International Trade Committee on May 10th, 2006

[The Chair, Conservative, Leon Benoit]

Good afternoon, everyone. Pursuant to Standing Order 108(2), the committee will now proceed to a briefing session.

The witnesses for today's session are from the Department of Foreign Affairs and International Trade: Randle Wilson, assistant deputy minister of strategic policy, communications, and corporate planning; Peter McGovern, director general of North America commercial relations; Susan Gregson, assistant director general of the regional strategies bureau; and John Curtis, the chief economist.

Thank you very much for coming, ladies and gentlemen. We're very pleased you're here.

I know most members of the committee have received a briefing from your department in advance. This briefing, I know, will be focused. We will allow 20 minutes in total for the briefing, breaking our rule of having normally 10 minutes or less for witnesses. But because it's a briefing, we want to hear what you have to say first. The discussion will, however, be focused by the members and their questions, and I think that's what's most important here. So if you could, please go ahead.

[Randle Wilson, Assistant Deputy Minister, Strategic Policy, Communications and Corporate Planning, Department of Foreign Affairs and International Trade (International Trade)]

Thank you very much, Mr. Chairman.

First, I'd like to express on behalf of the departmental officials how pleased and honoured we are to be here to be your first substantive briefers, an honour that would normally go to our deputy minister, Marie-Lucie Morin, who is, however, in a plane going to India, even as we speak.

You of course have four initial briefers here, and I am joined by a number of colleagues who are able to engage on a range of other subjects, from trade commissioner operations through to elements of our bilateral and multilateral trade policy. So they will come up to the table as questions dictate, if that's all right.

I have to say, starting out, looking at the range and breadth of the questions posed by the members in advance, it occurred to me and to all of my colleagues that this really is a committee about international trade, all aspects of it.

This means that the scope of your questions goes far beyond the basic mandate of our department. I want to assure you that we have committed to providing the committee members with the most detailed and appropriate answers possible. We have also committed to organizing, along with the committee clerk, if necessary, a joint appearance with any other department or agency responsible for issues related to the matter under consideration. As we stated, the scope of your questions goes far beyond to the mandate of a single department.

I am going to do a very quick scene setting. Those of you who have seen me in action before will not believe this, but trust me, I can do it.

The comments of the members are more than enough on this subject, but I will pass the floor to our chief economist, Dr. Curtis, who will speak within the time limit to issues such as the role of commerce in the economy, and some of the questions that have been flagged, like the dollar and the exchange rate impact. I will then turn the floor to Mr. McGovern to speak about the North American agenda, and then to Ms. Gregson to speak about emerging markets, in particular. Of course, we are more than happy to engage in any other question.

The background, as members know, is that Canada is a country that not only lives by trade, but has done extremely well by trade. When I say trade in the 21st century I mean a whole range of international economic engagements: investments, science and technology partnerships, strategic business partnerships, and many other forms of exchange. This is taking place against the rapidly evolving business models that are generally described as global value chains, or global supply chains. The issue for a country like Canada against this background is how to ensure that our business community, our country, remains well positioned.

The challenge isn't just one for business, however. There is a challenge to us at the national level from other countries that are taking advantage of the opportunities enabled by technological advances, especially in telecommunications and transportation. Countries like China and India are on everybody's lips, but there are many others that are deliberately positioning themselves, with all the attributes of a competitive, globally engaged economy.

I will leave to Dr. Curtis the traditional economist's role to be gloomy about where Canada sits in this picture--all right, he's from British Columbia and has a rosy view--but the fact is that the short and dirty answer on that one is there is no room for complacency.

The fundamentals of success going forward are obviously the right domestic framework and the right international framework for the orderly development of international and domestic commerce. It's a problem for this committee, naturally, because it means there is no hard and fast line between what is domestic and what is international.

That said, thanks to the existence long-standing economic analyses by the OECD and other organizations, we are cognizant of the factors that contribute to the productivity and international competitiveness of an economy such as ours. These factors are, namely, openness to international competition, investments in labour and, above all, in training the Canadian workforce, a regulatory regime and a fiscal regime adapted to needs and which encourage innovation and the expansion of trade. In short, there is a wide range of factors, most of which fall under the jurisdiction of different levels of government.

Already, you will of course see that this is therefore a national challenge in every sense—federal, provincial, territorial, municipal.

The single most important factor in driving this reality home, from our parochial perspective, is international investment, where it is the judgment of international investors as much as anything else that will matter. That's not a judgment that we will necessarily see happening, as boardroom decisions are being taken in Hamburg, in Rotterdam, or New York.

