Foreign Affairs Committee on April 13th, 2017

[The Chair (Hon. Robert Nault (Kenora, Lib.)), Liberal, Bob Nault]

Colleagues, we'll bring this Standing Committee on Foreign Affairs and International Development to order. Pursuant to Standing Order 108(2), this is the study of United States and Canadian foreign policy.

In front of us, on video conference, is Laura Dawson, director of the Canada Institute, Woodrow Wilson Center. She's in Washington, D.C., this morning. As well, we have Christopher Sands, senior research professor, and director, Center for Canadian Studies, Johns Hopkins University.

Welcome to both of you. I understand the clerk has briefed you on how we proceed.

We'll get Ms. Dawson to start with her presentation, and then we'll go straight to Mr. Sands' presentation. Then we'll go to questions for both of you for the remainder of the hour, if that's suitable to all here.

Good morning, and thanks for appearing this morning.

[Laura Dawson, Director, Canada Institute, Woodrow Wilson Center, As an Individual]

Good morning, everyone, and thank you for the invitation.

I wish I were there in person, because I understand you might actually be getting some spring in Ottawa. That's great news. My son and grandchild live in Ottawa, so it's always very close to my heart.

As mentioned, I am the director of the Canada Institute at the Woodrow Wilson Center in Washington, D.C. The center is supported by a modest congressional appropriation as well as private sector contributions. Because of the bipartisan nature of the Wilson Center, and also my respect as a Canadian living and working in Washington, D.C., my remarks this morning, first of all, are my opinions and not those of my employer, and also they indicate my great respect for the U.S. democratic process.

I have spent the past 25 years working on international trade issues, primarily bilateral trade—Canada, U.S., and Mexico—so those are the two issues I want to address here today. As a former university professor, it's hard to say anything in eight minutes, so I'm going to try to be disciplined. If there's more that you want to work with in the question-and-answer session, I'd be happy to delve deeper into these issues.

On the issue of Canada-U.S. commercial relations, the campaign promises about ripping up the NAFTA have been very worrisome for Canadians. With around 7% of Canadian exports going to the United States, ripping up the NAFTA could seriously destabilize the Canadian economy and the integrated supply chains, investments, and joint ventures we've come to rely on to sustain the Canadian economy.

We are each other's largest trading partner—everybody knows that—but Canada is much more vulnerable in the relationship. The asymmetry is not just a matter of size; it's also because, even though we are the largest buyer of each other's exports, some 20% of Canadian GDP comes from exports to the United States while less than 2% of U.S. GDP comes from their sales to Canada. Frankly, Canada does not matter as much to the United States.

For this reason, Canada is often overlooked in U.S. foreign policy and commercial policy considerations. Canada is not going anywhere. Canada is not a problem. So sometimes there is some complacency. Canada gets caught in the crosshairs of punitive actions that were not intended to hit Canada in the first place. We're hearing about targeted trade actions towards Mexico and China, and those may very well have a negative effect on Canada as well.

The Government of Canada has been really successful at managing this relationship through the turbulent early days of the Donald Trump administration. A lot of credit goes to Canadian Ambassador David MacNaughton, who has been a skilful quarterback, managing the multiple dimensions of the relationship. We hear about elder statesmen Conservatives meeting with members of Trump's inner circle. We hear about young Liberals meeting with Ivanka Trump and Jared Kushner.

They are hitting all the right notes and meeting at all the right levels. In particular here in Washington, it's terrific to see Liberal, Conservative, MPs from all parties, doing joint meetings together with U.S. partners. We also see provincial premiers and federal representatives. There's very much a united front and common messaging here. I think Canada is doing the right things so far in managing this relationship.

However, Canada needs to move from rapid response mode to a more targeted strategy that focuses on sectors where Canada can benefit from upgraded provisions in the trilateral space. I think we focus too much on defensive...and on what happens if this and what happens if that. This is an opportunity to open up a 20-year-old trade agreement, and it is an opportunity for Canada to take the long view and figure out what it needs to be more competitive on a North American scale in the coming decades. I would suggest an initial focus on the auto sector, on aerospace, agrifoods, energy, and services.

A couple of weeks ago, a draft notification from the Office of the U.S. Trade Representative was available for public viewing. This is the notification that will have to precede congressional approval for the U.S. to start new NAFTA negotiations. In some ways, the draft text was very reassuring for Canada, because what we saw in that text was not ripping up the deal or ripping up the rules of the road. It conformed to some fairly traditional, fairly predictable trade rule conventions and orthodoxies and patterns. Canadian negotiators are very skilful, and they're very used to working within that WTO language and framework, so for Canada there's some comfort in that draft notification.

