Foreign Affairs Committee on May 30th, 2017

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

Thank you very much.

Mr. Galimberti, you've spoken about, and touched on it here today, but I'm looking at a Reuters article that you were quoted in recently, the high degree of integration between the U.S. and the Canadian steel industries.

You talk about how metallurgical coal, iron ore, and steel scrap are bought from the United States by Canadian steel firms. I wonder if you could expand on this and speak about the integration of both industries, particularly in the context of the shift to a Buy American focus in the United States industry, but also about the integration because, obviously, that has implications for the Canadian sector.

[Joseph Galimberti]

Yes, in the NAFTA context it's a very seamless border of developed mutually complementary product lines. Canadian producers don't offer the range of product offered by U.S. producers. Our customers know that they're going to need to access both of those commodities on either side of the border.

As an industry we have embraced NAFTA integration. A lot of our large producers, as I mentioned, have facilities in the United States and maintain significant employment in the United States.

To the raw materials question, yes, $1.5 billion U.S. in metallurgical coal, scrap steel, other metal components, and iron ore last year alone is a significant commodity buy, along with with all the employment and economic activity it supports, such as in the mining sector in the United States, including iron ore and coal, the raw materials, transportation, and significant shipping.

Beyond the $1.5 billion, tremendous spinoff benefits are associated with that activity.

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

Is it fair to assume from this that both sectors rely on one another and need one another?

[Joseph Galimberti]

Yes.

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

And if they were cut off from one another, would there be dramatic negative impacts?

[Joseph Galimberti]

Yes, on both sides of the border.

That goes to my point about why, in those three specific Department of Commerce investigations, what we are looking for is a national exemption. We can make a case. In a lot of instances, the logic behind Buy American is that it displaces not only the direct commodity but also the associated employment. I talk about the raw material stuff.

Canada is in a unique position to make an argument that this is not the case when you're dealing with us, that there are significant economic spinoffs and economic benefits to dealing with a Canadian supplier. We're not saying, “Don't do a 232 investigation, or don't take action on the basis of your 232 investigation.” What we are saying is, exclude Canada. It makes no sense to include us, as you will only hurt yourself.

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

What has been the response when you've taken that message to American policy-makers within the House of Representatives and the Senate?

[Joseph Galimberti]

Generally, I'd say American policy-makers are receptive. Certainly those who are closer to the Canada-U.S. border have been receptive. As the same time, I take nothing for granted. These are three investigations that are ongoing. We had not contemplated this level of activity as it relates to a bilateral relationship.

As I mentioned in my remarks, steel dumping is their number one trade irritant. Both of their political parties talked about it during their campaign. We have to make sure that, as they follow through on those commitments, we're not caught up or implicated in a move against the globe.

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

Thank you very much.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Fragiskatos.

Madame Laverdière.

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

Thank you very much, Mr. Chair.

Thank you both for your presentations this morning, gentlemen.

I think everyone around the table shares many of your concerns. I am referring to your concerns about a great many jobs in Canada, and also about the situation in the United States and the unpredictability of the administration and of certain policies.

Mr. Wilson, you talked about the potential impact of a border adjustment tax on your sectors. We are not sure that such a tax will be adopted, but it is still quite worrisome.

What would the impact be on your sectors?

[Mathew Wilson]

Thank you. I apologize for the problems with the microphone.

This is something we take very seriously. We've said, and Joseph just said as well, that we never know how some of these things are going to play out. Certainly right now the talk around any type of border adjustment tax seems to be fading in the U.S. At the same time, we're really well aware that if the administration is going to put through its corporate tax cut agenda, it will need to find revenue somewhere. We're not sure where it would come up.

There has been a wide variety of opinions on what that might look like. Without getting into specifics on any one of the models that are out there, our concern, frankly, is simply with the level of integration and the number of things that go back and forth across the border. Joseph could talk about the steel that goes into auto assembly, for example. But pretty much anything that we make within the North American environment is crossing back and forth across the border numerous times.

