Subcommittee on Canadian Industrial Sectors Committee on April 21st, 2009

[The Chair, Conservative, Dave Van Kesteren]

I think we should begin.

We have a very interesting group of witnesses, and I welcome them here this morning. This is our sixth meeting on the study of the crisis faced by certain industrial sectors in Canada, such as aerospace, energy, forestry, high-tech, and manufacturing.

We have done some study on the forestry sector, and this morning we are pleased to have with us Michael Burt and Valerie Poulin from the Conference Board of Canada. From the Canadian Manufacturers and Exporters we have Jayson Myers.

Everyone is present and that's very good. I hope everyone had a great two-week break.

We're all very eager and excited to get back to work and hear what you have to tell us this morning. Again, welcome.

Mr. Burt, you may begin.

[Michael Burt, Associate Director, Industrial Outlook, Trade & Investment, Conference Board of Canada]

Thank you again for inviting us here.

My name is Michael Burt, and I have my colleague here, Valerie Poulin. We're with the Conference Board of Canada. For anyone who's unaware, we're an independent, non-profit think-tank based here in Ottawa. We do research in a variety of areas, including public policy and economic forecasting and analysis, which is the group we work in. I'm responsible for our Canadian industrial outlook service, and among other things we produce semi-annual reports on 16 of Canada's key sectors, including wood and paper products, aerospace, high-tech, and oil and gas.

I'll first give an overview of what's been going on in the manufacturing sector, and then I'll focus on four key sectors that were mentioned in the invitation we received.

Manufacturing is presently facing a variety of challenges, and as a result we've seen manufacturing's role in the Canadian economy decline in recent years. Some of these challenges have been structural and some have been cyclical.

On the structural side of things, we've had a strong Canadian dollar in recent years. It has affected industries in a variety of ways, most importantly in terms of their input and their output prices. Some industries have benefited from the stronger dollar, and many have had negative consequences as a result. We're also seeing increasing competition from emerging markets. Perhaps most telling has been the emergence of China on the world's stage, as a result of their entering into the WTO in 2001. We're also seeing increasing competition from other markets around the world.

Finally, technological changes have been a major factor affecting the performance of the industry. For example, we're seeing a transition in telecommunications away from wired services toward wireless services. This is leading to the rise of new companies and the demise of some older ones. Another technological change has been the emergence of electronic media. Consumers are increasingly consuming their information by electronic means, and this has meant a decline in demand for paper products.

On the cyclical side, the current global recession is affecting the industry. Autos and housing-related goods have been perhaps most affected. For example, the collapse in auto demand has spread throughout the supply chain and is affecting a variety of industries, everything from plastics to metals to chemicals.

However, I don't want to say that the outlook for manufacturing in Canada is uniformly poor. We expect to see growth in a variety of manufacturing sectors, and they fall primarily into three categories. First are those that are primarily domestically focused. Food manufacturing is a good example of this. It's the largest employer of manufacturing workers in Canada and is often overlooked, but we expect it to have a positive outlook going forward. Another source of growth for the manufacturing sector is industries tied to our primary goods industries, such as machinery and primary metal products. They will benefit from increased commodity prices in the coming years.

Finally, technology-intensive or skill-intensive industries will fare better. They will see less competition from emerging markets than some other industries. A good example of this is aerospace.

As a result of all of these challenges, the character of our manufacturing sector is changing. We're seeing services account for a larger share of the value of what manufacturers are producing. A good example of this is Research in Motion. It is primarily a telecommunications equipment manufacturer, but a large portion of its revenue comes from the service agreements associated with using its devices.

Another big change is that the skill requirements for our manufacturing work force is increasing. We're becoming more skill intensive, and this means manufacturers are increasingly competing with other segments of the economy for workers. Finally, we're seeing the disappearance of low-value-added, labour-intensive industries here in Canada.

I want to focus on the four industries that were highlighted for us. First is forestry, and we divide it into two segments: paper, and wood products. On the paper side, the industry is facing some significant structural challenges. We're seeing increased competition from emerging markets--low-cost producers in South America and Asia. We're also seeing a structural decline in demand for many paper products.

