International Trade Committee on June 14th, 2006

[Helena Guergis, Conservative, Simcoe—Grey, ON]

Thanks very much for the witnesses being here. We appreciate you taking the time out of your schedule.

I'll be brief in my questions, because I do want to give my colleague as much time to put his questions forward.

Are we working with the United States? What is the likelihood of having a joint U.S.-Canada-Korea agreement?

The United States has, I believe, a 2% tariff on Korean autos. What are the differences between the U.S. and Canada with respect to the auto industry's concerns? I understand that there are some differences, but I wonder if you could explain those to us.

If Korea were to negotiate a deal with the United States and Canada did not negotiate a deal, what would this mean for our auto industry, and what could this mean for the other sectors that have been identified as those that would benefit from a free trade agreement with Korea, such as agriculture, wood, fish, pharmaceuticals? Are you able to give us any quantitative information as to how much those other sectors may benefit if we do have an agreement?

[The Chair, Conservative, Leon Benoit]

Mr. Watson, you have about six and a half minutes in total.

[Jeff Watson, Conservative, Essex, ON]

Thank you, Mr. Chairman, and thank you to our guests.

I'm a parliamentarian, but in my previous life I was an auto worker. Looking through the briefing notes, imports in 2005 to Canada from Korea were $5.4 billion, with, as it says here, vehicles and parts leading the way.

That trade deficit with Korea was about $2.5 billion that year. The Canadian Vehicle Manufacturers' Association says that two-thirds of that deficit is auto-related. Do you agree with that number? If not, what is the auto-related deficit in our trade deficit?

[Ian Burney]

Thank you very much.

I guess I'll take these in the order they were presented. I'll try to be as brief as possible.

Are we talking to the U.S.? Definitely, we're talking to the U.S., but not in any kind of formal sense. Obviously, given the integrated nature of the Canadian and U.S. economies, we take more than a passing interest in developments in the U.S.-Korea negotiation. They had their first round of discussions last week in Washington. The consultation is quite close and it's of an informal nature, but I am in fairly regular contact with the chief negotiator on the U.S. side. We do touch base from time to time and keep each other up to speed in terms of what's going on.

I think there's a great deal of interest on the part of the auto industries on both sides that there be this kind of cooperation between the governments. That has taken place specifically in the auto sector, where we've had an opportunity to hear the concerns first-hand from both industries in a meeting with both governments.

On the differences in perspective between the U.S. and Canadian auto industries, again, that's perhaps something that can be best put to the industry participants who will be here later this afternoon. Obviously, we start from a higher tariff in Canada. The automotive tariff in Canada is 6.1%; it's 2.5% in the United States.

To the extent that you're talking about the big three, in Canada these are the subsidiaries of the global companies that are based in the United States. Those are global companies with global interests. You could make an argument that there's more of an export interest on the U.S. side of the industry because it's a global company; it's perhaps less likely that cars would be shipped directly from the plants in Canada to Korea. So you could infer that there's greater export interest on the side of the U.S. industry and more of an import sensitivity on the part of the Canadian industry. Again, those questions are perhaps best put to the industry participants themselves.

I think on most issues related to the Korea initiative they have had very similar positions. In the discussions we've had with government, we've heard the same points of view, by and large, presented from the two sides of the industry--an overriding concern for non-tariff measures in the Korean market.

I think your third question was, what would it mean if we didn't have a free trade agreement, and what kind of modelling or quantitative assessments have been done? Basically, the analysis we did at the front end of this, before launching, showed a fairly significant welfare benefit to Canada from an FTA with Korea. I think the internal analysis, which was based on CGE modelling, had a welfare benefit of about $500-million-plus There were other studies, which tried to build in a dynamic element, that put the benefit at over $2 billion. I think all these models tend to underestimate the impact of trade liberalization a bit, just because of the limitations of modelling.

In my presentation, I think I went through all the high tariffs that remain in Korea in the various segments. What we would lose is an opportunity to get those down to zero for Canadian companies and the likelihood that they would be shipping in against preferential arrangements for all their competitors. If the Americans succeed in their negotiation and we walk away from it, not only will we not have derived the tariff preferences from our agreement, but we would be facing competitive disadvantages vis-à-vis the United States and everybody else that Korea negotiates with. As I've tried to address, this is the story that's been playing out in other negotiations. It would be a replay of that.

Turning to the question from Mr. Watson, do we agree with the auto deficit figure, my understanding is that the current import range for auto imports from Korea is about $1.6 billion. We're exporting virtually nothing, so that would be the automotive deficit.

Again, as I mentioned in my opening remarks, we are running a huge global surplus in automotive trade. With the United States alone, the surplus is $26 billion. So this idea that it should be in balance with every country--

[Jeff Watson, Conservative, Essex, ON]

With all due respect, I have some other questions to get to.