In some of the cases I've seen, like an engine block that's created, that block alone will cross the border six times before it's put into a car. So with all the various parts, you're talking about thousands of transactions across the border. If you have to capture every single one of these shipments that go into the U.S.... Just the tracking, in and of itself, of those shipments will be difficult, as will be the effort to try to tax all of these. Trying to figure out exactly what it is that's value-added in Canada on the way back in, from a part that actually originated in the U.S. and separating out what might be Canadian versus what's American will be an administrative nightmare. From the way we're looking at it, it would be very difficult.

I've seen economic studies that show an increase in consumer prices of anywhere between 5% and 10% in the U.S. almost overnight. I'm not an economist. I've just read different articles from different economists who have looked at this. But I don't think that's the big cost. I think the big cost is actually going to be trying to figure out what is American, what's Canadian, what's Mexican, and what's from somewhere else.

I know the automotive sector fairly well. The steel sector is part of that in the integrated supply chains. In pretty much any sector you look at between Canada and the U.S., they eliminated all of that tracing a long time ago. They did it because with the rules that were set up in the automotive sector going back to the 1960s, in aerospace and defence in the 1950s, and other sectors you're looking at from the FTA onward in the 1980s, the data isn't there to trace a lot of that anymore. To try to re-establish the data trails on a lot of this stuff would be very costly for businesses to do. They would lose productivity, lose competitiveness.

Again, we're not talking about this just from a Canadian competitiveness point of view, but Canadian and U.S. global competitiveness together as we compete against China, Europe, and other markets. It's not just about building a car in Canada. It's about building a car within NAFTA and competing against cars coming from South Korea, Japan or Europe. That's the really big unknown in this.

To put a dollar figure on that, I would have no idea what it would be. I don't think anyone could truthfully tell you what that number is. But the cost for business would be significant. It may not even be a direct dollar cost. It may be an indirect business processing cost that would be very difficult to put a number on, if you ever had to start figuring out some of the tracing of some of these things.

My comment earlier, and our comments on these things, is that the biggest priority we hear from our members on NAFTA and Canada-U.S. relations is the need to simplify borders. These are American companies, Canadian companies, and European companies. If you were to ask American companies in the U.S. what their priorities were, they'd say a lot of the same things. To us, this just adds an additional complexity to this, rather than making us more competitive and stronger globally.

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

I would like to continue on this topic, but please go ahead if you have something to say, Mr. Galimberti.

As you said, making business practices more complex also affects Americans. Mr. Galimberti, I think you mentioned the need to work at all levels.

How do you work on your issues with your American partners? What kind of mobilization is there? What advice could you offer the federal government, which will have to take action and play a role on as many levels as possible?

[Joseph Galimberti]

We maintain a really close connection with our American industry counterparts. We have active dialogues with them through a couple of different fora. The American Iron and Steel Institute and the Steel Manufacturers Association are organizations that I talk to quite frequently. We are working in tandem with them and the Mexican association, Canacero, to develop a set of shared priorities for industry that we think will benefit all three countries in a NAFTA renegotiation. We're hoping to move toward a common front before the negotiation takes place. We think we'll be able to get there on some broad parameters.

We've talked to our stakeholders in the U.S. to communicate to them the importance of positive outcomes, not only for NAFTA but also in these ongoing Department of Commerce investigations. We've engaged with the Canadian embassy in Washington to make sure that they are fully briefed on our arguments and understand what's at stake. Frankly, we're working in a lot of ways that we hadn't necessarily contemplated doing about 12 months ago, to make sure this message is clearly communicated.

I should also mention that the USW, the United Steelworkers, is working with the Canadian office here, the Canadian president, and also their central office in the United States, because it is a shared union. We do have very similar labour structures in both countries, so it's a matter of making sure there is an understanding that those USW jobs are in play as well.

I mentioned the OECD. As an industry, we've been really good partners with the U.S. in driving a lot of over-capacity issues there and the dialogue on that.

