International Trade Committee on May 31st, 2012

[The Chair, Conservative, Rob Merrifield]

We would like to call the meeting to order.

We want to thank our witnesses for being here, as well as our committee members. They will be coming in shortly, all of them, but we do have enough to get started on our witnesses.

We are continuing our study on a comprehensive and high-level economic partnership agreement with Japan.

We want to thank Mr. Philip de Kemp, who's here in person from the Malting Industry Association of Canada.

Also we have by video conference, from the Canada Wood Group, Paul Newman.

Paul, can you hear me?

[Paul Newman, Executive Director, Market Access and Trade, Council of Forest Industries (COFI), Canada Wood Group]

Yes, I can. Thank you.

[The Chair, Conservative, Rob Merrifield]

Okay, very good.

We also have by video conference, from Canadian Honey Council, Mr. Lee Townsend, vice-chair.

Can you hear me, sir?

[Lee Townsend, Vice-Chair, Canadian Honey Council]

Yes, I can.

[The Chair, Conservative, Rob Merrifield]

Okay.

So communications are good. Let's move right along.

We'll yield the floor first to Mr. de Kemp.

The floor is yours, sir.

[Phil de Kemp, President, Malting Industry Association of Canada]

Thanks very much, Mr. Chairman. Good morning, ladies and gentlemen.

On behalf of the malting industry and its members, we appreciate the invitation today to highlight briefly for you the importance of an economic partnership agreement to strengthen our trading relationship with Japan.

For those of you who are unfamiliar with perhaps the significant economic contribution our industry provides to both farmers and the Canadian economy, let me first describe to you who we are, what we do, give a brief historical perspective on the evolution of our industry, and tell you why, in our view, an economic partnership agreement with Japan is critically important to our industry, our brewing customers, and our Canadian malting barley producers in western Canada.

Canada's malting industry is comprised of four companies. They include the Canada Malting Company, which has plants located in Calgary, Thunder Bay and Montreal; Prairie Malt Limited, which is located in rural Saskatchewan in a small town called Biggar, which is approximately about one hour west of Saskatoon; Rahr Malting, which is situated in a small rural Alberta community located northeast of Red Deer in a town called Alix; and finally we have Malteurop, which is a plant located in Winnipeg.

Canada's malt industry is the second largest world exporter of malt. We are second only to the European Union. Almost two-thirds of our value-added production goes into the highly competitive export market destined to brewers in over 20 countries. We are the largest customer for Canadian malting barley and historically purchase approximately 1 million to 1.1 million metric tonnes annually from farmers via what used to be the Canadian Wheat Board. Historically, our industry accounts for almost 60% of all malting barley sold by the former Canadian Wheat Board every year.

Today approximately 70% to 75% of all barley grown in western Canada is comprised of malting barley varieties with selections and quality parameters greatly influenced by seasonal weather conditions.

In our view malting barley is a specialty crop, and it provides significant economic returns to Canadian barley farmers.

Between 1985 and 1995, we invested over $300 million in building two new plants and greatly increased capacity at several others. We went from exporting just 40,000 tonnes of malt annually to almost 600,000 tonnes during that ten-year timeframe, and since 1995 we've kind of stuck at that number.

Just as an economic note on the domestic side as far as the supply of malt for the Canadian brewing industry is concerned, to give you quick snapshot, we buy about $100 million worth of barley from western farmers just to supply the manufacturing of malt for the Canadian brewing market. That $100 million translates into about $2.5 billion in federal and provincial excise tax just on the tax on a case of beer—so just keep that as sort of a Google reminder.

Our malting members have a long and treasured trading relationship with our Japanese brewing customers. Japan is our largest overseas market and comprises approximately 25% of our entire export business. Japan looks to Canada for purchasing approximately 160,000 tonnes of malt, which is equivalent to about 200,000 tonnes of malting barley annually.

Japanese brewers are not only our customers, but in fact, some of them are also our partners. Japan continues to provide a long-term focus in Canada by investing in our producers and in our barley breeding effort programs. Quite simply, I think it's fair to say that our supply arrangements can be viewed in many ways as a partnership. They recognize our commitment to quality and customer service—our reputation is based on this foundation—and we make every effort to ensure our Japanese customers have security of supply, which is a critically important factor in our business trading relationship with them.

The Japanese brewing industry and their consumers provide significant value to the Canadian malting industry and our Canadian barley farmers. Any loss in our ability to provide a high-quality, reliable, and secure supply of malt at competitive values would be detrimental to our industry, which is currently experiencing difficult times competing and maximizing capacity utilization in today's highly competitive global marketplace.

