Industry Committee on June 6th, 2006

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

We have heard this argument four or five times before. The government has to decide who it's going to help and how, because Americans are already doing it. They have an agreement with the Caribbean where clothing is made and sent to Canada and the United States.

[Eve Grenier]

When it comes to Canada-- [Inaudible]

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

It's getting to the United States and taking up a substantial part of the American market. And the worst in this is inaction.

Yes, sir.

[Harvey Penner]

Your first comment is on interest. You have to understand that we've had a deflationary movement of 50% to 60%, or 40% at least, in the value of imports. Where is that appearing? Mr. Dodge is very proud to say that inflation, other than in energy and cars, is running at 2% to 3%. You have a deflation of 40% in the value of the dollar. The profit of that is not coming to the Canadian manufacturer. It's the retailers and the importers, and by the way, neither one is passing on that savings to the consumer, because if they were passing on the savings to the consumer, you would see a drop in prices by 10%, 15%, 20%. They are utilizing that to increase their profitability on the backs of Canadian manufacturers.

On the second issue of outward processing, it is critical for Canadian apparel manufacturers to have a textile industry to supply the Canadian inputs. It's the principle of NAFTA. If you are going to use third-country inputs that are non-Canadian, you are not going to be able to ship your product to the United States. If we do not get outward processing, the textile industry will die. The knitters will die, the weavers will die, the dyers will die, and then there will be no sources for Canadian apparel manufacturers to source from. In particular, if they have to source from a U.S. source, which is a monster in size, they will, to put it bluntly, get no respect, no delivery, and no orders.

In order for the Canadian apparel industry to survive, the Canadian textile industry has to survive. In order for the Canadian textile industry...it has to have market access. It has no market access currently in the United States, to what it was; therefore it has to expand its horizons.

Apparel manufacturers here will be able to sew and cut in these other countries, bring it back, and average it with what they're making here. We are not competing with the Canadian apparel industry; we are competing with the $6 billion of imports that are coming into this country. This is all positive for the Canadian apparel industry. I'm an apparel manufacturer. I need that as well in order to survive.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Penner.

Merci, Monsieur Crête.

We will now go to Mr. Van Kesteren for six minutes.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chairman, and thank you all for coming. You paint somewhat of a bleak picture. When Mr. Lapierre was mentioning that we've had these problems for a long time, we were reflecting on some of the people who have appeared in the past. We had the auto industry here last week as well, and they too have some real challenges. I think we all agree that protectionism isn't going to work. That's certainly not the direction we have to go in.

I think, Ma'am, you also mentioned the possibilities of markets like China and India---and I think you said $600 million, but I think it was maybe $60 million, or something like that--but at least we know there's a huge middle class that's starting to develop.

At any rate, you seem to indicate that you need just a period of time to hang in there. In the interim, what can government do? I'm talking about taxes. I want to ask about corporate taxes and regulations. Are you hindered by regulations, and in your industry, has that caused you to be ineffective and unproductive as well? So it's taxes and regulation.

[Eve Grenier]

I'm sorry, I think Bob would like to address part of the answer, and I have something to tell you about taxes.

[Bob Kirke]

As you can see, the textile apparel industries don't always agree. That's maybe the understatement of the year. We view the two industries as having separate dynamics, and we tend to look at input tariffs, as Madam Grenier has mentioned, on the fabric. We import fabrics and pay duty on them, and in many cases, those fabrics aren't available here. So we view that as a tax issue, and we don't agree really with the textile people on that. That's the dilemma we have sometimes.

Clearly, on the rate of change in currency and so forth, whether it's through enhanced capital cost allowance--geez, wouldn't that be great? We have no objection to any of those remedies that would look at the velocity of change and the impact it's having on business. That would be phenomenal.

On SR and ED, are the ways that we develop product through risk currently captured sufficiently in SR and ED programs? No. So you can look at a number of those measures, and we would have strong support for that approach.

