Foreign Affairs Committee on May 4th, 2021

[The Chair, Liberal, Sven Spengemann]

Thanks very much, Mr. Oliphant.

Mr. Bergeron, you may ask a quick question.

[Stéphane Bergeron, Bloc, Montarville, QC]

I'll be quick.

Ms. Cianfarani said in her opening statement that decisions were hard to apply because of the lack of details. Mr. Mueller talked about a lack of clear communication, and Mr. Knutson criticized the lack of transparency.

Ms. Cianfarani, can you tell us quickly what you would like the government to put in place so the industry can play a positive role in the process?

[Christyn Cianfarani]

There should almost be a constant conversation between the political level, first and foremost, when something goes into a hot zone, and the industry to advise it in advance that there is an increased risk that its permit will not potentially come out the other end, so to speak. That would be the first thing, I would say.

Then there's a constant dialogue between industry and the department as to where that permit is within the permitting process, so that we can answer to our customers that it will be coming out within 10 days, 15 days, 20 days. There is absolutely no way right now we can tell another nation state that it will receive its goods or products on time.

Those are two things that I would say. The process should look like that a little bit.

[The Chair, Liberal, Sven Spengemann]

Thank you, Mr. Bergeron.

Finally, we have Mr. Harris for a brief follow-up question.

[Jack Harris, NDP, St. John's East, NL]

Thank you, Chair.

On April 9, 2020, then ministers Champagne and Morneau announced the creation of an arm's-length advisory panel of experts to review best practices in arms exports to ensure that the controls of Canada under the ATT were “as robust as possible”.They seem to love that word “robust”. My question is this. We're told that that panel was supposed to be responsible for evaluating permits. Have either of you, Mr. Mueller or Ms. Cianfarani, been consulted on the creation of the panel? Do you support it, and why or why not?

[Christyn Cianfarani]

I can go first.

We have not been consulted on a panel. We don't really know, because it hasn't been fully described, what such an agency or a panel would mean in this context. If an expert panel is simply to assess the vigour or robustness of our permitting system, then we are fine with that. If it's being set up to advise on specific permits, we would strongly oppose that, given the sluggishness already within the system.

On top of it, as I understand it, even individuals who are pro-panel and have made representations to you have acknowledged that no such panel exists in other nations upon which to base a model. That tells us that goods and services of this nature are instruments of foreign policy and fall under the consideration of governments themselves. The government cannot shift its legal responsibility for permit approvals to some external body.

[The Chair, Liberal, Sven Spengemann]

We have very little time.

Mr. Mueller, do you want to take 15 or 20 seconds to comment before we have to transition to our next panel?

[Mike Mueller]

To add to that, I would say it's incredibly important that industry and government sit down together to figure out that process. Just to reiterate, we need that the clarity, timing and transparency and that overall process.

I must say that the officials at Global Affairs have been great to deal with when we have these issues, but overall, we need that process, because business is suffering.

Our competitive advantage, as mentioned before, is the workers that we have, and those are who we really need to protect.

[The Chair, Liberal, Sven Spengemann]

Thank you very much.

Colleagues, on our collective behalf, I'd like to thank our witnesses from the first panel for being with us for their testimony this afternoon.

Madam Clerk, we will suspend briefly to allow them to depart and to sound-check our witnesses for panel two, and then we'll resume.

Thank you so much for being with us.

[The Chair, Liberal, Sven Spengemann]

Honourable members, we are now resuming the 32nd meeting of the committee.

I would ask everyone participating in the meeting to put their microphones on mute when they are not speaking. When you have 30 seconds left, I will let you know by raising a piece of paper. As usual, interpretation services are available; simply click the globe icon at the bottom of your screen.

I would now like to welcome our witnesses for the second panel. We have with us Mark Agnew, vice-president, policy and international at the Canadian Chamber of Commerce. We also have Yan Cimon, professor of strategy at Université Laval.

Mr. Agnew, I will ask you to lead off with your opening remarks for five minutes, please.

[Mark Agnew, Vice-President, Policy and International, Canadian Chamber of Commerce]

Mr. Chair and members of the committee, thank you for the invitation to appear today as part of your study on the granting of export permits.

As you will know from the chambers of commerce in your communities, we have in our membership companies of all sectors, including both large corporations as well as small and medium-sized enterprises.

I'd like to thank the members of this committee for taking up this study and exploring the issues around the export permitting system. Although the system is quite complex and, admittedly, this is a difficult topic, it is important for parliamentarians to hear from a wide range of stakeholders.

