International Trade Committee on Jan. 30th, 2014

[Randy Hoback, Conservative, Prince Albert, SK]

In regard to the technical negotiations that are ongoing now, can you explain the process and how it will unfold?

[H.E. Marie-Anne Coninsx]

It's going very well because it's not questioning one of the basic elements of the agreement on which there is a political breakthrough. I think we had foreseen that it should end by the end of this month. We are nearly at the end of this month. I think we might have a slight delay, but it's going well.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Again, I want to reiterate our thanks on behalf of the committee members for your presentation and your time with us. It's been very direct and is very much appreciated.

With that, we'll suspend for a few minutes.

[H.E. Marie-Anne Coninsx]

Mr. Chairman, I would like to thank all of you very much. I am always happy to come back.

[The Chair, Conservative, Rob Merrifield]

Thank you.

We'll suspend.

[The Chair, Conservative, Rob Merrifield]

We'd like to start the meeting again. We have our witnesses in place, our members are taking their seats, and we want to continue with our study.

In the second hour of our committee this morning, we have with us Mr. Mark Nantais, from the Canadian Vehicle Manufacturers' Association.

Thank you for being here with us.

From UPS Canada, we have Cristina Falcone, vice-president of public affairs.

Thank you, Cristina, for being here.

Cristina, ladies first.

There we go. I'm from the government and I'm here to help.

[Voices]

Oh, oh!

[The Chair, Conservative, Rob Merrifield]

The floor is yours.

[Cristina Falcone, Vice-President, Public Affairs, UPS Canada]

Thank you.

Bonjour. Thank you for the opportunity to testify on the landmark agreement of CETA.

This is my first time testifying, so I appreciate your patience.

My name is Cristina Falcone, although the security guard downstairs decided to change my name to “Wendy”, so I guess I'll answer to both.

I am here today representing UPS, a global leader in logistics.

The subject of today's hearing is one of great importance to our company. Here's a little bit about UPS. With over a century of operations, we've personally witnessed how international trade can drive success. Canada was our first international country of operation outside the U.S. We opened our doors for business in Toronto in 1975. We started with one employee operating out of the basement of a Toronto hotel using a brown Checker cab. We expanded into Germany less than 10 years later. We now employ over 10,000 Canadians, and 43,000 in the EU states.

UPS is the world's largest package delivery company and a leading provider of specialized transportation and logistics services. In our package cars, trailers, planes, and sea containers, we move approximately 2% of global GDP over 220 countries and territories every day.

Given that context, I'm going to provide an overview of the benefits we see CETA delivering to our employees, our customers, and the economy, and I'll offer two specific actions that UPS feels the government can undertake to ensure Canada achieves these benefits.

From our perspective, the benefits of CETA are easy to identify. The more trade grows, the more goods move through our network, and the more we can invest in innovative services and technology to expand our business, which in turn allows us to employ more people in Canada and abroad. We've estimated that for every 22 packages across the border, one job is supported in the UPS package operation.

Our customers will benefit as well. This historic and comprehensive deal will give Canada access to 500 million consumers and a market that totals $17 trillion in economic activity. This is something that our businesses must be aware of and excited about.

We have seen through our customers the potential for growth when they expand to new markets. The issue is that not enough businesses in Canada are exploring this potential.

A recent Deloitte study shows that while Canada has a high level of entrepreneurial activity, factors such as risk aversion and low export activity are stifling growth. This study and others that UPS has conducted show that exporting firms in the manufacturing sector achieved higher growth in productivity than their non-exporting peers.

We've been a voice highlighting the benefits that businesses and consumers can expect to see from this deal. We're informing our customers and partnering with trade associations to educate small to medium-sized enterprises, or SMEs, on how to get started.

As we prepare to help business hit the ground running when the agreement takes force, we're talking to provincial governments to better understand the range of CETA opportunities. One area of the country that we know will help to fill our outbound planes is Atlantic Canada, where there have been significant reductions in tariffs and market access for seafood.