As a partnering country, we recognize and respect the sensitivities that Japan has within its agricultural sector.

It is our hope that as the negotiations unfold, preferential access for Canadian malt can be made a priority and managed in such a way so as to recognize some of the domestic constraints that are currently faced by the domestic brewing industry in Japan.

Our key message to you today in terms of Canada's international trading agenda priorities is simply about three or four points.

First, Canada's export success and future prosperity is contingent upon the government's recognition and vigilance in ensuring Canadian export interests are not put at a disadvantage vis-à-vis our competing suppliers, such as the European Union, Australia, and the United States.

Second, particularly in light of the aggressive and successful bilateral trade negotiations some of these countries have had with countries such as South Korea, Thailand, and other Pacific Rim countries, these preferential trade agreements will impact on our future ability to remain competitive. In our industry environment, where margins continue to be narrowed, any competitive disadvantage puts our industry at further risk.

Third, this is quite critical and it doesn't refer only to Japan, but negotiations, particularly with South Korea, must be re-engaged and re-engaged soonest. Based on some of the information we received yesterday, that doesn't seem to be quite likely at this point.

An economic partnership between Canada and Japan is extremely critical, particularly in light of the risks associated with preferential access that may be given to competing countries if Canada is not—and I repeat, if Canada is not—included in the Trans-Pacific Partnership negotiations and Japan is allowed entry.

Finally, Japan is a highly respected and valued customer to us. It is an extremely important and critical market for our Canadian malting plants. Our malt exports drive value on all barley exports. We need to ensure that we protect and nurture our brewing partnership interest in this market.

Thank you for your time and consideration today. I look forward to any questions you may have at the end of the discussions.

[The Chair, Conservative, Rob Merrifield]

Thank you very much. I'm sure there will be some questions, but before that, we'll hear from Mr. Newman from the Canada Wood Group. The floor is yours, sir.

[Paul Newman]

Thank you, Mr. Chairman.

This morning I'm going to be giving some forest industry considerations regarding the economic partnership initiative with Japan.

The Canada Wood Group represents the Canadian forest industry overseas. We are, as an industry, the largest forest products exporter in the world. Canada Wood has offices in Japan, China, Korea, and Europe. We've been active in Japan since 1973, with an on-the-ground presence there for 40 years now.

I will give a very brief overview of the business history for forest products in Japan. In the 1980s, Japan became an increasingly important lumber customer for the Canadian industry. Our sales hit a high point in 2000, at two billion board feet, which was worth approximately $1.5 billion Canadian. Since 2006, we have seen some softening in demand from Japan, and it's been fluctuating between 1.1 billion and 1.5 billion board feet per year. A very positive situation has been that the volumes have been steady during the economic downturn we've seen since 2009. The Japanese market is very valued by the Canadian forest industry. It has the highest sales realization of all customer groups we deal with around the world.

Some of the trends that are occurring in business in Japan relate to increased foreign and domestic competition. We see changing preferences going on for forest products, and it's well known that Japan has an aging population and demographics are a key issue.

Canada was involved in Japan in pioneering the two-by-four, or North American, if you will, housing method in that country. Up until this point in time, we've seen a cumulative two million starts in construction. However, related to demographics, the single family side has been falling off, and we've now seen increasing use in apartments and other applications.

In terms of the trading relationship with Japan when it comes to tariffs, the impact of tariffs is fairly muted on the trading situation for Canadian forest products. For example, tariffs for SPF lumber, our major export, currently sit at 4.8%, oriented strand board at 6%. We've estimated that the elimination of tariffs would result in savings of approximately $30 million to $40 million annually. Having said that the impact is relatively muted, I would agree with the previous speaker that there is a danger to Canada if Japan negotiates free trade agreements with other nations and Canadian forest products face unfavourable tariff differentials versus its competitors.

In the area of non-tariff measures, it has to be acknowledged that Japan has made positive strides in advancing the use of wood in construction in recent years. Examples of some policies include building code amendments, which have enabled performance-based approaches for building codes, and relaxation in their fire requirements. Japan also introduced a couple of acts in recent years. One is the long-life quality housing act to improve the quality of their housing. Another one is the act to promote wooden construction in public buildings, which we might call the “wood first act”, because it's very similar to legislation here in British Columbia. However, Canadian industry does have concerns with both of these acts.