At the same time, it's clear that the United States wants to go after certain protected sectors. It's likely they're going to go after Canadian dairy. It also seems likely they're going to import some of the measures that they liked from the trans-Pacific partnership, like state-owned enterprise controls and increased protection for intellectual property.

I would say the NAFTA is reason to be vigilant; it is reason to be focusing on our defensive interests but also on a forward-leaning agenda.

More disruptive for Canada than a NAFTA renegotiation is the border adjustment tax. We keep hearing that Donald Trump doesn't love it, but it is such an appealing fundraising tool to enable the U.S. administration to raise funds for the initiatives that they want to undertake, that they can't seem to shake it. That border adjustment tax would have serious implications for Canada across all sectors.

I would be happy to discuss my opinions on that tax during the Q & A, but what I'd like to move on to now is Mexico. In Canada, it is tempting, perhaps, to just get out of the way and let Mexico and the United States fight it out. It's not a fight that Canada started. Also, Canada and the U.S. do have an existing priority commercial relationship through the Canada-U.S. Free Trade Agreement, so there are some who are saying just let Mexico go its own way.

In my opinion, that is a short-sighted view. Mexico is a young, growing consumer economy, with a population four times that of Canada. Our commercial policies are already closely linked through more than 20 years of the NAFTA, and most of the effective trade barriers have been eliminated. Companies like Scotiabank, Linamar, Bombardier, and Grupo Bimbo remind us of the important opportunities that relationship creates and will continue to create.

Also, many Canadians don't realize the important retaliatory power that Mexico has against the United States. Even though Canada is the largest buyer of U.S. products across the board, Mexico's purchases are more focused in key commodities. Mexico buys all of U.S. exported corn, so if Mexico turns around and puts a more than 100% tariff on that corn, that's going to be very punitive against the United States. Leaving trade aside, Mexico has been a very important partner on southern border control. If they stop being so co-operative and just open up the gates for Central American migrants right up to the United States, that will have a very destabilizing effect on the U.S.

Meanwhile, Mexicans feel insulted by the rhetoric that they heard during the presidential campaign. As a result, Mexico's leading candidate in the upcoming election is running on an anti-Trump campaign and a promise to restore Mexican dignity, so Mexico is going to take some very hard negotiating positions in the upcoming NAFTA. The U.S. has already carved out hard negotiating positions, so it seems to me Canada has an important role to play as a flexible negotiator, as a mediator, and as a consensus-builder, so that the NAFTA issue can be resolved in a way that's productive for everybody.

The most significant threat for Canada is not embedded in any one action. It's not the NAFTA. It's not Mexico. It's not the border adjustment tax. It is the aggregated effects of policies that disrupt efficient supply chains and generate unnecessary volatility in exchange rates and border taxes, as well as any other factors that make it difficult for businesses to engage in long-term planning and investment in North America.

While I didn't have time to address the security dimension of the trilateral relationship, I would be happy to take that up in the question and answer period.

Thank you very much for your invitation this morning and your attention.

[The Chair, Liberal, Bob Nault]

Thank you, Ms. Dawson.

We'll go to Mr. Sands, please.

[Dr. Christopher Sands, Senior Research Professor and Director, Center for Canadian Studies, Paul H. Nitze School of Advanced International Studies, Johns Hopkins University, As an Individual]

[Technical difficulty—Editor]

[The Chair, Liberal, Bob Nault]

We can't seem to get the audio going. Mr. Sands, we'll hold off on your presentation. We'll go to questions to Ms. Dawson then we'll come back to you and hopefully, they'll have the issue resolved by then. I apologize for that. It was working fine before the committee started because it was tested.

Colleagues, with that in mind, we'll go to questions regarding the presentation by Ms. Dawson and then we'll revert to Mr. Sands, once we get it sorted out.

Mr. Allison.

[Dean Allison, Conservative, Niagara West, ON]

Laura, great to see you again. I'm glad to see that you're doing well in Washington. I'm going to ask a couple of questions and then pass it over to Mr. Kent.

It seems that the administration is still proceeding with pre-clearance and all these other things, which obviously, would be great. How do you square that with the border tax and some of the disruptive things you talked about? You said you may expand a bit on the border tax.

A second question, and a subset of that, is whether you could talk to us about your knowledge of what the subsidies are for agriculture in the U.S. I know they talk about dairy, but I've heard from supply-managed people that subsidies are upwards of $30 billion. We asked our officials and they're going to get back to us, but do you have any knowledge or understanding of subsidies that the U.S. provides to agriculture as well?

