Finance Committee on Nov. 20th, 2007

[The Chair, Conservative, Rob Merrifield]

I call this meeting to order.

I want to thank everyone for coming. We have two sessions of witnesses this afternoon. We're looking forward to hearing them.

Before we get started on the witnesses, we'd like to inform the committee of a recommendation to invite Mr. Mark Carney here to testify before the committee. We have made that request to him and have had confirmation that on December 5 from 3:30 to 5 he will be here. That's the Wednesday that we are not travelling during the week that we are travelling. That's for your information. That week will be a very full week.

[Mike Wallace, Conservative, Burlington, ON]

Can you give me the full agenda, Mr. Chair?

[The Chair, Conservative, Rob Merrifield]

Yes. This gives information to the committee on that.

Today we want to begin with the pre-budget consultation exercise. The theme we have for this meeting is the rise of the Canadian dollar; we'll use that as a theme. For the subsequent week, the theme will be the tax system.

With that, we'd like to introduce our witnesses.

In the first session we have the Association of International Automobile Manufacturers of Canada....

I think what I'll do is just go through your titles; then as we give you the floor we'll introduce you individually.

There's the Canadian Auto Workers Union, the Canadian Manufacturers and Exporters, Cascades Paper Products, TD Bank Financial Group, and Toyota Canada Inc. Those are the ones in the first session.

We will yield the floor to you in order. I will give you five minutes to make your presentation, and then we will leave time for questions and answers after we hear from all of you.

We'll start with David C. Adams, president of the Association of International Automobile Manufacturers of Canada.

The floor is yours.

[David Adams, President, Association of International Automobile Manufacturers of Canada]

Thank you.

Mr. Chairman and honourable members, thank you for the opportunity to present before you today.

As you indicated, my name is David Adams. I am the president of the Association of International Automobile Manufacturers of Canada. My association is made up of 13 manufacturers, importers, and distributors of light-duty passenger cars and trucks whose head offices are located outside Canada and the United States. Those members are BMW, Honda, Hyundai, Kia, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Porsche, Subaru, Suzuki, Toyota, and Volkswagen.

In 2006 AIAMC members sold over 733,000 new vehicles in Canada, representing approximately 45% of Canada's new vehicle market. AIAMC members have invested over $6 billion in manufacturing facilities, and annual production from those facilities reached a record 900,839 new vehicles in 2006, out of the 2.54 million vehicles produced in Canada; over 77% of those vehicles were exported out of the country.

Member companies with production facilities in Canada include Honda, Toyota, and Suzuki, with General Motors in a 50-50 joint venture in Ingersoll.

With respect to the automotive industry, the 20% appreciation in the Canadian dollar against the U.S. greenback has adversely impacted various components of the industry: vehicle assembly, parts manufacturing, and vehicle sales.

For AIAMC members Honda, Toyota, and Suzuki, who assemble vehicles in this country, the fact that they are very vertically integrated and have brought with them key suppliers to the country to ensure the local supply of critical components means they have not been able to take advantage of the natural hedge arising for other assemblers who import significant quantities of vehicle parts from the United States. So the appreciation of the dollar is a real issue.

Given that we turn around and export about 80% of vehicle production to the U.S., the economics of that market are critical to Canadian producers. There are other significant factors impacting vehicle sales in addition to the higher Canadian dollar, namely higher energy costs, the fallout from the reset of adjustable-rate mortgages, tighter lending standards, and overall lower consumer confidence. All these factors are converging to produce lower sales volumes currently in the United States. There was a 2.4% drop through October, and significantly lower volumes in 2008 are forecast, with some forecasters suggesting that a 9% drop from this year's sales figures is not out of the question.

With respect to the parts manufacturers in Canada, the currency appreciation is one more factor making them less competitive with their American counterparts and is contributing to the 11,000 job losses, the 41% reduction in profit, and the 4.5% reduction in production this year, according to a recent Conference Board of Canada report. However, there are other factors impacting parts makers over and above the appreciating currency, namely higher energy and commodity costs, decreased production from primary customers, lack of adequate capital investment, and globalized sourcing by all OEMs for parts. I would encourage the committee to invite Gerry Fedchun, president of the Automotive Parts Manufacturers' Association, to appear in front of this committee to more fully elaborate on the impact of the dollar on this critical segment of the automotive industry in Canada.

