Foreign Affairs Committee on May 18th, 2017

[Carlo Dade]

If you don't know your colleagues in ways and means, your colleagues in the House advisory committee on trade negotiations, and Senate finance, now's the time to really start focusing on the members of the committee—Lloyd Doggett and others. Get to know those guys one-on-one and build relations with them.

[The Chair, Liberal, Bob Nault]

Thank you.

Colleagues, we're going to take a couple of minutes to set up for the next hour and then we'll get right back at it.

[The Chair, Liberal, Bob Nault]

Colleagues, we're going to be hearing from David Podruzny, vice-president of the Chemistry Industry Association of Canada. That should make Mr. Saini extremely happy, because he's into chemistry. Before us as well is Flavio Volpe, president of the Automotive Parts Manufacturers' Association. Welcome to both of you.

As is the normal process, we'll give you the opportunity to make some opening comments and then we'll get right into questions.

Go ahead, Mr. Volpe.

[Flavio Volpe, President, Automotive Parts Manufacturers' Association]

Thank you for having me. It's always a pleasure to be here in Ottawa to speak to a committee.

We are talking about North American relations, ostensibly U.S.-Canada relations. I'll give you a little background on the automotive sector in Canada and how connected it is with the automotive sectors of the U.S. and Mexico.

In Canada the automotive supply sector ships 32 billion dollars' worth of goods a year, and we employ 96,000 people. Some of the companies you would know are Magna, Linamar, and Martinrea. There are, however, other companies that are ascendant and important in the new space. We have Ottawa-based companies like QNX, and companies that own the market on global infotainment. We also have companies like Valiant, which is a large Windsor-based tool company now in the midst of M and A activity with the Chinese, which is contextual here.

Canadian automotive parts companies employ 42,800 people in the United States in 150 facilities, as as well as 43,400 in Mexico in 120 facilities. Canadian interests in automotive supply cannot be described geographically to be solely within the borders of Canada, even though probably 95% of our domestic industry sits between Windsor and just east of Toronto.

When we talk about NAFTA and when we respond to cues by the American President about American interests, the commentary usually concentrates on American geographic interests and American companies. Big American companies, however, count on the Canadian parts supply sector and our assembly sector, including but not limited to the Detroit Three. Canada has big operations from the Detroit Three in that corridor, and our supply sector serves many of those facilities, including Toyota and Honda.

The Canadian interest in Mexico is not a reciprocal one. Mexican automotive investment in Canada is limited to Nemak operations in Windsor. Our Canadian automotive market is just short of two million vehicles, and growth as well as retraction is in single digits.

We make 2.4 million vehicles a year. That's down from a peak of 3.1 million vehicles in 1998. The growth market for my members and parts suppliers has been in new OEM investments in the U.S. southeast and in Mexico.

In 1998 we made twice as many vehicles as Mexico. Last year, Mexico made 3.4 million vehicles, and if the President's social media influence doesn't slow the number down, that number should go up to 4.8 million vehicles by 2021.

Mexico is a very important market for Canadian parts suppliers. We send product down the continent; we invest in Mexico, and we employ locals. The same can be said for the U.S. southeast. Traditionally, and very importantly, the parts sectors in Ontario and in the states that delivered the presidency are intricately connected. Ontario and Michigan together make more vehicles than Mexico. They make more vehicles than the rest of the Great Lakes states and more vehicles than the other cluster in the southeast U.S.

I provide this context because the signals we get from Washington from the President and the public exhortations stand in contrast to the interests of our commercial partners in the U.S. American automotive companies are telling their representatives in Congress, their governors, and the administration not to hurt them by thickening the border between Canada and the U.S.

Everybody likes to talk about how many times a part can go across the border. Not every part goes back across the border, but if you think about putting a bolt on an engine block that comes back into a car here and then goes to get finished in the U.S. and is then sold to a Canadian consumer, you start to see how important it is to make sure we don't put up visible or invisible barriers at the border. The same can almost be said on the Mexican-U.S. border, although there is no spot that, from a satellite, looks like Windsor-Detroit.

What we've been seeing and hearing in our in-person visits to American automotive capitals and to American political capitals is that everybody should take a breather. I think the gentleman who spoke earlier talked about a NAFTA process. This will be a long process and the outreach by this government, and—I'll give credit where it's due—the bipartisan approach to that outreach to the U.S. are working in keeping the temperature down. Of note is that in Mexico that temperature is not being kept down. The Secretary of Economy has issued challenges a couple of times, and of course the political tensions between the two countries are different from ours. While they're ready to throw down the gauntlet, I think what we're doing is right and that is to provide the time for industry sectors like ours to go speak to people in Lansing and to go speak to people down in Pulaski, Tennessee, who then go back to Washington and say, “You know, you're going to hurt me if you hurt Canada by hurting Martinrea.” Martinrea doesn't employ any Canadians in Tennessee; it employs Tennesseans.