[Laura Dawson]

Thank you, Mr. Allison; it's good to see you again long-distance.

One great challenge—and maybe we shouldn't fault the United States for it, as it may be just a function of government—is that there's very little coherence among the silos of different policies. The United States still seems quite amenable to issues such as pre-clearance and still seems quite amenable to continuing with the agenda of the beyond the border agreement, which sought to improve movement for people and goods and travellers across the border. We're seeing that moving forward, but at the same time we're seeing a border adjustment tax.

In my opinion, the border adjustment tax is antithetical not only to the NAFTA but to participation in the World Trade Organization. The fundamental principle of both of those agreements is national treatment, which means that you treat domestic products the same way you treat imported products. When you discriminate, treating one differently from the other, you're violating the rules of those agreements, and I don't know how you can stay in or maintain those agreements.

The United States likes many of the provisions of the WTO. It likes protection for intellectual property. It likes to be able to use anti-dumping and countervailing duty mechanisms. I don't see the United States walking away from the WTO or the NAFTA. It just seems to be a real paradox—just two things existing at the same place that are mutually incompatible.

I can't go into the details on agricultural subsidies, but I'm going to underscore what you said. It is my understanding that whatever subsidies—agricultural supports, etc.—Canada might have, it has them in spades. One thing, though, is that Canada often will support its agricultural sector through mechanisms that affect prices for the consumer, whereas the United States focuses more on subsidies at the front end, and because of these different ways of providing agricultural supports, the American ones seem to slip under the WTO radar much more often.

As you also know, however, Canada has had an exclusion from the trade rules of WTO rules on most aspects of supply-managed dairy. It has agreed not to export its dairy products in exchange for the ability to maintain high domestic protections. It looks to me as though the Harper government might have been willing to relax some of those supports in the TPP but was not actually asked to do so. There may be a plan up on a dusty shelf somewhere that might set out what Canada could be willing to do in reducing incrementally its supports for supply management.

[Peter Kent, Conservative, Thornhill, ON]

Thank you, Director Dawson. I'd love to give you an opportunity now to discuss the security and defence considerations that you didn't have time for in your opening remark. President Trump has made it quite clear that in multilateral terms he expects more from America's allies, certainly in NATO. By implication, I think we should read that bilateral security and defence co-operation and prioritization may go quite some distance on the commercial side to assist the commercial relationship with the United States.

Could you discuss the considerations regarding greater defence investment and perhaps expansion of NATO? Also, we know that the ballistic missile defence is back on the table, being considered by Canada's defence minister, so.... The floor is yours.

[Laura Dawson]

Chris is probably going to be bringing a more fulsome security approach to his presentation, but I will say, first of all, that there has been a lot of focus on the 2% NATO commitment. That's what the Trump government is looking for from its allies, but I am hearing increasingly, and I believe that Canada's Foreign Affairs Minister Chrystia Freeland has also been putting the case forward, that there is recognition for all of the other ways in which Canada contributes to the security of North America and the security of territorial United States.

When you add in all of the other mechanisms, whether they're NORAD, border security, border infrastructure, or information sharing, etc., that package is being taken into account in the United States.

When we started the NAFTA in 1994, the idea was to integrate North America on an economic level but also to work towards greater levels of shared foreign policy and shared integrative mechanisms such as we've seen in the European Union. We didn't have a method for doing that and, as a result, the trilateral security initiatives that might have gone along with the NAFTA have been a little bit piecemeal and have not really been formalized.

Every time we come up with an entity like the security and prosperity partnership of North America or the beyond the border agreement, people get nervous with all those initials and they throw it away.

Therefore, there has been an ad hoc and incremental alignment and integration of Canada, U.S., and, to a certain extent, Mexico in security measures to do with immigration and policing and cybersecurity and resilience against shared threats, both man-made and environmental, but there has not been any systemic institutional approach to doing this.

As a result, what we see now—what I see now—is that as we become more integrated in things like pre-clearance for air passengers, Canadians are getting a little nervous and saying, “How much information are we sharing with the United States? Is that a good idea? What are the costs and benefits of that trade-off between information sharing and easier access or information sharing and more co-operation?”

I think Canada, as it moves forward with greater North American security integration with the United States—which is not necessarily a bad thing and could be a very positive thing—needs to have an internal conversation to figure out its principles and values going forward in terms of information sharing, co-operation, and collaboration.

[The Chair, Liberal, Bob Nault]

Thank you, colleagues.

Now we're going to go to Mr. Sands' presentation.

[Dr. Christopher Sands]

Excellent. Thank you very much, Mr. Chairman.

