International Trade Committee on Oct. 19th, 2006

[Michael Murphy]

Sure, I'll throw a few things out to respond to that. I think there are some important points there. I'll mention four things really quickly.

In terms of fiscal policy, tax competitiveness is hugely important. We talked about this issue earlier, in terms of skills and how you get more people into the workforce. We just did our pre-budget process with the finance committee in the last two or three weeks. This is the fourth budget period in which we have raised this issue of the hammering job we're doing on low-income Canadians--basically between $25,000 and $45,000 a year--and the clawbacks on their benefits. In effect, their marginal tax rate, as Glen said earlier, is through the roof.

So there's a potential, in terms of dealing with the skills agenda, where you're completely disincenting people from upgrading themselves and getting into the workforce, because they're just going to pay a heck of a price when it comes to tax time.

That's just one of the tax issues.

I agree with you 100% in terms of EI and the disincentives built in on labour mobility with respect to EI. We spent some time with the human resources committee on that in June. They're doing hearings on employability right now, which is an important issue in terms of getting more people into the workforce. I think our disincentives there that you raise are real and need to be addressed.

Focus the spending, I think, is another one of our themes here. You have to decide how you're going to be strategic in terms of program spending. We have two areas. One is infrastructure, and there are a lot of components of that. We've talked about transportation today, and that's one of the key ones. The other is post-secondary education, in terms of upgrading skill levels in the economy. So make those your two highest priorities.

I won't say any more about regulation and trade, because we've talked about those quite a bit today. I'll let the others have a crack at it.

[The Chair, Conservative, Leon Benoit]

Okay.

Mr. Myers, go ahead.

[Dr. Jayson Myers]

I agree with everything Mike has said, and the key message of that book is that we have to get our own house in order in North America. It's stunning how similar the issues are, looking at competitive issues not just within North America but within any developed economy. These are issues around skills, investment in skills and workforce capabilities, investment in innovation and knowledge, investment in infrastructure, investment in new technology--all of this is extremely important.

I would say the other message is we have to think about business and international business very differently. Mike and I both have lots of companies in our organization where it's really difficult to talk about trade, because that's not where their business is. I've got Canadian owner-operators, engineers, and designers who are working with Indian engineers who have manufacturing operations in China and in Canada who don't have any product, or the final product doesn't come from Canada, but is shipped into the United States and into world markets. They're virtual companies. People are operating at the same time they're designing a product, and you have designers and engineers around the world working in several different countries at the same time.

You think, what does our R and D tax system say about that? Probably it means that research is not eligible because it's international. How do you classify the benefits in Canada? You look at EDC financing or the benefits on the Canadian side. It's very difficult to know how much value is being generated in Canada, because it's part of an international business. So we have to think very differently about the nature of international business and how we support that.

One final thing. The one area on the trade policy side where we have to pay a lot more attention is in the enforcement of trade rules. Free trade is not just about opening markets, it's also about making rules. We do a really good job defining the rules of the game and we do a terrible job enforcing them, and I'll give you an example: counterfeit product and fraudulently marked product made in Canada. More automotive dies are shipped from Canada to the United States marked “Made in Canada” than are manufactured here. This sends up several red flags to the United States' trade representative, who has already put Canada on the watch list. We're a major exporter of counterfeit and fraudulently marked product into the United States. This is going to become a major problem in our trading relationship with the United States unless we effectively enforce and stop this product coming into Canada.

In 2004, U.S. Customs made 36,000 seizures of counterfeit product coming into the United States; Canada Border Services Agency made six. Even if you scale that up by a factor of ten, you don't come close to 36,000. We don't have the ability to enforce some of these trade rules.

We have a very cumbersome procedure for companies facing unfairly subsidized product coming into the country. We make it very difficult for Canadian companies to bring those cases forward. When they are brought forward to the Canadian International Trade Tribunal, they're often turned down by government. I'm talking about the case of bicycles and barbecues, where, frankly, the sector was sold down the pipe because someone made a decision that in the best knowledge of the officials, we don't produce bicycles and barbecues in Canada. Then we will acknowledge China as a free market economy, which simply puts the onus on Canadian companies to prove there's subsidization in China. In every other product area it's up to the Chinese to show that subsidies are not being applied. That put Canadian manufacturers at a tremendous disadvantage. They were unable to make the case.