In terms of other regulations, Harvey mentioned that if we import fabrics and make a garment, we can't export it. Well, of course, we can export it, under certain arrangements under the NAFTA, if it's going to the U.S. or Mexico, but we pay a quota charge to the Canadian government to issue that permit.

The Americans change the rules overnight. You need 12 times as many permits as you needed last year. There are a lot of those things. You will see, coming out of the Waco summit about a year and a half ago and more recent meetings between the leaders of the countries, that there's a recognition that we have to sweep away these nuisance regulations. And any measures this committee can recommend on that front are welcome as well.

[Elizabeth Siwicki]

I would just make the comment that the textile and apparel industries agree on the SR and ED point that this is an important program for the textile industry. We're heavy users of it. There are some interpretive issues as to what constitutes R and D that I think warrant looking at, as well as looking at some of the types of things that our industry and, as Bob mentioned, their industry do that aren't currently considered R and D and that might be.

In terms of the bigger picture, if we have nobody to sell to, if we don't have our markets, if we don't have an industrial and trade policy framework that encourages investment, the paperwork issues, the regulatory issues, really go to the back burner. The focus really needs to be on the bigger picture right now because I believe that is what's causing the trouble for our industries.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Very quickly, the other thing I think somebody mentioned is that we've begun to import many of our textiles from places like Bangladesh. I think the reasoning behind that was pure. We thought we could aid nations that didn't have the same advantages we had and we could give them entry.

Is that something we should look at? It hasn't worked. What we've had as a result is, what you said, sir, that we're producing stuff for pennies. We can't compete. Should we as governments look at our sources and possibly demand some type of living standard for those who produce? Is that an area we want to start to delve into? Is that an area we want to move into?

[Elizabeth Siwicki]

We have never moved away from the concept of Canada as a nation helping the poorest countries in the world. In fact, we think that's a good thing. But on the initiative that was put into place, where we think it can be changed is with respect to the rules of origin, because in fact in that initiative, up to 75% of the value of a garment that benefits under that program can be from a non-LDC country. So the benefits of that program are going to countries like China, Korea, Pakistan, Brazil--other countries that were not the intended targets. So we think there's scope in the rules of origin to go back and look at that program and to ask how we can truly help the people in Bangladesh, in Cambodia, in Africa, and not really have these benefits flow to non-LDC countries. So yes.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll be going to Mr. Julian.

Before that, I want to briefly comment. Mr. Crête has asked me to recognize a very special guest with us today, His Excellency Robert Hans Tippenhauer. He's the new ambassador to Canada from Haiti. Perhaps the ambassador could just stand up to be recognized by the committee.

[Some hon. members]

Hear, hear!

[The Chair, Conservative, James Rajotte]

I'm also told he was with the Haitian Canadian Chamber of Commerce, so he obviously has some interest in the issues before the committee right now.

We will go to Mr. Julian, the final questioner in the first round, for six minutes.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Thank you very much, Mr. Chair.

Thank you for coming today.

We know that the situation in the last few years has had devastating effects on the textile and apparel industries. There were tariff changes that resulted in job losses. Overall, since 1989, we have seen an erosion of the income of a great majority of Canadian families. We know that 60% of Canadian families have less resources and less income than in 1989 and that 20% of families have the same income. Only the highest-paid people got a salary increase.

The issue of quality jobs is very important not only to this committee but to all of the Canadian Parliament.

I want to go back to the issue of tariff changes for the textile and apparel industries. What action should have been taken to prevent the job losses of the past several years? What action should the federal and provincial governments take in order to maintain and even increase the number of quality jobs in your industries?

[Harvey Penner]

With regard to textiles, we have four points that we have continued to hammer away at for the last four years. Obviously, there's outward processing, which is critical to our survival, which allows us to have an expansion of our revenues. It provides more customers for us to sell to and would allow the apparel industry to grow in Canada by being able to outsource what is the most difficult part of the total package, which is the cut and sew, which requires a labour differentiation that's too dramatic to be able to sell to the main market in Canada in the long term. We have seen this because there have been many firms in the apparel business that no longer manufacture anything here, and we can list the names. Probably of the 600 companies, half of them are importing probably 100% or at least 75% of their business, so outward processing is the issue.