With respect to vehicle sales, it's not lost on manufacturers that with ready access to television, newspapers, and the Internet while the dollar is at par or above, Canadian consumers can readily compare prices for what they believe are identical vehicles in both markets and are justifiably concerned when advertised prices in the U.S. are lower than they are in Canada. It is, however, important to note that vehicles offered for sale in the U.S. are rarely exactly the same as the vehicles in Canada, due to different standard equipment packages and different regulatory standards. Not the least of these is the unique immobilizer standard in Canada vis-à-vis the United States, as reported in today's papers. Those differing standards contribute to higher costs.

That said, if vehicles were equipped exactly the same and if our regulations were fully harmonized, different cost structures exist for business in Canada versus the United States. For instance, the U.S. has greater purchasing power, lower distribution costs, lower hydro costs, and lower levels of taxation than Canada. With respect to our industry specifically, Canada has a 6.1% tariff on imported vehicles, versus a 2.5% tariff in the United States. That differential adds about $1,000 to a $30,000 vehicle.

But consumers really don't care about structural costs and regulatory differences. They are focused on price. By strictly looking at the market price, it would appear that manufacturers understand this and are responding. If they were not, highly discretional vehicle purchases would not have been made while consumers waited for lower prices, or they would have headed to the United States in droves for cheaper vehicles there.

There has been a worrying uptake in vehicle sales imported from the United States, but, importantly, there have been robust domestic sales, with October sales up 2.1% over the same period last year; and year-to-date sales are up 3.8% over last year. And it should be noted that last year saw the second-best vehicle sales in history.

The appreciating dollar is a concern for all components of the industry, and in this regard we would make the following recommendations:

We would encourage the immediate announcement of the 2008 eligible vehicles for the ecoAUTO rebate program. While the criteria have been set for that program, the list of eligible vehicles for 2008 has not been announced. Those rebates, as many of you are aware, can put $1,000, $1,500, or $2,000 into the pockets of consumers, giving them another reason to purchase vehicles in Canada.

We would also argue for the temporary tariff reduction on vehicles from all sources, removal of the excise tax on air conditioning, addressing unique Canadian standards as a top priority, appropriate funding for a vehicle scrapping program, investment tax credits, and clear signals from the government concerning the fair value for the Canadian dollar.

I look forward to answering any questions you may have.

Thank you.

[The Chair, Conservative, Rob Merrifield]

The Canadian Auto Workers Union, Jim Stanford, chief economist, the floor is yours. You have five minutes, please.

[Dr. Jim Stanford, Chief Economist, Canadian Auto Workers Union]

Thank you very much, Mr. Chair and committee, for having me.

The CAW represents about 260,000 members in a range of Canadian industries, mostly in the private sector. About one-third of our members work in the auto industry, which is one of the industries hard hit by the rising dollar.

The auto parts sector is feeling the pain most immediately. Over 15,000 jobs have now been lost in auto parts since 2002, when the dollar first took off. I know from personal knowledge that there are literally dozens of auto parts plants facing imminent closure--one more, apparently, announced today. Lear Seating in Windsor is going to close, I understand. Without a dramatic change in the industry's outlook, I would expect at least another 10,000 auto parts jobs to disappear in the coming year.

The situation in auto assembly is not as dire but is still very negative. Auto assembly has lost about 10,000 jobs in Canada since the late 1990s. Thousands more will be lost in coming months due to plant shutdowns and shift layoffs.

Now, it would be wrong to blame the auto industry's problems entirely on the dollar, but the rising Canadian dollar has taken a bad situation and made it far, far worse.

The same story can be told across manufacturing. Canadian manufacturing has lost well over 300,000 jobs since the loonie started rising in 2002, but the job losses we're seeing today are the result of the dollar's rise two or three years ago. There are significant time lags and adjustments resulting from company investment planning, multi-year contracts, the impact of hedging, and other transitional factors. So we have not yet begun to see the consequences of the dollar's rise through 90¢ and then the dollar's rise to and beyond parity.

If the Canadian dollar stays anywhere near parity with the U.S. dollar in the medium term, I project another 300,000 manufacturing job losses in the next two to four years.