On the trade policy side, we're not paying sufficient attention to the fact that everybody doesn't necessarily play by the rules of the game around the world. We have to make sure we're not just protecting Canadian industry, but that everybody is playing the same game.

I'm sorry, Mr. Chair, for going on.

One other issue that always causes a problem is when Canadian companies doing business around the world are frankly used as a pawn for foreign policy. I'll give you a good example. The Canadian government would like to impose export controls on products being exported to Belarus for political reasons--maybe some very good political reasons. The diplomats aren't prepared to do anything. We still recognize Belarus politically, but we're going to stop exports.

I have a member in Quebec who exports agricultural seeds and equipment to Belarus. Their business will be shut down as a result of this. In cases of small countries, why is it that this government penalizes Canadian exporters to make a political point on the foreign policy side that it isn't willing to make on the diplomatic side? Why use Canadian exporters as the pawn for something we're trying to achieve diplomatically?

At the end of the day, we're talking about getting our domestic house in order, and there are issues like that. We have to look at what we are trying to achieve in our foreign policy and our trade policy, and to make sure these are integrated together much better.

[The Chair, Conservative, Leon Benoit]

Okay.

Monsieur Cardin.

I apologize by the way. You were on the list and I missed you.

Go ahead, please.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chairman.

Among the questions prepared by our researchers, one is of special interest to me and I will use it as an introduction to my question.

How can we get better access to those emerging markets -- China, India, Brazil -- and to the well-established markets of the European Union -- Japan, South Korea -- in order to stimulate our economic growth?

At the end of the day, when one talks about international trade, globalisation, liberalization of markets, it's all aimed at reaching a certain level of economic growth, let's be frank. Furthermore, economic growth is not automatically equal to consumption. Everyone wants to globalize in the other countries but the other countries want to do it here and, in the end, this leads to a very aggressive competition all over the world. We could compare the situation to an skating rink where, as Mr. Myers just said, the rules of the game are not the same for everybody and, even when they are, they are not necessarily respected by everyone. So, if we have international organizations to ensure some order in the world of trade, perhaps we should also have organizations that would start by establishing some rules and then make sure that they are enforced.

I come back to this because, last fall, I had to do a tour of several regions of Quebec during a an examination of the consequences of globalisation and of some weakened companies. Very quickly, we realized that people were talking about some rules that weren't the same for everybody. When one looks at the big picture, one sees immediately that there are enormous differences in the way labour is treated in various regions. There are also major differences relating to the management of raw materials and of the quantities available in the various sectors, as well as about protecting the environment.

It's obvious that the rules are not the same for everyone. When one begins to mass produce, one cannot always be a major player, especially because of labour costs.

In today's economy, we all know that raw materials are more and more valuable but what is also more and more valuable is added value or what I would call intangible value. The other day, I was thinking about the production of my eyeglasses. Look at the cost of the raw materials. Today, a pair of glasses will cost you about 700 $ but what do they sell you for that? They sell you style, which is intangible, as well as some added value and, perhaps, the performance of the lenses. So, more and more, value is not necessarily related to raw materials but more to innovation and creation. Of course, in manufacturing, you also have to add technological innovation.

It's because of all those components that competition is now at the world level. As long as our objective will be to ensure our economic growth... one can philosophize and make all sorts of technical points but we all know very well that, in the end, within this world market, if we can prosper in some corners of this planet and continue to create wealth and produce economic growth, it's because there are disparities somewhere and because some do not get the benefits of that growth and, instead, contribute to the growth of others. In fact, there's no economic fairness so that some can continue to grow.

A while ago, Mr. Myers talked about government support to businesses for, among other things, increasing their exports. As far as insurance for accounts receivable is concerned, for foreign customers, EDC provides capital protection. So, people feel safe. If I wanted to sell to foreign countries, I believe that I would know that the government can help me and that there is insurance.