Thank you, committee, for putting up with another appearance by me and also the technological glitches. I hope I don't repeat too much of what Laura said. I heard her formal testimony but not the Q and A. Let me just say that she's fantastic. We've known each other since we were in grad school, and I'm a huge fan of her work and her analysis, so you can disregard everything I have to say. As long as you have her guidance, you're going to be doing just fine. But, since you did invite me, I'll have a little guidance of my own.

What I want to begin with is a kind of commonplace observation, but one that I think is very reassuring right now with regard to the relationship between Canada and the Trump administration. That is, the two countries—Canada and the United States—are friends, fundamentally because the people of Canada and the United States are friends. That guides everything, and even in a moment when American politics are very populist, Canada shouldn't worry because most people, including Trump voters, think Canada-U.S. relations should be good, constructive, not without their disagreements, but managed in a constructive way. I think that's really important because it's going to keep a boundary on just how chaotic or difficult relations with the Trump administration might be. We have no reason to think that the president has any animus against Canada either, but there are some concerns in the relationship now, and I'll echo some of what Laura said and try to cover the remit that was given to me by the committee.

First of all, in regard to the commercial relationship, we have a great trading relationship. Thanks to trade liberalization, thanks to regulatory cooperation, and thanks to security co-operation, we have been able to knit tremendous value chains together that allow firms with specializations on both sides of the border to work together to build products that are world class. This has kept the American economy as well as the Canadian economy going. Canadians create millions of good American jobs, and the United States economy helps to fuel the Canadian economy by creating jobs there as well.

The problem, however, is that the Trump administration has created a great deal of uncertainty about those foundations of the relationship. Specifically, he's talking about renegotiating NAFTA, which Laura addressed, and however that comes out, whether it's a tweak or a twerk, or something grander, I think the uncertainty over the trade rules is going to be bad for our business community in both countries. It's going to cast a doubt about whether we can continue to invest and expand on that economic activity. The sooner we resolve that, the better. There's no resolution like a final resolution. Even though we're going to keep hearing rumours, and tweets will fly, it's very important that we resolve this as quickly as possible.

Secondly, since the Trump administration has begun, and in part, since the Trudeau government has taken power, our vehicles for border security co-operation, the beyond the border working group, and regulatory co-operation, the Canada–United States Regulatory Cooperation Council, have all but disappeared from the scene. We don't hear much from them. They've been moved within the Canadian government, and they haven't been particularly highlighted in the U.S. government, not in the meetings between Trump and Trudeau, and not elsewhere. That work is extremely important because it provides a way for the economies to get closer that doesn't have to be managed by the president or the prime minister; it can be managed by officials on both sides. We need a green light for that to continue, and we can't afford to let that work split.

At the same time, I think that our approach to NAFTA renegotiation—and this something that, I think, Laura pointed to—has been remarkably defensive. Those of us who care about Canada-U.S. trade have gone into this saying we'd like to keep exactly what we have now, if possible. I think it's very short-sighted. We ought to be looking to expand labour mobility, particularly by, for example, treating business travellers as though they were tourists. Allow three months of visa-free, hassle-free visits to each other's countries in a row so that a business person can come up to a conference or a sales call in Canada, or vice versa, without being given the third degree at the border over whether they may or may not have a tax liability or who's paying them. We could open up business travel.

We could, similarly, maintain our good investment relationship. We could look at doing joint infrastructure projects as a way of heading off Buy American or Buy Canadian provisions in our government's infrastructure spending plans. There are a lot of things we might hope to achieve in NAFTA renegotiation if we have a bit of vision and ambition.

Let me add another thing I'd like to see us consider. I would like to see Canada and the United States negotiate a mutual recognition agreement of functional equivalency in regulatory standards and inspections, so that if a product has been certified as safe in Canada, it would be considered automatically safe in the United States and vice versa.

This is not to harmonize our standards to the exact same level, but to recognize that while there are some minor differences our standards are functionally equivalent. This would cut tremendous amounts of regulatory red tape on our businesses that operate on both sides of the border. I would argue that it is consistent with President Trump's commitment to cut red tape and ease the regulatory burden, especially on our small and medium-sized enterprises.

I echo what Laura said about Mexico. On a positive note, Mexico is a tremendous emerging market. It is a market with a middle class almost as big as the entire Canadian population. It is a huge business opportunity for Canada. Yet, since Canada was able to get access to the Mexican market in NAFTA some 20 years ago, I think a lot of Canadians have tended to overlook or take for granted their access to the Mexican market as they look to expand trade with China, India, and Europe. All this is good, but don't forget Mexico.