Some commentators have said the problem is global and results from a weak U.S. dollar rather than a strong Canadian dollar. This is not true empirically. Most of our problem is that the Canadian dollar has been uniquely strong, not that the U.S. dollar is weak. Consider the evidence. Compared to its 2005 average level, our dollar is up by about 25% against the U.S. dollar. On a trade-weighted basis against all its trading partners' currencies, the U.S. dollar has fallen by 10%, so it's fallen by 10% against the broad basket. Our currency has risen by 25%. That suggests that less than half the problem is a weak U.S. dollar; more than half the problem is a strong Canadian dollar.

The picture is even clearer from a longer-term perspective. If we go back to average 2002 levels as the starting point, our loonie is up 60% against the greenback; the dollar is down only 20% against its trade-weighted basket. That means for every penny of depreciation against the trade-weighted basket, we've experienced three pennies of appreciation of our currency. So, again, more like two-thirds to three-quarters of the problem is the unique strength of our Canadian dollar.

Not all currencies have strengthened against the U.S. dollar. Some have been stable and have even fallen. The yen, the yuan, the peso, the Taiwanese dollar, and others have all been broadly stable or even declining. It is factually false to claim that Canada's experience of rapid appreciation is universal.

Our currency has risen faster against the U.S. dollar than the currency of any of its other major export partners. Look at the list of the 10 largest exporters to the U.S.: our currency has increased faster than any others, by more than twice as fast as the average, yet we are the ones who are the most dependent, along with Mexico, on exports to the U.S. market. The combination of the uniquely rapid rise of our currency and our unique dependence on U.S.-bound exports puts Canada absolutely in a class of its own in terms of the risks we face from currency markets today.

How do we understand the run-up in our currency? Monetary policy is clearly part of the story but not all of the story. Our central bank has increased rates while the U.S. Fed has cut rates. That differential is a consistent determinant of our exchange rate. The Bank of Canada's recent actions were clearly a mistake. They have been guided by an unduly narrow reading of their own inflation-targeting mandate.

The bank should cut rates immediately and substantially. Moreover, it should indicate more clearly that its future interest rate decisions will take into account exchange rate volatility and the long-term economic risks that volatility pose to us.

Those actions alone would release much of the steam from the loonie's bubble, but that would not be enough. The loonie has been driven up in tandem with world oil prices. Some people call Canada's dollar a petro currency. There's no economic justification for that. We export more motor vehicles than oil, but this is the behaviour of financial markets, resulting from record prices for minerals and energy exports, record profits for Canadian energy and mineral producers, the investment boom in energy and resource industries, and the surge of incoming portfolio investment from foreign investors, who are purchasing Canadian resource companies.

The inflow of many tens of billions of dollars of foreign portfolio investment to Canada has been a crucial cause of the loonie's assent in the last year, and the government can take action on this point, too. They can control the pace of Canadian resource development more carefully, they can ensure that Canadians are getting fair value from that resource development in terms of taxes and royalties that make sense, and they can review foreign takeovers to make sure they can add real value to our economy. Merely announcing those measures would be akin to taking down the “For Sale” sign that currently hangs on Canada's door and would cool down the overheated, speculative inflow that's driving up the dollar.

The federal government and the Bank of Canada have both declared they can't do anything about the dollar. In my view, this is an absolutely blatant shirking of their economic responsibility.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Now we have Jayson Myers, president of Canadian Manufacturers and Exporters.

The floor is yours for five minutes, please.

[Dr. Jayson Myers, President, Canadian Manufacturers & Exporters]

Thank you very much, Mr. Chair, and thank you to the committee for looking at this very important and urgent issue for two of the most important sectors of the Canadian economy, the manufacturing and exporting sector, and for all those service jobs that depend on a strong manufacturing and exporting sector. I think it also shows the importance and the urgency of implementing the recommendations of the House of Commons industry committee that were tabled earlier this year.

I speak on behalf of Canadian Manufacturers & Exporters, but I also speak on behalf of the 37 industry associations that are members of the Canadian Manufacturing Coalition. We cover the entire manufacturing sector, and we've distributed the letter that we've written to the Prime Minister outlining our policy priorities for manufacturing over the year ahead.

I've distributed this presentation to all members of the committee as well. You'll be glad to know that I'm not going to go through it page by page in this presentation, but it does show the impact the Canadian dollar is having on manufacturing sales, on pricing. It draws from the 1,014 manufacturers we surveyed earlier this year who have said that the appreciation of the dollar is their most pressing concern, and it shows here what their response is.