Let me give you a very concrete example, Mr. Chairman, which demonstrates that, sometimes, policies developed to help businesses do not always reach their objectives. As an MP, I get life insurance from the House of Commons. As an MP, let's say that I want to fight organized crime and that a price is put on my head tomorrow morning in all the newspapers and that the House of Commons decides to cancel my life insurance.

EDC does the same thing. How can a Canadian business selling abroad have confidence in government programs when EDC can act in this manner?

I won't name names but I know a Canadian company that had a very substantial account to receive from a US company. When EDC realized that this company risked bankruptcy, it cancelled its insurance. We try to give tools to businesses to protect them and to help them succeed the on foreign markets -- and they pay their insurance premiums -- but, from one day to the next, the insurance policy is canceled and they lose huge amounts of money.

In the end, Mr. Chairman, it's not very easy to find our way in everything I have just said and to develop consistent and integrated policies in all those fields, including government participation.

I have referred often to Mr. Meyers who talked about economists, professionals and great economic thinkers who do lots of studies, produce reports and create theoretical models but, very often, there's no action. This makes me think of a sex adviser who would still be a virgin: he can talk a lot about sex but he doesn't really know what it is and doesn't get any satisfaction from it. I realize that the comparison may not be totally fair but, in the end, it's always action that is more important. The skating rink is big and it's up to us to decide if we want to play rough in the corners or just keep playing in the center where it's easier and where we can continue to invest in sectors where there are bilateral or multilateral agreements.

I believe that this trade policy should really be improved and integrated at all levels for us to make any progress. More and more, as I said, we have to take account of the knowledge economy and, up to a point, of the virtual economy because lots of things are intangible. So, it's up to us to act and to make choices for the consumption of our goods and services.

[The Chair, Conservative, Leon Benoit]

The food has arrived. I will look for responses to the comments from Monsieur Cardin. I have a question and then Monsieur André has a question or comment.

All right. Let's just take a couple of minutes to get the food and come back, and then we can have responses after that to Monsieur Cardin's comment. Thanks.

I'll suspend the meeting for about two or three minutes.

[The Chair, Conservative, Leon Benoit]

We will reconvene.

We'll start with the responses to Monsieur Cardin's comments.

Mr. Myers.

[Dr. Jayson Myers]

I think, Monsieur Cardin, you've pointed out the advantages of looking beyond high-level trade negotiations to find out how to support the actual activities of businesses in international markets. You are right to underscore the importance of EDC, CCC, and CIDA in this regard.

Mike and I both experience situations like, “Oh, gee, we're going to do a new round of trade negotiations with whatever country”, or “We're going to take a look at the WTO, so can you bring a group of your members together so we can talk about this?” And we go out and ask how many members are interested in talking about it. The problem is, it's really hard to get anybody interested in these broad policy issues.

On the other hand, if we were to announce a meeting about the EDC's adoption of an innovative new line of financing that would address some of the issues facing businesspeople in China, there would be no problem at all in getting companies to attend.

Companies deal with real business issues. That's why I think looking at what EDC, CCC, or CIDA does is extremely important. We must continually make sure that their services back up the needs of Canadian business.

A couple of years ago, we were getting ready for another ED Act review. This was ten years ago, when nobody looked at what the needs of Canadian business would be over the next ten years, and whether EDC was prepared to meet those needs. We spent a lot of time kind of looking backwards at previous problems.

We need to make sure that the activities of agencies like EDC, CCC, and CIDA reflect the changing needs of Canadian businesses operating internationally.

Monsieur Cardin started off by talking about regulatory differences around the world. That is a problem—the various labour and environmental standards that exist throughout the world.

It is important to have an integrated approach between the activities of CIDA and our policies on business development or trade. We have a development agency that should be looking at how to assist countries around the world in improving their environmental and labour standards, while making sure that Canadian business plays an active role in that process.

I'll give you an example of something I think worked really well. We come out with some really great ideas. After the Kyoto earthquake, Canada was one of the first to offer aid, bringing in prefabricated houses. This is one reason our prefabricated housing manufacturers do so well in exporting to Japan today.