At UPS, we have estimated that the CETA agreement could boost our trading volume by over 10% over the next 10 years.

This would be a direct impact above normal expected growth. This deal represents significant opportunity for our company.

Because the agreement is so comprehensive, it can be a tool for Canadian businesses of all sizes to easily compete in new markets. It also establishes Canada as a smart choice within the NAFTA countries for manufacturing investment. But while Canada moves the agreement towards the ratification process, the projected economic returns are not guaranteed.

We know that the projections are attainable. We're here to raise two actions the government can take to ensure that CETA delivers: one, inform and empower the small business segment; and two, further simplify customs requirements in Canada-EU trade.

As the lifeblood of the Canadian economy, small business will play a critical role in CETA's success. This month UPS engaged Leger marketing to survey Canadians. Our findings were interesting: 47% were not aware that Canada had signed an agreement with the EU. Of those who were aware, 77% support expanding trade; and of these supporters, 58% believe the agreement will help drive Canada's exports and manufacturing sector, 49% believe it will drive employment, and 27% feel it will help Canada enhance innovation and productivity. Most respondents feel optimistic about the business opportunities for Canadian businesses through CETA.

Now, these are high-level responses from the general population, but they do flag a need for awareness. They also show that those who are informed are very optimistic about the opportunities.

We applaud the government for including a clause for Canada to gain any new benefits that the EU negotiates with other countries in deals. This is a modern 21st-century agreement with incredible opportunity. With this groundwork, we know there is potential to reverse the trade deficit, but we need to continue to get more exports moving outside of Canada.

Industry Canada indicates that in 2011, 90% of Canada's exports were made by companies with fewer than 100 employees. Most of this is going to the U.S. and also to Europe. What's disappointing is that only 10% of Canada' s small businesses are exporting. Since SMEs have an impact on Canada's economic health, and a lot of them that export already have Europe as a partner, we see the opportunity for that remaining 90% to use CETA as a springboard for their export debut.

Companies that are not exporting today have their work cut out for them. They need to know how to get their business certified to trade with the EU, they need to understand the duty-free benefits specific to their industry, and they should be aware of how to access procurement bids. They need to be ready when the agreement moves into force.

Now, this will take additional investment from the private sector and from government, but we know that the results can be worthwhile. The bottom line is that companies and countries that best understand how to leverage the provisions in CETA can take the right actions to gain the most benefit. Our exports will grow if we inform and empower our businesses to do this.

The second action the government can take is to continue to reduce the non-tariff barriers, such as complex customs processes. Modernized customs processes, like those signed in the recent WTO trade facilitation agreement, help to improve the flow of goods and secure the global supply chain. Canada and the EU have a unique opportunity to be the voices for modernized customs and encourage other countries to follow.

We hope that establishing a single window for the clearance of goods into the EU and Canada will be a priority. This would help to improve the flow of goods and also reduce administrative burden and cost for small businesses.

We're pleased to see CETA's inclusion of harmonized regulation while ensuring that safety is secured. In line with this thinking, we see opportunity for an aligned trusted trader program for those highly compliant importers who want to be successful in two-way trade. Making our businesses trade-ready and modernizing customs processes can help Canada achieve, and even surpass, the contribution estimated to the Canadian economy. CETA can deliver some significant results if the government is committed to taking this gold standard negotiated text and moving it to a highly strategic and effective launch and implementation.

Our vision at UPS is to bring the world's businesses together, through what we call “synchronized commerce”, by leveraging our global network to coordinate supply chains and allowing customers of all sizes to compete in an expanding global economy.

A commitment by Canadian policy makers to launch CETA effectively and dedicate more work towards reducing bottlenecks in the supply chain will help UPS to play our part.

We're ready to provide further constructive input and we're ready to promote the agreement with our customers. We view it our priority to make CETA as successful as possible and to do this as quickly as possible.

Thank you and I look forward to answering any questions.