I readily acknowledge the media coverage over the last number of years of export permits for certain markets. There are indeed challenging geographic areas where, given the intersection of foreign policy, commercial and human rights considerations, it can make for fairly fraught discussion. However, I will focus my remarks on the export permits on a macro level, since I am not well-placed to comment on specific companies or permit applications.

It is important to note also that the export permits are used by a wide range of sectors and the challenges with the system are not just for those who are exporting offensive weapons system platforms.

As you heard from Global Affairs Canada officials at their earlier testimony to this committee, industry has had ongoing contact with the department on the need to improve the processing of export permits across the board.

I would like to go on the record and recognize the efforts of departmental officials to seek to understand the concerns of industry. We also welcome the announcement in Budget 2021 of increased funding for the trade controls work of Global Affairs Canada, which includes the export permitting system among other things. However, there is still a need for improvement in the system, and I would like to offer a number of areas that we hope the committee will reflect in its recommendations.

First is to increase information sharing in the export permit application process. Companies invest significant money and years of business development to secure foreign contracts. The export permit is usually the last step in the process after a contract is signed and products and/or services are ready for delivery. Communicating earlier regarding a particular export and destination country would be very beneficial and allow companies to focus on the contracts that are most likely to have government support. Additionally, written guidance would aid companies in evaluating potential bids, including not only understanding how rules are applied on a country basis but also how assessment criteria are being applied during the evaluation process so that companies can know what considerations they need to proactively address.

Industry acknowledges that there are broader foreign policy implications to publishing written guidance. However, we feel that it is important to strike a suitable balance between managing bilateral relations, predictability for companies and not undermining the government's need to respond to changing conditions.

Second, it is critical to ensure consistency in the messaging that companies receive from government officials. Companies with a low level of awareness of how the wheels of government grind may not be as sensitive to the division of responsibilities within or between departments. This is particularly the case in trying to differentiate between the parts of government that regulate export permits versus those that have mandates to promote industry and exports.

While companies acknowledge that the rigour required for export permitting by necessity requires independence for evidence-based decisions, businesses do feel caught between different parts of government when expectations are not met. Therefore, enhancing messaging consistency from government would help businesses manage their expectations.

Third, we think there is a benefit to having an explicit triage system and expedited service standards for existing permits. Given the length of contracts, companies will sometimes need to resubmit an application for an export permit. Although there can be circumstances where the context changes for an application, it can also remain the same. The introduction of a triage system and expedited service standards for reapplications with no context changes would aid companies and enable departmental resources to focus on more complex applications.

Fourth, and finally, and at the risk of saying the obvious, we need a whole-of-government approach where the departments that have a role to play are all properly resourced to enable the attainment of service standards. This is particularly the case, given that changes from the ATT and the new nature of interdepartmental approaches.

Getting the aforementioned areas right is not optional if we want Canada to have a reputation as a reliable business partner. This includes supporting not only Canadian companies acting as prime contractors, but also Canadian businesses that are supply chain participants feeding into OEMs, such as those in the United States perhaps, where we have deep supply chain integration, and that need reliable input sources.

In closing, I would like to emphasize that we do not operate in a risk-free world. This is especially the case for the products that require export permits. I hope to leave the message that the system needs to be regulated thoughtfully, and this means ensuring that we are supporting foreign policy and human rights goals, and also recognizing the important role that exporters play in the economy.

Thank you for your attention. I look forward to your questions.

[The Chair, Liberal, Sven Spengemann]

Thank you, Mr. Agnew.

Mr. Cimon, the floor is yours. You have five minutes. Please go ahead.

[Yan Cimon, Professor of Strategy, Université Laval, As an Individual]

Thank you.

Mr. Chair, vice-chairs and members of the committee, thank you for inviting me to appear before you today.

The granting of export permits is important not only to the industry, but also to Canada as a whole. Like the previous witness, I want to recognize the very important work that industry and government have done on this issue so far. The matter is certainly complex.

Over the past two decades, I have had the opportunity to conduct research and give presentations on the industry, which is strategically important to the country.

My remarks will focus on the industry side. I would like to give you some food for thought in three areas.

First, the government needs to consider the temporary suspension of controlled equipment exports, because robust controls are necessary for the use and re-export of military goods and related intellectual property.