There's a huge opportunity. Laura underscored the energy component of this, and I would concur, but there are so many ways in which the Mexican market would be a good diversification of Canada's export portfolio and a great opportunity for Canadians. I think that's going to require some diplomacy, because Mexicans are feeling Trump's ire. They need a friend right now, and I think Canada can be that friend.

With regard to the security relationship, President Trump has brought burden-sharing front and centre in the NATO alliance. This is not a new concern for the United States, but it's one that he's made with a particular focus for the first time since the end of the Cold War. I think this has been translated by many people as meaning that NATO allies need to reach the 2% of GDP contribution that all of the NATO countries agreed to aim for at the Wales Summit. I think that's a reasonable benchmark. I would think, however, that Canada needs to have a wider accounting of security contributions than simply the military contributions it makes.

Our European allies have a tendency to throw in all sorts of things to try to make their figures look like they're closer to 2%—veterans benefits, contributions to diplomacy. They consider these things as contributions to security, and they count them in to make their numbers look better.

The problem is that Canada is too darn honest. Canada considers only military expenditures as contributions to collective security. In my view, given the deep integration between Canada and the United States, the RCMP together with Canada's efforts in intelligence gathering and border security contribute to the national security of the United States and should be counted in Canada's favour. When you add military expenditures to these domestic law and order expenditures, Canada is at 2%.

That doesn't mean Canada shouldn't resolve defence procurement and try to buy a new jet fighter. I think that it also would refound the relationship if the United States could acknowledge its dependence on Canadian contributions beyond the military in North America.

I would like to urge, as a concerned observer, the Trump administration and the Trudeau government to return to Ogdensburg. I think we need a new bilateral discussion, or statement, on the Canada-U.S. security partnership that incorporates domestic and traditional military contributions and that endorses these contributions within a strong partnership, just as Franklin Delano Roosevelt and William Lyon MacKenzie King did 70 years ago.

It's particularly important now because this year is the 60th anniversary of our NORAD agreement. It's also the 15th anniversary of the reorganization of American defence in North America, which created the U.S. Northern Command. In these anniversary years, it is particularly important for us to renew our commitments to the past in a forward-looking way.

On the rest of the world, you have given me a wide remit. I can say that I'm only an expert on Canada-U.S. relations, so my observations are going to be bit cursory, but I'm happy to discuss them at greater length.

The world today, partly because this has been Donald Trump's emphasis, has returned to great-power politics, something we saw last saw at the beginning in the last century. It is an uncertain time. Donald Trump has taken on as a global strategy the banner that Ronald Reagan brought forward of peace through strength.

He wants increased defence spending but he wants to maintain an international order by being a very international strong player. This has shown up since he's become President in renewed commitment to NATO. I think you'll see that underscored at the NATO summit coming up in May, which the President will attend, and you've seen it also in his direct challenge to Russia. Despite all of the media speculation about his relationship with Russia, he's been remarkably tough with the Putin government.

We saw it just this week with the invitation to Montenegro to join as the 29th member of NATO, with his willingness to challenge Russia over its claim that chemical weapons weren't used in Syria and to push back on that disinformation that Russia has put out. I think you will see it in the months ahead in a stronger commitment by the United States to Ukraine. I know that's very important to Canada, but I think it's also important to the United States. It wasn't where Trump wanted to lead, but it fits with the way in which he tends to remind countries how important the United States is to their plans.

We saw this particularly with China, where the President reached out to Taiwan, took a phone call from the Taiwanese President and rattled Beijing. The President has also said, with regard to China, that he wants China to step up on the North Korean peninsula issue and help discipline North Korea. I think that's tremendously important. We've seen China at least moving somewhat in that direction, because it challenges China as a rising power to act like a rising power and to take some responsibility for security in its own neighbourhood.

I think this is an important pivot for the U.S. and not unrelated to the U.S. action in Syria, showing that the U.S. is willing to act in a proportionate way, but in a decisive way in defence of international security and norms. At the same time, China knows that the United States is very committed to resetting the trade relationship between the United States and China. There's some peril for Canada in this, which is simultaneously reaching out to China and trying to establish a bilateral investment treaty, and also a trade treaty.

If there's daylight between Canada and the U.S. on China, it will be potentially an issue between the United States and Canada. I think it's important for our two governments to come together on a common approach and in a way be a Team Canada-U.S. with regard to China, rather than having the Chinese try to play on our differences and perhaps use Canada as its access point to the North American economy, raising issues for our trade officials as well as for the President.