Has your department done an analysis of South Korea's expected gains in a bilateral free trade agreement? You've obviously forecast a minimum of $500 million per year for us. Have you done any kind of analysis on what to expect in terms of dollars per year for them and how much of that is in the auto sector? Are there any expected gains for Korea in our markets?

On the impact on dealerships of eliminating a tariff, if applied directly to the hood--that is, to the price tag of an automotive vehicle--when you typically have a 2% to 3% margin in negotiating your price over the MSRP with a customer, adding that tariff elimination to the price tag will have some competitive advantage to certain vehicles in our market as opposed to others. Have you done any assessment--particularly in Canada as a small-vehicle-buying market--of what that impact will be on Canadian auto dealerships, particularly for the big three?

On this automotive consultative group--I'd like this question answered first--what date was that started?

[Ian Burney]

Taking the last question first, we basically started that immediately after launching the FTA negotiations in July 2005. The consultative group was struck about then; I think the first meeting was in the late summer of 2005.

To your question about impact assessments, the government does a whole range of internal assessments and analyses before we enter into FTAs. In my response to an earlier question, I think I alluded to some work that was done on modelling the benefits for Canada. I don't have the document in front of me, and to be perfectly honest, my recollection is that we also did model some impacts for the Korean side, which showed considerably less benefit to it.

We're in the process of basically updating and refining that study, and our intent would be to make the results of that public when they're available, but it may not be until later this fall.

With respect to the auto sector, we have also done internal analyses and assessments of the impact in the automotive sector. As I mentioned in my opening remarks, the conclusions were that the impact would be very, very limited, as a result of the factors I mentioned. We're starting from a low tariff, and 85% of what we produce is sold in the United States. Basically there are three kinds of Korean cars coming into our market: those made by Hyundai and Kia, which will be produced in the United States and shipped duty free under NAFTA at a certain point; and those made by Daewoo International, a company owned by GM and accounting for about 30% of what's coming in from Korea. So these are coming in from General Motors. The other two companies, as I say, will be producing in the United States. Alabama is already open; they haven't met the NAFTA rules of origin yet, but they intend to do so. Kia has announced that it will be constructing a $1.2 billion facility in Georgia, and that will account for Kia vehicles.

[The Chair, Conservative, Leon Benoit]

Thank you.

To the last questioner of these witnesses, Mr. Julian.

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

Thank you very much, Mr. Chair.

I appreciated Mr. Watson's questions. I'm going to follow up on them.

But I would like to start with your presentation mentioning the prosperity coming from NAFTA. I do think it's important to say for the record that the latest Statistics Canada figures actually show that since 1989 and the signing of the Canada-U.S. Free Trade Agreement, for 60% of Canadian families, their income has gone down in real terms; for another 20% of Canadian families, their income has stagnated. So what we've actually seen is only the top 20% of Canadian families, according to income level, actually gaining since 1989. In fact, the concentration of wealth now is such that the top 20% actually has 50% of the national income. I think that's a real problem; it's an issue that should be part and parcel of any discussions we have around other agreements. If what we're doing essentially is exporting our natural resources to create jobs elsewhere, we have a problem.

I'll come back to that if I have time, but I have three specific questions to start. The first comes off Mr. Watson's questions around the automotive consultative group. I'd like to know who are members of that group. You mentioned that they started work in the summer of 2005. How often do they meet, and what is their mandate or role as part of the negotiating process? That's my first set of questions.

Secondly, in terms of the analysis that you've done, you did mention that the impact on the automotive sector and auto parts would be relatively minimal. What are the figures, though? If you've run the analysis and you've run the model, what are the figures in terms of lost jobs and lost sales? Those kinds of impacts are important for us to know. And more broadly than that, if you've done similar analysis with shipbuilding and tool-and-die machinery, it would be helpful for us to know what the impact in lost manufacturing jobs might be.

Then my third question is about your negotiating instructions. What are they in terms of this agreement, and have they changed since the election of the new government on January 23?

[Ian Burney]

Wow. Well, answering the easiest question first, on the consultative group, basically we are consulting with all segments of the industry. That's the main point. The consultative group itself has the CVMA, which includes the big three, as you know. We also have the CAW and Honda and Toyota.

Now, Marvin is the lead on that and he can correct me if I've missed anybody, but I think those are the formal members of the consultative group.

[Marvin Hildebrand, Director, Bilateral Market Access Division, Department of Foreign Affairs and International Trade (International Trade)]

As you said, we consult extensively. The automotive consultative group represents those organizations or companies that have manufacturing or labour interests in Canada. We also consult outside of that with other groups regularly and on request.

The consultative group meets the head of every negotiating round—

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

How often is that?

