Foreign Affairs Committee on April 11th, 2017

[Dean Allison, Conservative, Niagara West, ON]

Some would call it skill, sure.

Thank you. We appreciate that.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Allison.

I'm going to go to Mr. McKay. We're going to keep to the time fairly tightly, because we'll see what happens with the vote, and then we'll get to everybody.

Mr. McKay.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you, Chair.

Thank you for coming.

I agree with your central premises. Canadians know how important the American economy is to them, but very few Americans actually know the reverse. Hence, there's value in those little brochures that the embassy gives out when you're sitting with a congressman or a senator; the trade figures are broken down by state, and even sometimes by district. Almost inevitably the eyebrows shoot to the top of their heads, and they'll say they didn't know that.

I don't know whether your organization had much to do with putting those together, but I found them to be a very useful tool.

I want to ask a number of questions with respect to the thickening of the border. I got a very irate call from a very good friend of mine yesterday who runs a small business. It's a spice business. It's a very prosperous business. He imports spices and distributes them to 36 countries, and obviously, the U.S. is a major country. When he sends a shipment down to be distributed in the U.S., he sends with it one of his employees who teaches the distributor how to mix and match, etc.

This particular individual has been doing it for 13 years. He got turned away at the border. By the way, he had no Muslim name or anything like that. He got turned away at the border because the border guard said he was going to take away a job from an American. This guy's going to be in and out in 24 hours, and he's told that he's going to take a job away from an American.

I have a number of anecdotes to that effect. The question is, in your observation, is there a trend developing here? Do these anecdotal events actually end up as trade impediments?

[Warren Everson]

We hear those kinds of anecdotes now. Global Affairs says they track the numbers and that the numbers are down for those kinds of harassment things.

By the way, that's not a legal action by that border guard. He's not entitled to deny anyone access to the United States.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Yes, there's something fishy here.

[Warren Everson]

We do look forward to, and you heard the previous guest talking about, pre-clearance at land crossings. It does seem maddening that the same truck leaves the same plant with the same product heading for the same buyer driven by the same driver every day on behalf of Chrysler, Magna, or someone, and has to be stopped and searched at the border over and over again. You wonder why we can't build a trusted shipper design. Your friend with the same driver going every year, or more often, would be a candidate for it.

I'm of the mind that this American administration will like that kind of stuff. I think we'll see them engaged on that. I think they'll see that as forward progress and a way of getting rid of the waste of the resources that are currently employed. The one caveat here—and I think we all know it—is the nightmare scenario for us that someone whom we've let into our country, but whom the Americans wouldn't have allowed into their country, crosses the border and commits a crime. That will be on every news broadcast. We have to demonstrate, and the political leaders more than anyone, I think, have to demonstrate, that we have their backs. Americans have to believe this and that we're serious about their security. That's an overwhelmingly significant issue and not one that we quite absorb north of the border.

[John McKay, Liberal, Scarborough—Guildwood, ON]

It's almost a paranoia. I just came from Phoenix. The craziness of the security there was just beyond. There' s no analysis of whether I was a security risk, for instance. No one else....

The second question has to do with how we are treated as a domestic supplier for the purposes of military procurement. I think that's a very curious anomaly and something that we need to explore and expand. For the purposes of military procurement, we're treated as a domestic supplier, but for the purposes of supplying PVC pipe or steel to that same military base, we are treated the opposite. What craziness does that mean to how their country of origin stuff works?

[Warren Everson]

I don't have a competence in this space, so I can't say anything useful. You've made the point.

I think, in the imperial period of the United States in the fifties and sixties, Canada was seen as a helpful little brother for the military, and so it ended up with a separate path, probably much to the benefit of people trying to do their manufacturing here in Canada.

[John McKay, Liberal, Scarborough—Guildwood, ON]

It strikes me as a very useful argument when they say, well, for the most sensitive procurements, you're exempt, but for junk, you're not. It's crazy.

[Warren Everson]

Americans also don't know the degree of intimacy of our co-operation on defence. There are Canadian officers commanding at Cheyenne Mountain, and there is the Five Eyes' daily exchange of intelligence. There is an enormous amount of co-operation. We have their backs. We need to tell them that continuously.