The right international framework is, of course, more familiar to us. It is the framework of multilateral, regional, and bilateral trade agreements, augmented by other agreements like investment agreements, science and technology cooperation, air agreements, regulatory cooperation agreements. In other words, for every aspect of modern global business, you will find an international intergovernmental structure, and very often an international business structure that addresses this, just as, for example, in air transport you have ICAO and IATA.

Deploying these instruments, the government traditionally pursues three paths. There's the rules agenda that I just referred to, namely trade agreements and trade in the very broad sense. There's the international and pan-Canadian network of government offices run by the Canadian Trade Commissioner Service, which works with business in about 160 cities around the globe, including a dozen in Canada, to identify and pursue business opportunities. You also have buttressing that a very considerable domestic network that intersects with our regional offices, but also extends through other agencies and departments, like Industry Canada and the regional development agencies, which offer the front-line support to business in Canada. Again, I come back to the point that growing a business in Canada is not necessarily something that can be envisaged as a purely domestic activity.

I'll cut off my remarks there, Mr. Chairman, so as to allow my colleagues some time, because the rest of our story becomes regional, and of course I have Ms. Gregson and Mr. McGovern to tell that story.

[The Chair, Conservative, Leon Benoit]

Thank you.

We have about eleven minutes left of presentation time.

Go ahead, please.

[John Curtis, Chief Economist, Department of Foreign Affairs and International Trade (International Trade)]

Thank you, Chair.

I'll be very brief. I'm particularly interested in hearing the questions and discussion with the members present.

Let me very briefly bring to your attention and highlight what many of you know--that is, the state of the world economy, the state of the Canadian economy in the international context, some of the risks, as well as the opportunities--and then perhaps we can turn to questions later on.

I'd just remind members that the world economy as a whole is doing extremely well at the present time. In fact, we're in the fourth year of very strong worldwide economic growth of between 4% and 4.5%. This includes not only this country and the United States, on our own continent, but the recovery has spread both to Japan for the first time in a decade and to parts of Europe, although some member states of the European Union aren't doing as well as others. Russia has recovered spectacularly in the last five years or so, as well as, of course, Asia, which my colleague has mentioned, not only China and India, but many of the other countries of Asia. And Africa has had for the past two or three years really quite spectacular growth. So overall the world economy is doing well, notwithstanding very high energy prices, as we all know, notwithstanding the natural disasters of the last couple of years.

I think that should be, if I may suggest, the context in which we think of the performance and the prospects for the Canadian economy. We have a fairly benevolent world economy at the present time. There's strong demand, low inflation, and fairly stable financial markets. It's not bad overall with these risks, which we can talk about.

Secondly, the Canadian economy--which of course has been reported on by the Minister of Finance over the past week--within the context of the world economy is one of the star performers, mainly because of very strong worldwide growth. When the world grows, Canada grows. It has regional impacts and sectoral impacts. In particular, at the moment it is having a major impact on the value of our currency relative to other currencies. Perhaps you'll want to speak to that a bit later on.

But in fact the Canadian economy is fairly robust, with double-digit trade numbers and increasingly strong investment numbers, both in and particularly out. It's a strong economy overall, recognizing the very serious problems in certain communities in the country and certain sectors of the economy. Like anything else, for economists there are things on the one hand and on the other, and of course we can't agree on whether things are good or whether things are bad.

Finally, as to the risks, just to point this out, both for the world economy and our own, one is, of course, the pressures on energy prices and on inflation, something that most of us have forgotten about since the nasty 1980s, but inflation can in fact return, and there are signs that it is returning. There are tightening fiscal conditions, such as higher interest rates; the state of the United States consumer, which we can talk about if you wish; the global imbalances, the evil twins, particularly in the United States, of both fiscal deficit as well as trade and investment problems; and other risks to the prospects of the world economy, particularly the risk of a world-wide influenza outbreak, and in fact the thickening of borders because of security.

I think that's a brief overview that might give us a chance to carry on later, if there are further economic questions you want to raise.

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you.

Mr. McGovern, are you going to make some comments as well? Great.

[Peter McGovern, Director General, North America Commercial Relations, Department of Foreign Affairs and International Trade (International Trade)]

Yes. I have a prepared text here, and I'll either talk very fast or just skip to the chase right away.

For four years I spent my time as a consul general in Milan, Italy. When I came back I was made the director general for the U.S., and everybody was talking about Brazil, China, and India.