On market access, we explained again that under NAFTA, when we had the U.S. as our market, we grew by 300%. Because the Americans, in their judgment, look for low-cost countries to produce, what they did in essence were the Caribbean and African trade laws, which eliminated Mexico and Canada from shipping in textile, yarns, or fabric to be able to manufacture in these countries. So they eliminated us from that market and we're excluded. It's only American inputs that can go into these Caribbean countries to come back duty-free.

The other issue, of course, tied to that was the idea of the free trade of the Americas, which had seamless goods moving within all the countries that represented that. I think there are 34 countries.

The last issue is the LDC, which I have hammered particularly. The LDC rules of origin absolutely need to be addressed, because you not only have these countries like China, Korea, etc., taking advantage of it and pushing to the lowest country for labour, and then they ship here and don't have to pay any duties, but you have the exploitation of the worker, instead of helping the worker in the countries we've signed the agreement with. They push them to the lowest labour cost or they won't give them the work. So if you can change the rules of origin so that they are more in line with what the Americans and the Europeans have done, you will then help to build those countries in Africa and Bangladesh by making them adjust and set up an infrastructure, rather than just using the labour to cut and sew. They'll have to put dye and they'll have to put knitting in order to take advantage of that duty-free entry.

This is what we need. Those are the four points. It's market access. It's customers. It's revenue. Some 90% of my apparel business goes into the United States. I have a strategic plan that works. We've grown our sales, but in the textile industry the same thing is required to have some of these four points put into work.

We've hammered it enough.

[The Chair, Conservative, James Rajotte]

I have Mr. Kirke. Will you be speaking?

[Bob Kirke]

Yes, I'll just mention a few things.

The fact is, the world is changing totally in terms of the trade picture for textiles and apparel. Harvey has made a case for the rules of origin to be changed under the LDC. I'm not taking issue with the statement. I support them, and we supported that change in 2002 when it was being proposed. But in point of fact, what that would do is allow those same people to make 48¢ a day sewing his fabric. That's what he's saying: “Let me ship the fabric so that it can come back”, but he would still pay them 48¢.

When we look at the changes in the world, what we run into is that there's no way to look at them with a clear picture in one little shot. The fact of the matter is, everything is changing, and Harvey and Eva have been successful because they've found strategies that work. They're usually in niche markets and usually focused on exporting into the United States.

There are lots of other companies in both sectors where there are success stories. We're here because you're dealing with problems, and we're going to bring some problems to you, but there are successful companies, and, my God, most of them don't issue press releases when they are successful. They stay to themselves and remain quiet.

The other side of it is, speaking to your point, that we are moving to a stage where there will be less direct employment in manufacturing here in Canada in the apparel industry. What's the upside to that? The upside is that those same companies, the ones that are surviving, are hiring more management, marketing, product development, and design people. You're seeing, in some respects, a transition to a white collar industry. Are there positives and negatives associated with this? Surely there are. We're here to tell you what the problems are, but I also would say there are success stories out there.

[The Chair, Conservative, James Rajotte]

Thank you very much. Thank you, Mr. Julian.

We'll go to Mr. Fontana for the second round.

[Joe Fontana, Liberal, London North Centre, ON]

Thank you, Mr. Chair, and thank you all for the great insight.

Regardless of whether it's in plastics, apparels, or textiles, I think there is a theme. It may very well be, Mr. Chairman, that we'll have to call Mr. David Dodge back in, once we've heard the witnesses, for the purpose of asking some very fundamental questions that we might want to pursue further with him.

You raised a fundamental question, so I want to ask it again. I think it asks who will make the goods Canadians need and want. I think that's important.