[The Chair, Conservative, Rob Merrifield]

Thank you very much for your testimony and we look forward to the question and answer period. Before we get to that we'll ask Mr. Nantais for his comments.

Mr. Nantais, the floor is yours.

[Mark Nantais, President, Canadian Vehicle Manufacturers' Association]

Thank you very much, Mr. Chairman.

Good morning, members of the committee. Thank you for providing this opportunity to speak to you today about international trade and CETA in particular. CVMA is the industry association representing Canada's leading manufacturers of cars and light trucks. Our membership includes Chrysler Canada, Ford Motor Company of Canada, and General Motors of Canada.

As the number one contributor to Canada’s manufacturing GDP, the automotive manufacturing sector is one of our country’s most important economic drivers. Last year, Canada manufactured almost 2.4 million vehicles, both cars and trucks, with Chrysler, Ford, and General Motors accounting for roughly 62% of that total. But our effect in the economy spreads well beyond assembly plants. For every auto assembly job, nine other jobs are created elsewhere in the economy. No other manufacturing sector can boast such a high job multiplier. That adds up. There are about 500,000 Canadians directly or indirectly related to employment in the automotive industry from coast to coast.

Trade plays a very important role in our industry, which has evolved in response to a series of trade initiatives dating back to our earliest days. Front and centre, as some of you may recall, was the Auto Pact in 1965, which literally created tens of thousands of jobs in Canada, the principles of which were entrenched in the Canada-U.S. FTA and later in NAFTA itself. The end result was not just the integration of our Canadian and U.S. economies, but also the complete integration of the automobile manufacturing industry and its supply chain, which operates seamlessly on both sides of the border.

Now after 50 years of carefully executed and irreversible policy decisions, Canadian auto production is geared to support an integrated North American market, providing larger economies of scale to offer the best products at the most competitive prices. I think as we go forward it's really important that I touch upon the global competitiveness reality that we now face in the automobile industry.

Trade is indeed critical to our industry’s growth globally and in terms of our competitiveness in that regard. Motor vehicles and parts represent about 15% of Canada’s overall trade. That’s about $64 billion annually. Already the automotive sector in Canada exports about 85% of all of its production. While the primary export destination is the United States, Canadian produced vehicles are also being exported to more than 30 countries around the world, including countries in South America, Europe, the Middle East, and Asia Pacific. This is also why we need agreements with favourable transshipment rules to assist us to export to countries outside the United States.

Canada’s auto sector has consistently punched above its weight, making economic contributions disproportionate to the sector’s already large size. But make no mistake, other competing jurisdictions and countries around the globe consistently and very aggressively take measures to nurture and grow their own domestic industry. Most notable is Mexico through its highly effective ProMexico organization, as well as the southern United States.

Canadian negotiators must not become complacent about the role that governments in other jurisdictions play in ensuring their automotive industry’s capacity to generate employment and economic growth.

There are a number of principles that must underpin trade agreements in order for the auto industry to benefit. I would just like to comment on them briefly.

All trade agreements must recognize the high levels of North American integration, designed to maximize efficiency and investment opportunities. This fact is also a challenge for Canadian negotiators as they attempt to negotiate agreements that are actually beneficial to the auto industry, whilst not detracting from the benefits of North American integration.

Pursuing free and balanced trade was one of the key recommendations from the “A Call to Action” report, which by the way is a report that the CVMA delivered to each one of you and all members of Parliament late last November. It's a report that makes a recommendation specifically as follows as it relates to trade:

Free trade must be mutually beneficial. Canada is a trading nation and its auto industry has long been an advocate of increasing prosperity through mutually beneficial trade. As it seeks to develop new trade agreements, Canada should ensure that it gains meaningful and sustained access for Canadian-produced vehicles and encourages investment in the Canadian auto industry. Trade policy initiatives should be motivated by a goal of strengthening investment and production in Canada.

