International Trade Committee on Feb. 15th, 2007

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

That's not my question. My question is about these other countries that have a much more balanced approach to using trade as part of a series of levers and policies that actually bring most of the population up, rather than down—

[Gilles Rhéaume]

Yes, but the example you gave is that these countries have become strategic in focus. We haven't, so far. We haven't developed a strategy for trade. We haven't developed a strategy for investment. We haven't even developed a strategy for innovation, for that matter. All these components are important.

You mentioned these Nordic countries. These Nordic countries are highly productive. They have developed clear strategies on where they want to be globally competitively. They're going to be strong. They have a strong innovation agenda. They also have a strong adult learning agenda. We don't have it in Canada.

[Glen Hodgson]

But they also have a strongly competitive agenda.

Sweden's R and D and productivity, for example, have taken off since Sweden entered the European Union in 1995. Sweden has been able to maintain its very elaborate welfare state. It has high marginal tax rates. This is all factual. But they also have double the Canadian performance on productivity.

As you start to examine why, I think a lot of the answer is that Swedish industry is compelled to compete at a much higher pace within an integrated Europe. They're now facing competition from 450 million other consumers and producers within Europe. So they have the combination of targeted state investment of particular industries—and they do that—but they've also opened themselves up to international competition, which we have not.

That's the core message around creating the single Canadian market. We actually believe we can do both. We think we can have much more targeted innovation strategies. We're doing work. We've just created a new council that invites private-public sector academia to work together around innovation.

But we also believe very, very strongly that the balkanization of our national economy is holding back our ability to create sustainable wealth.

[The Chair, Conservative, Leon Benoit]

Thank you.

Oh, you still have another minute, Mr. Julian. It seems like you've gone longer. Go ahead.

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

I'm not going to filibuster. I'll just take the minute.

Getting back to my key point, then, because you have raised Sweden as an example. The context of the report seems to be in the tradition of right-wing or laissez-faire economics. But there are many aggressive examples, which are established, where productivity increases through government investment, through public policy.

Why aren't those examples cited more in your report? You're aware of them obviously. You have studied them. To my mind, that is a crucial component of moving forward. We can't continue to go down the same track that we have for 20 years. It hasn't worked. So why aren't there more of those reference points in your report?

[Gilles Rhéaume]

Actually, I wouldn't say we are taking a right-wing, laissez-faire type of thing. If you look at the report carefully, we do talk about a regulatory environment that has to be strong. We talk about government having the policies that will create the right type of environment for investments in adult learning and new machinery and equipment so that we can become more competitive.

We are far from saying it's a laissez-faire economy— far from it.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Julian. You're out of time.

Now to the Liberal Party, Mr. Temelkovski, for five minutes.

[Lui Temelkovski, Liberal, Oak Ridges—Markham, ON]

Thanks, Mr. Chair.

Thanks very much, Glen and Gilles.

You mentioned in your presentation, Glen, that global economic imbalance is evident, especially in the American market where the deficit is close to a trillion dollars or so...you mentioned $980 billion.

[Glen Hodgson]

They'll probably get to $900 billion this year.

[Lui Temelkovski, Liberal, Oak Ridges—Markham, ON]

Yes, and you also mentioned that there could be an adjustment in the near future. We know that if the Americans sneeze, we will catch a cold, especially economically.

So how do you see this happening, their balancing their books? It appears that the emerging markets are going to be surpassing American productivity and investment and capacity to pay their bills.

[Glen Hodgson]

I can make two points in response.

First, economists are very good at identifying the imbalances. We're not very good at telling you when the adjustment is going to happen. But we do know that absent a coordinated plan amongst the G-7 or OECD countries to try to work out the imbalances— which was why the G-7 was created in 1985-86—market forces will take over. One day investors in Saudi Arabia and China will wake up and say they have too much American paper in their portfolios. They're not going to buy the next round of U.S. T-bills. They're not going to keep buying U.S. dollar assets. Then markets will adapt.

That's the story of 250 years of capitalism. Markets tend to go to excess, they overshoot, and then there's adjustment. It's not pretty when it happens. The most likely thing you will see is a further sharp decline in the value of the U.S. dollar. The U.S. dollar has lost 40% of its value against the euro and other major currencies over the last four years. If one day investors woke up and decided that the U.S. dollar wasn't worth as much as they thought it was, that's how the adjustment would happen. That would probably mean a recession or a sharp slowdown in the United States.

