have announced plans for further assembly plants in the NAFTA area, from which Korean cars could be exported to Canada duty free under the NAFTA.

For all these reasons, the government's assessment is that the incremental impact on Canadian production from tariff elimination in a Korean FTA would be minimal.

On that note, Mr. Chair, I'll conclude and accept questions. Merci beaucoup.

[The Chair, Conservative, James Rajotte]

Thank you very much Mr. Burney.

We'll go right to questions.

Mr. Lapierre, six minutes.