The demand for wood products is primarily determined by North American construction of residential buildings. The collapse of the U.S. housing market, and now a slowdown in housing activity here in Canada, has had negative repercussions for the wood products industry.

We do expect housing residential construction activity to begin to improve next year, but it's going to be a slow recovery. We don't expect demand for wood products to reach its previous peak at any time in the foreseeable future.

Both segments are facing challenges, so we need to start asking whether we are making the best use of our forest resources. Basically, are there other ways we can use the fibre in our forest? Whether it's for energy production or feedstock for the chemicals industry, there are possibilities.

We need to ask whether we are producing what is in demand in new emerging markets. For example, they don't generally build wood-framed housing in China, so rather than two-by-fours, should we be making products that are in demand in that market?

Turning to energy, there are basically two key challenges here, one short-term and one long-term. In the short term, we have had the rapid drop in energy prices in the last year. This has challenged profitability, and it has reduced investment activity in the oil and gas sector.

Longer term, the main problem is decline in productivity in conventional oil and gas wells in Canada. We do expect energy prices to recover fairly quickly over the next few years. In fact oil prices, as many of you are probably aware, are already up significantly from the low they reached earlier this year. This will lead to the resumption of the oil sands projects, in 2010-11, that were delayed recently. But cost pressures and declining conventional production will continue to be an issue for this sector.

Turning to high-tech, the manufacturing component of high-tech is experiencing a significant contraction right now. But the services side, which is much larger, is actually still growing, albeit at a much slower pace.

On manufacturing activity, basically we've seen a large decline in global demand, both from consumers and businesses, for IT-related goods. Our domestic manufacturers have been affected by that. Of course we also have the recent bankruptcy of Nortel, which is complicating the domestic situation for our high-tech manufacturing industry. The one bright spot is in demand for wireless communications equipment; that seems to be holding up a bit better right now.

With respect to IT services like telecommunications and computer services, we do expect them to grow this year but at a much reduced pace as a result of the current recession.

Finally, aerospace was one of the components of the broad manufacturing sector that was doing very well going into the recession. They were probably one of the best performers in manufacturing. They have full order books. In fact the order books for our aerospace manufacturers are backlogged with orders for about two years right now. We're actually seeing production continuing to increase. The most recent data we have is for January. We reached a record level of production in our aerospace manufacturing industry in January of this year.

With that said, we have started to see some layoff announcements in recent weeks. That's been primarily in the business jet portion of the industry. That's because demand for business jets is very sensitive to corporate profitability, which has plummeted as a resulted of the global recession. That's been one of the areas that have been affected first.

The demand for commercial and military jets is holding up a little better. The backlog of orders will help to support the industry through the current recession, although we are seeing some delay of receipt of some of the aircraft that have been ordered.

The outlook for aerospace demand is fairly good. One of the key reasons for this is our outlook for stronger energy prices going forward. Fuel accounts for roughly one-quarter to one-third of the operating cost of the average airline, so there's a real incentive when oil prices are high for airlines to try to get a cost savings on their fuel bills.

Thank you.

[The Chair, Conservative, Dave Van Kesteren]

Thank you.

Mr. Myers.

[Dr. Jayson Myers, President, Canadian Manufacturers & Exporters]

Thank you, Mr. Chair.

Maybe I've been around CME too long. I remember back in the recession of the early 1990s when I was debating with the Fraser Institute about the demise of manufacturing. This was one year before the manufacturing sector in Canada experienced its fastest growth rate ever and doubled in size, of course, in the 1990s.

I think Michael has laid out many of the challenges manufacturers in the particular sectors you are looking at are experiencing today. We should not lose sight of the fact that in this very challenging economic time there are also opportunities that the many companies have. As we emerge from this recession knowing that customers will be wanting different things, and things delivered differently, the nature of manufacturing itself is going to change. We have to spend some time not only looking at the current condition of the sector but also at what the nature of Canadian manufacturing is going to be over the next decade or so as we emerge from the recession.

