Foreign Affairs Committee on May 18th, 2017

[David Podruzny]

We can talk about whether we want to end up with a common market rather than a trade agreement. In the investment field, there are certain discounts. Investments, frankly, start the game by being a bit of a coward on this, and they will take a worst case scenario as they go forward. Historically, there's been an exchange rate, but there's been a purchasing power parity comparison between the two countries that has run in that 80% range for a long time.

With individual projects, the companies will see that the currency discretion is narrowed. The companies take a very conservative approach when it comes to a new investment, and if it turns out that we keep the 80-cent dollar as an average going forward, well and good, and if the oil industry booms again and we drop to parity or increase to parity, depending on your perspective, then they take their lumps. We don't control it. There are reasons why the American dollar is a haven, globally too, and we're not going to influence that one. I think we should just take our lumps on this one.

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

The second question has to do with the country of origin labelling. This has been a bugaboo for years. If you were to advise the government on their approach to tweaking, what would your advice be on country of origin labelling?

[Flavio Volpe]

Let me give you the American context on that. The TPP debate finally ended up stumbling on a few pieces. Rules of origin as they pertain to automotive was one that didn't work for us, but worked for the Japanese. The idea was to have a better definition of what originating means, to tighten how they might dispute that and how they might audit that, and then by the way they'd lower it. The argument came from the American-based assemblers trade organization, the American Automotive Policy Council, which told the USTR they might be at 62.5% regional value content, but in practice, given the matrix of products they had to use, the 29 product categories to prove compliance, they really only had 53. So, if they conceded 45 to the Japanese, it wasn't that much of a concession. Hopefully, they got something better in return.

In this context, the commerce secretary and the treasury secretary are informed by that exhortation. In practice, they were really at 53%, so their commentary and the commentary we're hearing from Washington and from our commercial partners is the administration will be seeking to tighten those rules of origin and how we determine origination, tighten tracing requirements and tracing rules. We're going to try to get to 62.5% because they think they'll be able to repatriate some of the capacity there through that.

I don't want to generalize for Mexico, but Canada is a very compliant trading partner, at least in our business. Our businesses generally are looking at the spirit of the law which is, I think, a higher standard than the letter of the law and of the agreement, so generally we'd be supportive of that. Tighten it; no problem. I could tell you where the stuff comes from.

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

Where does the stuff come from?

[David Podruzny]

There are a couple of things here.

First of all, on the rules of origin, our association, working with the European association, had an exchange of letters with the chief negotiator during the CETA to suggest that we needed an easy way to know when origin was achieved. What we proposed was something that could be understood by the people doing the transaction rather than by the government. As much as possible, we tried to take constructed value out of the equation. That was what the European administration wanted but not what the companies in Europe wanted.

We put together some proposals for rules of origin that would result in.... If it were a chemical reaction, we changed the essential character. It's something different. Origin is achieved. We put forward some very simple rules.

We're in the process now of doing something similar with our counterparts in Mexico and the United States. While we have a statement supporting free trade among the three countries, now what we're getting into is looking at the rules of origin and what they should look like in the dozen chapters that constitute chemicals out of the hundred chapters of the harmonized system of global trade.

It's important that the companies undertaking transactions and trading have some idea of how they're going to be treated, whether the goods qualify or not, and so the rules need to be transparent enough and simple enough that they don't allow someone in commerce to construct a value and say, “No, no, you don't qualify anymore.” This has to be transparent.

Our American counterpart association recognizes that if they have $250 billion in new capacity coming online, 80% of which needs world markets, they need to be looking outward and not inward. This isn't protectionism. This is about opening up trade. Their rules of origin will be our.... We'll have a common proposal.

There is one other aspect to this, which is the origin labelling. With fungible goods, we haven't figured out a way to stamp “made in Canada” on each molecule yet, so a paper trail is still required. But I have to tell you, the rules in NAFTA are sufficiently opaque that some of our members choose to pay the World Trade Organization duty, the MFN rate, rather than going through the paper trail of proving origin in Canada. Improving the NAFTA to have better transparency is something we want on both sides of the border.

[The Chair, Liberal, Bob Nault]

Thank you.

We'll go to Madame Laverdière.

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

Thank you very much, Mr. Chair.

I would like to thank the two witnesses for being here today.

I will begin with a question that is not really related to the subject of our study, but I cannot pass up the opportunity, Mr. Volpe.

You talked a lot about the number of vehicles manufactured in Canada and in Mexico, the integration of the production chain, and parts. I think there is a significant increase in hybrid and electric vehicles. How is the parts sector adjusting in particular? Has it been a difficult process or is it still under way?

[Flavio Volpe]

I'm sorry. I'll respond in English.