The very rapid appreciation of the Canadian dollar, of course, acts like a price cut on export sales for many companies that are either pricing their exports in U.S. dollars or having to adjust their prices to remain competitive in their major market in the United States. We have companies that are exporting 85% to 90% of what they're producing into the United States. If you look at the impact that's having on producer prices, you'll see that finished goods prices have fallen 6%—this is over the last five years. Consumer products prices are down 12%. Machinery and equipment product prices are down 14%. Automotive prices are down 32% over that period of time. Much of that is driven by the impact of the dollar appreciation.

But the two factors that are driving the dollar up are also having a major impact on investment decisions and on the bottom line for manufacturers and exporters. Of course, as regards the higher commodity prices and energy prices that Jim was referring to, manufacturing is the largest consumer of commodities and energy, so that's driving up costs as prices are coming down. That squeeze on the bottom line means that, last year, out of an average eight-hour production shift, Canadian manufacturers had about six minutes to make money, after they paid depreciation, operating costs, taxes, and financing expenses—six minutes to make money, and that's the money they needed to invest in new products, new technology, reorganization, new market development, and skills upgrading. Those are the things they have to invest in, in order to remain competitive.

So the number one problem right now is cashflow for companies. The problem, though, is this surge in the Canadian dollar, a 25% increase that we've seen over the last six months alone—or actually since February, so I guess we're at eight months now. That rapid surge has meant that on contracts that were put in place earlier this year, companies are getting paid now, but they're getting paid something like $800,000 on a million-dollar contract. The appreciation of the Canadian dollar simply overwhelmed their pricing strategies and overwhelmed their ability to adjust costs. We're in a situation right now where many companies are simply in a loss position on their export sales and export contracts.

That's the major problem--cashflow--right now, but it's also the other problem we're seeing: the weakness of the U.S. dollar caused by a weakening performance in our key industrial markets in the U.S., in housing, automotive, and consumer markets in particular. What we're seeing is an increasing rate of plant closures—Jim referred to that—but there's a common story here. There are conditions of overcapacity in the North American market. Companies are consolidating, and with the high Canadian dollar, Canadian operations, as good as they are and as efficient and as world class as they are, are being closed because it's no longer productive to remain here.

I just want to go to the very end, the policy recommendations, which are also outlined in our report to the Prime Minister.

We recommend that the two-year writeoff window for investment in manufacturing equipment be extended to a five-year period. But I think it's also important at this time, under these very extraordinary circumstances, to consider measures that would enable manufacturers to be able to monetize the loss they're incurring, to provide some form of either a loss carry-back for companies that were profitable over the previous number of years or some kind of investment tax credit that could help them to monetize their loss at the current time.

We've recommended making R and D tax credits refundable. This is the time when companies should be innovating, but if they're not making any money, they can hardly take advantage of the R and D tax credits. So the refundability is important.

We've also recommended the implementation of a trading tax credit that could be creditable against EI premiums. All of these target cashflow, and at this very urgent time for manufacturing and exporting, and all of the other sectors that depend on it, that's what is necessary.

Thanks.

[The Chair, Conservative, Rob Merrifield]

Now from Cascades Paper Products, we have Monsieur Lemaire, vice-president.

The floor is yours for five minutes, please.

[Laurent Lemaire, Vice-President, Administrative Council, Cascades]

Ladies and gentlemen, members of the committee, Cascades is a multinational specialized in the production and processing of packaging products and tissue paper made mainly of recycled fibres. The company has over 100 production and logging units in Canada, the United States and Europe. Founded in 1964, the company employs over 14,000 men and women, and generates business on the order of $4 billion Canadian a year.

The relative increase in the value of the Canadian dollar compared to its US counterpart has become very significant for Cascades and the sector it does business in. I would like to thank the members of the committee, which is holding pre-budget consultations on the Canadian dollar, for giving us the opportunity to explain the scope of the impact of the high dollar on our activities, but also and especially to present solutions which may help us address this situation.

Given the fact that 90% of our sales are affected by the fluctuating value of the dollar, that 40% of Cascades' production is in the United States and 50% in Canada, that its labour costs in Canada compared to those south of the border are not competitive anymore, it is clear that Cascades has been struck hard by the stronger dollar.