As for work that the Canadian government can do, we certainly appreciated hearing that the Prime Minister had specifically raised the section 232 investigation on steel and aluminum with President Trump at the recent G7 meetings. This is an issue of such significance, of such importance, that it deserves that level of attention and sort of persistence going forward. Our understanding is that when President Trump and Secretary of Commerce Wilbur Ross initiated this investigation under section 232, they intended to have an answer in 50 to 60 days. That's sort of drawing us toward the end of June. I think it's really going to be something that we have to watch quite carefully.

As I said, I take nothing for granted with this administration. The government's approach to engagement at the local and state levels, of making sure that Canada's message is out there as much as it can be—and all political parties have been involved in that effort—is going to have to continue for the length of this administration. I don't believe there is going to be a chance. If we're out of mind for a moment, I think it will problematic.

[The Chair, Liberal, Bob Nault]

Thank you, Ms. Laverdière.

You have the floor, Mr. Levitt.

[Michael Levitt, Liberal, York Centre, ON]

Good morning, gentlemen.

Just to follow up on that last point, I had the opportunity, as did members of many committees, to go down to Washington in the last number of months. I can tell you that even though it wasn't the primary focus or reason for the visits, at each and every opportunity with a range of congressmen from both parties, and Senators, it was obviously an issue that we raised with them. Certainly the experience we had—and it was all parties travelling down there—was that there was great understanding among the individuals we met of the importance of keeping the border thin.

There did not seem to be an appetite for border adjustment taxes. That was something we heard time after time. We were delivering the message about the number of states for whom Canada was the primary trading partner, and I'll tell you that we got a good reception on that. Obviously, as you said, that's work that we are going to continue doing from this end, reaching out to colleagues down there to make sure that the message is amplified as much as possible.

Mr. Wilson, I want to go to a higher level and talk about the new face of Canadian manufacturing, what it looks like today and where it's going. In my riding of York Centre in north central Toronto, we have both the traditional idea of large-scale advanced manufacturing, as well as small and medium-sized enterprises that make everything from consumer and industrial goods to specialized research products.

What's the face of Canadian manufacturing today compared to the idea that many of us have? Where is it heading, and how can we, in Ottawa, continue to support it?

[Mathew Wilson]

That's a great question, and I'm happy to talk about it. I'm sure that Joseph would talk about it as well, specifically from a steel perspective.

I think what we get is this media image of smokestacks and really heavy industry and dark corners and things like that. If you go into a modern assembly plant, including in the more traditional industries like steel, what you see is often more like a lab than what you would expect from manufacturing—floors so clean you could eat off them, and that type of thing. The introduction of technology into manufacturing is really rapidly changing what is happening. The old jobs and the old type of work that was taking place—screwing things together and old assembly line processes—are being replaced very quickly by autonomous robots.

Even new ways of building things, such as using 3-D printers, are changing the way companies are building products, and very rapidly so. An example would be that we build a lot of auto parts and aerospace parts, especially in Ontario, and probably a lot in your riding would be parts manufacturers for different industries—tier one and tier two suppliers. We're at a stage now where we have a history of being really good in that space. Companies like Magna, Linamar, and Martinrea, for example, are world leaders in this area. But they're changing, because of technology, from being able to maybe take eight or 10 separate parts and making one part that then goes into a bigger unit like an automobile to 3-D-printing that one part. You're eliminating eight parts and making one part to make it more efficient, and that's all through technology.

The face of manufacturing is about that. It's now more about computer programming and design than it is about smokestacks and things like that. That's going to continue to change as new technologies come along. There is a lot of discussion out there about AI and the Internet of things. Most of that Internet of things and AI is actually going to be applied in a factory setting long before it will be applied for you and me in day-to-day use.

Maybe one of the best examples of that is autonomous vehicles, which is a big discussion point right now. The first auto assembly plant I ever went to was a GM plant in Oshawa in about 2001. That entire plant was a mobile robot. Every pickup truck moved from station to station, and the truck itself was on a robot that was autonomously moving. That was almost 20 years ago, and that technology is probably 25 years old. Industry is really at the forefront of implementing all of these technologies, so as we're talking about these in consumer settings, that's really what's happening.

