International Trade Committee on April 24th, 2007

[The Chair, Conservative, Leon Benoit]

Good morning, everybody.

Pursuant to Standing Order 108(2), the House of Commons Standing Committee on International Trade is undertaking a study examining the opportunities and challenges Canadian businesses and our trading partners face with respect to the Canada-U.S. trading relationship.

The committee is specifically interested in identifying and removing the obstacles that stand in the way of stronger economic ties with the United States, to answer the question, what can the Government of Canada do to help Canadian businesses take better advantage of trade, investment, and other business opportunities?

Today we have as witnesses, first of all, Mr. Anthony Burger, chief economist, from the office of the chief economist at DFAIT. We have William Crosbie, director general, North America bureau, DFAIT; we have Paul Robertson, director general, North America trade policy, DFAIT; and we have Mr. Lee Gill, director of industrial research at Industry Canada.

I'd like to thank you all very much, gentlemen, for being here. You have been in discussion with the clerk. You know you have about an eight-minute presentation from each department, and then we'll open it up to questions. We have only an hour and a quarter with you this morning. After that, the committee will be finalizing, hopefully, our report and as well dealing with the issue of committee travel.

Gentlemen, perhaps you could go ahead. We're looking forward to your presentations and then the answers to the questions. You have told me you have some other people with you who would be willing to answer questions, if the need arises, but please proceed.

Mr. Crosbie.

[William Crosbie, Director General, North America Bureau, Department of Foreign Affairs and International Trade]

Thank you, Mr. Chair.

We have left the full copy of our opening remarks with the clerk, but in order to reduce the time we have abbreviated our oral comments. I will start off and then I will turn to my colleagues to continue the opening statement. We're aiming to reach about nine minutes for our opening statement.

Good morning. My name is Bill Crosbie. I'm the director general of the North America bureau at Foreign Affairs and International Trade Canada.

While my colleagues Tony Burger and Paul Robertson will provide you a more in-depth picture of Canada's economic relationship with our North American partners, I've been asked to begin this presentation with a broad outline of the political facets of our relationship with the United States and Mexico.

The United States is more than just our number one trading partner; it is overwhelmingly our most important source of both investment and new technologies. It is also our most important bilateral relationship, built on a foundation of common values.

Ours is a rules- and institutions-based political partnership, solidified by more than 300 treaties and agreements which govern our relationship with the United States in all political and economic areas, such as border management and ecological cooperation. Within this framework, defence and security of North America remains the highest priority for both our countries.

Of course, the relationship with our North American partners is not without its challenges. The first is demographic in nature. The U.S. population is slowly shifting towards the south and southwest, where Canada is less “top of the mind” and less influential. At the same time, the Hispanic population, which historically has had little contact with Canada, is a growing force in U.S. politics.

Secondly, in the post-9/11 environment, “security trumps trade” is not mere rhetoric. The U.S. has enacted or adopted numerous measures with the stated intent of enhancing homeland security, such as the Bioterrorism Act and the western hemisphere travel initiative. Regardless of whether these measures achieve their security objectives, they have the potential to impede the flow of goods and legitimate travellers across the Canada-U.S. border or to make companies doing cross-border business less competitive.

Finally, our relationship with the United States is increasingly being viewed within a trilateral context by American political leaders in the Administration and Congress. In all senses—politically, economically, socially—Mexico and the U.S. Hispanic population, dominated by Mexican-Americans, have changed the way Americans view their own society. These trends have also affected how the U.S. views its relationship with its two neighbouring governments. U.S. border policy is the most notable example.

Let me be clear: the evolution of Mexico as a political, economic, and security partner for Canada and for the United States is something we welcome. It is to our great benefit that our relationship with Mexico has flourished, particularly since the signing of the NAFTA. Moreover, a vibrant and more prosperous Mexico adds to the unique strengths of the North American economy.