In the tsunami a couple of years ago, the Australians were looking at doing something to help in Indonesia. They said, “Let's learn from the Canadians, but let's do it better. What can we do as a government that's really going to be helpful to Australian industry?” So the Australian Ministry of Industry, Science, and Resources, together with AusAID and the manufacturers' and homebuilders' associations, got together and said, “We're going to set up a contest to build a $100-dollar home, and it's going to meet these recommendations—building standards, Internet connections, electrical connections, and so forth”. They not only did it within six months, but they got the cost of the home down to $50.

Now the Australian industry has a modular home with new building materials that they can export around the world. In getting their act together, they looked at the problem, asked themselves how they could work together to solve it, and aligned their domestic, financing, and development programs.

We always seem to be caught in discussions at a very abstract level. Then, when it comes to actually trying to get together to do something, we all throw up our hands and nothing seems to be done.

I think we have a lot to learn from other countries, such as Australia, who, frankly, learned from us a long time ago but were able to actually carry things out.

[The Chair, Conservative, Leon Benoit]

We only have ten minutes left and we have to end on time. Let us just have short responses to Monsieur Cardin's comments. Then I have a question, and then we'll go to Monsieur André, and that should be the end.

Mr. Tomlin, go ahead.

[Ben Tomlin]

I'll be very quick with this, but there are two specific points I want to touch on that you brought up.

In this whole issue with promoting growth and trade at home and having trade promotion, EDC is important, but there's also something we can do here to get companies to help themselves. We have serious barriers right now to the growth of small and medium-sized enterprises that need to be addressed, such as tax hikes. As you know, once a firm hits $300,000, they jump up to a brand new tax level, which really creates a disincentive for firms to grow. Obviously, strong, homegrown Canadian firms are important for Canada's trade and economy overall. That issue of the difference in the tax system for small and medium-sized enterprises has been addressed and it has changed, but I think there's more room for improvement.

The other thing I want to talk about is another one you brought up: the fact that Canada is a big producer of value-added goods. There's another issue we need to address here, which is that we need to start discussions for a common external tariff system with the U.S. Right now we have a rules-of-origin process whereby when we bring in a lot of intermediate inputs to create a final product, the product goes through a lot of processes if we want to ship it over to the U.S.

If we could get a common external tariff system, we could eliminate the rules-of-origin law. That would really help to facilitate trade.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Tomlin.

Mr. Murphy, do you have some response to that?

[Michael Murphy]

This is a very quick comment on EDC, in particular, Mr. Chair, just because, as broad a base as our membership has, we also have EDC as a member. We get to interact with them quite a bit.

Other countries have similar agencies, and you're always trying to get a sense of how you're doing in that field compared with others. I'm no expert on that, but what I do have a sense of is how much EDC seems interested in outreach to our other members. That's a good thing, and we help facilitate it where we can. I think they do a pretty good job of being plugged into the needs of businesses, and I just wanted to mention that.

On the globalization issues Monsieur Cardin raised—and there are a number of them—the interesting thing is the issue of how we get our broad policy suite together that deals with trade and all these other issues we have domestically. That's the central question for all of us. We try to make a contribution in that regard, as far as dealing with parliamentarians and with government more broadly on a wide variety of issues is concerned, because they all, in effect, come together at the end of the day. There is no such thing as having a discussion on one of these without having it impacting the others.

I don't have anything more specific to add than what I said earlier, in terms of where I think the priority areas should be, both from a trade and a domestic policy standpoint, but they certainly have to be looked at together, which I think was one of the points that was being made.

[The Chair, Conservative, Leon Benoit]

Okay. Monsieur André, I guess, doesn't have a question. I have a short comment and question. Then, if you have any short wrap-up comments, gentlemen, we would certainly allow for them.

When the free trade agreement was signed, and then NAFTA, there was a lot of concern about textiles, about the furniture industry, and about how the wine industry was going to be devastated. It's interesting that the wine industry never seemed to miss a beat; it seemed nothing but up, totally against all forecasts. The furniture industry, you were saying today, Mr. Myers, did suffer some very severe difficulties, but now it's many times larger than it ever was before. The textile industry probably—at least to my knowledge—hasn't really done well.