[John McKay, Liberal, Scarborough—Guildwood, ON]

My third question has to do with the Canada-European trade agreement. I see this as ultimately quite an advantage to us. The Americans have no interest in multilateral agreements, either TPP or EU stuff. In terms of using that as an advantage, is there an argument to be made that some product made in California with an ultimate destination in Europe could be shipped with advantage through Toronto?

[Warren Everson]

Yes, there might be.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Should Americans be reminded of that?

[Warren Everson]

Not in noisy ways. It's perhaps for the Europeans to[Inaudible--Editor]. This is the whole argument around country of origin, and the rules about that are arcane and very expensive to administer. Mr. Ross, the new commerce secretary, spoke a lot about tightening up the rules of origin under NAFTA, which I don't necessarily think would be a bad thing for us if it were North American oriented. However, the world economy is shifting all the time, and you see all these charts that show that a Saab vehicle, and the like, is made up of 50% product from outside the country.

I'm not sure where this is going to go, but yes, of course, there might be some significant advantage. Canada has, over the last 20 years, secured for itself some highly advantageous positions with respect to access to markets that other people don't have.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Concerning this lunacy of a border tax, when I was in Washington a few weeks ago, I'd sit with a congressman and say, “Look, when I'm in my living room in Toronto, I'm consuming electricity that was produced in Cleveland, in New York, in Quebec, or in Ontario. How are you going to tax that?” Not one of them had any kind of coherent answer. My suspicion is that when a lot of this nonsense about a border tax is actually addressed, it will simply be seen as that. It's virtually an impossible thing to do.

[Warren Everson]

I have a couple of points. I agree with you, of course.

There are at least five or six significant tax reform plans being proffered about Congress right now. Mr. Grassley has one and Mr. Brady has another. Obviously, Mr. Ryan has been out early with his proposals. It's too soon to tell where this is going, but the Americans have a problem. Their tax system only affords the federal government five or six sources of money. They have corporate and individual income tax, payroll tax, estate taxes, and tariffs. There's not a hell of a lot else.

They've already pledged to get rid of the estate tax, which is 4% of gross tax revenue right there. Any significant saving on corporate tax, and some individual tax reductions as well, will put them into a gigantic deficit. They can't bring legislation to the Congress that proposes such a massive deficit, so they have to construct some sort of argument that they will make up the money somewhere else; hence, the word “adjustment” in the border-adjustment tax that Mr. Ryan put forward.

I think there's every chance that they will try to raise revenues at the borders, but I think this is all posturing at this point. I don't think any of the plans that I've seen really make a lot of enduring sense. Yes, you will get a lot of money in the first year when you put a huge tariff in place; then there's nothing in the second year. How is that going to affect them? How fast can Americans repatriate money, build new facilities, and drive up the payroll tax revenues for the government? This is a very tricky situation for them.

I don't want to waste your time, but during this administration's mandate, I think there will be some push-back from Americans, because protectionism is very expensive. It's expensive to the producers. They are trying to export their products. They have to use higher cost inputs and it's expensive for the consumer.

At a certain point, probably at some annual meeting of some megacorporation, I do think that investors are going to stand up and ask, why exactly are we moving the facility into a high-wage jurisdiction when we were in a low-wage jurisdiction and still getting a very fine product? I don't think they're going to be immune to that debate.

[John McKay, Liberal, Scarborough—Guildwood, ON]

By the way, I just want to agree with Mr. Allison, as far as the utility of joint business-political collaboration goes.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. McKay. We'll go to Madam Laverdière, s'il vous plaît.

[Hélène Laverdière, NDP, Laurier—Sainte-Marie, QC]

Thank you, Mr. Chair.

Mr. Everson, thank you for your presentation, and also for your humour.

I want to make a quick comment on the border adjustment tax. I was in Washington two or three weeks ago, and a former economic advisor to Ronald Reagan explained that it was the same thing as a value-added tax, which seemed a bit questionable. In any case, we'll see what happens.