Nevertheless, the idea of what manufacturing is is extremely important for the Canadian economy. We often think of manufacturing simply as production technology, producing things. In fact, if that's the definition then manufacturing is naturally going to become a smaller and smaller part of the Canadian economy. The money today is not made in production. The money is made in the services, the design, the engineering, the research, the innovation, the logistics, the delivery, and the customer service that goes around the product. Nevertheless, the product is an important anchor. If we lose the product, or part of it, or lose that connection in the value chain, which is a global value chain today--the anchor here in Canada--then we're losing not only all the services, the high-value work that is done around it within companies that produce things, but we're also losing a very large part of the supply chain. One can just see the impact of the automotive challenges today on the advertising industry, the communications industry, and the paper industry, on all of these service sectors that are dependent on manufacturing.

In total, you have not only a good supply chain and a primary resource supply chain, but a very large services supply chain tied to the fact that we produce things and can trade things and can export things from Canada. If there's any one lesson of this global financial crisis and economic downturn, it's that we can't generate economic wealth simply by trading other people's debt and leveraging other people's debt. At some point you have to create real wealth, and that's a job that manufacturing essentially does. It's creating, embodying value in a product.

I've distributed to members of the committee our latest business condition survey. We track, as I'm sure you do, the latest numbers coming out of Statistics Canada, both in manufacturing sales, in production and employment, and in exports and so forth. Keep in mind that these statistics are, number one, two months late. If we're making policy on the basis of these statistics, it's like driving a car looking in a rear-view mirror: it doesn't tell us anything about what's coming up. Secondly, keep in mind that the sales numbers reflect current price changes, but much of the production was based on contracts that were put in place last year or previously. It's those orders that were booked previously that we're seeing production figures on now.

We have to look ahead. The real indicator here of what lies ahead for manufacturing are the orders being received right now and over the next several months, because those are the orders that will lead into future production and those are the orders that will keep people employed or will affect employment in the sector.

We realize that running on Statistics Canada numbers wasn't a very reliable way of actually predicting what was going on in the sector, so in December we started our own business condition survey. We have 700 manufacturing companies and exporters across the country responding to the survey.

I just want to table it. I'll touch the highlights or the lowlights of the survey, because the numbers have not changed dramatically since December.

One of the questions we asked was, given seasonal variations, whether their current order book is higher, lower, or about the same as it was three months ago. The numbers haven't changed very much. About 10% of companies say that their orders are up over the past three months; 20% say they're about the same; and, two-thirds of companies are reporting that their orders are down, with 20% of companies reporting that their orders have fallen by more than 30%. If you look at the Statistics Canada numbers, the value of new orders in the last survey is down by close to 30%. These are orders that, again, lead to future production and future employment.

We asked whether they expect their orders over the next three months to be up, down, or about the same. Just about 50% say they expect further reductions, although not by as much as they've experienced over the last three months. If there's a silver cloud here, maybe it is an indication that we've experienced the worst in the downturn in orders. Nevertheless, when we asked whether they intend to increase, decrease, or keep their employment rates about the same, 40% of companies say that they expect to cut jobs over the next three months. When those orders are booked, that will lead to production, and employment will reflect the production period. We are seeing orders cut in the aerospace sector, but we will see the impact of that on production in 18 months to two years' time. That's how long this takes to come through the system.

Of course, as you will see here, the major sectors and the sectors that were hit first were wood products and building materials, primarily as impacts of the U.S. construction industry. The second was the automotive sector. With regard to the automotive sector, plastics, metal fabricating, steel, and aluminum all took a very large hit. These are the key suppliers to the automotive sector. We are now seeing that this downturn in orders is evident in almost all sectors. It may have started with wood and automotive, but it's clearly being experienced now right across the manufacturing side.

There are a couple of bright spots: agrifood production, food processing. Beverage and tobacco products always do well as the economy turns down. Pharmaceuticals and some aerospace products are still very strong. We're seeing advanced technology and certain parts of the information technology sector still remaining strong. However, we're seeing this downturn in orders pretty much across all sectors.