The Conference Board has made some projections for 2025. They see that trade with China is going to increase 600%, to about $40 billion. They project that our trade with the United States is going to be $780 billion. In a nutshell, that's what it's about.

If you look at some of our statistics, for instance, we do $62 billion worth of trade with Michigan. That's in auto parts, machinery, and energy. In California, we do $27 billion worth of trade. Those numbers are only going to grow. Thirty-seven American states count Canada as their principal trade partner. Of what we now do in the United States, 22% doesn't enter the border in a truck; it crosses the border on a high tension wire or in a pipeline.

In many ways we don't compete with the Americans, we build things with the Americans. It's an integrated process. We owe a lot to the NAFTA. If you watched the Super Bowl, the NAFTA was like the half-time show. The NAFTA is like the Rolling Stones; it's kind of wrinkly, but it still makes the best music around, and that's the way it is.

On our current activities in the department, we are in the process of preparing a U.S. commercial strategy. The purpose of our strategy is to define those sectors where we think we can really have an impact on the activities we provide through our network of consulates general, consulate offices, and the embassy in the United States.

I am more than willing to answer questions on that, but I will stop here. I can get the message on the States, and I'll allow my colleague Susan Gregson to speak about the 14% of our exports that don't go to the United States.

[The Chair, Conservative, Leon Benoit]

Thank you very much.

Ms. Gregson, are you going to make some opening comments?

[Susan Gregson, Assistant Director General, Regional Strategies Bureau, Department of Foreign Affairs and International Trade (International Trade)]

Yes, if there's more time to be had, Mr. Chair.

[The Chair, Conservative, Leon Benoit]

There are four minutes still. The others have been very generous.

[Susan Gregson]

Thank you very much.

I'll just speak very briefly then to the strategies that are currently under development in my area.

For fiscal year 2005-06, we developed some initial strategies for China, Brazil, the U.S., and Mexico. You've just heard from my colleague about the U.S. strategy. For this fiscal year we'll be working on strategies for India, Korea, Russia, ASEAN, the Gulf Cooperation Council, and the European Union.

I'll be happy to answer questions further on this, but right now I'll give you a brief overview of our approach to the important emerging markets of China, India, and Brazil.

First, why China? It's an obvious choice. It's clearly a priority because of the sheer magnitude of the market and the size of its population. The increasing prosperity of its citizens has made them greater consumers. China's infrastructure has undergone considerable development in recent years, making it easier to reach those consumers.

China is a key link to the global value chains that you heard about earlier, but we need to be conscious of other links in those chains. For example, we need to be conscious of the fact that when we export inputs to Korea, those inputs may then be re-exported to China. We need to know what's going on in the supply chain related to Korea so we can take advantage of China and that market.

We're identifying priority sectors in each of these markets. For China, we've identified the following sectors: agriculture and agri-food, information and communications technology, building products and construction, environmental equipment and services, energy resources and mining, and health and biotechnology. In order to reflect the growing priority of China for our clients, we're in the process of diverting some of our resources to our missions to better serve the Canadian business community.

India, of course, is also a priority emerging market. As with China, this is due in part to the magnitude of the market itself and the size of the population, but it's also due to the rapidly increasing educated middle-class and its rapidly expanding economy. For India, the priority sectors include agriculture and agri-food, information and communications technology, infrastructure and transportation, building products and construction, environmental industries, energy resources and mining, life sciences, and enabling services including financial services and education. In order to reflect India's priority, we are proposing to add a new science and technology position to our mission in New Delhi.

Brazil is the third market that I will talk to you about today. This is a priority market due to its dominant political and economic power in South America. It is the centre of future continent-wide road, river, rail, pipeline, and electrical power transmission networks. It has enormous potential as a partner and as a client, but also as a competitor. Here our priority sectors are agriculture and agri-food, oil and gas equipment and services, electric power, environment, forestry, information communications technology, mining, and cultural industries.

I thank you very much for this opportunity to speak to you today. We all look forward to answering your questions.

[The Chair, Conservative, Leon Benoit]

Thank you all very much. I do appreciate your keeping within the time.

We'll go to questions, but I just want to remind the committee that we haven't set the agenda of this committee yet. In the meeting we had when we elected the chair and vice-chairs, we did have some discussion on that. The researchers took that information and put together some initial thoughts. No doubt from today's meeting you'll also be considering what you want on the agenda, and I encourage you to get that information to the members of the subcommittee on the agenda so that when we have our first meeting next Tuesday, we'll be as well informed as possible.