I'll leave that here. It's a very complex matrix, but the automotive interest.... This isn't 1998 or 2002, and we can't unwind what the result of NAFTA is. NAFTA works for automotive, and we're generally optimistic that the facts will work in this case, because the facts support the American interest.

Thank you.

[Dean Allison, Conservative, Niagara West, ON]

Thank you very much, Mr. Volpe.

We're going to move over to Mr. Podruzny. Sir, welcome, and the floor is yours.

[David Podruzny, Vice-President, Business and Economics, Chemistry Industry Association of Canada]

Mr. Chairman, thank you for the opportunity to meet with this committee as our bilateral relations with the U.S., in the context of its new administration, have jumped to top of mind.

The chemistry industry that I'm representing today is an invisible but vital component of Canada's economy. As my friend next to me was talking about back and forth, we're looking at a couple of $4-billion investments in Alberta that will produce the raw materials that become auto parts, and lightweight auto parts specifically, to reduce CO2 emissions. The value chains get longer and longer and better and better.

Chemistry is pretty invisible as a component of Canada's economy, but it's the fourth largest manufacturing sector with $53 billion in shipments. I've left each of you with an information package that shows our size, our regional characteristics, and some of our subsector characteristics.

Forty billion dollars of our production is exported each year. That's second only to transportation in the whole manufacturing sector. Not many people know that we're the second largest exporter. We import $50 billion. In the Canada-U.S. situation, three-quarters of our exports and two-thirds of our imports are with the U.S., to or from. We're about balanced. It's in the range of about $30 billion to $32 billion each way, and it varies from year to year. Every one of our members trades. We know what trade is about.

Our sector is proud of its highly skilled workforce. Thirty-eight per cent of our 87,000 employees are university graduates. That's second only to the IT sector. Our average salary at just over $80,000 is about one and a half times the manufacturing average.

In my brief time with you today, I want to share several key messages on behalf of the chemistry sector, but before I get to some of the points, I want to get to a couple of the conclusions.

With the U.S. system and the tactics we're observing, let's just agree to understand the terrain. I think you do, from what I heard earlier, but I'd better be on the record. The President and the administration have a role to play, and frankly, an important but sometimes deliberately distracting one. It's well worth separating tactics from lines of authority. There are some rather murky checks and balances in the U.S. governance system, and they're there regardless of what the social media say. Our discussion with key Congress and U.S. Senate leaders suggests that they know their jurisdiction, and they're not about to cede that jurisdiction to this or any other president, past, present, or future.

That said, there's considerable disagreement over the real power and executive authority. Just look at TPP for one example of that. This is not an area where we have expertise, but I just want to say that our concern regarding commercial relations is that we not take our competitiveness for granted. While the new administration is focusing on winning, on facilitating winning, and on reductions of regulatory burdens, what are we focusing on? There's one thing that needs to be obvious to all Canadian policy-makers at the federal and provincial levels, and that is that we can't afford to take for granted our competitive position and our trade relationship with the United States.

The United States administration is deliberately engaging in one of the key tactics in the book The Art of the Deal; it is keeping the other side off balance. While it's impossible to attribute motives and tactics, the only thing new is the tendency to talk win-lose in the media, and seriously, is that really new? This is our neighbour. We know them. We know their tactics and we know how they work. It's the job of leadership here to fight for Canada, for investing here, and growing our economy and breaking us out of this anemic sub-2% GDP growth band that we seem to have slipped into.

Let me turn to the specific opportunity from a commercial relations perspective as we look specifically at NAFTA.

First, let's look at the larger global chemistry industry. It's large, fast growing, and deeply interconnected. Over half of world trade is intra-company. Annual sales in this sector are well over $5 trillion U.S., with growth rates well in excess of global GDP. To put that in context, we're 1%. We're about 2.5% in trade, but we're 1% of the global industry. Further, the sector does trade more than any other manufacturing sector, and there we're not number two. Globally, this is the largest trading sector, over $2 trillion, 40% of global production trades.

Free and fair trade in chemicals will remain a very important component of this industry if it's going to realize the contributions demanded from it in the decades to come. We are solution providers in a lot of areas of need-to-address issues.

My second point is that Canada's position within this highly integrated global sector is at an inflection point. I gave you the trade numbers. They are material. However, our relatively balanced trade in chemistry with the United States shouldn't be taken for granted. The availability of low-cost natural gas arising from the shale gas phenomenon has resulted in 300 global-scale chemistry investments, with a value of $250 billion in the U.S. in recent years. These projects are new capacity. They're export oriented and they're likely to displace significant exports from Canada as our biggest market becomes our biggest competitor.