At the same time, we don't wish to lose what has been unique about the Canada-U.S. relationship, notably along our shared border. The U.S. is our most important ally and partner, and this will never change. The government's new framework for advancing Canada's international commercial engagement, the global commerce strategy, emphasizes the primary importance of this market to stimulating Canadian productivity, growth, and prosperity.

The strategy, which represents the international component of the government's economic plan, Advantage Canada, sets out an approach to sustain our North American advantage by reinforcing our strong network and mission presence, by increasing our emphasis on attracting investment in key knowledge-intensive sectors, and by building more robust innovation links to fuel Canadian research excellence. The global commerce strategy recognizes that our competitive position in the U.S. is not only an enormous benefit to our firms, but it also enhances our attractiveness as a location for foreign direct investment and ensures that regional and global value chains continue to run through Canada.

But we need to be more proactive in responding to political and economic trends in the U.S., in order to more fully benefit from them, maintain our traditional access, and continue to enhance our competitiveness and prosperity.

Our missions in North America will continue to act as our first line of defence in helping identify and develop strategies to prevent and/or remove impediments when they arise. In the U.S., our missions' staff play a vital role in working with provinces, other federal departments, Canadian firms and industry associations to advocate on their behalf with the relevant U.S. actors. We also welcome input from members of Parliament and invite you to visit and work with our missions in North America.

This political context helps inform us on how to best engage the United States and Mexico with respect to our economic interests.

To discuss those economic elements, I will now turn to my colleague Tony Burger.

[Anthony Burger, Chief Economist, Office of the Chief Economist, Department of Foreign Affairs and International Trade]

Thank you, Bill.

Thank you, Mr. Chairman.

The Committee has asked what has been the effect of Canada-North American economic integration on the Canadian economy, industrial composition and the welfare and lives of Canadians.

Our view is that that impact has been positive in terms of growth and employment, but our success today needs to be complemented by new strategies to address today's global challenges. To do this, all three NAFTA countries will need to work together to ensure that we have a common North American platform that can compete on a world stage, and that we can ensure, therefore, that our goods and services are competitive, not just in the U.S. but in global value chains that cross the Atlantic and the Pacific.

NAFTA and the Canada-U.S. FTA facilitated a restructuring of our economy and ensured that our secondary manufacturing production became more specialized, that production runs became longer and that output increased, with incomes rising. But today we have accomplished what NAFTA was set out to do, and the new question is, how do we optimize our position on the North American platform on the world stage?

China has changed dramatically in the 90s and in this decade, and will continue to change dramatically. India is changing also. So are Brazil, Russia, South Africa and many other countries that form part of global supply chains. Another place of change is the European Union, which is busily integrating the common economic space of a 25-member community.

Canadian exports to the U.S. have risen by 238% since 1989, while merchandise exports to Mexico are up by 304% since 1994, when NAFTA came into effect. The manufacturing sector has benefited from this, with its share of GDP rising from 15.7% in 1991 to 19.0% in 2000. We know that it has since fallen with the restructuring that the global environment has generated. Manufacturing now accounts for 15.9% of Canadian GDP, but even though that's a fall from 19% in 2000, it's still better than it was in 1991. We notice that over the same period there has been a significant reduction in the share of manufacturing in the U.S. economy. So if you're concerned about the future of manufacturing in Canada, it has done a lot better than that of our partner to the south. So in 2006, 82% of our manufacturing exports went to the United States. Another indicator, unemployment, stood at 7.5% in 1989. It went up to 11.4% in 1993, but declined to 6.3% in 2006. Over the period since 1989, we've had a significant decline in unemployment. We have a stronger manufacturing sector than we had at the beginning of the period, and the GDP has grown by 56% in real terms since 1989.

Some other statistics show that we have also fared well from a structural perspective. The number of head office jobs in Canada was 158,000 in 1999. There were 175,000 in 2005, the latest year for which we have figures. In 2006, there were 14 Canadian companies in the Fortune 500, compared with only five in 1995. GDP per capita has risen from $28,000 in constant 2000 dollars, to $36,500 today. Average family disposable income has risen by 7.7%, or $3,600 in constant 2000 dollars over the same period. Spending by all levels of government on health and education has risen by 129% to $96 billion.