Second, the government should introduce a predictable and efficient review framework for the export of military goods to other countries, one that includes pooling and risk-sharing mechanisms vis-à-vis industry.

Third, Canada should advance a systemic approach alongside its allies and partners to establish an oversight mechanism for possible violations by consignees of military goods.

Why am I making these three recommendations?

A look at global competition in the defence industry reveals a tremendous amount of nationalism, industrial policies that strongly favour national interests. It also reveals a large number of emerging players, in particular, India and China; Russia, too, still has a very significant presence. Moreover, Turkey has become a major exporter in recent years, signalling a geostrategic shift in defence. Through their companies, these emerging exporter countries of military goods are significantly increasing their domestic capacity.

That said, defence equipment supply chains are increasingly globalized, in terms of both inputs, subsystems and systems—a fairly globalized layer of the chain—as well as more complex platforms, an area that is becoming increasingly globalized. A trend is emerging: the use of commercial off-the-shelf inputs and end products.

Canada's defence industry exports the bulk of its products. Exports account for roughly 60% of industry sales, and even Canada's defence policy recognizes the importance of co-operation with the defence industry and export opportunities. Why? Because the Canadian market is too small to sustain the industry.

Consequently, the defence industry has to carve out a place for itself in global value chains, so that Canada can preserve extensive strategic industrial capability, while remaining a leader in defining platforms for the future and the technologies on which they are built.

The industry's prosperity is at stake, as Canada tries to secure its place as a leading supplier of lethal and non-lethal defence products, services and technologies. What sets the industry apart from other sectors is its very high value-added contribution to the Canadian economy, not to mention the extremely high-tech jobs it generates.

When it comes to Turkey and the issue before the committee, it is clear that Turkey is not only an advanced country, but also a NATO ally. It also exports drone platforms, mainly the Bayraktar drone, which is also sold to the Ukraine. At issue are electro-optical imaging sensor systems, an important part of the added value in this type of platform. Another important consideration, however, is the global market for these types of devices and platforms, a market with a significant civilian component and clear strategic value.

Although Turkey recently indicated that it no longer needed Canadian equipment, that is not necessarily true. As far as the platform technology is concerned, Turkey's domestic capacity is not yet sufficiently advanced for its desired use of the platform.

In addition, a very important question needs to be considered. What impact does the current suspension of military exports have? Suspending export permits does not mean that other providers will be able to step in to fill the void created by Canada.

All of that informs the thought process around Canada's defence and aerospace industry. If the government does not approach the export restrictions carefully, it could increase the cost of doing business and undermine the sector's competitiveness. It could also lead to supply chain diversions, in other words, the substitution of Canadian inputs with those of foreign competitors.

That could speed up the pace at which foreign competitors—both friendly and not so friendly—copy Canadian technologies. According to sources who have examined the situation in the United States, export restrictions intended to strengthen national security can sometimes have a negative impact on national security and competitiveness.

Increasingly, states are circumventing dual-use export permits and restrictions, going through civilian channels when similar technologies already exist. That means dual-use high-tech goods are being exported to countries through other means. India and others have taken advantage of that option through their space programs. This problem has given rise to input substitutions in industry supply chains.

In conclusion, for the sake of its own security, Canada should preserve a strong industrial base with the capacity to safeguard its interests. The corollary is that the defence sector must continue to grow its exports, or substantially and quickly increase sector-allotted resources to keep its technological edge. By doing nothing, Canada risks losing market share and the base of cutting-edge technology it currently enjoys.

There are ways for Canada to ensure that export consignees behave in a manner that is consistent with the letter and spirit of relevant agreements, while upholding Canadian values. That is crucial.

Canada has a number of options. At an industry level, Canada could more efficiently and effectively monitor, or oversee, the critical components of the value chain, including the technology links, to help Canadian companies become an essential part of users' business models. That would give Canada more sway over how end users behave.

Another way to solidify the essential role of Canadian companies and limit the likelihood of Canadian expertise being copied is to develop a service- and equipment-based business model. Likewise, this would prevent copied products and technologies based on Canadian expertise from entering the value chain.

On a government level, it is obviously important to adopt a system-based approach alongside allies, because unilateral actions to stop exports vis-à-vis a platform do not necessarily prevent that platform from being used. Internationally, multiple types of suppliers have the capacity to produce electro-optical modules, among other technologies.

Furthermore—

[The Chair, Liberal, Sven Spengemann]

Sorry, Mr. Cimon, but I have to stop you there. We don't have much time, so if you don't mind, we are going to move into the question-and-answer portion of the meeting.