Successful trade deals must create a level playing field for Canadian companies by removing market-distorting non-tariff barriers. Free trade isn’t free if Canadian businesses spend all their time arguing about the rules while their products sit on the dock in abeyance. Let’s remember it only takes one non-tariff barrier to trade, such as a unique technical standard, to prevent entry into the party country.

Successful trade must include mechanisms to ensure regulatory consistency and fair trade in foreign markets. As the world moves toward regulatory homogeny, the affordability of goods for everyone improves.

Ultimately, it’s important to remember the significant contributions Canada's existing automakers have made, and continue to make, to Canada’s economy and manufacturing sector. These large-scale capital investments were made within the context of an integrated North American marketplace. Adjusting for new opportunities outside North America will take time, which is why appropriate tariff transition periods are necessary. We must proceed with caution to ensure the business case for manufacturing in Canada is not diminished.

New trade agreements should not put Canada’s existing automotive production footprint at risk and should focus on markets that provide meaningful opportunities to grow exports of Canadian-produced vehicles on a sustained basis, with timelines that allow the existing footprint to adjust accordingly.

Let’s talk about CETA specifically. CVMA commends Canada and the European Union for concluding a high standard and comprehensive agreement in principle. CVMA and our member companies look forward to continuing the dialogue regarding the automotive-related aspects of the agreement and working closely with our Canadian negotiating team to take the devil out of the detail.

Fortunately, CETA is an agreement between mature economies. However, it is very important that we have a full understanding of the key elements of the deal in order to fully assess the auto industry’s ability to benefit from its provisions.

I have already mentioned that bilateral trade agreements, whether CETA or agreements with other countries, must recognize that high level of North American integration, designed to maximize efficiency and investment opportunities. This is a primary challenge when negotiating bilateral agreements, which, as we’ve learned, sometimes requires creative approaches regarding rules of origin and regional value content calculation methodologies, as Canada’s negotiators engage in FTA discussions. The same needs to apply to other bilateral agreements such as the Canada-Japan economic partnership agreement. In this regard, we believe our negotiators have been able to get an agreement on certain provisions in CETA which over time will benefit our industry and other integrated manufacturing sectors.

In this instance, I refer to the rules of origin and what, in essence, is a placeholder for the accumulation of content provision in the case of a U.S.-EU agreement, the discussions now under way, which would allow parts originating in the United States to count towards the originating status of vehicles produced in Canada or the EU. This is extremely important as it recognizes that the EU, which has 27 member states from which auto parts, or content, can be sourced for content calculations, versus achieving content levels from within Canada alone, had the integration of the industry not been recognized. Failure to do so would ensure no duty-free access for Canadian-built vehicles. Once again the details around the applicable conditions will indeed tell the story.

The language included in the agreement concerning the content rule for parts, including the 50% transaction value exports, is also a subject requiring further discussion and clarification. It is important that the auto rules of origin methodology be as consistent as possible—that is, allowing net cost option, with averaging—with the Canada and U.S. FTAs to avoid adding unnecessary administrative costs and burdens on the industry and government. The automotive rule of origin methodology harmonization has successfully been accomplished in the FTAs involving both Canada and the United States. The burden of having to meet different rules would actually undermine the expected benefit to our industry.

While the timing of an EU-U.S. agreement remains unclear, the agreement in principle sets out a derogation of 100,000 units under which a more liberal rule of origin applies for non-originating materials. While it is our view that effective bilateral agreements should not be achieved through quotas, the derogation agreed to seems to provide sufficient levels of access until the EU-U.S. negotiations are concluded. We submit that we will need to have more clarity around the allocation sharing framework.

Again, Mr. Chairman, I want to thank you for the opportunity to appear today, and I would certainly be available to answer any questions members may have.

[The Chair, Conservative, Rob Merrifield]

I am sure both of you provoked some good questions with your testimony.