The issue of greatest concern to us is the extensive promotion efforts that are being made by the Japanese government to increase the market share of domestic timber. The driver for the Japanese government is the Kyoto protocol, where they pledged to reduce their carbon emissions by 6% below 1990 levels. In promoting greater usage of their forests, Japan is hoping to recognize 3.8% of the 6% from carbon sequestration through their domestic forests.

Japan has been using the long-life and promotion of wooden housing acts to displace imports via preferential purchasing policies and subsidies to the domestic industry.

I'll give you some examples of that. For the domestic forest industry, there is a law under the act called the thinning promotion law, where approximately 13% of Japan's forests are being thinned, and in the process, creating a vast new source of wood fibre. The Canadian equivalent of $13.6 billion has been allocated to that particular activity. A further $1.5 billion has been provided or appropriated by the Japanese government for a green industry renewal activity, and this subsidizes the construction of forestry roads. It will cover up to 50% of the cost of new machinery and wood product production facilities, and it also offsets transportation costs.

For consumers, there is a policy instrument that will reduce housing loan interest rates if they utilize domestic wood products in the construction of their homes. For local governments, there are subsidies provided to builders of institutional and public structures to subsidize construction costs and offset the purchase of domestic wood products.

In many cases, this preferential purchasing is occurring at the prefectural and municipal level, which makes it difficult to counter. Also, the messaging is deliberately ambiguous. It indicates that domestic wood is required, but it doesn't completely shut the door to imported wood either.

In conclusion, having stated those significant challenges, we do think the potential for Canadian wood products remains positive in Japan. We have an excellent reputation in that country, and wood construction is well regarded. There is considerable and growing rebuilding occurring in Japan following the 2011 tsunami and earthquake disasters. We see new segments in non-residential and institutional building going on, which is helping us to diversify from the single-family segment.

Our recommendations, Mr. Chairman, with regard to this initiative would be to pursue an EPA and free trade with Japan. We would suggest that we seek tariff reductions in forest products. We would suggest that we establish bilateral mechanisms to enable technical barrier trade issues with Japan to be tabled and addressed. We also suggest that attention be drawn to Japan's preferential purchasing policies and subsidy programs.

Thank you very much for the opportunity to comment.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move to the Canadian Honey Council. Mr. Townsend, the floor is yours.

[Lee Townsend]

Thank you, Mr. Chairman.

I would like to thank the honourable members of the committee for allowing me the opportunity to speak on behalf of the Canadian Honey Council and its members.

The potential economic partnership agreement between Canada and Japan is something we are following closely as it will impact honey exports by our members.

The Canadian Honey Council represents over 7,000 beekeepers and 600,000 honeybee colonies from across Canada. Seventy percent of Canada's colonies, as well as honey production, is located in Alberta, Saskatchewan, and Manitoba. Canada produces approximately 70 million pounds of honey each year, with 70% of this production being exported. The Canadian honeybee industry also contributes more than $2 billion annually to the Canadian economy.

Canada exports the majority of its honey production to the U.S.A., with the Japanese marketplace being the second largest importer of Canadian honey. It is important to note that 90% of all Canadian honey being exported to Japan comes from Alberta. Since 2009 Canadian honey has been strongly promoted in Japan with great success.

This has been highly successful due to a number of reasons. Canadian honey is world renowned for its white colour, subtle taste, and second-to-none food safety standards. These factors, combined with the effective marketing strategies by our industry in Japan, have steadily increased the value of these sales from $5.1 million dollars in 2008 to $9.8 million dollars in 2010.

While these numbers are quite small compared to other industries exporting to Japan, they are becoming more substantial to our industry with the potential growth factor.

As Japan produces only 5% of the honey it consumes, the opportunities for Canadian honey exports to Japan are substantial. I must note that there was a slight drop in exports from Canada to Japan in 2011 due to the Tohoku earthquake and tsunami. Japan—

[Technical difficulty--Editor]

[The Chair, Conservative, Rob Merrifield]

The tsunami again. Somebody didn't like the bees.

Shall we give it a minute? Do they expect that it's going to be long?

I'm torn. We could start with questions and answers. Do you want to start with that?

[Don Davies, NDP, Vancouver Kingsway, BC]

Why don't you just give it one minute to see if we can get him back on track?

[The Chair, Conservative, Rob Merrifield]

There we go, okay.

Are you back, Mr. Townsend?

[Lee Townsend]

Yes I am. The joys of technology, right?

[The Chair, Conservative, Rob Merrifield]

There we go, okay.