We tracked or matched the U.S. for the last 45 years—I've put the data together—at roughly 10% in investments, but in the last five years, while the U.S. has surged with the $250 billion in new investments, we have sputtered to 1% from 10%.

At the same time, the new administration in Washington has purposed to embark on an aggressive round of reforms in areas like trade and taxation and regulation. We can't predict the outcome of those specific areas. They're going to tackle some things that they find have some local and natural inertias that are very difficult to overcome, but we know they are aggressively pursuing a more competitive landscape for their manufacturing sector.

Taken together, in the absence of an accord made in an appropriate response, we will be second in every investment decision in our sector, and there is no prize for being second. If we're going to retain and grow this valuable sector and our quality of life, we have to shape policy to win in Canada and make a difference.

My final point is that there are good reasons that we have developed strong trade ties with the U.S. I'll be repeating a little bit of what you have probably already heard. There are reasons that we need to make a focused effort to continue what we have in place.

Canada and the U.S. have the same lowest carbon chemical feedstocks in the world. For Canada to seize the opportunity and attract a fair share of significant investments and do it here rather than somewhere else, based on making the same thing from coal, with a carbon footprint eight times what it is making from gas, these are ways in which we can tackle global problems.

We need to respect, recognize, and focus in three areas. We have to be prepared to renegotiate a modernized and better NAFTA. Early in March, our sector, along with the Mexican and American chemical associations, delivered a three party statement to our respective governments on what we like about NAFTA and where we can go further to improve it. I shared a piece of paper on a press release. It's on our public website in both official languages. I apologize for not bringing copies with me.

NAFTA has facilitated the growth of complex supply chains. You've heard about that already. They allow products to cross our border multiple times, sometimes in ways that you might not have thought about. We are now pipelining pure ethane up from gas fields in the United States into Alberta and Ontario, converting it into polyethylene and other materials and shipping it back to the United States, so it's not just raw materials heading south. There are value chains that upset that classic vision.

Also, there are good business reasons for maintaining and growing NAFTA. We share many common economic, social, and cultural characteristics with our neighbour and trading partner.

Trading is easier with a closest neighbour. You heard that earlier. Cost of transactions, logistics, overheads are lower, profit margins.... Dealing with the United States, they pay their bills. We've dealt with countries where rule of law comes in kind of second. It's going to be nice to have a trade arrangement with some of our Asian partners, but let's not kid ourselves. A state-controlled economy is a state-controlled economy, and when urgency is set in place, there are going to be changes in what moves and why. We've had joint ventures where the electricity has been shut off for a week and we just had to deal with it.

I'll make a last point and then open it to questions. Federal and provincial governments have to pay attention to investment competitiveness. Sure, Canada reserves the right to pursue its own policy objectives, but it must take measures to maintain and enhance investment competitiveness overall at a time when competition for investment is, very simply, fierce. There is lots of investment happening. Do we want it to happen here? This isn't about another consultation, strategic table, study, or panel. This is about engaging to win investments right now.

I'll stop and welcome any questions.

Thank you.

[The Chair, Liberal, Bob Nault]

Thank you very much, both of you.

We're going straight to questions. We'll try to keep it fairly tight with short times.

Mr. Kent, go ahead, please.

[Peter Kent, Conservative, Thornhill, ON]

I have two questions and then I'll cede the rest of my time to Mr. Aboultaif.

To begin, I'd like to go beyond the bilateral and trilateral negotiations of NAFTA and get your reaction, response, and perspective on some of the words of concern and warning from the U.S. administration, from the White House, and from Congress about Canada's negotiation of, on one hand, a free trade agreement with China, which has caused great concern in the United States for several reasons, but also the TPP.

Is that likely to affect the negotiations that either of your sectors anticipate with the United States and Mexico?

[David Podruzny]

The way to make sure it doesn't is to have an agreement that ends up being very specific to the parties, and where the benefits of the agreement accrue to the parties and not to people outside. The biggest concern we're hearing has to do ultimately with transshipment and with leakage into the agreement from parties that aren't part of the agreement. That's where some of these arcane little characteristics like rules of origin come into play. To the extent that the value add and essential character come from the parties to the agreement, we will not be allowing this circumvention. That's my simple response.

[Flavio Volpe]

Canada is a sovereign nation. I think the expectation in all capitals around the world is that a sovereign nation over which you have no control can go and have any trade discussions anywhere at any given time. You're talking about the sensitivity of having a discussion with China while you're dealing with NAFTA. It is something that.... Let's take a step down from American political interests. American commercial interests are worried about the way China acts as a commercial operator around the world. They've expressed that to us. They've expressed that publicly. It feeds that political discourse. It's relevant, but at the same time, the people who work in economic development in the United States are seeking the foreign direct investment that we're pursuing in Canada.