We'll start with Monsieur Morin. The floor is yours, sir.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

Mr. Nantais, we know that there are companies that are very solidly established on the European market and have been for decades. I am thinking for instance of the Ford company. They already have a large part of the market and have European plants. I think that they are going to be able to adapt more easily than other manufacturers who are less well settled there and have less of a history there.

How do you think these other manufacturers, who have not made such inroads in Europe as Ford has, will adapt?

[Mark Nantais]

I think what you're referring to is the fact that Chrysler, Ford, and General Motors actually have a philosophy to produce where they sell, which is why right now in Europe each of those three companies has considerable production capacity.

What we're talking about here under the trade agreement is how Canadian-based plants can develop products, produce products, and ship products duty free into the European market. As the industry evolves as a global competitor, as companies evolve as global competitors, we want to keep what we have here in terms of our manufacturing footprint. We want to be able to produce vehicles in Canada, and in addition to the capacity in Europe, be able to ship from Canada to Europe, and provide the jobs and the investment opportunities here.

While it may be easier for some companies, it's really only Chrysler, Ford, and General Motors, and Toyota and Honda Canada that produce in this country now. Most of the upside of this agreement certainly in the short term will be from Europe into Canada.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

There are also agreements between certain European manufacturers and North American companies.

Aren't running the risk of seeing the market being flooded with European vehicles?

[Mark Nantais]

I think in the early stages of this agreement it is indeed the objective of the European manufacturers to ship more vehicles into Canada and North America. That is indeed the case now. There is about a 10:1 differential. In other words, for every one we ship into Europe, we get 10 into Canada now. We see this as a characteristic of all agreements now and future agreements that certain countries would like to enter into that; auto for the domestic industry is huge in terms of the economic benefits. These countries want to be able to ship their product into Canada whilst not making necessarily investments here. So it is a risk.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

There does not seem to be much concensus in Europe. For instance, the German industry builds vehicles that require much more fuel and pollute more. Chancellor Merkel prevailed upon her European partners to amend a text that called for CO₂ emissions to be reduced to 95 grams per kilometre. That standard was to come into effect in 2020. The European partners still have to hold meetings to discuss this.

In your opinion, how will our manufacturers be able to adapt to those standards?

[Mark Nantais]

In terms of the European CO₂ standards to which you refer, and we call them greenhouse gas standards, because our companies already have production in Europe, they must abide by the rules in Europe.

In North America a huge transition is now under way. We are already more stringent on smog-related emission standards than Europe is. This comes about from the fact that we actually harmonize our standards between Canada and the United States. We are world leaders when it comes to smog-related emission standards. The new CO₂ standards, the current ones and then from 2017 through to 2025, will be unprecedented in their stringency.

As we already have production in Europe, we have to meet their standards. That's the way it is. There is great debate in Europe now about making those standards more stringent. Whether that happens or not remains to be seen. Certainly in North America we are not debating it; it has already been determined that we are going to be moving to much, much more stringent CO₂ standards for vehicles.

In the end, the idea would be to have global standards where all vehicles would meet essentially one standard that would be acceptable in all jurisdictions. That would be the ultimate objective, but one which is very difficult to pursue in a short period of time.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

Ms. Falcone, I understood from your comments that the government has a certain role to play to allow businesses to benefit from the agreement.

Can you give us some concrete examples of the role the government should play to ensure that our businesses profit from the agreement?

[Cristina Falcone]

Certainly.

Once again, we've been using the “Technical Summary of Final Negotiated Outcomes” to begin the education of our customers. We think industry's clear outline of tariff reductions and the benefits of going into the EU is a very positive start.

Increasing awareness in general through further communications—and maybe speaking directly through the trade associations to specific industries that will benefit and working with the provincial partners to get that message across—will also be beneficial. This was a landmark deal in terms of working with the provinces to deliver unique benefits across the country, which they bought into.

We think taking that to the next step—making sure the province communicates with industries located there that can benefit—will go a long way, as will having trade missions, increasing business relationships, increasing the dialogue, and continuing the dialogue with stakeholders like the Canadian Manufacturers & Exporters, I.E. Canada, and companies like us that have private companies looking to expand their export opportunities.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Hiebert.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Thank you, Mr. Chair.