[Lee Townsend]

I guess where I left off was just saying that Japan's honey imports primarily come from China, Argentina, and Canada, in that order. One of the limiting factors for continued growth in the Japanese market is current import tariffs applied to honey from Canada. Countries such as Myanmar and Mexico—who have an FTA agreement with Japan—can export to Japan with 0% taxation, as long as they remain under the Japanese government's imposed quota limits. Countries such as China, Argentina, and Canada are subjected to a 25.5% tariff on all honey exported to Japan and have no quota limits.

Where this tax becomes quite difficult for Canadian exporters is in the fact that Canadian honey is of the highest quality, and is amongst the most expensive honey imported by Japan. While the Japanese consumer demands this honey, the Japanese packers are hesitant to expand their imports from Canada when they are already paying twice the price for Canadian honey compared to their imports from Argentina, and triple compared to imports from China.

While the removal of this tariff won't cause sales or profits to increase overnight, it will offer our producers more opportunities for expansion within the Japanese market.

I thank you for you time and consideration.

[The Chair, Conservative, Rob Merrifield]

We're sorry about the technology hiccup. Thank you very much for your presentation.

We will now move to Mr. Davies for seven minutes, please.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

On behalf of the official opposition, I would like to welcome and thank all of the witnesses for taking time out of your busy lives to share your expertise with us. I would like to address some questions to all of you, if I may.

I will start with Mr. Newman. I am from British Columbia, so I am well aware of the importance of forestry and the wood industry to our country. I have heard that Japan, among other countries, is pursuing a policy of deliberately trying to add value to their exports. I think that's something that Canada should be doing.

I would like to ask you if you could give us a general idea of what percentage of our exports of wood products to Japan right now are unprocessed or barely processed wood products versus products that have more value added to them? Can you give us a general idea?

[Paul Newman]

That's a good question. I apologize if I don't have the specific numbers on hand. Certainly, the largest proportion of our products are manufactured. They would be saw and lumber, which is cut to specific grades, dimensions, and lengths. It is structurally graded and stamped, and meets Japanese requirements for structural use. I mentioned projects such as oriented strand board, which is a fully manufactured product, and so on. There are also log exports off the B.C. coast here.

In the scheme of things, percentage-wise, that's quite a small proportion of the shipments that come out of this province, and the reason is that we have log export restrictions. The operators on the coast who are operating a private forest will have greater opportunity to ship to Japan.

I might just add that Japan and other countries in the Asian market have had great difficulty securing raw materials in recent years because of restrictions, not only on our own log export restrictions, but difficulties from Russia and other countries that have had measures in place to kind of restrict raw wood exports.

[Don Davies, NDP, Vancouver Kingsway, BC]

Mr. Newman, do you have any suggestions for ways that the federal government can develop policy that might help your industry to develop those value-added products? I keep thinking of something like lumber and the oriented strand board. Those are good products, and they are added value. Even more so, in order to get to furniture and other more highly value-added wood products, do you have any suggestions for what you would like to see the Canadian government do to assist the industry?

[Paul Newman]

That's a good question.

When I undertook to investigate this talk today, I asked some of my colleagues where they had seen impacts on trade from, say, the preferential purchasing and subsidy issues in Japan. One of the examples I was given was the loss of a 1,000 package home order. The issue of package homes is that if they come out of Canada, they typically will contain cabinetry and higher value-added wood products within the package.

Apparently what was happening, due to the requirement for domestic wood to be used, was that they were unable to meet the procurement requirements, and therefore that sale was lost and the value-added elements of that sale were lost.

The fully fitted-out home kits are an excellent way to get our value-added products into the market. As I say, with the current progression we're seeing in subsidization and domestic wood initiatives, it's going to make it more difficult to get those kits into Japan.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

[Paul Newman]

I would urge the government, in our EPA discussions, to take on this subsidy and preferential purchasing issue because it is, I believe, contrary to WTO, and it is causing our industry problems getting its value-added elements in there.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

Mr. de Kemp, we heard some testimony from the canola growers about some issues around GMOs and some of the difficulties that may present in increasing our trade with Japan. Are there any such issues with respect to your membership?

[Phil de Kemp]

Right now, there is no issue with GMOs. We don't accept it. As far as barley, the farmers are not interested in GMOs. Quite frankly, it's all driven by the international brewing industry, in terms of any perceived or misconceived notions about GMO products. They drive the demand, and as such it hasn't come up on the radar.

Barley is a little different from canola or corn or what have you, because there's not as much grown. So for the seed growers or for the large multinational seed companies, there's not as much incentive just yet. As I mentioned before, malting barley is a specialty crop. At this point, it's not on the radar.