The increase in the value of the Canadian dollar alone, which occurred between 2002 and 2007, has cost us over $300 million annually. The sudden rise of the dollar has forced us to close three manufacturing units in Canada, in Ontario and in Quebec, and two other plants temporarily. These closing alone have led to the loss of over 1,000 jobs in outlying areas. Whereas under the Cascades business model we have always tried to help struggling businesses, the recent decision to close plants was very difficult for my brothers and myself, our management team and our employees.

Furthermore, the price we pay for raw materials has gone up because of increased demand for waste paper from Asia, where the paper is sorted by hand by a much cheaper labour force. If we hadn't refocused some of our activities and if we hadn't reduced our costs, our company would not be profitable anymore, which is what happened to several other companies in our sector which had to considerably reduce their operations or merge with American companies.

If the loonie remains strong, Cascades will have no choice but to shut more plants in Canada and shift more of its production to the United States, if it is to remain as competitive as it was before. In fact, we will from now on make our strategic investments in the United States or in other countries where costs are lower. This is a market change for a company which 40 years ago began when it bought out a bankrupt company which exported all of its products to the United States.

The US greenback will remain the benchmark for the basic reasons we are all familiar with. And because our asset base in Canada is still significant, we still want to continue to export to the US. I am not an expert in monetary policy, but a businessman and a manufacturer of packaging products and tissue paper. I cannot tell you what to do, but I will make some suggestions.

Yes, it is possible to live with a Canadian dollar at par. Cascades has adapted and will continue to do so. No, it is not possible to live with the current direction and volatility of the dollar, and to plan for investments in Canada. We therefore have to make Canadian companies more competitive by making available better, faster and refundable incentives for our sector, including in the areas of research, development and innovation, infrastructure and labour support, as well as accelerated depreciation programs, as my colleague has suggested. In Scandinavia, the depreciation period is very short, and this has helped the pulp and paper industry to modernize and remain competitive. We would like the federal government to acknowledge the impact the sudden rise in the Canadian dollar will have on the Canadian manufacturing sector in the medium and long term, especially in sectors like ours, where we are trying to do things differently while protecting the environment.

As for the environment, a final measure could really help us, and that would be the creation of a carbon exchange. As do other companies operating in Europe, Cascades has greatly benefited from the European carbon exchange, and it still does. On this side of the Atlantic, for the fiscal year ending December 31, 2006, we have reduced our 125,000 tonnes of greenhouse gas emissions by 10%. That represents a fair amount of money which unfortunately is not credited to us in North America.

We need to quickly create a carbon exchange in Canada. This could easily be achieved with the Montreal Stock Exchange, which is in the best position to accommodate this type of exchange. This kind of system is recognized as being potentially the most effective one to fight climate change, and it would be a strong incentive for companies, as they would also benefit financially.

It is also imperative that the creation of a carbon exchange use 1990 as its base year, because we should not penalize the companies which first chose to become environmentally friendly before the environment became a concern for all of us.

Finally, such a system won't work within a reasonable timeline unless mandatory caps are imposed on each industrial sector based on yet-to-be-determined conditions.

Thank you for giving me the opportunity to speak. I remain available to take your questions.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We're really asking the witnesses to keep it in that five minutes. I hate to cut somebody off, but to respect the panel and the time for questions, we really ask that you do that.

We have now the TD Bank Financial Group, with Don Drummond, senior vice-president and chief economist.

The floor is yours, for five minutes, please.

[Don Drummond, Senior Vice-President and Chief Economist, TD Bank Financial Group]

I'll keep way within the five minutes and pass on an opening statement.

I look forward to any questions the committee might have for me.

How's that? That got you back on schedule.

[The Chair, Conservative, Rob Merrifield]

It gets us right back on schedule. That's what you prefer to do?

[Don Drummond]

Yes.

[The Chair, Conservative, Rob Merrifield]

Okay.

Then let's go to Toyota Canada Inc., and Stephen Beatty, managing director.

[Stephen Beatty, Managing Director, Toyota Canada Inc.]

Thank you, Mr. Chairman. I promise not to use his five minutes as well.