Going back to the earlier question by Mr. Allison, about competitiveness, our concern and the stuff we're looking at, from a Canadian perspective, is that we're falling behind on the development and the adoption side of these new technologies. The further we fall behind, the harder it will be for Canadian industry to keep up in terms of our global competitiveness, whether it's in a relationship with the U.S. or our ability to even supply U.S. companies in those supply chains.

Our focus in Canada needs to be, one, to understand the disruption by these technologies and how they can apply to the industrial sector; two, how we take advantage of those technologies; and three, how we help and get more companies, especially those 10- and 15-person shops that are really risk-averse and unable to adopt technology, to adopt the technology, because they're not adopting it today at the levels they need to in order to be globally scaled and globally integrated.

Hopefully that helps. I'm happy to answer anything specific.

[Michael Levitt, Liberal, York Centre, ON]

Mr. Galimberti, do you want to respond?

[Joseph Galimberti]

I think Mathew touched on a really key point.

We talk about fostering technology and technology development in Canada. Opportunities to commercialize this technology are fostering manufacturing. If you do not have a domestic manufacturing sector, you are at a tremendous, tremendous disadvantage as relates to technology development.

As we talk about losing competitiveness to the U.S., and attracting foreign investment, when you're attracting that direct foreign investment to Canada, 99.9% of the time that foreign investment is in new technology, so that's the kind of economic activity you want your manufacturing sector generating.

Certainly all of our member steel facilities are tremendously high tech. When the advanced manufacturing facilities talk about making an investment, it is in technology, and it is in commercializing what is hopefully Canadian research.

[Michael Levitt, Liberal, York Centre, ON]

Thank you very much.

[The Chair, Liberal, Bob Nault]

Thank you, Mr. Levitt.

Mr. McKay, go ahead, please.

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

Thank you, Chair.

Thank you to you both.

I have a very simple question for Mr. Wilson, which I think maybe has significant implications. The question is this: what is manufacturing?

I'm looking at this. This is a pretty impressive piece of technology, and I can kind of understand how putting it together requires manufacturing. I don't know about the code and all of the rest of the patches that go with it, etc.

The reason I ask is that the definition of manufacturing is probably somewhere in the current NAFTA agreement. I would image—and I don't know—that the writing of that definition is probably as important as all of the other negotiations that go with NAFTA.

Give us your best advice as to what manufacturing is, how that will affect the negotiations between Canada and the U.S., and also vis-à-vis the larger world.

[Mathew Wilson]

It's a simple question, but very complicated.

First, I'm not sure there is a definition of manufacturing in NAFTA. There would be definitions of the products of manufacturing in NAFTA. We have a definition, and the U.S. has a definition, and there are global definitions. Really, StatsCan holds our definition in Canada, and it's based on a 1960s and 1970s reality of manufacturing. One of the things that we've been pushing governments to do for a while is take a more serious look at it and update it.

If you look at just the raw stats of manufacturing, one of the key definitions of what is manufacturing is that 50% of your workforce needs to be involved in assembly. I don't know how many of you have been inside an assembly plant lately, but I was in a pharmaceutical company, for example, and while they employ thousands of people, most of them were scientists developing the chemical compounds that go into the making of the pills.

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

With that definition, GM might almost not be a manufacturer.

[Mathew Wilson]

Right. If you look at GM's or Ford's latest investments, what are they investing in? They're investing in autonomous vehicle research in Canada. Almost by definition we're underselling what we're doing from a value-added perspective. Our definition, frankly, is a lot simpler. It's what are you adding value to, and how are you changing things? Even things like energy production in Canada is really just an advanced manufacturing operation. For example, I had an opportunity to tour some sites in Fort McMurray a couple of weeks ago, and what they were doing there really didn't look any different from an assembly plant in southern Ontario. It's a lot of the same type of stuff.

Our definition is a lot broader, and I think we need to look at it in a broader sense. It is everything from coding, development of smart phones.... BlackBerry is a good example. They were defined in Canada's stats for years as a cultural industry because of the way their employment fell, but if you asked them, they said they were manufacturers because that's what they were doing. They made the hardware.