[Marvin Hildebrand]

We've had negotiating rounds roughly every two months; we've had five since last July. That provides an opportunity to provide a debrief on the last round and we are also to discuss issues that will be relevant in the coming round. In terms of the mandate of the group, we discuss all issues of interest to the sector: rules of origin, tariff elimination, and, as was already mentioned, tariff barriers. We have spent considerable time discussing the industries' concerns, understanding exactly how these measures affect them, and what the best ways are to tackle them in the context of these negotiations.

[The Chair, Conservative, Leon Benoit]

Mr. Burney.

[Ian Burney]

With respect to the auto studies, they are being finalized. As I was mentioning earlier, in the context of the broader government analyses that were done and are being refined, our intent would be to release those also when they become available sometime in the fall. The results have been shared on a confidential basis with our automotive consultative group, so they have an indication of what the magnitude is. All I would say at this stage is that we're talking about very, very low numbers, especially when you look at the production base. If we're talking about production of units, we're talking about a very low number when you compare it to the fact that 2.6 million units are being produced every year. In terms of job implications, we're also talking very, very low numbers.

[The Chair, Conservative, Leon Benoit]

I've asked the clerk to actually write a letter, so that once the study is complete we do get this information as soon as possible. I'll ensure that it gets to all members of the committee.

Go ahead.

[Ian Burney]

I think there was a third question pertaining to negotiating mandates, which I obviously can't discuss in a public forum.

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

Have they changed?

[Ian Burney]

I would prefer not to comment on the subject of my negotiating mandate. Nothing should be inferred from that.

[The Chair, Conservative, Leon Benoit]

Mr. Julian, you still have two minutes, if you'd like to ask more questions.

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

I didn't do too well on the last round.

[The Chair, Conservative, Leon Benoit]

I'm sure Mr. Watson would love to have the time, if you don't want to use it.

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

Obviously, if there are concerns about this agreement, the release of those studies would allow us to have a better sense of how legitimate they may be in terms of the actual impact. It might potentially work in favour of the negotiations. So the earlier those figures get out--provided they're solid numbers, which have been done with the view of honestly addressing the impacts--I would suggest, the better.

Coming back to the issue of the NAFTA model, as I mentioned earlier, we're seeing a situation now where manufacturing jobs have been eroded since 1989. Ultimately, what that has meant is that 60% of Canadian families are earning less in real terms than they were in 1989. That's the bottom line of any trade strategy.

I come back to the issue of a NAFTA model. We've seen some real difficulties with dispute settlement because they're not being used, either by the current government or by the previous government; the chapter 19 provisions of NAFTA have not been put into effect, and that is to our detriment.

As part of the approach that the ministry took in looking at this agreement, were there any discussions of other models of trade agreements that might be more effective in terms of meeting that bottom line, which actually is having family incomes come up rather than go down?

[Ian Burney]

With respect to the first point about releasing the studies, all I would say is that there is a bit of a tension between the interests of wanting to be as transparent as possible and also preserving our negotiating coinage at the table by not releasing too much of the internal analysis about how the impacts are going to play in one sector or another. That's one of the challenges we wrestle with. I've heard the message loud and clear, and as I've already committed, we will endeavour to put as much information in the public domain as we can.

On the second question, when we assess whether to pursue a trade initiative with a country, we look at the full range of policy options that are at our disposal, including FIPAs, air services agreements, and so forth.

I don't think that quite addresses your question. If your question is whether we looked at alternative approaches to free trade agreements, perhaps I would need a bit more specificity. We do have some variations in how we pursue trade agreements. We don't always pursue services and investment chapters, for example; it depends on the market. We have, in most cases. For Canadian business, the most comprehensive model we have is the NAFTA model, so that is our natural default. Unless there are overriding reasons as to why we shouldn't be pursuing a comprehensive, high-quality agreement, that would be the route we would tend to pick.

Maybe I didn't follow the first part of the question, in terms of what the problem is with the model.

[The Chair, Conservative, Leon Benoit]

Mr. Burney, that's a discussion for another day, I guess. Mr. Julien's time is up.

We won't start another round with the current witnesses. We do have a motion to deal with at the end of the meeting today, and we want to give the other witnesses a fair chance. I know we have questions for them as well.

I'd just like to thank you all for coming. I do appreciate the background information that you gave today in the answers to your questions.

We'll take a two-minute break, and I'd ask members to get back to their seats as soon as they can. We'll switch witnesses and get on with the next round of witnesses.

Is there a point of order?

[Pierre Paquette, Bloc, Joliette, QC]

Before we go to the next panel of witnesses, I would like us to consider my motion. I would not like this to wait till 5:30 p.m.. The motion was tabled less than a week ago. I know that it is not because of any lack of goodwill that the committee failed to deal with it at the last meeting. But we were supposed to look at it at the beginning of this meeting.

We could perhaps say goodbye to our friends. We will certainly be seeing them again.