You said we have about a $20 billion trade deficit with China now. I'm wondering if that is necessarily a long-term thing, or whether it may be a short-term thing. As the Chinese economy develops, people become wealthier. They already want top-end goods—and possibly services, I'm not sure. I'm wondering whether that deficit could be a temporary thing and, if Canada is well-positioned to take advantage of this new market that's developing in China, whether it might help our trade surplus with China. Do you have any comments on that?

Yes, Mr. Myers.

[Dr. Jayson Myers]

Maybe I could start.

Furniture grew and has been very successful because it allowed furniture manufacturers to specialize. It allowed them to focus on better design, better engineering, better sales, better distribution systems, because they were operating in a larger market. This industry is facing some pretty big problems currently, largely because of the impact of the dollar, but I didn't know until very recently that Canadian furniture designers are second only to the Italians right now in international sales. Here's a totally new industry that has been generated around this, and it's a good example of where services and manufacturing work together. So you're exactly right.

China manufactures something like 70% of the world's air conditioners. We have a company in our membership that is manufacturing air conditioners for China. An economist would tell you that's nonsense, but, you know, economists tell you a lot of things.

One of the basic things you learn in microeconomics is that firms will enter a market until profits are driven to zero, or down to the return on capital. For any business, this is exactly the problem you want to avoid. In today's world, the global economy is a world of commoditization, unless you're very specialized, unless you're very fast, unless you're very focused on customers and customer service. So that's where we're going to excel, in that area. That's what the furniture guys did fifteen years ago, and that's what the textile companies that are doing well did.

The textile industry is not doing very well right now because we've eliminated the import quotas. Some companies are doing well. We could make that industry a lot more successful if we, for instance, continued to offer duty rebates on textiles coming into the country. For many companies, that's a very important issue, and it seems we're not doing anything in that area. We could do a lot more to make the textile industry, and the clothing industry, a lot more competitive in the country.

Again, going back to this issue about China, we can succeed but only to the extent that we are specialized, fast, and customized. The reason these guys are doing so well in the Chinese market is because they're not trying to compete head to head with China on the types of air conditioners the Chinese are manufacturing. They had a whole new area of Chinese customers and asked themselves, “What do they really need?” Well, they don't need big residential air conditioners because they don't fit in Chinese apartment buildings and they don't work because of brownouts, but what they do need is a small air conditioning system with a battery cell that allows the air conditioner to work even with brownouts.

They can't keep up with demand in the Shanghai market. They have a base in Calgary. They're expanding their operations both in Canada and in China. It's a good example of companies--and there are many Canadian companies doing this--that are growing in the Chinese market.

That's all I wanted to say.

[The Chair, Conservative, Leon Benoit]

We have about two minutes left, so I'm going to have to go to one minute for comments on my questions or very short closing comments from the other two gentlemen. Thank you.

Mr. Tomlin.

[Ben Tomlin]

I don't really have any comments, other than to say, on your comment about the wine industry, much of the success of the wine industry has to do with the foibles of the EU and getting the appellation system set up. Canada was able to make a profit on that, but that's all I have to say.

[The Chair, Conservative, Leon Benoit]

Okay.

Mr. Murphy, a final comment.

[Michael Murphy]

I would very briefly add that in terms of China and India, quite frankly, in thinking about the significant challenges there for us--and there are many--when we were doing our work on it, we ended up spending as much time thinking about what needed to be done here in Canada as well as at the other end of the equation, whether it's intellectual property or whether it's infrastructure. So you never get away from those things in terms of the importance.

I'll leave it at that.

[The Chair, Conservative, Leon Benoit]

Okay. Thank you, Mr. Myers, Mr. Murphy, Mr. Tomlin, and Mr. Hodgson, for coming today. It was a very interesting meeting and very much appreciated. We will take this and work with it. I'm looking forward to the study that will come and the input you've had into where that will go.

Thank you all very much. The meeting is adjourned.