No doubt there will be other ideas coming from the minister's appearance before this committee on Monday. From these three meetings and from your own thoughts from before we will at least make our first attempt at setting a long-term agenda for the committee.

So with that in mind I'll go directly to questions, first from the Liberal Party, the official opposition, for seven minutes.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you, Mr. Chair.

I want to thank the witnesses for coming and briefing us on all the trade negotiations and our trade situation.

I have two questions. My first one is on the WTO.

My understanding is that the window of opportunity is closing very quickly. If we don't have some sort of agreement this year, especially with the situation with the mandate from the U.S. Congress, also the rounds.... I guess this month and leading into the next month is going to be very important.

What's the status of it? And if there is no agreement between the Americans and the Europeans, what's the outcome? Where do we go from here, and what are the repercussions?

[Randle Wilson]

Mr. Chairman, I would like to invite up Bruce Christie, director of the multilateral trade policy division, who lives, eats, and breathes the WTO.

[The Chair, Conservative, Leon Benoit]

Please go ahead. Thank you.

[Bruce Christie, Director, Multilateral Trade Policy, Department of Foreign Affairs and International Trade]

Thank you, Mr. Chairman.

Regarding your question on the state of play in the WTO Doha negotiations, where we are at present is seemingly where we always are--at a point of crisis. I briefed some members of this committee last week on the state of play in the negotiations. Essentially, in the follow-up to the Hong Kong ministerial conference in December we had set a new deadline to achieve modalities, the detailed formulas and commitments, in the core negotiating areas of agriculture and non-agricultural market access by April 30. The week before that deadline the director general had made an announcement that it was clear that members were going to miss that deadline and that he had decided at that point not to bring ministers together, but to launch a re-intensified negotiating process over a six-week period, taking us to mid-June.

So, essentially, where we are now is we're re-engaged in around-the-clock negotiations for members to overcome the difficult issues at hand in order to come up with that framework by mid-June. At that point there will be another stock-taking exercise, and our aim remains to come to an agreement on a deal by the end of July. We're certainly cognizant of the deadlines looming and certain constraints, as you mentioned, specifically relating to the exploration of the U.S. fast-track negotiating authority, which expires on July 1, 2007. Obviously, we'll need to come to a conclusion of this round by the end of this year in order to meet that deadline.

As you indicated, there is a lot of work remaining and there are a lot of challenges ahead of us, but the battle is ongoing.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

How big is our role in the outcome? Do we have much sway in trying to get these parties on the same wavelength? Because our biggest role is to lower agricultural subsidies. That's what our main goal is, and everything flows from that.

What are the repercussions for us, besides our farmers still getting low dollars for their crops? What are the repercussions for Canada if this fails?

[Bruce Christie]

I think the repercussions will not just be for Canada but for all members, because this is really an opportunity to tackle some of the most egregious market access barriers, specifically in the agricultural sector.

We are an exporting nation. We rely heavily on our agricultural exports for our farmers' and producers' survival. Our role in this process is.... Well, we're engaged at many levels. We had been a member of a quad group of countries, with which I'm sure you're familiar, in previous years, along with the Americans and the Europeans and the Japanese.

That group has been overtaken by a core group of four countries—the Americans, the Europeans, the Brazilians, and the Indians—and they're essentially the four players who have to come to an agreement for this deal to move forward and for the remaining WTO members, such as Canada, to come to a final agreement. We are engaged in that process through very good linkages with all of those members on different issues in different negotiating areas.

There is also a new group that has emerged at the senior officials' or chief negotiating level, a group of 12 countries, and Canada is a member of that group. At the chief negotiator level, we're trying to draw the linkages necessary to drive a final deal forward. We have, I would argue, extensive influence in that forum. Our ambassador in Geneva, Don Stephenson, is the chair of the NAMA negotiations. That keeps us very closely involved in the critical issues being discussed there.

The outcome for us from not reaching a deal is, as I mentioned in the beginning of my comments, that it's really a missed opportunity. The WTO is the only forum where we can actually negotiate agricultural subsidies in key markets such as the European Union and the United States. These countries, as you know, do not negotiate bilateral deals in agriculture.

Outside of agriculture there are also tremendous opportunities---

[Mark Eyking, Liberal, Sydney—Victoria, NS]

I'm sorry, but on that point, we're almost certain to have low prices for our commodities for a few years to come if this negotiation fails; it's pretty well a given.