The Middle East is an area in which we're both involved in fighting the Islamic State. The President has a strong commitment to Israel but a desire to play a more secondary role in the Middle East, not get drawn into its conflicts and its chaos. I think it's a very difficult thing for the United States to do. We can't just withdraw and expect peace and security. The President is also very skeptical of the Iran deal that was put together by the Obama administration.

I do not think that the Trump administration is going to break the Iran agreement, but I do think that the Iranians will break it for him. I think they've already pushed the limits of what the agreement has required of Iran. I suspect that we'll see, in the next month or so, the administration publish and fully disclose the details of the Iran deal so that the media and others can scrutinize compliance. I think the administration will impose consequences on Iran for its violation of the deal.

As with Syria, we hope those consequences are proportionate and fall well short of war. But interestingly, this week the former president of Iran, Ahmadinejad, has stepped back into politics suggesting that Iranian politics themselves may be an issue. I think that's a vulnerability for Iran that the U.S. will put pressure on to try to change Iranian behaviour. This could be a moment for an opening, but I think the administration takes Iran very seriously. In this regard, the Iranian situation is going to be tied to the situation in North Korea.

The U.S. attitude on non-proliferation has become much more assertive with regard to North Korea. I believe it will be equally assertive with regard to Iran, and it's important, I think, for the United States to have Canada in its corner on that.

Lastly, there was a question that the committee raised regarding multilateral institutions, and in this area I only want to say the funding cuts that the President's budget proposed need to be taken in the context of funding cuts in the U.S. domestic economy.

We've seen that Laura's organization, the Woodrow Wilson Center, was zeroed out in the President's budget. It's not the President who decides where funding goes; it's Congress. The President's budget is a suggestion like the budget of the Prime Minister. This is illustrative and sends a signal, but is not the final word. I don't think Laura is going to lose her money, but more importantly I don't think multilateral institutions will be zeroed out or cut as drastically as the President has suggested. But it's a shot across the bow; it's a challenge to those organizations to reform; and it's difficult to reform an organization like the United Nations or its parties. It's going to be difficult to reform the World Trade Organization, the IMF, and the World Bank. By signalling a willingness to step back from those organizations, the U.S. is finally active on its concerns of the past and said they expect change or they will change their posture. This will put pressure on every one of those organizations to reconsider the trajectory they've been on.

Resolutions condemning Israel at the UN are really not constructive for either the UN's reputation or the UN's relationship with the United States. As those organizations try to recalibrate their position, re-establish the trust and conscience of the United States, and address problems in their organizations, they can have no better friend than Canada, which is a committed multilateralist with a professional diplomatic corps that has helped it make those organizations as successful as they have been. Canada's commitment on multilateralism is not at odds with what the U.S. is doing, but may enable the U.S. to get what it ultimately wants, which is functioning international institutions. The U.S. role as such a big country is to threaten funding perhaps, but Canada's role could be to take that, translate it into reform that can make, if you like, the United Nations great again, and all these other organizations more functional and more supportive of the international order.

With that let me stop. I'll be happy to take any questions, and maybe now I can hear Laura if she jumps in too.

[The Chair, Liberal, Bob Nault]

Thank you very much, Professor Sands.

We will go to questions, right to Mr. Fragiskatos, please.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you to both of you for being here today.

Dr. Dawson, I wanted to ask you about the border tax suggestion that's been made by some American policy-makers. You have said of the border tax that it “makes no logical or economic sense. It's complicated and may not deliver what [the U.S.] wants, and may result in retaliatory tariffs of up to $100-billion from trading partners.” Furthermore, you've made the point that those who would be hit hardest are low-income Americans. I wonder if you could expand on these points.

[Laura Dawson]

The border adjustment tax is premised on the notion that, first of all, you can impose a tax on imports but not apply it to domestic sales. That's why it's quite a bit different from Canada's value-added tax, the GST, or different from provincial sales taxes or state-level sales taxes. The border adjustment tax just targets products that are coming in. Any consumers who are dependent on a higher level of imported products—think Costco, Walmart, and Dollar Tree—are going to be most affected by a potential 20% increase in prices. Also, with the threatened increase on prices of gasoline, a border adjustment tax is going to hurt considerably those with a long commute, a minimum wage job, and an inefficient vehicle.

The success of the border adjustment tax is premised on the idea that it's going to adjust exchange rates by increasing the value of the U.S. dollar. I think that number is 20% as well. In the United States even 1% is a big deal and causes a lot of volatility. I don't know what a 20% change would do. I'm not a monetary policy specialist, but I do know there are lots of things that impact exchange rates. A one-for-one correlation between this tax and that exchange rate change is quite difficult to make. All sorts of other things affect exchange rates, as well, such as global activities, business activities, and currency speculation. The basic premise of that tax is that the exchange rate is going to rise as they predict, and I don't think they can make that prediction.