There are two problems that raises in terms of financing for companies. One is that as orders turn down, as orders drop off, companies actually experience an increase in cashflow, because they're being paid for the product that they sold, but they don't have any cost. At the beginning it looks like things are okay, but companies are looking ahead, of course, and seeing that the order books are emptying, and they're really scrambling to adjust to that. I would think that the demand for work-share has never been higher than it is right now, as companies try to keep many of their employees employed at some level. The second problem arises in the recovery, because that's the time when you book new orders, and there's no money coming in, but there's cost as your production ramps up. That's going to be the second largest area of demand for financing.

In the survey as well, we asked companies if they were experiencing difficulties in obtaining financing. Many are, particularly in areas of asset-backed financing or leasing. Many companies, as you know, lease their equipment. As well, any type of bond market activity or securitization is extremely difficult to obtain right now. Of course venture capital has virtually dried up for many companies, and this is affecting product pipelines, particularly in the biotech, information technology, and pharmaceutical sectors. Many companies, small companies in particular, are experiencing more and more difficulty in extending their lines of credit or obtaining new credit even for expansion purposes.

I'll give you one example. I don't think he would mind my mentioning it. Rick Jamieson of ABS Friction in Guelph, Ontario, produces brake pads for the after-sales market. He exports 85% of what he produces. Everything is insured by EDC. He was told by his bank that it was no longer going to margin his receivables, even though they're fully insured by EDC. And the reason was that he's in the automotive industry. This is a company that grows in a recession. If you're not buying a new car, you're fixing an old one. He was looking for expansion capital, and he was turned down by three banks. So it's very tough. And if your orders are turning down, it's going to get tougher to obtain financing. That's the current condition.

Looking forward, though, we're going to come out of this recession. The nature of manufacturing is changing around the world. It is evident that Canada cannot compete on volume and it cannot compete on low labour costs. The advantage of Canadian companies is going to continue to be in customized product, specialized product, innovative product, the services that go around the product, and fast response. We're very good at producing small batches of things. We're extremely good at that. So it's that agile, specialized type of manufacturing that is going to be the future of manufacturing in this country, and I think there are tremendous opportunities here.

The future of manufacturing depends primarily on our business leadership. It depends on the investments these companies are making in productive assets, new technology, skills, and innovation. That's the type of long-term policy that we need to support manufacturing going forward. In my view, the policy priorities right now are, first, availability of financing, making sure that enough money gets out the door to those those competitive companies that need the financing. Competitive infrastructure, that's a second priority. The third is to provide an investment climate that encourages investment and productive assets. The two-year writeoff for machinery and equipment in manufacturing is an extremely important policy measure. But we could do more to make the R and D tax-credit refundable. We could do more to encourage worker training or retraining.

Regulatory systems that are efficient, low-cost compliant, and fast are more important than ever, with companies scrambling today in this economic climate. I'm extremely concerned about our relationship with the United States—Buy America, border issues, and how we compete with targeted investment. In many industries, we see 100% financing for investment in technology and innovation being subsidized by the U.S. government. That's the kind of competition we're up against.

Finally, how do we coordinate this? I see many departments, many levels of government, all trying to do good things but not necessarily going in the same direction at the same time. We have to do a much better job of developing an advanced manufacturing strategy that focuses on supporting specialized manufacturing in this country. We have to make sure we have all levels of government, all departments, going in the same direction.

Thanks.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Myers.

Mr. Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

My first question is for the Conference Board, for Mr. Burt or Madame Poulin. Canada has lagged behind in innovation for a long time, and there's been a great deal written on the subject. I'm asking a more general question. Has the Conference Board identified why we're lagging, and what Canada should be doing at the federal level to make this a more innovative economy?

[Michael Burt]

We produce an annual report card on how Canada performs, and innovation is one of the things we measure as part of that. I don't know the exact number, but generally we don't rank very well by most measures. It's a quantitative-based thing, looking at things like patents and the number of people who are graduating with PhDs, these sorts of things.