In your presentation, you mentioned the campaign you want to carry out in the United States. I know we have an idea of what the campaign involves, but I want more details on what you're planning exactly.

[Warren Everson]

I don't want to oversell our effectiveness so far. I think we're just trying to spool ourselves up a little bit. What we actually want to do is to talk to U.S. legislators in the presence of their own constituents about the relationship we have and the prosperity it has generated.

I think that's the most effective way to send them back to Washington, with at least caution in their minds about actions that would be bad for Canada.

In cooperation with the government, we plan to pick different regions of the country and research the business relationships. I think Americans and Canadians are sometimes not aware of how dense the relationships are and how important they are. In Texas, there are 180,000 people whose jobs are connected to Canadian businesses. I would imagine 179,000 of them have no idea.

Our thought was to send at least our president, who has a fairly good profile, and some other Canadian business leaders and then discuss with the federal government here whether or not including Canadian politicians would be advantageous, on the theory that politicians may bring out local politicians. We would then just try to make the case in as friendly a fashion as possible, but with some warning.

Minister Freeland mentioned to Mr. Ryan that his state produced $1 billion in exports to Canada. Mr. Ryan was visibly affected by that number and said that's pretty good research on her part. As I say, I don't believe Americans are hostile to us. They just need to know how complex the relationship is and how easy it is to hurt themselves by doing something that's negative to Canada.

[Hélène Laverdière, NDP, Laurier—Sainte-Marie, QC]

Thank you.

We've heard that the United States has a much harsher attitude at the World Trade Organization. I don't know whether you were able to notice this. I gather that, in a recent statement, the United States representatives even refused to talk about a rule-based system and use other standard phrases.

Can you comment on this?

[Warren Everson]

You know, all my life, Americans have protested against the decisions of the WTO when those go against them. It doesn't stop Americans from going to the WTO to petition against Chinese steel, for example, and fertilizer, and paint, and things like that.

I have a view that is no more educated than anyone else's. I think the negotiating tactic of some of the people in Mr. Trump's administration is pretty clear. They come on very strong. They assert a very bullying tone, and they try to intimidate. Whether that in fact turns out to be their strategy.... I mean, some Americans have talked about pulling out of the WTO. Is that actually something that the country would like to do? It's too soon to tell.

I will make the point again that it's not obvious that the administration is going to lead Congress very effectively. I think it's going to be a much more chaotic environment. What the administration may wish to do is not necessarily what Congress will wish to do. It's hard to tell.

[The Chair, Liberal, Bob Nault]

I'm going to go back to Mr. Kent, because we cut his group a little short.

We were thinking there was going to be a vote, but there isn't, so I'm going to go to Mr. Kent and then over to Mr. Fragiskatos.

[Peter Kent, Conservative, Thornhill, ON]

That's very gracious, Chair. Thank you.

Mr. Everson, I just have one question. It has to do with the border import tax, the Republicans' “better way” agenda, which seems to mean different things to different Republicans, depending on how close their state is to the Canadian border.

I'm wondering what your messaging is with regard to this potential largely undefined concept.

[Warren Everson]

I don't think we're going to lead with our chin on this. I want to make sure that we understand what the Americans are actually proposing before we start tilting against it.

I think Mrs. Laverdière mentioned that the Americans don't have a VAT. They're one of just a handful of countries in the developed world without one. There seems to be a consensus that they can't have one and that it would be politically impossible, so Mr. Ryan is trying to mimic one by punishing imports and rewarding exports.

Our main message I think is not going to be very complicated. When you put a huge tax on imports, the cost of imports goes way up, and the consumers have to pay. Americans have enjoyed, in our lifetime, and certainly in the last 20 years, an astounding reduction in retail prices, from sweaters to lawn mowers—anything. I think consumers in the United States enjoy that quite a bit. A decision to reverse that and start driving those prices back up is politically very challenging. I think we'll probably end up making that point.

Because we're a major energy supplier, it's a kind of vivid lesson. You can say, well what benefit is it to you to raise the price of oil entering your country, so that at the pumps you have to pay more and every factory needs to pay more for heating? I think that's easy for them to accept.