Finance Committee on Nov. 20th, 2007

[Dr. Roger Martin, Dean, Rotman School of Management, University of Toronto]

I can hear you. Can you hear me?

[The Chair, Conservative, Rob Merrifield]

Yes, I can hear you. As long as you can hear us, that's fine.

We'll yield the floor to you at the appropriate time. We just wanted to double-check on the sound.

Mr. Nantais, the floor is yours.

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

Thank you, Mr. Chairman, and I thank everyone for this opportunity to appear before you today.

In the previous panel you heard the other side of the auto industry, if you will. The CVMA, on the other hand, is a national association, a leading association that represents light- and heavy-duty manufacturers, including Chrysler, Ford, General Motors, and International Truck and Engine Corp. Together, these companies account for over 70% of all domestic vehicle production, 55% of vehicle sales, and in total they support 150,000 Canadian workers and retirees throughout their entire operations.

On the surface, Canada's auto industry looks to be in fairly good shape, especially when one reads news reports about near record levels of new vehicle sales across the country and the significant recent automotive investments in Canada, including those from our member companies. However, under this thin facade is a much different reality. Today we are witnessing what I would call a perfect storm, demarcated by several threats, and one that will make for a wild ride as we go forward.

The rapid acceleration of the Canadian dollar has been one of the largest hits, no doubt. However, this is just one of the many impacts on our industry in Canada that include most recently what I call deep impact regulations, such as the new requirements on fuel economy, unique and inconsistent Canadian regulations, record levels of auto imports from offshore, outdated trade infrastructure, and border backlogs, just to name a few.

In the not too distant past, Canada had a competitive advantage within North America to help attract investment, one being a lower Canadian dollar compared to the U.S. dollar and another being the often repeated labour and health care advantage. However, recent contract negotiations in the United States between our members' parent companies and the UAW have changed part of this dynamic as a result of health care trusts being established to reduce some of that burden, while the rapid acceleration of the Canadian dollar has had a dramatic change on the other.

The rise in the dollar impacts Canadian assembly in several ways. Generally, all inputs into production are calculated in U.S. dollars to create a baseline for comparison of costs between assembly plants in various jurisdictions. The cost of all local inputs increased significantly with the rapid rise of the dollar. These impacts have wide-range inputs, including labour rates, employee benefits, corporate taxes, parts and services, and sourcing, etc.

In light of these realities, I'm here before you today to present an opportunity for Canada to develop and implement an automotive strategy that will help our sector deal with the rapid rise of the Canadian dollar, and the other impacts and, create a position for Canada to be a competitive location of choice for automotive investment.

First is ensuring that we have a globally competitive investment fund and corporate tax regime. The second critical element is supporting auto industry efforts and environmental sustainability. Canada really needs to introduce national vehicle standards, and in particular fuel economy standards, that are in line with the dominant North American standard. Recently in Canada several provinces have publicly stated their desire to adopt their own standards or California standards. These are what I call deep impact standards that have a tremendous impact on our industry.

The third element is creating a smart, efficient, and cooperative regulatory regime with Canada and with our major trading partners.

Expanding critical trade infrastructure and simplifying border processes is the fourth major element of the auto investment strategy. Simply put, it is 27,000 times more difficult and costly from a customs perspective to get 4,500 North American built vehicles into our market than it is to import those vehicles from offshore. This is because, during production of those vehicles in North America, parts and components can cross the border six or seven times, each time with the necessary paperwork and security checks, while imported vehicles simply clear customs by the boatload or 4,500 units at a time.

The last but not least important element of an automotive investment plan for Canada is opening foreign markets through free and fair trade agreements. Canada's auto industry, and Canada, as a result, has benefited greatly from free and fair trade, especially with our NAFTA partners. However, implementing trade agreements that create unbalanced, one-way trade in vehicles without reciprocal access would undermine all other aspects of an automotive investment strategy if they were implemented.

Canada is currently negotiating a free trade agreement with South Korea that would result in continued one-way trade in automobiles and no broader economic benefits for Canadians. In most cases, products can be built anywhere within corporate global enterprise and sold in markets around the world. If Canadian manufacturers simply cannot access foreign markets, then production mandates will be placed in other jurisdictions.

In summary, I cannot stress enough the difficult situation our member companies in the OEM parts sector are now facing within Canada. The rapid rise in the Canadian dollar is just the latest strike against our industry in which 570,000 Canadians are directly and indirectly employed.