In my narrow interest of automotive, the golden fleece is the greenfield investment of an automaker. Chinese automotive production is bigger than North American in total. It's also bigger than that of the EU. My counterparts and your counterparts in the U.S. are pursuing those Chinese foreign direct investments for automotive assembly. That usually ends up being a $2-billion investment and $10 billion in purchases a year.

They can't have it both ways, although I think we need to be cautious, and we're using some caution. At least, what I'm hearing is we're saying that we're taking a slow approach in looking at what's possible in China, but our focus is the U.S. If we shifted that, if we were to announce something publicly like, “Here we are, very formal engagements on a certain set of terms”, that might shift the dial. Right now, for our business, if you're not talking to China, you're wasting everybody's time, and so we appreciate it.

[Peter Kent, Conservative, Thornhill, ON]

Go ahead.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Thank you for being here this morning. I have the productivity charts here and at page 14, it seems that all chemicals have declined about 2% on their overall productivity versus the industrial chemicals that have an improvement of about 1.5% to 1.4%.

The question is to renegotiate NAFTA and to find a better ground for the chemical industry. We need to be more competitive, I guess. I hear from some sources in the industry that we can increase our trade a lot, that we have a lot of room to grow when it comes to the chemical industry.

How can we do that? Where are the markets, and how can we improve our productivity?

[David Podruzny]

That's bringing me back to competitiveness. Productivity is a consequence of investment. Productivity is a consequence of the latest technologies and continuous improvement, and the industrial chemical productivity has improved and will continue to improve as we invest.

I am concerned that as the Americans have taken the field in new investment, our productivity numbers are going to suffer as those new facilities come on stream. Productivity is about size and efficiency, and new investment drives that. The response will be that we need to get in the game.

A week ago I brought four companies into town to meet with federal officials. They represented about $12 billion in new investments. They were going to be making a decision between now and this time next year, many of them within a few months. I wanted to make it very clear that the provinces were engaged. The federal government was into consultations and studies and analysis, but not ready to start sitting down and seeing what it takes to match what's happening south of the border. That's where productivity will be addressed.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Thank you.

[Flavio Volpe]

He's a chemistry guy, but I'll say something about chemistry productivity. Generally, the biggest advantage we've had over American production, on a 30-year scale, is a predictable exchange rate that's hovered around 80¢.

You'll hear companies in our business, especially the supplier business and the plastics, say that they can't take advantage of that because their feedstock is American, so the American funds choose the currency under which they supply. A prospect of increased supply from Canadian sources tied to productivity and competitiveness also helps the price competitiveness of Canadian parts suppliers.

[The Chair, Liberal, Bob Nault]

Mr. McKay, please.

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

Interestingly, your last comment was exactly where I wanted to go—

[A voice]

I was reading your mind.

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

You were reading the article in The Globe and Mail article, and that article talks about the potential of having a currency clause in an agreement like NAFTA which would pretty well destroy any advantage we might have in entering into any agreement, because the way NAFTA has largely worked is that we've been successful on a discounted dollar.

In your observation and your conversations with counterparts, is this a realistic discussion?

[Flavio Volpe]

God, it's always one of those niggling pieces of trade discussions, and I'll go back to my sovereign nation comment here. In our business, especially when we're dealing with American customers, they dictate the currency more often than not these days, and we fight back.

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

Sorry, but to the uninitiated like me, what does that mean and how does that work?

[Flavio Volpe]

They'll take a look at the currency prospectus for today and five years out, and then say that the contract is in Canadian dollars, or the contract is in American dollars. You can say no, and then they'll buy from him.

We push back. Big companies can push back. Of course, if you have the productivity and the product innovation, that enables you to say there's leverage on this side of the table. We push back on it, because that's a flexibility that enables us to maintain our competitiveness against, at the very least, the Great Lakes states that we compete with.

The idea of shared currency, there are experiments that have lasted a long time that have worked sometimes, but this has been a Canadian debate since Laurier lost an election there. I would say read The Globe and Mail today, but I don't hear anything in Washington.

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

That is interesting, because if that's part of the negotiations, some formula.... Putting aside the sovereignty of the nation and the wish to have our own currency, if there were some formulization of the discounts back and forth so whatever advantage our own currency gave us was taken out of any agreement and that effectively makes the utility of it—

[Flavio Volpe]

I don't know what Stephen Poloz would say about that speculation, but I would certainly say.... I think sometimes we infer a sophistication from some of the commentary which in actual fact is informed speculation. I don't see the Canadian advantage in that, and I'm not—

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

I don't see any Canadian advantage.

Mr. Podruzny.