This being said, I have been receiving inquiries from moderate folks in the Republican Party who are saying, “Okay, if this doesn't work, tell me again how the GST works. Tell me how you do it in Canada. How do you manage to have a value-added tax as a revenue fundraising mechanism? How do you provide a credit if you import a product, add some value to it, and then export it? Tell me how you make that neutral.” So they are looking at other models, too, as a fundraising mechanism.

This is so complicated. Can you imagine small and medium-sized businesses trying to administer all the paperwork required to get the benefits for a border adjustment tax? We know in Canada that SMEs are reluctant to even manage the extra paperwork to get a NAFTA credit or a trade agreement with Costa Rica credit. They tend to default to the WTO level because the paperwork is easy. I don't see how U.S. small and medium-sized enterprises could benefit from this border adjustment tax. Again, this is just my opinion, but that's what I see.

[Peter Fragiskatos, Liberal, London North Centre, ON]

You have mentioned a number of sectors—auto, agrifood, energy, services, and aerospace—and made the point that Canada ought to put these areas forward in terms of a focus. Obviously members of the Canadian government will be fanning out across the United States—well outside of Washington—in the American heartland, so to speak, in places like Kentucky and Iowa.

Could you expand on the point that you made in the media? You suggested that it's also up to business leaders within Canada, in the various sectors you talked about in your presentation, to also go to the United States to make the case about the importance of Canada for the U.S. economy, not just in Washington but across the United States. I wonder if you could go into that.

[Laura Dawson]

Thank you, and it's nice that you are following my media. Do you follow me on Twitter?

[Peter Fragiskatos, Liberal, London North Centre, ON]

I will now.

[Laura Dawson]

Thanks.

As Chris mentioned—and I think I mentioned it as well—it is wasting a great opportunity to really improve North American trade and competitiveness by just dealing with this negotiation as clinging to defensive interests, or defending traditionally protected sectors, or maintaining the status quo. That's what the USTR notification looks like: very traditional, orthodox trade policy.

Canada has been pushing to expand competitiveness and expand its opportunities in North America as a result of the agreement. The sectors I pointed to are areas where we can really build North American competitiveness and where positive voluntary undertakings could really assist with our competitiveness.

Take aerospace, for example. Aerospace is already very well integrated on a trilateral basis. They're doing great things in training in all three countries. Universities in Montreal and universities in Mexico are lined up on that. What else can we do in terms of workforce development, in a co-operative effort for all three countries, to better promote great jobs in the aerospace sector?

Similarly, on energy, there's a very tiny energy component to the NAFTA. Energy companies could walk away from it and not pay much attention to what's going on in the NAFTA negotiations. Instead, if we look at all the ways in which the three countries can work together to be better collaborators.... Yes, I understand that we are also competitors in certain energy sectors, but what can we do on pipeline permitting, on regulatory issues, on reducing transaction costs, and on ensuring that we get affordable and accessible energy to manufacturers and consumers all over the three countries in order to make North America an economic powerhouse?

Finally, on the issue of what businesses ought to be doing, we're seeing a lot of Canadian MPs and businesses in Washington. You are always welcome. I've always got a cup of coffee in my office, and Chris Sands will do a meeting with you. The legislators inside the Beltway are different when they're in Washington than when they're at home in Bismarck, or Detroit, or Lansing.

I think it's really important now to focus on what Canada's positive asks are in these new negotiations and to go out on the road to the districts of U.S. legislators and remind them of how important their relationship with Canada can be and how much better it can be, and to travel in a pack that includes local U.S. supply-chain partners that can mobilize votes and jobs and help to underscore the message of the importance of Canada.

[The Chair, Liberal, Bob Nault]

Thank you very much, Mr. Fragiskatos.

Madam Laverdière, s'il vous plaît.

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

Thank you very much, Mr. Chair.

I thank the two witnesses for their presentations.

You both mentioned several sectors where a lot of work remains to be done, for instance regarding NAFTA, the Beyond the Border Action Plan, discussions about security, and so on. At the same time, we see that the Trump administration is taking some time to appoint officials and those who will be heading up the talks.

How do you see this issue moving forward in the weeks and months to come? The question is for both of you.

[Dr. Christopher Sands]

Thank you, ma'am.

I'm going to start by saying that I think you have tapped into one of the most important issues the United States is going to have to face, and that is personnel. There need to be some 4,000 people appointed politically to run the administration. The President has made a very slow start in getting those people named. Of those 4,000, some 500 require Senate confirmation, and that includes an ambassador to Ottawa. That is going to take time.

