Natural Resources Committee on Dec. 12th, 2011

[Avrim Lazar]

It's a wonderful idea, and we've seen it work well. It's not a panacea, because the hardships the big companies face in trying to make the economics work, with all their resources and their networks and their supply chains, are just doubled when you....

We have to remember that Canada's forest industry exports more than two-thirds of what we make, so it's not like we can have a local industry—well, we can have local industry for local supply, and it could be relatively self-sufficient. But most of the jobs depend on being part of the global supply chain.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Stewart.

We go now to Mr. Seeback, and if there is time left, to Mr. Zimmer.

[Kyle Seeback, Conservative, Brampton West, ON]

Thank you very much.

I was curious about a couple of your comments on diversifying markets. You made mention of expansion of markets into China, India, and in particular Korea as well. You talked about how free trade negotiations with the EU and India, and potentially China, would be very beneficial.

What are the specific trade impediments that exist now? Are they significant, or are they things you're able to deal with and overcome?

[Avrim Lazar]

They are serious irritants; they're not huge impediments.

If you were to ask us what our number one interest is in, for example, India, China, or Korea, it's not getting rid of the trade impediments; it's getting rid of the market resistance and cultural impediments. Most of where the government has been spending its money is in helping those nations understand how to be better customers.

That being said, there are small trade impediments—we've detailed them, and I can send you the list—that these trade agreements will help get us over. I'll give you an example: within the European Union, where you wouldn't expect much trouble, every now and then one of the nations comes up with a requirement that paper or wood must meet a set of standards that makes no sense at all in Canada, because basically it would only happen in the Netherlands.

In the trade agreement being negotiated, we, along with the European industry, have asked for an annex setting out the standards for government procurement so it would be free from these harassing.... They are small things, but sometimes small things are just enough for the production of one mill.

[Kyle Seeback, Conservative, Brampton West, ON]

What are the cultural impediments? I'm not 100% sure of what you're saying. Are you saying there's a desire from these countries not to buy foreign products?

[Avrim Lazar]

The Japanese are scared to death of fire, so they're scared of wood. We should be trying to sell them paper houses, I guess. But they've had so many disasters with fire, so we've had to work—this is where government is absolutely essential—with the Japanese government to change the codes and standards so the safety of wood can be seen.

The Chinese are not used to building wood frame houses. We need to work with the government on demonstration projects, but also on making sure the codes and standards to get into China don't bar our entry.

There are many things like that, which are long-term shifts in the market acceptance of our products.

[Kyle Seeback, Conservative, Brampton West, ON]

It was interesting for me to listen to your four objectives: transformation, productivity, diversified markets, and extract more value on the western front.

The Government of Canada came up with a number of programs to support and encourage the industry, especially on the diversification front. You've talked about it a little bit today, but which programs do you think have provided the most value, and which ones would you like to see continue? And please don't just say all of them.

[Avrim Lazar]

Yes, I'm going to say all of them.

[Voices]

Oh, oh!

[Avrim Lazar]

I don't want to lie to please you.

If you want to cut money from Natural Resources, go into the A base, because you could sharpen all of those programs. I've made my suggestions to the officials at NRCan on how to make them a little more strategic and a bit sharper. All of those programs are designed to transform the industry. If you want to cut 5% or 10% from Natural Resources—I'm not suggesting you do it, but if you have to—look at their legacy programming, which is not sunsetted.

For some reason, the stuff people dreamed up 20 years ago is protected and the stuff your government designed over the last few years is the most vulnerable. It should be the other way around: the stuff you designed a few years ago, because it's needed today, should be the most protected, and the stuff that's been in the department for the last 20 years should be looked at quite carefully.

We haven't gone through all of their programming, saying “Cut here, cut there.” That's the government's business; if you want to consult with us, we're open. But we know the transformative programs should get priority.

[Kyle Seeback, Conservative, Brampton West, ON]

Of the transformative programs we've talked of today, if you had to choose one that you think is best and has provided the most value to the industry, which one would it be?

[Avrim Lazar]

The green transformation program of $1 billion. We love that the most.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Seeback. Your time is up.

It's very rare when someone says they'll leave some time for someone else and they actually do.

Mr. Harris, you have up to five minutes.

[Dick Harris, Conservative, Cariboo—Prince George, BC]

Thank you, Mr. Chair.

Thanks for your comments today, Catherine and Avrim.

I want to go back to this transformation mode that we've been in. Looking at my riding, I really believe that part of that transformation was due to mills in the industry that hadn't kept up with technology and wouldn't invest in technology. They were soon left far behind, as far as being competitive, even in domestic markets, with the mills that had invested. It's a sad tale but true.

We see all over the country where mills that have been simply too labour intensive and haven't done the investments have had to close because they couldn't compete. The other thing was that because of their proximity to the markets they were used to, the U.S. market, and with that in the sewer in the last several years, they simply couldn't take part in the overseas markets that came into being. If your mill was in the west and you prided yourself on being on the leading edge.... You're in that market now.

Mr. Gravelle talked about mills in northern Ontario maybe having to shut down. Maybe a technology deficit or proximity to where their market used to be is more a cause than anything else. That's a reality nobody likes to talk about, but can you comment about just how much of a reality that is?

[Avrim Lazar]

We're an exporting industry and we're competing against Brazil, the Scandinavian countries, Russia, and parts of China. If we can't beat them, there isn't enough money in the federal treasury to save our bacon. You simply cannot support us if we can't be competitive. You can help us get competitive, but even there your role is relatively minor.

