Subcommittee on Canadian Industrial Sectors Committee on April 23rd, 2009

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

Thank you very much.

Mr. Paton, you say that we have to reposition ourselves for the future. In their recent budget, the Conservative government announced measures as part of the stimulus plan.

Do you think that they will be satisfactory or clearly inadequate? I would like to know how you see those measures.

[Richard Paton]

Well, we did support the measures. We felt that liquidity was--and still is--a huge problem for our companies, so the first big priority was liquidity. We also believed that we needed some demand stimulus, so we did support those aspects of the budget.

The area where we were disappointed, though, was on the accelerated capital cost allowance, which was the number one recommendation of the Rajotte report, a recommendation for an accelerated capital cost allowance for five years--not two, but five. We have been continually disappointed that the government has not responded to that.

As for the reason that is so important, in order to get the capital cost allowance, you need to have the equipment on the ground, ready to be installed, and companies can't make a set of decisions—investment decisions, pre-engineering design, environmental approvals, buying the equipment, and putting it on the ground—in two years. They can't do it, not in big plants--not in big chemical plants, not in big aluminum plants, not in big steel plants, and not in petroleum refiners. So even though we argued that capital cost allowance has to be five years, we keep getting it continuously for two years, and I would call that a tepid response. That is not an appropriate response.

I know that your party and the NDP and others have supported us on that, but for some reason, we don't seem to be able to get the urgency of dealing with that. Fiona mentioned that equivalent issue in terms of upgrading. Feedstock is another example of just not getting it in terms of capital cost investment.

[The Chair, Conservative, Dave Van Kesteren]

If we have a really quick response and a really quick answer, I'll let you continue. I let Monsieur Garneau go over by a minute, so—

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

Mr. Nordenstrom, I mentioned to you that several countries have nationalized rail transportation. You feel that it is important that a fund managed by Industry Canada be set up. You mentioned that rail transportation had been nationalized in other places.

Does that mean that you are in favour of nationalization? Or would you prefer to get grants or loans?

[Jay Nordenstrom]

Thank you very much, Mr. Bouchard. Unfortunately, my French is not very good, so I am going to answer in English.

I'd like to be very clear that by no means am I suggesting we should nationalize the railways again--the short lines and the class 1 railways--because they are one of Canada's great success stories as far as productivity, investment in infrastructure, and innovation in rail are concerned. I want to be very clear on that.

I think they do an amazing job. There are always some trials and tribulations when you are moving so much freight per revenue tonne kilometre. However, I think they've been very responsive in working with Transport Canada and Industry Canada to make sure that productivity and Canadians' interests are at heart.

When referring to nationalized systems, I was recognizing that there are many international nationalized systems out there investing their own public dollars in their systems. I indicated that ,as Canadian railway suppliers, we need to be positioned in an economically viable way to pursue some of those contracts so that we remain an exporting nation.

It must be said that we have an excellent reputation and this is one of our competitive advantages, I guess. We have an excellent reputation internationally for top-quality products and after-market service. On rail, it is hard to skimp on price, because you get what you pay for, and we have excellent technology that we've developed right here in Canada.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Nordenstrom.

Mr. Lake.

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

Thank you, Mr. Chair.

Thank you so much to our guests for being with us today.

I want to start with just a little bit of a global context here, if I may.

It was interesting, Mr. Paton, when you mentioned that 87% of your business is exported to the U.S. Mr. Nordenstrom said it was somewhat less than that for them, but it's still fairly significant in terms of exports. We have commentary from around the world on this.

The Wall Street Journal says that:Canada is connected at the hip to the world's largest market, and collateral damage coming from the housing and financial meltdown in the U.S. can't be ducked. Tax cuts in 2007 softened the blow and kept Canada out of recession.

We have Newsweek saying:If President Obama is looking for smart government, there is much he, and all of us, could learn from our quiet—OK, sometimes boring—neighbor to the north.

We have The Economist saying:...in a sinking world, Canada is something of a cork. Its well-regulated banks are solid...The big worry is the fear that an American recession will drag Canada down with it.

Mr. Harper says, rightly enough, that his government has taken prudent measures to help Canada weather a storm it cannot duck....

The New York Times states: There is no time to waste. Reconfiguring the American banking structure to look more like the Canadian model would help restore much-needed confidence in a beleaguered financial system. Why not emulate the best in the world, which happens to be right next door?

I could go on. In fact, I will. The Daily Telegraph says:Some will regard it as alarming that, in current times, world leadership should rest with Canada. But the Canadian Tories are a model of how to behave during a downturn.

They have kept spending in check and reduced taxes....

....If the rest of the world had comported itself with similar modesty and prudence, we might not be in this mess.

President Obama has said: And, you know, one of the things that I think has been striking about Canada is that in the midst of this enormous economic crisis, I think Canada has shown itself to be a pretty good manager of the financial system in the economy in ways that we haven't always been here in the United States.

There is more, but I won't read it for you, as I think you have the idea. Canada is really the envy of the world right now because of our economic situation. That said, we're facing a significant difficulty because we do export a good portion of what we manufacture here, and if Americans in particular and people around the world stop buying our products, it's going to have an impact on Canadians, and Canadians are going to lose their jobs. I think that's a big part of what we're dealing with here.

So I guess the first thing I'd want to talk about is this protectionism. Prime Minister Harper has been recognized worldwide as leading the way in the fight against protectionism. How important to the industries you represent is this fight against worldwide protectionism?