Basically, our analysis suggests that, first of all, we need to make sure we have adequate training in place in terms of getting the personnel and the skills we need to have innovation take place here. That's not just science-related degrees, it's also in terms of our MBAs, our business training to ensure we have the skills necessary to innovate and go forward.

On the other side of the equation are some of the things Jayson was talking about in terms of ensuring adequate venture capital, ensuring adequate financing for new ideas, so we're able to commercialize the ideas we come up with in our universities and other institutions and turn them into commercial products that can be sold both domestically and globally.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

You mentioned venture capital. It's been a subject that's been discussed quite a bit recently. Canada's pool of venture capital has certainly shrunk in the last few years, and although government intervention with providing funding through BDC has partially offset that, there still is a very serious issue. Do you have any ideas about how to increase that venture capital?

[Michael Burt]

It's an interesting question. I'm not sure if I have a specific prescription for that problem.

Essentially, it's about our attitude toward risk in terms of our financial institutions and also the maturity of our things like private equity, these sorts of things. I think, at least when we compare ourselves to the United States, we don't have the same level of development in a lot of alternative forms of investment that our neighbours do to the south. I think essentially what we need to do is look at best practices in other jurisdictions that have been successful, not just the U.S. but also places like Finland, and try to assess what they're doing right and learn from their success and apply those successes to our particular situation.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

I think from what you've said, it sounds as if we're culturally risk-averse compared to some of our neighbours, but you also mentioned there are best practices. What I'm trying to get at here is whether there is a role for the federal government to implement some of the best practices other countries have implemented.

[Michael Burt]

I think so. I think there's certainly a role for our various agencies, whether it's BDC or Industry Canada or other organizations in the federal government, to learn from these best practices and try to apply them to our situation. Essentially, if the private sector to this point has not stepped up to fill that niche or that role, then certainly there's a role for government to fill that niche.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

My next question is to both of you, if I have time.

I've just come from a presentation that indicated the percentage of publicly funded research is higher in Canada—the percentage of research here in Canada versus a country like the United States and other countries. I'm talking about through our universities or our government labs. It pointed to the fact that private R and D in this country is lower than in other countries. I'd like to have some idea from you as to why you think we do not, in the private sector, invest as much in R and D as in other countries.

[Dr. Jayson Myers]

Maybe I could take a first crack at that.

I think one very important reason is that we don't have the global companies and the ownership of the global companies that are doing the R and D. One of the benefits of our relationship with an awful lot of multinational companies is that the knowledge and the technology is transferred into Canada for product development. But in terms of product concept through to initial development prototyping and to spinning it out to commercialization, I think you'd probably find that most of the R and D expenditure done by the private sector around the world is done by large global companies very close to where they're headquartered or very close to where their large pools of capital are.

We're very lucky to have a company like RIM and very lucky to have the private sector R and D that does go on here. I worry when we see the loss of local ownership of companies, because I think it also takes with it the loss of a lot of investment and innovation decisions. Of course, this is generalizing. The pharmaceutical sector and aerospace and IT are certainly doing a lot. Those are the three leading sectors in R and D.

Given that this is the situation, what do we do about it? We have an awful lot of really good research going on in universities and in a lot of small companies and mid-sized companies, in particular, that are trying to do different things. I think we can do a much better job of trying to transfer that knowledge to the companies.

As I said, we put a tremendous amount of money into research and then try to push it into the marketplace. We rarely see innovation as a solution to a business problem. I think we could do a much better job linking up the research if we were actually saying that there is a business with a product or a production or a business problem we think we can help with through our research or an opportunity we think we can provide to that business.

You were asking for best practices. I think one of the very best practices in this area, in terms of technology transfer from colleges and universities to business, is the Ontario Centres of Excellence. And one of the very best practices, in terms of venture capital and where that's going, is the role the Ontario Municipal Employees Retirement System is taking. They're actively supporting OCE. They are working with OCE to provide venture capital to those companies they know, and they have some idea about how those companies are managed.

I think there are new innovative ways of doing this. Innovation is going to be more important than ever to Canadian manufacturing, because it's very clear that the manufacturing product and the process is going to demand rapid change going forward. The challenge is that it's happening right around the world, and here too, and we're competing for that.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Myers.