We urge the government to immediately develop and implement an automotive strategy to help restore a competitive advantage to investing in Canada's critical automotive industry.

Thank you, Mr. Chairman.

[The Chair, Conservative, Rob Merrifield]

Thank you very much for being very, very prompt and absolutely on time. You must have rehearsed that.

We now have with us the economist, Jean Laneville, from Quebec Federation of Chambers of Commerce. The floor is yours for five minutes, please.

Thank you.

[Jean Laneville, Economist, Quebec Federation of Chambers of Commerce]

Good evening, my name is Jean Laneville. I am the economist for the Quebec Federation of Chambers of Commerce. I am very pleased to be here to talk to you about the impact that the rising dollar has had on our members, particularly those from the manufacturing sector.

The Quebec Federation of Chambers of Commerce represents 162 chambers of commerce bringing together more than 55,000 members. We claim to be the largest and most representative business network in Quebec. Indeed, we have members in all administrative regions of Quebec and we also have members in all of Quebec's economic sectors.

During the next three or four minutes, I will first of all address the issue of the soaring dollar from a structural perspective. I will also discuss the Dutch disease effect theory. I would be pleased to answer any questions you may have in order to clarify the economic context.

The rise in the price of raw materials has had an impact on the Canadian economy because Canada is a net exporter of natural resources. This increase has had an impact primarily on our currency. Over the past five years, the Canadian dollar has appreciated substantially. On average, it has climbed 10% per year. This situation has proven to be relatively difficult for exporters and manufacturers because the profit margin of exporters has declined whereas most of them are price-takers on foreign markets, particularly the U.S. market.

If we were to divide the Canadian economy into three sectors, we would have the natural resource sector, the domestic and service sector and the manufacturing sector. We can see that the soaring dollar has created a great deal of upheaval. Over the past few years, in Canada and in Quebec, we have noted that the natural resource sector has performed relatively well: very well in the west and not so well in Quebec. This has resulted in a great deal of wealth that has contributed to the service sector, namely to domestic consumption.

Resources have been displaced, they have gone to the natural and service sectors, whereas the manufacturing sector has performed very poorly. With the soaring dollar, this sector has found it increasingly difficult to export, but it also faced the problem of dwindling resources. We are starting to see the situation, in Quebec, where there are shortages for certain types of jobs. This is rather difficult in a situation where competition is fierce. The situation is difficult because of the appreciation of the dollar.

In terms of the GDP, on the manufacturing production side, Quebec has had an average annual decrease of approximately 4% since 2002. This is not huge, but we have observed, on the employment side, an average annual decrease of approximately 4% since 2003. So we are talking about a substantial impact.

There is one fact that is alarming: over the past three years, from 2003 to 2006, we have seen declining investment in the manufacturing sector. However, the government refuses to see this and tells us that, with the higher dollar, it will be easier and less costly to purchase machinery and equipment, which is completely false. Our members are telling us that certain conditions have to be present before investing. One does not invest because the machinery is cheap, but because better performance can be achieved. This is how we have to look at the situation. We can't simply say that the higher dollar will enable us to purchase machinery at a lower cost. The first point that we want to get across is that the higher dollar is making the situation less profitable for Quebec manufacturers.

In Quebec, we have seen production, employment and investment decline. That is very alarming. Everything is pointing to the beginning of deindustrialization. The word may be strong, but there are certain indicators present that lead me to the theory of the Dutch disease effect.

As the name suggests, this theory originated in the Netherlands. At the end of the 1950s, natural gas was discovered in the North Sea. There was a period of prosperity in Holland, which made it very wealthy and increased the value of the currency. In the long term, over 15 years, the manufacturing sector declined. Once the economic prosperity caused by the natural resources disappeared, Holland found it no longer had a manufacturing sector to drive the economy. That is what we fear. That could happen, particularly in Quebec, because we are more dependent on the manufacturing sector than the United States and Canada are as a whole.

There are a number of very appealing solutions that have been put in place in Norway. The first is to be cautious as regards fiscal policy. When there is very high potential growth and consumption, the economy should not be over-stimulated, by reducing the GST, for example, because this results in inflationary pressures.

Quebec manufacturers are suffering because of the fluctuation in the value of the dollar, which is something that cannot be controlled. It would be a good idea to do what Norway did and establish a fund to stabilize the dollar. Natural resources and government revenues should be invested in the fund, and it should then be used on the exchange market to stabilize the dollar.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now entertain, through videoconference, Mr. Roger Martin.