[Bruce Christie]

I can't speak to that. It's certainly an implication of missing this opportunity. I don't think, if we miss our deadline for 2006, the sky will fall. As is the case in most of these multilateral negotiations, we need to take more time than we allot ourselves initially. The Uruguay Round took almost nine years to complete. I think we've been at it for about five now.

Perhaps we were too ambitious in thinking we could come to a final outcome this year, but it's not the end of the road. We can continue to negotiate through new deadlines. We may have to take a period of time next year to pause and reflect and wait for the U.S. to renew their negotiating mandate. But I think the commitment is still there, especially at the political level, among all WTO members, so the opportunity still presents itself.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you very much.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Eyking. Certainly those are questions every member of the committee is very concerned about.

We now go to the Bloc and Monsieur Paquette, for seven minutes.

[Pierre Paquette, Bloc, Joliette, QC]

Thank you, Mr. Chairman.

Gentlemen, thank you for appearing before the committee.

In his initial presentation, Mr. Curtis said that the Canadian economy was strong and that exports were doing well. I want to be a little more specific. When I look at the figures, I note that exports increased this year by approximately 5.8 per cent, but this is mainly due to the increase in energy exports. Were it not for this boom in energy exports, particularly to the United States, this increase would be very slim, at a time when our imports increased by 6.6 per cent. This means that our imports increased much more rapidly than our exports. This concerns me.

Second, I note that the percentage of Canadian exports on the American market went from 87 per cent in 2002 to 84 per cent in 2004. In other words our share of the American market dropped, even if the absolute figures remain positive. The reason we are doing so well overall is because imports from the US to Canada are dropping faster than our exports to the US.

Things seem to be going well. However, slowly but surely, the Canadian economy's ability to be competitive, particularly compared to other economies, is falling. I want to know if you share my concerns. I am not saying that the house is on fire, but I think that we should consider the details and encourage our exporters to be more vigilant.

I want to conclude by saying that profits are at record levels, but investments are low. For example, in Quebec, this year, investments were less than one per cent. I'm a little concerned because, despite appearances, it seems that the Canadian economy remains an economy with clay feet. I'd like to hear your comments on this.

[John Curtis]

Thank you.

Might I reply, Mr. Chair?

[The Chair, Conservative, Leon Benoit]

Yes, go ahead, Mr. Curtis. When a member asks the question, just feel free to go right into the response.

[John Curtis]

Yes, fine.

I thought every question, certainly, was a very good one, and one has to be always nuanced. And that's why I, myself, was trying to say that while the world economy and the Canadian economy are doing fairly well, one has to worry about regions, one has to worry about sectors, one has to worry about communities. There's no question.

The economy is always changing, always--as we say in English--churning, particularly in the labour market.

I would like to make a couple of points, if I might. You're quite right, Monsieur Paquette, that energy and energy prices--and that is not only oil and gas but also minerals and metals, of which of course Quebec is a major producer--are particularly strong, and other export sectors are less so. But there has been, as you put it, an across-the-board increase in exports. And that includes, I might add, commercial services, which are doing extremely well. Of course, a lot of it is Montreal and Quebec based.

So I think one has to be, as you suggest, careful, but on balance, every year things will change. Some years it will be agriculture; some years it will be automobiles. Each sector, each year, is somewhat different.

With respect to your point about declining share, one can turn that around. Of course, we economists like to--I won't use the word play with numbers--work with numbers. I'll make the case that partly, because the rest of the world, for our markets, is growing, in fact the U.S. share, looked at that way, is declining. It's partly a reflection of the relative growth of demand on the part of the Americans as against the relative growth on the part of China, which has been referred to by my colleagues, and India. To some extent, it's other markets demanding an increasing amount from us that results in the share going to the United States looking as if it's declining.

But in fact, our exports overall to the United States from every region of Canada are doing extremely well. To some extent, it is through the United States, as well, that our exports, as well as our imports, are very strong.

The other point I'd make finally, if I might, Mr. Chairman, is the point Monsieur Paquette has made with respect to profits, particularly in Quebec. But this is true for many established firms in Canada. Because of the rise of the Canadian dollar, this will affect particularly those exporters who are finding their exports priced in U.S. dollars, which of course means that in Canadian dollars their profits are less.

But this is not necessarily a disaster in the long term. One has to take a fairly long-term view. This is not to be complacent. This is to say that one has to look at the entire picture before rushing to a judgment as to whether things are good or bad. So let's just say they're pretty good.