I'd like to thank you and your colleagues for offering me the opportunity to address the committee. At Toyota we believe it's very important in these uncertain times to maintain a dialogue with Canadians, and clearly the committee plays an important role in that regard.

Mr. Chairman, the dollar's strong performance this autumn has created many challenges for all Canadian manufacturers, and Toyota is certainly no exception. In the face of a rapidly escalating loonie, Canadians have made it clear that they're looking for pricing equality with our neighbours to the south.

Toyota is a global company, but we firmly believe in building vehicles where they're sold, and I'm pleased to say that Toyota has invested billions of dollars in Canadian manufacturing facilities to build vehicles not only for our Canadian customers but for the North American market as a whole.

By building our most popular models here in Canada, Toyota was able to shield Canadian consumers from the impact of the dollar's slide in the early part of the decade and build export sales to the United States. Now, however, we're challenged to find ways to improve our offers to both our American and Canadian customers while remaining profitable.

Certainly, we pledge to respond in ways that are viable in the Canadian regulatory economic context that are meaningful to current and future customers and are respectful of our employees.

It may be stating the obvious to say that manufacturing starts with sales, but I think it's important to remember that without a market, there's no reason to build a product. It's also worth repeating that customers are driven by value, whether shopping for a book or a car. I mention books because with both Canadian and U.S. prices printed on their covers, books have become symbolic of pricing disparity.

I can't speak for the publishing industry, but I think there is some parallel with automobiles insofar as consumers look at vehicles bearing the same name in Canada and the U.S., see pricing differences in advertising on the Internet or other media, and feel they aren't getting a fair deal. As the old saying goes, “You can't judge a book by its cover”.

All vehicles that we build for sale in the Canadian market, as distinct from the American market, are equipped with features mandated by federal regulatory requirements--indeed, some that are not required by our U.S. counterparts. Other Canadian vehicle features, again as distinct from those American cars, relate to choices we make as a distributor based on a variety of factors, from what survives a Canadian winter to what has proven popular with our customers in the past.

Dollar parity has resulted in a new conversation with consumers to highlight the many differences between Canadian and U.S. products. We need to examine how best to minimize these, whether by truly harmonizing regulatory standards across North America or by changing standard features to make Canadian and American vehicles more directly comparable. I can report that we are responding on both fronts.

We're repositioning the prices and features of our vehicles that are popular with Canadians. We're offering a variety of financing lease rates. We're providing additional value through complementary service, gas cards, cash equivalents, and other programs. As we've done for the past 40 years, we're going to continue to monitor the market and adjust our operations, our products and services, to ensure best value for our Canadian drivers.

Now, Canadian companies are good at being successful despite a relatively small domestic market. But we're more successful when we're operating in a favourable economic environment, and this is something in which the federal government plays a key role.

Toyota Canada would like to suggest three ways in which the government can help. First, there's support for capital investment. Every time Toyota retools for a new model, it must invest hundreds of millions of dollars in equipment and technology. Out-of-date plants, clearly, are less productive, and American policy makers are keenly aware of this. As one example, in the state of Kentucky there's an incentive for this very type of investment.

Second, there are people. We must continually train our people to improve processes and enhance productivity, and there are almost no incentives or programs to support this effort in Canada. Support for technology investment and people development would help Canada compete more effectively with other countries.

Third, as you've already heard from my colleague, Dave Adams, inconsistent Canadian regulatory requirements and other policies that burden Canadian consumers should be removed to encourage consumers to buy Canadian. I've already mentioned disharmonious vehicle standards, but that's not the only reason why Canadians must pay more for vehicles. For example, subcompact cars are not built in North America, but both Canada and the U.S. apply duties on imports of these vehicles. Why any duties should apply is a perplexing question, but it's particularly perplexing that in Canada, a market that demands small cars, the duty is 6.1% while the U.S. limits its tariff to 2.5%.

In summary, we're making adjustments across all of our Canadian operations to ensure that Toyota is able to provide competitive pricing and features for our customers across North America. Governments can help us by pursuing economic and fiscal strategies that will restore stability to the marketplace, eliminate unnecessary costs through regulatory and tariff harmonization, and by assisting automakers to retool and retrain for added productivity.

I look forward to discussing these proposals with you and would be pleased to answer any questions you have.

Thank you, Mr. Chairman.