The floor is yours. You have five minutes.

[Dr. Roger Martin]

Terrific.

I have just five points.

First of all, a higher dollar is good, and good for the country. How high and how fast it's gotten high is another question, but I'm not despairing over the dollar being higher.

Number two, being below purchasing power parity, as Andrew Jackson mentioned earlier, when purchasing power parity has stayed constant over the last 30 years, in the low 80¢ range...I think it was bad for Canada to have the dollar consistently below that, at 75¢ or below, for a decade from 1992 to 2002. Why? Because we're then selling the entire economy too cheaply compared to our costs of operating.

What's the problem? I think the problem, as everybody said, is obvious. It has risen too fast and too high.

Just to give some perspective, it is truly unprecedented. If we look back over a long period of time, if we go back to the height of May 1974, at $1.04, the dollar took 11 years to drop 31%, to December 1985, to 72¢, and then did its big rise. The biggest rise the dollar has ever experienced prior to this one was from December 1985, over a six-year period, to October 1991, to 89¢, or a 24% rise. It then took another decade to fall all the way to 63¢, and another six years to rise to the current levels, a 60% rise. So think of this as being a rise that is more than double the amount in the same period of time as our previous most rapid rise, and it has dramatically overshot anything approximating purchasing power parity.

I agree with Jean Laneville, who just talked about the conflicting messages this sends to manufacturers or anybody buying machinery and equipment, hardware and software. All the service industries buy enormous amounts of hardware and software as well. On one hand, all the imported product, machinery and equipment, is cheaper by a long shot, but on the other hand, they're scared because they don't know where the dollar is going. The dollar has gone up so rapidly that it's hard to make the adjustment. That's why, as Jean said, they don't automatically go racing out and becoming more productive really quickly, because they're scared and they're experiencing something they haven't experienced before. So if anything, there is a lag effect until we'll see any kind of pickup in investment in machinery and equipment. It will only happen when the manufacturers feel comfortable and confident that their economic equation is going to work for them now in this new higher regime.

What does that mean? For policy—these are points four and five—there are two things I would say. One is that this is the best time ever for Canada to finally fix the problem with how we tax corporations and how that impacts corporate investment. As we've said on our task force for a number of years, Canada has one of the worst regimes for new investment in the world, among the highest taxation of corporate investment. Why we think we can be a great importer of capital and a place where companies want to set up shop and our own companies want to grow and expand, when we have one of the greatest punishments for new investment, is beyond me.

I think it's great that we finally have a dialogue in Ottawa on this, with both the Liberals and the Conservatives suggesting that they're going to cut corporate income taxation. All I say is that I would use the very positive treasury situation now to cut deeper in that than even planned, to make Canada below the OECD average in terms of its effective tax rate on capital investment.

So do it. I'm thrilled to see the fall update address it, but now is the time to go even farther to help our companies.

The final point I'd say is that this gets back to the question of fixing the exchange rate against the dollar. I know there's this argument every time this is raised, where everybody says, “Well, that will reduce our sovereignty and our flexibility”, and the like. All I have to say is, look what we're doing and talking about and saying now. Is this just so terrific to have this kind of sovereignty when it begs the question, in what respect is this great sovereignty that we have this huge problem now because the dollar has swung up 60% over a course of six years, 10% a year on average, and now we have to scramble to do something about that? Nobody in the world is free from the effects of the global economy. So saying that because we have our own currency we somehow are sovereign, more sovereign than we would be if we fixed it to our major trading partner, I think is an old-fashioned view, and I wish we as Canadians would just get over that and do the thing that will create the stable platform for our companies to invest and grow.

Thank you very much.

[The Chair, Conservative, Rob Merrifield]

I'll now ask the committee, because the bells are going to ring, instead of the first round being seven minutes, I believe we can get in a full round of four minutes. Let's try that. It will go into the bells, but I think we'll get to the vote in time without any problem, if that's all right.

Mr. McCallum, the floor is yours.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

I agree with much of what Roger Martin said. We're the party of deep corporate tax cuts, and I'd like to see Canada as the Ireland of North America. But today my focus is more narrow. I have advanced the hypothesis that this big exchange rate jump will have major negative effects on jobs. What's happened so far is just the tip of the iceberg of what will happen in a year from now, given that there are lags, assuming the dollar remains about where it is. So now is the time for a plan, because governments should look to the future and not just to today.