Thank you, both of you, for being with us today.

My first question is for the Canadian Vehicle Manufacturers' Association. In your remarks you made it fairly clear that you're looking for clarification on a number of different areas. I would like to provide you an opportunity to elaborate on where you think clarification needs to be provided.

You highlight the content rule for parts, in particular the 50% transaction value exports through those boards, and the methodology and the net cost option.

For the benefit of those of us who do not have an intimate knowledge of auto manufacturing, could you just elaborate on those key concepts that you're looking for clarification on?

[Mark Nantais]

The whole area of rules of origin...determining originating materials is done through different methodologies. You have a regional value content; you can have what is called value cost; or you can have net cost. It's beyond me to get into a huge amount of detail on this.

But whether we can use the existing net cost methodology with averaging, for instance, is one area where clearly it's being considered, I believe, based on what we've read in the agreement in principle document. But again, the devil is always in the details. As Madam Ambassador mentioned, those technical details are now being worked out between the negotiating teams. Sometimes a small detail can make or break whether or not you get a benefit. So we are making ourselves available to the negotiating team to the extent they can share that information with us, to help them in turn put in place or get agreement on the necessary details to ensure, basically, that we are able to benefit from this.

We have high expectations for this agreement. We think it really sets the standard, going forward, in many different respects. We want to take advantage of all the benefits that could accrue through the various provisions. For instance, under the 100,000-unit derogation, how is the allocation framework actually going to be allocated? That is another example of some of the details we would like to see. Obviously we want an allocation framework that's going to be fair for everybody. We want an allocation framework that's going to be reflective of growing markets. What is the market going to be in Europe four or five years out, or until such time as the U.S.-EU agreement comes forward?

We want to be able to take advantage. If that allocation derogation, or derogation—whatever you want to call it—as a quota is insufficient, should that be changed? Should there be a mechanism to change it or adjust it as we go forward?

These are all the things that ultimately we don't know because we haven't seen the text. We're optimistic, but I think even the negotiators will say that until we actually get that final text, it's very difficult for them go to out to industry, whether it's our industry or any other industry, to say, “Here it is, and we think that it's very beneficial to you”.

So we're just looking for the opportunity to go through those details and make sure that we as a country and an industry and a sector can benefit from that.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Great. Thank you.

Ms. Falcone, you talked about the importance of international trade to your industry and how, first of all, a large number of small and medium-sized enterprises weren't aware of the trade agreement or weren't sure how to take advantage of it.

What is UPS doing to help promote CETA or the opportunity that CETA presents to its customers?

[Cristina Falcone]

As an international logistics company we have experience all over the world. We have insights into how the economies are growing, where the opportunities lie. We present that information to our customers if we're seeing strong growth. For example, we put out our earnings this morning, and international volume growth exceeded U.S. domestic growth for UPS. This is starting to change what our patterns have been. Much of that growth was in part due to Europe, in Poland, Italy—very strong package volume growth. We share this information with our customers.

We're also doing a lot on industry sectors. We're identifying sectors and really diving in and understanding what the opportunities are for these sectors. Obviously, we want to grow exports, so we look for markets of opportunity that would be interested in purchasing Canadian goods. We show them what the trends are. Then, you know, it's our goal to take what we have right now from the CETA text and what's going to come out.... We're not trade lawyers, but as best as we can we're going to show them that for their specific industry, in high-tech or automotive parts, this is where we think they can benefit and here are the countries that may have an appetite for their goods. That's what we're doing right now.

We also hope to work with CME on their Canadian-Europe business connections—they're working to build that dialogue—and to bring our expertise to the table on what they need to know about customs, because we're also the world's largest customs broker. We make revenue off it, but we also work to reduce the administration and non-tariff barriers so that we can make it easier. So we're trying to provide some education in that regard as well.