We're deeply concerned about the adjustment in the U.S. housing market that's going on right now. We're starting to see bank failures in the United States and concern about the secondary mortgage market, where there has been way too much lending against property values that have stopped rising.

So all the little warning signs are there, but no economist is going to walk in and tell you exactly when the adjustment will happen and how severe it's going to be. But you can already see the warning signs now.

[Lui Temelkovski, Liberal, Oak Ridges—Markham, ON]

I've been in the financial industry for 20 years, so I know that predicting future forecasts from what happened in the past is like driving while you're looking in the rear-view mirror. But what can Canada do to put some sort of barrier between the two economies?

[Glen Hodgson]

That's the whole point of our report. We believe the 76 recommendations we've offered are all about building greater flexibility and resiliency into our national economy, so we have a greater capacity to withstand a shock through collapse in consumer demand in the United States, for example.

But we're on the front line when 82% of our exports are going to one market. If consumers close down the United States, we'll be affected. We're affected already. We're forecasting exports this year to grow by only 2.5%. There has been very little export demand growth for six years now, which is why domestic consumption is so important for our economy right now. But absent changes to how we align our domestic economy and make it more flexible and adaptable, we are on the front lines of any adjustment in U.S. behaviour.

[Lui Temelkovski, Liberal, Oak Ridges—Markham, ON]

What I'm reading between the lines there is diversification in many ways--not relying on our trade with the U.S. as much and increasing our trade inwards and outwards to other markets that are emerging. Am I right in the reading of that?

[Glen Hodgson]

Absolutely. That's why our advice is to become serious players in Doha. We have to find ways to keep making North American integration work better. But we also have to pursue more bilateral regional trade opportunities with other markets where there is growth potential.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Temelkovski.

Monsieur Cardin.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chairman.

Good afternoon, gentlemen.

You just referred to the Doha Round. Clearly things went a little sour in the agriculture file. I'd like to come back to farming and Quebec's hog and pork industry. As Mr. Julian said, the Free Trade Agreement with the United States has adversely affected our employees' working conditions. Prices are more or less controlled in the pork industry which means that companies like Olymel, instead of increasing productivity, have had to cut wages and ask for sacrifices of as much as 30%, in order to survive. It took a lot of votes for the proposal to carry.

What's more, companies like Monsanto, that claim they have pig patents, are going to make sure they control things and seek to impose a charge on all every hog produced. Some companies and multinationals are looking at going a lot further and a lot faster than some other businesses. As part of our negotiations, could we create a separate category for agriculture, particularly with respect to planning and competition, in order to protect each country's food sovereignty? You could specify that once this particular condition was met, the rest would follow.

[Gilles Rhéaume]

I think that would be a challenge for us. For the entire farming sector to perform adequately there is a certain reliance on exports. Only a very small part of the agricultural sector relies only on the domestic market.

If pork were to be protected, for example, what would we say the countries with which we are trying to negotiate freer trade? They may decide to open up their market to us, but if they have any stake in the pork industry, that might prove more difficult.

We mentioned in our report that future business opportunities in the farming sector will centre around value-added products and not core commodities. So we need to provide a climate in which farmers can become more innovative and we need to help them along this path.

The current word is that the production chain does not allow for this type of innovation to occur. Market vend0rs have information on consumer needs, but this information doesn't reach farmers. Were these farmers more familiar with what consumers—who are at the end of the chain—want, they could at least see if they can produce something different.

[Serge Cardin, Bloc, Sherbrooke, QC]

I understand about economic cycles, competition, creativity and innovation, but when it comes to agrifood and agriculture in general, you also need to consider environmental factors. This is one area where environmental factors must come into play. Coming back to the hog sector, instead of making it a strong and competitive industry, and therefore a highly concentrated one, mega hog houses are being developed and meat is being transported for consumption and the liquid manure is being kept and is becoming increasingly hard to spread. So there is a major environmental imbalance in the farm sector.

[Gilles Rhéaume]

In our report, we look at this issue from an environmental needs and measures standpoint. Agriculture and Agri-food Canada is bringing forward environmental stewardship programs. This information needs to be disseminated to farmers, and that is always a challenge. The fact remains that sound practices can be adopted in this field.