We'll go to Monsieur Bouchard.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chair.

I have a question for Mr. Burt regarding the forestry industry. Your statements may lead to the conclusion that the future of the forestry sector is not rosy. You said that the demand for paper has gone down, that the real estate market is going down and that construction sites have bottomed out.

Should we expect more closures of pulp and paper mills? During the coming year, should we expect other softwood lumber sawmills to close their doors?

[Michael Burt]

In the very short term, I don't think it's unrealistic to say there may be more shutdowns, because the industry is still going through the process of trying to rebalance. On the wood side of things, they're trying to go through the process of balancing production with the level of demand, because, as you say, housing starts in the U.S. are certainly at the lowest they've ever been on record. Here in Canada we've seen a pretty significant drop as well over the last year. So in the short term there's going to be a correction.

For wood products going forward, we do expect housing starts to experience some recovery. We don't expect them to reach the peak level of production we saw in 2005-06, earlier this decade. There will be some recovery going forward once the current recession has gone past.

On the paper side of things, the current situation is more problematic. It's more of a structural decline. The current recession has only aggravated the current decline that this sector has been facing. Newsprint is one of our major products. It's going through a major crisis right now. Newspapers are shutting down around North America and their business model is in jeopardy. Our newsprint producers are subject to that problem. With that said, there are some growth areas. Prior to the current recession we were seeing a demand for our pulp in China because they don't really have a domestic forestry industry there. They produce paper and wood products there, but they don't have the raw materials needed to feed that industry, so they were buying our pulp to produce locally.

There are some growth areas, and that's why I tried to allude to the fact that if we want to see growth in this industry going forward we need to rethink what we're doing with our forests. I think we need to look at new products, new ways of using our resources. That's the only way we're going to see growth because of this structural decline in demand for basic paper products.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

My other question is for Mr. Myers. You said that you carried out a poll of Canadian manufacturing companies. I gather that you conclude that the worst problems engendered by the crisis are known.

Could you give me some more arguments or explanations for this conclusion? Have we put those difficulties behind us or are we going through them right now? You seem to be showing some optimism, as you think that the worst is now behind us.

[Dr. Jayson Myers]

I think the impact on production and employment lies ahead, and I think for the rest of this year it's going to be a very challenging period of time for manufacturing. I hope the worst is behind us in terms of the downturn in orders, but the adjustment to that, which is what affects jobs and decisions about whether to stay open, and financing, all those challenges are being felt right now, but I think they're going to be with us at least until the end of this year.

I've heard many economists say we're looking at indications that economic conditions are improving. I look at sectors like steel and aluminum and chemicals and basic plastics. These products go into everything and they're the ones where we should see demand picking up first. Yet in all those sectors we're seeing orders continue to fall. Companies are working down their inventories. There is the argument that as soon as they work down inventories and demand begins to rise, we'll see a sharp pickup. Well, demand is falling and inventories are continuing to be worked down. I think the impact we're going to see on employment and investment still lies ahead. I hope I'm wrong, but I think it's going to be a very tough year.

If I could, I'd like to say something about the way I usually talk about things and economists generally talk about supply and demand. Looking at opportunity from a business point of view, Canada has at most 2% to 3% of the world market in most manufactured products. That's a big market to expand into, and we're talking on a sector-by-sector basis. But what it really very much boils down to in many cases is how particular companies take advantage of opportunities at particular times. I'm not expecting many companies to grow rapidly, except that we do see some manufacturing companies doing that in Canada right now, but survival may be a really good growth strategy.

I've got members in the automotive industry who are buying up suppliers at a tremendous discount and taking this opportunity to consolidate their business. I have one company that has lost 70% of its production, but has tripled its market share simply because their competitors have gone out of business. So this is changing the economic and competitive landscape, and I think we should assist those companies in taking those opportunities. Just because you're associated with a particular sector doesn't mean you don't have the opportunity and aren't making these adjustments.