David talked a little bit about protectionism. Well, I think Canada is the only country in fact that is playing by the rules; there is no protectionism. Everybody else, including the United States, tries to pretend it is playing by the rules while in fact putting in all kinds of.... The textile industry talked a little bit about how, by entering into a NAFTA agreement, we're getting screwed by virtue of something the United States is doing or not doing. I think there's a fundamental question: either we want very innovative manufacturing sectors, such as textiles and apparel and plastics—because I think you've done it all, you've researched it, you've developed a product, and you've been this competitive—or we don't.

You've also talked about this perfect storm. If there is a perfect storm, let's figure out how in the hell we're going to survive it until such time as it passes, or whether we are going to pass it. Let me ask a question specifically.

I'll start with you, Atul, because I think you've been left out of the questions up to now, and plastics are very important to southwestern Ontario in the auto parts industry and some others. You also talked about how we mitigate against this storm that's coming and its high-dollar and high-energy costs. You talked a little bit about how it is we might want to talk about dealing with this perfect storm.

You've all talked about trade policy, promotions, and looking at strategic bilateral trade agreements we should enter into. The SR and ED credit program is one of the most generous in the world, but obviously it's fraught with some problems. And there are others. If I were to say the next two or three years are crucial--you have these high interest rates, high energy costs, and all these other things happening in the world--so tell me what the number one or two thing is that would allow the government.... In some cases we or the government or parliamentarians can do something. In the absence of doing something else, that perfect storm is going to come, and it's going to ravage all the plastics, the textiles, and the apparel industries.

I need to get very specific. What is it that we urgently need to do? Do we change our tax policies, accelerate capital cost allowances to mitigate against the high interest rates or the high cost of the dollar...? I need some very specific things that this committee might want to do and might want to talk to Mr. Dodge about, or the finance minister—or the industry minister, by the way, who is coming in the next half hour, if you want to wait around and talk to him.

[The Chair, Conservative, James Rajotte]

Mr. Sharma, do you want to start off?

[Atul Sharma]

Thank you, Mr. Chairman.

You raised a number of issues we've talked about. If we were to ask what the number one thing to come out of this committee in the recommendations should be, we would have to say the capital cost allowance needs to be accelerated. We're in an exchange rate regime now in which, while our exports are more expensive, in fact it is cheaper for us to import. If we were looking for the plastics industry at a time when we can begin innovation and do some capital replacement with some imported machinery, this is certainly the time, because they will be cheaper as imports.

How can you assist in that? Accelerate the capital cost allowance and make sure we have depreciation for no greater than two years. One year would be great--the year of purchase--but if that can't be done, then within two years. That would be the number one thing I would recommend.

The other thing is a theme that everyone has touched upon: we see a shift within Canadian society away from manufacturing and toward the knowledge-based industries. While that's good, and we need to have the knowledge-based industries, we can't lose sight of manufacturing. It is still a substantial employer within the Canadian economy. We'd like to see the government adopt a vision that promotes and shows leadership on the importance of manufacturing.

We've talked about what our vision would be in terms of adding value to natural resources. For our industry in particular, we also need security of the feedstock; we have a unique industry, one in which we not only need the energy to run the businesses, but we also need it as an input into the products we produce.

That would be my top three. I'd be happy to discuss more. We do have a list of them.

Thank you.

[The Chair, Conservative, James Rajotte]

Mr. Penner is next.

[Harvey Penner]

I've already given you the four points, although maybe it was not concise enough, but I can tell you we need a policy framework that signals to textile manufacturers that they should continue investing in Canada because the government recognizes the value of our industry to the country and the economy. This is a critical issue for us. Tax credits, etc., are irrelevant if we don't have a customer base and profits. Give us a trade framework that allows us to grow and have market access, and we will invest and go forward.

[Joe Fontana, Liberal, London North Centre, ON]

Eve talked about it a little, but do you think the Canadian public is ready for--