One thing that we didn't refer to in our presentation but which was included in the report is the opportunity that farmers now have to provide ecological services and protect natural sites located on their farms. That could be beneficial for the environment. We have to look at what type of compensation can be offered to farmers in exchange for this environmental protection. Some countries and even some levels of government in Canada are exploring this possibility, but a lot more needs to be done in this regard.

[Serge Cardin, Bloc, Sherbrooke, QC]

Generally speaking, in the short term—

[The Chair, Conservative, Leon Benoit]

Merci, monsieur Cardin. Your time is up and then some.

Mr. Lemieux, you have five minutes.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Thank you very much. I want to pursue one of your strategies for success, number four, which talks about focusing on international trade and investment strategies. You mention multinational agreements, and you're probably aware of some of the challenges we have faced. When you bring many countries together, in a sense it's a bit of a silver bullet. If you actually manage to wrestle a multinational trade agreement to the ground, it's beneficial to all parties, but there are many competing interests; every country has its own interest. Trying to negotiate it and make headway on it is very challenging.

I think there are also too many other factors. There are trade issues, but there are other factors, many of which are political, that play into it as well.

We've been studying bilateral trade possibilities here as a committee. One of the advantages is that we're of course able to target our efforts to particular countries, if there are particular countries with which we think having an agreement would be beneficial to Canada. It falls into one of your other suggestions, which is basically targeting certain markets. You mentioned China and India.

I have two questions related to looking at bilateral agreements. One of them is about import-focused bilateral agreements and from where you would see it as advantageous to Canadian industry to be able to import sub-assemblies, etc.

We were speaking to you today, and we spoke to the EDC earlier this week about integrated supply chain management. It's probably very difficult to select one country and know that it would be very good for imports and very good for exports. Each country probably has its leanings. We spoke about China today, and you said we might import a lot but not export a lot of finished product to China.

One of my questions is whether you have recommendations concerning import-focused countries we should be looking at in terms of bilateral agreements and then, on the other hand, export-focused countries with which we would put in place bilateral agreements.

[Glen Hodgson]

We didn't get into specific markets from either an import or an export side. We established the principle. Part of the challenge with freer trade, going down the road, is that it's no longer about tariffs. We pretty much have a world now where tariffs are down to rock bottom, with certain exceptions. Tariffs are low; they're no longer the barrier they were 25 years ago.

Then you start looking at non-tariff barriers, which are all about standards and regulatory process. They bring us back to the question of whether we are ready domestically for this and whether we actually understand the very subtle forms of protection that exist in other markets.

If you're thinking about imports, you're obviously looking to people who can provide things cheaper. The Chinese have no trouble at all right now exporting a lot of stuff to Canada. We have a $20 billion trade deficit with China now.

Clearly there aren't barriers from markets where you can actually procure fairly basic stuff, whether it's raw materials or basic steel products—things like that. The barriers aren't really there; they're getting into much more sophisticated forms of trade.

I would look to things such as the underlying growth potential of the export market and the degree of cultural alignment. These are the things that will determine where we want to trade.

I'll give you an example. We in Canada have tried to pursue free trade with the European Union for perhaps 25 years and have made absolutely no headway, even though we would be huge beneficiaries in terms of more imports and huge beneficiaries in terms of access to their markets.

Why have we not made progress? It's for two reasons: because we're small potatoes compared with the United States, let's say, where the Europeans would really like to trade, and because it's all about non-tariff barriers.

There isn't really an easy answer to your question. You'd have to think about what the real drivers are of freer trade bilaterally and regionally to go ahead. I'll give you Europe as an example, though. My hypothesis is that it's highly unlikely Canada will ever have a true free trade agreement with the EU unless we do it as a partner with the United States, because only then would there be the alignment of regulatory interests on both sides of the Atlantic, and only then could we make real progress on non-tariff barriers.

It's easy to identify particular markets. There was something in the newspaper this week about EFTA, the European free trade area, and how Canada is pursuing something there. EFTA is, what, two countries, four countries? It's a tiny fraction of our overall trade. Frankly, given the scarcity of human resources out there to negotiate, why bother?

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

That's where I was going with my question. Resources are limited, and although no bilateral agreement is strictly imports or strictly exports, you do evaluate the flow of product one way versus the other way. If you put in place something with China, it will probably have very limited export value to us. What sectors do you foresee being more advantageous to Canada from an export perspective?