Let me add something further. The majority of the American civil service is of the baby boom generation nearing retirement. Many of them carried on through the Obama administration and are now beginning to think, well, there's a hiring freeze that might keep me in Washington a bit longer, but I'd like to retire. As they go, I think we're going to face a real loss of institutional memory.

Canada has invested heavily in good relationships with American officials that have lasted for 20 years and more. As those people retire, who will replace them? Many of the millennial generation of students, the kids of the baby boomers whom I have in class now, don't see a career in public service, or they see it as a brief career—stopping, for example, for four or five years to work for the State Department or USTR before they go to the private sector. This is going to change the way the U.S. deals with Canada, and it's going to make it very challenging for us to get going on negotiations.

The President has been very keen to focus on the symbolic gestures that the presidency can make by way of signalling to people his intentions. I think it's been a sort of hallmark of his leadership style, for better or for worse. In this case, his signals—draining the swamp, freezing the hiring of administration officials, cutting budgets dramatically—have sent all the wrong signals to our civil service, and it's going to make it very hard for us to get going on co-operation in all of the areas you mentioned. This is something that I think the United States will eventually realize, but we have a bad habit of ignoring a problem until it becomes too big, and then we overreact. Renewal of the civil service is one area we've ignored for a long time. We're now overreacting, and it's going to be a bit of a mess.

[Laura Dawson]

I think that provides Canada with a great opportunity, in fact, to be planning and figuring out longer-term agendas. None of our trade agreement negotiations have gone quickly. I did my Ph.D. thesis—actually, Chris did too—on the Canada-U.S. auto pact. It took a really long time and involved many false starts, but that piece of forward-looking trade and industrial policy still continues to shape the way we do business in the auto sector 51 years later. I think we have been given a bit of an opportunity to think and plan and find a leadership role.

At the same time, Canada has its own things to look after. I was delighted that last week the interprovincial trade agreement was released. It has some very good things in it, but it could be better—exclusion of wine and spirits, for example; there's a lot of room for work there. On softwood lumber, it's very difficult to come to a resolution when the four provincial entities that are most involved in the negotiation have different policies and different perspectives. It's very easy for the U.S. to pick Canada off.

Similarly, even though Chris and I are violently in agreement on almost everything, I'm going to depart a little bit on China. Canada can no longer continue to focus on just one market and just one economy, and the economic benefits for Canada with China, particularly in the agrifood sector with canola, are so significant that it is worth the risk of embarking on those negotiations independently.

I affirm that there's a risk. China does not play by recognizable international trade rules; the asymmetry is huge. At the same time, China is easier to work with when you're within a rules-based framework than outside a rules-based framework. I commend Canada for having a conversation with China about increasing the rigour and the scope of the rules that govern our bilateral trade. I would hope, as Chris warns, that this process is a way to feed and support North American trade, much as Canada's early negotiations with the European Union helped to condition the negotiations the U.S. is I think continuing to have on its free trade agreement with the EU.

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

Concerning the rule-based framework, I was in Washington a few weeks ago; some of the people there were skeptical, and critical of the Border Adjustment Tax—known as the BAT—which is somewhat concerning. There was no agreement as to whether or not it will be brought in.

I would like your opinion on that. I would also like to know what the consequences of that measure would be at the World Trade Organization.

Thank you.

[Laura Dawson]

I can't really imagine how the enforceability of the border adjustment tax is going to take place, again, because of the extraordinary amount of paperwork that is required and because it is done at the business level.

I don't see that it could be compatible with the WTO commitments. The WTO has long evaluated various types of the value-added tax system. Canada's GST is considered to be WTO compliant because it doesn't violate the national treatment rules because it does not function as an export subsidy, but the border adjustment tax would seem to be in violation of both of those things.

If that is the case, the U.S. has said, well, maybe we'll just ignore those rules, maybe we're just going to barge ahead anyway. Other global trading partners have come forward and said in response that they will retaliate with their own countervailing duties, and the estimate from the Peterson Institute for International Economics—and you can go on their website and find this document—is something in excess of $100 billion in retaliatory tariffs that the U.S. could be vulnerable to, including some $40 billion from Canada.

Again, by almost all measures, including the President himself saying he doesn't love the tax, it does not seem to be a winning policy, but at the same time, it is a fundraiser for a government that desperately needs funds, so they're loath to get rid of it.

[The Chair, Liberal, Bob Nault]

I want to go to Mr. Levitt with the little time we have left.