First I want to do a survey of our witnesses. Do you agree with this hypothesis that if the dollar stays where it is, the layoffs and job losses that will occur 12 months down the road will be much greater than what we've seen today?

I won't ask Mr. Hardacre, because he's confirmed my point that the effects will occur in 2008, but maybe Mr. Jackson, Mr. Nantais, and Mr. Laneville could respond.

[Andrew Jackson]

Absolutely. Just to repeat myself, I think the 300,000-odd jobs we've lost in the manufacturing sector to date reflect the appreciation to the—

[John McCallum, Liberal, Markham—Unionville, ON]

So you think it will be much worse?

[Andrew Jackson]

I think we'll see at least that many lost jobs in the next two years.

[John McCallum, Liberal, Markham—Unionville, ON]

Mr. Nantais.

[Mark Nantais]

I would concur. We fully expect, particularly in the supply chain, that our suppliers themselves are going to incur more job losses.

[John McCallum, Liberal, Markham—Unionville, ON]

Monsieur Laneville.

[Jean Laneville]

From memory, economic studies tend to show that the impact of a rise in value is felt over two years. That would take us to 2009.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, I agree 100%.

My next question is for Mr. Nantais and it's about the auto sector. The auto sector is crucial, for Ontario in particular. We all know that this government has done a lot of harm to it through the Korea trade agreement, through the silly feebate program, through not investing any money in the auto sector. We like the corporate tax cut, but I don't think that deals with the immediate crisis.

My question is a twofold one. Has this government done anything good, other than the bad things it's done, vis-à-vis your industry? Do you have one or two positive suggestions for how they might redeem themselves going forward, vis-à-vis the auto sector?

[Mark Nantais]

Boy, talk about a loaded question.

Let me say this. I think whether it was the previous government—they did some great things for the auto industry—or whether it was the economic statement this government made a month or so ago, those are all things that we can well support. I think we're at a position now where we have the opportunities I mentioned.

Putting the dollar aside for the moment, we need to do things that are going to offset the ramifications of that. Our view, as we said all along, is that we need a comprehensive, balanced automotive strategy, one that incorporates many of the things that have been announced, one that most importantly, again, reintroduces large-scale investment supports.

Any country around the world that wants to maintain or wants to introduce an auto industry to its economy provides supports. We can be very creative here. Australia is very creative, for instance, where they take revenues from import tariffs and funnel that back into the industry to fund these large-scale investments, and they've been very successful. So the key thing, moving forward here, is to put in place now an effective, balanced, and comprehensive automotive strategy that factors in things such as research and development incentives, that factors in many of the large-scale investments, as I've said.

Yes, we do need to get rid of some of the things that are impacting us very negatively. One of them is the ecoAUTO green levy program. That, clearly, amidst all these other things—

[John McCallum, Liberal, Markham—Unionville, ON]

And the Korea free trade deal.

[Mark Nantais]

The Korea free trade agreement, the way it currently stands, based on what we understand about it, could be very detrimental to the auto industry in Canada, yes.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you very much.

[The Chair, Conservative, Rob Merrifield]

Thank you.

Monsieur Crête, you have four minutes.

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

I would like to ask Mr. Martin a question. He was talking about a fixed exchange rate. Do you conclude that we need to have parity with the American dollar as quickly as possible? Do you think the government should make such a decision quickly, or when it tables its next budget?

[Dr. Roger Martin]

Actually, other than for the fact that parity has some kind of simple “Hey, wouldn't it be nice if a dollar were a dollar?” appeal, I'd rather get away from the notion that it's some magic number. I think we should think long and hard about what to fix it at and just fix it at something.

My hope would be to have a dollar in the low nineties. I'd like it to have a tug up on purchasing power parity, not down. My guess is that parity with the U.S. dollar is higher than is optimal for Canada at this point.

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

Very well.

You said about the same thing, Mr. Jackson and Mr. Laneville. But it's interesting, because the CLC and the chambers of commerce have quite different points of view.

Could you talk a little more about the consequences of replacing well-paid jobs in the manufacturing sector with less well-paid jobs, for example those in distribution or storage centres? What will the impact of this change be in the medium term if we do not put an end to this shift in employment in Canada and Quebec?