On the financing side, though, and I think this is particularly the case with forestry, a part of it is because of the changing nature of demand, the downturn in orders as well as the structural changes companies have to adjust to. What we're seeing for large capital-intensive companies in particular are the financing problems in the market leading to bankruptcy protection decisions or decisions about whether to open or close or keep investment in Canada. If you are highly capital intensive, as most manufacturers are in a large company, and you're a part of a multinational supply chain or a multinational company, you're facing tremendous pressures today to retain and attract investment or at least retain investment in Canada to stay open. Many companies that will go to the bond market to refinance are just finding it impossible to do that and to find securitized financing under these situations.

A part of it is supply and demand, but a very large part of the problem in forestry and in large capital-intensive processing industries, which we have not yet seen because this refinancing is going to be coming up over the coming year, is the inability to access and to refinance debt. Unfortunately, I think that's going to be another shoe that's going to drop over the course of the next year.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Myers.

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair.

Thank you to both of your organizations for coming out.

Today in the news we hear that President Obama's top trade official has confirmed that they have no plans to reopen NAFTA. I think the quote from Ronald Kirk was that “The president has said we will look at all of our options, but I think they can be addressed without having to reopen the agreement”. How important is that, do you think, to our industry here in Canada?

[Michael Burt]

Obviously, the U.S. is our largest trading partner, so it's definitely good news, although I would say most of the low-hanging fruit that came as a result of NAFTA has been picked. We haven't really seen a big improvement or big increase in our trading relationship with the United States since the beginning of this decade. Our trade's basically been flat with the U.S. over that period of time. What we're seeing is our manufacturers, our exporters, are looking to new markets, because that's where the growth is, that's where the opportunities are. The U.S. share of our trade has actually shrunk in recent years, and I do expect to see that continuing going forward.

It's important for us to maintain that relationship with our largest trading partner, with somebody who's right next door and is easy for us to work with. It's also important for us to look forward and continue to open up new markets, new opportunities, and to seek these new markets.

[Dr. Jayson Myers]

I would also say that the NAFTA offers Canadian manufacturers and exporters tremendous opportunity and protection within the North American economy, but it doesn't cover everything here. From the point of view of the threat of opening up NAFTA, whether that would change our level of safeguard within North America, then that news is good. Keep in mind, 50% of what is manufactured in Canada is exported into or through the United States. Everything that manufacturers did over the last 15 years to succeed in the U.S. market is now coming to haunt them because of the economic difficulty in the United States.

There are four areas I am particularly concerned about in our relationship with the United States. The first is Buy American provisions that cover all iron, steel, and all manufactured products and were written into the American Recovery Act. This is only $80 billion of procurement opportunity. Although the Senate amendment has said that the U.S. would meet its international trade obligations, the fact of the matter is that most of that money is spent at state and local levels, in which we do not have any safeguard under the NAFTA. Because we're not signatory to the general procurement agreement, we don't have any safeguard at the state level. Even the Europeans who have signed the GPA and can take advantage of the procurement of 37 states don't have the access into municipal procurement. The federal legislation in the United States Recovery Act really expanded the restriction on Buy American.

The problem now is that we're seeing the very same wording being written into appropriation bills. We understand that congressional leaders have instructed their staff to write this into appropriation bills. We could very well see the same Buy American provisions appearing in the energy act, the housing act, the transportation act, the highways act going forward. This federal money that is being spent at state and local levels is not covered by NAFTA. The clean water technology sector saw the United States as a major market. I was with five companies here in Ottawa last week because they're now being effectively shut out of the U.S. market because the Buy American provisions have been written into the clean water appropriations bill. So Buy American is a big challenge.

The second challenge is export controls, and particularly the ability of Canadian companies to hire Canadian nationals or people with dual nationality here to work on technologies. That's a huge issue. It is another example of protection.

At the border, more and more regulations are slowing the border process. It's not just customs and security regulations, although there's a lot of that too. It's the fact that we administer 137 statutes and the U.S. administers 97 statutes at the border, all with different regulations here. The lack of harmonization is now.... When the United States is focusing on enforcement, this becomes a major source of compliance costs and time delay in moving product across the border.