[The Chair, Conservative, Rob Merrifield]

Thank you very much for coming here and testifying.

We'll now open it up to the questioning period of our meeting. We'll start with the Liberals.

Mr. McCallum, seven minutes are yours.

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

Thank you, Mr. Chair, and thank you very much to all the witnesses for being here.

Since this is the first session of six on this topic, I thought I'd begin with just a brief explanation of why we Liberals pushed for these hearings of nine hours on the connection between the high dollar and jobs. And I'm grateful to our opposition colleagues for supporting this. The reason we're pushing for this is that the Liberals feel there's a looming crisis in relation to the high dollar and jobs and that now is the time for action.

Partly I say this using my economist's hat, because it is definitely true that when there's a major exchange rate appreciation, it will have an effect on jobs and manufacturing and other exchange-rate-sensitive industries, whatever the state of the economy overall. I'm only talking about exchange-rate-sensitive industries. But these effects operate with a lag. Companies can go on for a while, but when they make their new business plans, if the dollar is still high and is expected to be high, they'll plan to produce elsewhere, like in the U.S. It's likely that we've seen only the tip of the iceberg in terms of layoffs. We had 1,100 at Chrysler and 800 in forestry in the last few weeks.

My hypothesis is that if this dollar is sustained at parity or thereabouts for the coming year or year and a half, then what we've seen to date will only be the tip of the iceberg in exchange-rate-sensitive industries. The oil sector might be fine. The economy as a whole might be all right, but I'm talking about exchange-rate-sensitive industries like yours. I think, to use a Wayne Gretzky metaphor, a good government should be focused on where the puck will be down the road, not on where the puck is today. We know that 12 months from now, if the currency is still at parity--and that's an “if”--the situation may be a lot worse.

I should also say, just as a premise, that we don't think the government has a plan, so part of the purpose of these hearings is to get your advice to develop such a plan.

I would like to ask my questions as follows. My first question to those who represent industries with jobs at risk--maybe starting with Mr. Myers--is whether you agree with the hypothesis. You have problems today. But do you agree that if nothing is done, assuming that the dollar remains where it is, then looking ahead 12 months to 18 months, the situation will be even more dire in your sector?

[Dr. Jayson Myers]

Yes, I agree, and Mr. Stanford said the same thing. I think the closures we're seeing and the layoffs we're seeing are the effect of adjustments that have been made over a period of time. Companies have been trying to respond to the dollar. They've been doing about as much as they can to cut costs and improve efficiency. We are at a stage right now where there is very little margin and where it's becoming more difficult to access financing. As for this very recent surge of the dollar, we'll see the impact of that over the course of the coming six months or so.

I think you are absolutely right. Next year we will see a much more severe impact on employment and on closures within the sector.

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

Thank you.

We'll have Mr. Stanford.

[Dr. Jim Stanford]

Yes, I agree wholeheartedly. With respect to the 350,000 lost jobs in manufacturing that have already been experienced since 2002, when the dollar took off, I estimate that there is a two- to three-year lag, on average, for the impact of an exchange rate appreciation to work its way through investment decisions, sales contracts, and production planning. What we're seeing today is the result of where the dollar was two to three years ago, which was in the low- to mid-80¢ range. If, indeed, the dollar stays at or anywhere near parity, we'll see that hemorrhaging continue, and it will get worse.

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

Thank you.

Mr. Lemaire, what would the repercussions be on jobs in your sector if the dollar stays as strong as it is now?

[Laurent Lemaire]

There would definitely be a strong impact. As far as our investment planning for next year and the years after that are concerned, we will factor in whether they will make us more competitive. The dollar at par does not really reflect reality. Salaries are at least 25% to 40% higher in Canada than in US plants. We are only at the beginning. We have to make adjustments and find ways of reducing our costs.

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

Thank you.

Since my time is almost up, let me just end with one question, perhaps, to the same three individuals.

Given the looming crisis, which you agree is a fact, if you had just one or two things--not the Bank of Canada, not the dollar, not interest rates, but fiscal policy, budget, and so on--what would be your top one or two priorities for the federal government? Can you say them very quickly?

[Dr. Jayson Myers]

Let me go first.

I think looking at tax credits or refundability of tax measures that would provide a boost to cashflow is the most important thing right now, and we've outlined the three that I recommend.