The electric vehicles, connected vehicles, autonomous vehicles always have wheels and doors and steering wheels—well, some have steering wheels—and all the different accoutrements that come with a regular vehicle. The parts sector in Canada, specifically the IT side of it—Toronto to Waterloo, and a very good node in Ottawa—together with the leadership of some organizations in the Montreal area, private and public, have been pushing for the marketplace adoption of these vehicles. As with anything on product planning, it's what the market looks like for it. Currently the market in Canada is less than 1%. It's growing at a decent growth rate, but the absolute numbers are 11,000 electric vehicles last year out of just short of two million sales.

Incentive programs have helped in the provinces, but they won't make a significant dent. The significant market share would be 5% or 10%. It has to come from the market itself. The products that are available, and they are not made in Canada, are things like the Chevy Bolt, where the MSRP is $44,000, but the physical experience for the customer is not $20,000—and my apologies to General Motors—better then a very well-apportioned Chevy Cruze.

You have first adopters. You have people who believe in offsetting their GHG output. Canadian parts suppliers are happy to fill bids for those components if those main OEMs decide that yes, there is a market for 200,000 of them this year. And the transition is quick, but it's also a very good opportunity for Canadian automotive technology companies that were non-traditional players and have moved into it from the IT sector.

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

Thank you very much.

My next question is very broad; I am going from the specific to the general.

You said that the renegotiation of NAFTA will bring greater transparency, which is good news. We know the renegotiation process will be very lengthy. On the whole, what are your greatest hopes and fears regarding the renegotiation of NAFTA?

[David Podruzny]

We look on the renegotiation as an opportunity to take the agreement and what has been a very good working relationship and economic relationship, into the 21st century. Twenty-three years ago, NAFTA was state of the art, as our little three-way statement went with the other associations. That was before the Internet. Things have changed. Now we need an agreement that has aspects of trade that didn't exist back then. We need to include trade in services. We need to include trade affiliated with the movement of goods, after-sales service. We need to be able to move global experts around and across borders and take special teams that are intra-company and move them back and forth.

There are aspects that need to be improved. That's what we would like to see. Use CETA, TPP or other agreements as models, if you like, but even go further. We're talking about a neighbour where we have a lot of cultural similarities. I was involved back when I was in government with the Canada-U.S. agreement and we had to actually compromise a bit when we went to NAFTA.

There's an opportunity here to simply make this the best free trade agreement in the world, and let's go at it with that kind of attitude. This isn't about protectionism. This is about opening up within a group of agreeable parties. Let's use it as an opportunity.

[Flavio Volpe]

I'll be brief but to the point. The biggest risk is a politicization of the triggering of the negotiations based on ideology that isn't weighted by fact.

As a specific example, we'll talk about rules of origin. We agree that the current scenario for NAFTA works for Canada and the U.S. There had been some chatter about a U.S.-specific regional value content floating out of the U.S., not here, as an instrument for repatriation of manufacturing to the U.S. That doesn't work for us. It actually doesn't work for our American partners and their American interests. They rely on a supply matrix that sources components from the most reliable and efficient places.

One opportunity is for an updating of the agreement to include in the tracing components things such as information technology that weren't in the original draft 25 years ago. If as an assembler you're able to use some of the IT spending on investment in the componentry to show compliance to 62.5%, I think companies in our technology corridors will be first in line, side by side with Silicon Valley. I mean that. The Toronto-Waterloo corridor in automotive IT, and Ottawa now, is a real rival for Silicon Valley.

As well, there are definitions for H-1 visas based on the types of businesses that were extant in 1994 that have now evolved. A lot of our business means shipping specialists back and forth very quickly to work on acute problems or acute opportunities. Sometimes they have to shoehorn themselves into electronic componentry definitions when they are really on the coding side.

[The Chair, Liberal, Bob Nault]

Thank you, Ms. Laverdière.

I'll go to Mr. Sidhu, please.

[Jati Sidhu, Liberal, Mission—Matsqui—Fraser Canyon, BC]

Thank you, Mr. Chair, and thank you both for being here and sharing your knowledge with us.

I have three questions on chemicals. As you know, the Government of Canada is currently consulting on how best to manage confidential business information under the chemicals management plan. The word “transparency” came up a couple of times. What are your thoughts on keeping the transparency, as well as the industry's protection of chemical information? Is there a balance between the two?

[David Podruzny]

It isn't my first area of expertise by a long shot, but my colleagues who are working on the chemical management plan inputs from our association are just down the hall, so I do overhear the importance of confidential business information.

We have ways of sharing information and keeping the information confidential. The government has spent a long time at the public service level engaged in ways to protect confidential business information. There's a difference between knowing and having the information to make good decisions on health, safety, and the environment, on the proper treatment of chemicals, and transportation, and so on, and being obliged to release it. There is a whole series of rules and regulations on how to protect confidential business information. We have a lot of confidence that this government knows how to protect that information and respect it. It then comes down to being credible in what you claim to be confidential versus what is already publicly available.