It used to be the case in B.C.; it's much less now. But in Quebec and Ontario one of the reasons we have many unproductive and non-competitive mills has been provincial policy. In the past the provinces have insisted, because they own the trees and allocate cutting rights, that the mills not consolidate. If you had three mills, each of which were not globally competitive...the companies were willing to invest in one globally competitive mill, but the provinces—to be fair to them, they were looking at communities—said they wouldn't let the wood supply be taken from those three towns and put in one town with one big mill.

This worked really well when the dollar was low and we could get away with that. But the dollar went up, prices went down, and competition went up. All three mills are not competitive now. It's partly due to different owners, but one of the side effects of state ownership of the forests is that the provinces are reluctant to allow the necessary consolidation—for virtuous, righteous reasons. They don't want to be the ones to say, “These two towns have to close.” But in the end all three mills shut down.

We've seen such devastation over the last little while, not just because markets are bad, competition is hard, and the dollar is high. We also have excess, inefficient capacity throughout the country, but mostly in Ontario and Quebec. B.C. shifted and went through it four years ago. That inefficient capacity couldn't make it through the hard times. If we had gone through a normal process of restructuring over the last 10 years instead of having that inhibited by the provinces, it would not have been as devastating.

[Catherine Cobden]

If I can interject, there's another thing that impacts greatly, and where I think there's an awful lot of opportunity for the government to support. This is very relevant to Quebec and Ontario.

We can't access some of the new markets because we are really hindered from a transportation perspective. There's the monopoly we face with rail and getting our products to market. We estimate that has a $280-million-per-year price tag for just our membership—not looking at the bigger picture. This is a huge cost burden for us in the long haul. This is a huge opportunity for Quebec and Ontario mills to get product to some of the new, emerging markets. The brilliance of it is that it's fairly low cost in terms of implementing change.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Harris.

Go ahead, Mr. Caron, for up to five minutes.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

I want to come back to the softwood lumber agreement. I agree with you that it was not the ideal solution. Companies ended up accepting it. Those companies, however, did not have much choice given their situation—they were already down. They accepted it reluctantly. I think we can agree on that. That was what you said more or less.

As I see it, there are three negative consequences. You talked about stability, which is indeed a more positive one. But I can see three negative consequences.

First off, I want to point out that, eventually, we usually won against the Coalition for Fair Lumber Imports. I think we had won 20 cases in a row before international courts. We were about to win another the day after the agreement was signed. We will have given the U.S. $1 billion, a portion of which has gone to the Coalition for Fair Lumber Imports. So there have been negative consequences as well, by virtue of the fact that we have conceded quite a bit.

The first consequence is that, whereas we used to win before international trade courts, we have lost two cases so far, and we may lose a third, involving the mountain pine beetle. So now we are losing our cases when we go before the courts, as opposed to the past, when we used to win them.

The second consequence is this. This year, the Estey Centre Journal of International Law and Trade Policy published a study in which it examined a variety of conditions including the economic downturn and the drop-off in housing starts in the U.S. According to the study, the softwood lumber agreement alone was responsible for about 9% of the decrease in Canadian exports to the U.S.

The third consequence of the softwood lumber agreement that can be categorized as more negative is that it convinced a number of companies, including those in British Columbia, to export raw lumber to Asian markets especially, and even to the U.S.

Would you agree that these are three negative consequences that have affected the industry rather significantly?

[Avrim Lazar]

Yes, I would agree, of course.

I was quite clear: most of the industry hates the softwood lumber agreement. It is just that it's

it's a lot better than not having it. Yes, we're suffering from it. We don't believe in it. We believe in free trade.

Even when we were winning cases we weren't winning, because U.S. law puts so many instruments in the hands of private interests to take action. The U.S. Commerce Department—and I'm not sure what is the politically correct way of saying this, so I'm just going to say it—is so responsive to narrow commercial interests in the U.S. that they can basically harass us to death, even when we're winning. They get so much advantage, even when they lose a case, because until they lose it the tariff is in and they have all this market advantage. It's just a very sorry situation.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Whenever we negotiate agreements like the softwood lumber agreement, we are always working from a position of weakness, and ultimately, we end up giving the United States what it wants. Do you agree?

That being said, I want to raise another point. I probably have a minute and a half or two minutes left.

[The Chair, Conservative, Leon Benoit]

You have two minutes.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you.

I can give you 30 seconds to answer that.

No? Okay, I'll go on then.

We're always negotiating in a weak position with the U.S., for example, in the softwood lumber agreement. That's what we've done, basically.

[Avrim Lazar]

It's their marketplace. We're the seller, they're the buyer. They control the rules under which they let our stuff in.

You talked about the cost of housing. We used to mobilize the U.S. housing lobby by saying this was causing house prices to go up. But the distribution of power in the U.S. means that the places where housing costs matter a lot, which are the populous states, have less power than places that grow trees, which are the non-populous states, because of the structure of the Senate. So even though we could mobilize the U.S. lobby by saying, “Give us cheap houses and let the Canadian wood in”, we'd always lose in the Senate. Sorry.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

That's perfect, because it leads to my following question. In March 2011, in The Economist, Pat Bell, the forestry minister for B.C., was quoted as saying that “the time is past when we pretty well had to take what the Americans offered.” That was in response to the trade dispute regarding the pine beetle wood and salvage-grade exports. He was also referring to the growing Asian export market as an alternative to the U.S. market.

Do you think that will give us a reversal of the marketing power that might actually lead us to be able to renegotiate the negative aspects of the softwood lumber agreement?

[Avrim Lazar]

It's quite possible. We would be less dependent.

If markets return, with the pine beetle reduction in our fibre availability, with the exports to other countries, the United States may be more in a position of asking for our stuff than trying to control it. Time will tell, but it's a valid hope.