As you answer members' questions, you may have a chance to cover what you didn't get to.

The first six-minute round of questions will go to Mr. Diotte, please.

[Kerry Diotte, Conservative, Edmonton Griesbach, AB]

Thanks to both witnesses for being here. It's an interesting topic, obviously, and I'd like to start with something fairly broad that's maybe obvious to the experts.

Maybe you could explain in layperson's terms how important Canada's defence industry is, especially for different regions across the country. I would particularly like to know if there's a great deal of importance for my home province of Alberta. Maybe you can quantify it.

Maybe we'll start with Mr. Agnew. Then Professor Cimon could weigh in.

[Mark Agnew]

I don't have particular regional breakdowns. The numbers you heard from the previous panel are aligned with what we have internally, with about a little over 60,000 people who are in the defence and security industry, and with over half of this being exported.

In some ways, it's quite hard to measure as it pertains to export permits, though, because there are many other applications beyond just how defence and security is narrowly defined. For example, a number of IT systems are included within the scope of a “controlled good”. It's quite hard to give you a firm number, but we can take that back. I'd be happy to send to the clerk whatever we are able to find.

[Kerry Diotte, Conservative, Edmonton Griesbach, AB]

Sure.

Go ahead, Professor.

[Yan Cimon]

I would agree with Mr. Agnew. The industry can certainly be broken down regionally across the country, but not necessarily in relation to exports. The breakdown tends to be by sector.

Eastern Canada, including Quebec and Ontario, has really strong players in electro-optical and infrared modules, as well as in software, system and subsystem design. A lot of maintenance, repair and overhaul is performed out east and out west. Ontario is home to combat vehicle manufacturers. It's important to keep in mind the other military activities that are based on both sides of the border.

Many defence companies have operations or sell products and services that can be deemed dual-use. Those goods can be subject to permits and very strict export requirements, as Mr. Agnew pointed out with respect to IT systems.

[Kerry Diotte, Conservative, Edmonton Griesbach, AB]

Thank you.

As we've heard, there's been a significant drop over the last few years in the government's meeting deadlines for handling export permits. A recent Globe and Mail article said that its meeting of deadlines has dropped from 94% in 2017 to less than 72% in 2019.

First of all, what effect does this failure to meet deadlines have on Canadian companies?

Mr. Agnew, could you start on that?

[Mark Agnew]

Given that the export permit is the last stage in the process, typically that means the company would already have a contract in place with its buyer. The contract, as contracts will, specifies a deadline and a time for when the goods and services will be delivered. Simply put, if the permit is late, because it's been written into the contract on the assumption of a service standard, then the company will be missing that deadline. That could mean either penalties it has to pay and less money going to it, or on a future go-round, when the OEM is looking for a renewal, it may decide to switch to a supplier it thinks is more likely to meet its deadline, because that OEM, of course, has another buyer it is trying to send products to.

[Kerry Diotte, Conservative, Edmonton Griesbach, AB]

Professor, do you have anything to add on that?

[Yan Cimon]

I would add that indeed there is a competitiveness issue, because of what Mr. Agnew just underlined, but there's also the fact that if you meet your deadlines, this also has significant implications, in terms of financing, the cash flow calendar and how the proceeds are exchanged for the sale. There may also be the fact that it's a sustainability issue for these firms, because don't forget that 90% of the industry is made up of small businesses.

[Kerry Diotte, Conservative, Edmonton Griesbach, AB]

That's especially important right now, when everybody seems to be struggling with COVID and so forth.

That article in the Globe talked about, as I mentioned, a big slowdown in deadlines and so forth.

Was there anything that stood out to either one of you gentlemen for why that happened? Was there a change in attitude? Was there a change in minister? Was there something that happened that suddenly, bang, we're not getting these permits; they're just not being filled as quickly as they were in a previous time?

[Mark Agnew]

I'm not sitting in the minister's office, so I can't claim to speak for them.

The sense we have, as outside observers, is that what happened with Saudi Arabia several years ago was one factor, in terms of increasing an added element of caution into the system, and caution means a bit of a slower move on getting permits turned around. That's then overlaid, of course, with the ATT and the uncertainty about how that is applied as well.

It's probably those two factors that were contributing to it would be my reading of the situation.

[Kerry Diotte, Conservative, Edmonton Griesbach, AB]

Thank you.

Professor, do you have anything to add there?