We are strong supporters of the chemicals management plan and how it works. We also have a very strong ally, coincidentally, in the United States. They would like to see the Canadian CMP used as a model around the world and as a counterpoint to the European REACH program, which we frankly find is the wrong way to go at things. However, both systems require protecting confidential business information as it is that which allows the private sector to differentiate with their products and to have comfort in compliance with regulations, that in doing that they are not going to be giving something up of real commercial value, because it will be protected by the public service system and not released.

I think we have a way of making the system work. We just have to be diligent.

[Jati Sidhu, Liberal, Mission—Matsqui—Fraser Canyon, BC]

Furthermore, the government has spoken potentially of aligning more with the U.S. Environmental Protection Agency when it comes down to reviewing confidentiality claims. Do you see how the EPA process compares to the Canadian process?

[David Podruzny]

I'm sorry but I don't know enough about that specific area on CBI, confidential business information, to comment. I have a colleague, and if you like, we'll exchange cards, and I can put him in touch with you.

In terms of working with our American counterpart in this area, I know there is a lot of co-operation going on. There is some concern that we don't get too tied up in a whole series of legal hoops. Bear in mind that the U.S. system is much more on legal interpretations and fighting things in court. Our view is sometimes that is after the horse has left the barn. You're going to be fighting to say, “We need compensation because you released this information.”

We've had a good working relationship within the public service, and on access to information requests, the rules are clear on what they can't reveal, and the government is good at what they don't reveal. That may not be particularly pleasing to some of the press, but in the end, it respects ownership and value of property.

[Jati Sidhu, Liberal, Mission—Matsqui—Fraser Canyon, BC]

This is the last question, Mr. Chair.

The trade between the two countries from 1994 has gone up from $20 billion to $63 billion, or even more. How do you see Canadian companies benefiting from this? Are we going to create more employment in Canada?

[David Podruzny]

Our employment has gone up at the same time.

The other thing is we have increased our multiplier effect as a sector. Statistics Canada is telling us that our multiplier effect is now just over five; for every job in the chemistry industry, we're creating five more. We are one of the largest purchasers of IT in the country. It's simply a reflection that, with the economies of scale you can achieve, you're going to be able to grow, have higher productivity, and convince foreign investors.

When I mentioned the $250 billion going to the U.S., over 63% of that is direct foreign investment. That's the characteristic of what we're bringing into North America because of natural gas, because of the shale gas phenomenon. We have as much of it as the U.S. has, so it's just a matter of winning those investments and using that gas to make stuff rather than just burn it for its energy content.

[Jati Sidhu, Liberal, Mission—Matsqui—Fraser Canyon, BC]

You did talk about adding value to the product before it leaves our shores. Do you see industry going more toward the direction of adding value?

[David Podruzny]

I hope so. We, as a sector, like to sell the fact that value chains are what we're about, whether they are inorganic minerals, energy products, or biomass. We have members that take the raw material, which is a resource in Canada, and add 10 times to its value. We take it to a level that none of us see here, a mound of polyethylene pellets or polypropylene pellets, but somebody else takes that and makes an auto part out of it, or a Frisbee or a kayak, and there the value added is a hundredfold.

If we have some basic competitive comparative advantage, we can do it here. We have the resources in this country. We are adding value to them. We have companies—to use our oil sands example, because that's always a classic—that go into the oil sands and contract to reduce water consumption as a chemistry service or to capture all the SO2 emissions, convert them into sulphur and fertilizer, and ship it to China as a fertilizer. These are chemistry-driven solutions.

We have other companies that have taken what were being used as off-gasses in making bitumen, and rather than burning them to make more bitumen—it is very rich in chemical feedstock—they are pipelining that down to Fort Saskatchewan, converting it into petrochemicals, and shipping dry gas instead—it doesn't have any of the liquids in it—to burn for their energy needs. That's saving a half million tonnes of CO2 emissions every year for those oil companies. That's a good thing to pursue in seeking to add value.

To add value means we need markets, and that's where the NAFTA comes in.

[Jati Sidhu, Liberal, Mission—Matsqui—Fraser Canyon, BC]

That's good to hear.

Thank you, Chairman.

[The Chair, Liberal, Bob Nault]

Thank you very much, Mr. Sidhu.

On behalf of the committee, to both of you representing the associations, this has been a very good process and a good hour of listening, too. This is a long process for us. We want to thank you.

As always, I try to remind the witnesses that if there is other information they'd like the committee to see, please feel free to send it along. Both of your associations and industries are very large and very important to Canada. Thank you very much.

Colleagues, we're going to take a one-minute break, and then we're going to do a bit of work in camera. It will take just two minutes and then we'll be done. We'll just clear the room and then we'll go right into that business. Thank you.

[Proceedings continue in camera]