We're just as bad as the Americans are. CBSA is proposing to have importers declare the source of the product, the tariff code of the product, whether the product is a health and safety risk, whether the product has been fumigated. These are things they're asking importers to declare from a manufacturing exporter. You're asking your customer to declare this information. If they can't declare that information correctly, they face huge fines from CBSA. After trying to convince American border authorities not to do this in the United States, the fact that CBSA is even contemplating this in Canada just frankly sends shivers up the spine of anybody doing business across the border. So we have our own act to get together here on border issues.

The most recent indication of the challenges we'll face in the future is U.S. EPA regulations affecting greenhouse gases. If Canadian companies are expected to report GHG content, or to do a detailed accounting on energy going across the border, this will add another layer of cost and another layer of delay. Frankly, if you are a company looking at putting a production facility in North America, where would you put it, given all the problems in getting into the U.S. market today? It is already beginning to have an impact on where companies locate production and investment. None of these problems falls within the current rules of the NAFTA.

To answer your question, yes, it's good they're not going to reopen the NAFTA, but we have to do a lot more, working with the Americans, to make sure we have a commercial relationship that works well between the two countries.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Myers.

Mr. Thibeault.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you.

You mentioned the Buy American plan. What do you think a Buy Canadian plan would do, or should we even have one?

[Dr. Jayson Myers]

We've been proponents of a Canadian content preferment for procurement—and it would not be possible at the federal level, but at provincial or local levels—to at least afford Canadian suppliers the type of access American suppliers have. Part of that is the transparency of the procurement process; part of it is making sure small companies are told about opportunities and can bid; a part of it would be volume issues too, because moving to higher volume to cut costs in provincial or local procurement has often excluded smaller Canadian companies. So all of that has a part in it. As well, most countries have some form of local procurement in terms of regional benefits. So that preferment is not a bad thing, and we have encouraged that.

What I would not want to see, though, are the same types of restrictions the Americans are putting on their procurement. To say all manufactured products have to be made in the United States, the rule will be substantial transformation of the product. What that's going to do will be to affect American suppliers to Canadian companies that then sell back into the procurement market. Those American suppliers will lose the business as well as the Canadian companies. It will tremendously complicate the procurement process, so if you want money out the door fast, this is not the way to do it.

The other problem Canada runs into far more than the United States is that we simply don't produce a lot of the technologies that are needed. I would say the Americans will find the same thing in particular areas like medical technology, security, environment, or energy as well.

All well and good. When we run into Buy America issues in the United States, they're extremely political. Of course, the argument is, well, we've got American taxpayers' money going into procurement and going into the recovery and the stimulus package, so why wouldn't that money be spent on American product? The irony is, of course, that the Americans borrow heavily from everyone around the world to finance their deficit and finance that procurement.

That's the problem. How do we solve it? I think the one thing that does get everyone's attention in the United States is the threat of retaliation. The Americans have paid a lot of attention to the fact that the Mexicans did targeted tariff increases there. They also paid a lot of attention to the Ontario Green Energy Act, because there is a local preferment policy there. So they're very sensitive to that issue and we should be leveraging that.

I think what we need to do is work on a sector-by-sector basis to find some form of reciprocal waiver that would allow American technologies into Canada and Canadian technologies into the United States based on the fact that federal money is being spent, and this could be a federal-federal agreement. At the heart of this is maybe the threat of some form of reciprocal action, that provincial procurement will remain open to suppliers from all countries as long as Canadian exports can freely flow into those markets.

At the same time—just one other thing—EPA has written guidelines about Buy America. At the very same time, EPA in the United States has just published a document for U.S. environmental technology industries saying look at the procurement opportunities in Canada and how can we help you take advantage of Canadian procurement in the environmental technology area? So there's a lot of commercial advantage to open-market access in both countries. I think that should be the basis for some form of reciprocal sectoral agreement that would waive Buy American restrictions there. It's going to be very difficult to negotiate that, though, given the political circumstances in the United States.