[Richard Paton]

I can make a general comment and maybe Fiona can add to it. As a trading nation, I think we're the most dependent on trade of any OECD country, so obviously protectionism doesn't help us.

Our association supported free trade, in 1982, I think it was, so we were way ahead of the curve, on the grounds that you can't build billion-dollar chemical plants for a domestic market of what was probably 28 million people at the time. It's a globally traded commodity. You have to build plants to export and to import. That's basically how the industry works.

So on protectionism, we of course support Mr. Harper's strong comments, and I was very happy to see President Obama kind of shift his view on the NAFTA renegotiation as well. Yes, trade is critical to us. Just to add to that, just so you understand our business, a lot of that trade is intra-company trade, whereby part of a company is sending a product to another part of another plant in the United States to complete a process, which is much like what we've heard with the auto industry and the moving back and forth. It is so highly integrated that the idea of putting up barriers would be just a complete disaster.

Jay made some interesting comments on that yesterday about all the various things that are happening that can create barriers, but I don't think, Fiona, that we've seen those kinds of barriers, because we're producing tank cars of chemicals. It's a little bit different, perhaps, from steel for bridges.

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

Jay, before you answer that, I notice that as part of your proposal you talk about the Canadian steel preference policy, where we give a 10% price preference. If we do 10%, and then the Americans do 12%, and then we do 14%, doesn't it concern you about going in that direction given that we sell a lot more to them than they sell to us?

[Jay Nordenstrom]

That's true. First, maybe I should just say that we view this as a North American industry. Obviously we recognize that there's a border there, but for trade, it needs to be an artificial border. We've done a lot of work with government to make sure that we do pre-screening, especially in rail. I think a lot of work has been done and I think there's a lot of work that needs to be done.

I'm not sure everybody knows this, but “buy America”--and what they were talking about in trying to squelch it--has been there for ages. This is nothing new. What they were trying to do is take “buy America” and move it to certain other aspects, but as far as our industry and our sector are concerned, we've been affected by this quite substantially for decades now.

We've actually seen our members set up shop in the U.S. I'll use Bombardier as an example. They're in Plattsburgh so they can access some of the projects in the U.S. that are being federally funded at the state and municipal levels. This has created an actual manufacturing cluster in that area, in a very positive way.

We're saying that there needs to be.... That's why I give it a two-year moratorium and then it should be gone. We need to help Canadian railway suppliers and other manufacturers and this is one way to do it. I'm not suggesting that we emulate “buy America”. I think if we had our way we'd get rid of “buy America”, but we know that probably is not going to happen, to be honest.

We're saying that we'd like to see some ways in which government can support us and get our production capacity up to levels where we can bring back jobs for the people we've had to lay off or make part time. Also, talking about exports, of our exporters, 90% export to the U.S., so it really does paint the picture that we're a North American industry.

[The Chair, Conservative, Dave Van Kesteren]

I've given everybody about an extra minute, so if you have a comment or something, please wrap it up.

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

I'll just throw out a quick question. One of the major differentiations during the last election campaign was the issue of a carbon tax, with one party advocating for a carbon tax and one party saying that's the wrong way to go. Maybe we could have your comments on how a carbon tax approach would affect your industries.

[The Chair, Conservative, Dave Van Kesteren]

Very quickly, please.

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

I'll start with Jay, maybe, and then hear from Richard.

[Jay Nordenstrom]

As an association, we do not have an official policy on ways to mitigate environmental degradation when it comes to industrial transport. However, what we do as an association--and it's probably not the answer you're looking for, but this is our reality--is produce the solution through our members.

We actually are part of the Ontario Emissions Trading Registry, which has been successful. Railways have been able to apply to that, and they've been able to do so with components like anti-idling devices. At certain temperatures, locomotives really need to get beefed up as far as the engines go so they don't freeze. We now have devices so they don't have to do that, so that when they're stationary they don't need to be running. We produce components like that, so we believe we can be helpful in whatever government policies you put in place.

[The Chair, Conservative, Dave Van Kesteren]

Maybe we'll let them finish up later, Mr. Lake.

Mr. Garneau.

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

Thank you, Mr. Chair.

I'm going to go back to Richard with some questions. I'd like to get a sense of how much R and D is done by your companies. I guess one of the questions that comes up is how much of it is Canadian-owned; therefore, perhaps, some of that R and D is happening in this country. Fiona can also answer. How much do you value or how much priority do you put on research and development within your industry?

[Fiona Cook]

Obviously, we're very, very focused on R and D, given the nature of our product. We need to stay innovative. I know a lot of our companies use the SR and ED tax credit system extensively and are very involved with government officials on how to improve that program and make it more accessible.

The reality in our industry is that because we are so dominated by multinationals, R and D tends to be done near headquarters, so the percentage of total R and D done in Canada is pretty small compared to what gets done by companies, with a lot of done in the U.S., for example.

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

Can you put a rough figure on that within your sector?

[Fiona Cook]

About 2% to 3% of sales is R and D here in Canada.

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

Of all the R and D done in your sector, what percentage occurs in Canada and what percentage occurs abroad?

[Fiona Cook]

I will have to get back to you with exact numbers on that. I don't have them with me today.

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

But it's mostly done abroad?

[Fiona Cook]

Yes.

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

You mentioned the accelerated capital cost allowance as an area where the federal government could have a role. You talked about the need for government policy.

Could you be a little more specific? If you had a wish list, apart from the capital cost allowance, in what other areas do you see a role for the federal government to support you in a way that respects WTO, NAFTA, and all of that?