I wouldn't be telling the whole story if I didn't admit that there has been a decline in the real income of the lowest income groups, but recent data indicate that this has turned around, and income in all income groups is now rising. It is likely that by next year the losses in income for the poorest will have risen to where they were before the adjustments the economy went through during the recession in the early nineties.

Some changes would have happened anyway, so how much of this is attributable to NAFTA? Based on studies by experts, we conclude that growth in Canadian exports to the U.S. would have been lower by about half if it were not for the two trade agreements. Productivity growth would have been one-quarter lower, and that would be 90% lower for the most heavily impacted industries.

Access to the North American market allowed Canadian manufacturers to adopt more specialized, longer production runs. The average manufacturing firm in Canada has increased in size by over one-third. Consumers have saved approximately $8 billion annually due to the lower cost of buying what they require.

I won't go into much about Advantage Canada because my colleague talked about it. I'll just say that the strategy basically has a domestic component and an international component, and the global commerce strategy is the international component. I'll now talk a little about the investment dimension of that global commerce strategy.

Foreign-controlled firms operating in Canada contribute 22% of Canadian assets, 25% of capital investment, 30% of operating revenues, 32% of R&D expenditures and 25% of merchandise exports. Thus foreign direct investment transfers leading-edge technologies, stimulates domestic competition, introduces new management techniques et provides better access to distribution channels and international markets. All in all, foreign direct investment enables higher productivity and living standards for Canadians.

The United States is the largest foreign investor in Canada. U.S. direct investment at the end of 2006 was $285 billion, accounting for 61.5% of the stock of total FDI in Canada. Mexico is also an increasingly important investment partner. At year end, Mexican FDI to Canada reached $204 million, an increase of 26% since 1995.

Canada is also investing in Mexico, where our investment reached a stock of $3.1 billion in 2004 compared to a much lower level in 1995. It grew by 231% over that period.

North America shares a vision for an enabling environment that mobilizes respective science, innovation and technology and business strengths. Canada and the United States already enjoy the world's largest bilateral science, innovation, technology and commercial relationship. There are strong research and development linkages between government entities, academia and research institutes.

Another part of the global commerce strategy entails promoting the international engagement of Canadian firms to access to technology, talent, investment, and markets. The Canada-California strategic innovation partnership, an S and T partnership, demonstrates the value of private-public partnerships in high-speed broadband links, cancer stem cell and infectious disease research, sustainable energy, and nanotechnology. In all these areas, cooperation with the United States helps us build a platform for international competitiveness.

Another aspect of our support is trade policy. For a review of the salient trade policy issues facing Canada and our North American partners, I'll now turn it over to my colleague Paul Robertson.

[Paul Robertson, Director General, North America Trade Policy, Department of Foreign Affairs and International Trade]

Good morning, my name is Paul Robertson. I'm the department's director general of North American trade policy.

After 13 years of growing trilateral trade and investment, NAFTA continues to be the cornerstone of our trade investment relationship with the United States and Mexico. NAFTA has served Canada, the United States, and Mexico well. It has stimulated growth, raised standards of living, and delivered competitive prices for consumers. It is now a mature agreement that is largely implemented. In this respect, the completion of tariff liberalization in 2008 will establish virtually tariff-free trade in North America, and the agreement has proven to be of significant benefit for the trading community.

Also, throughout the years, the different NAFTA working groups have continued to pursue work plans that facilitate the free flow of goods, services, and capital, and that strengthen North American competitiveness. As shown earlier by my colleague, the benefits of that work are tangible.

The United States is our largest trading partner, and this relationship is almost completely dispute free. Canada is committed to working closely with the United States to strengthen North American competitiveness and to further improve the largest and most comprehensive trading relationship in the world. Certain trade irritants exist, and we will continue to defend Canadian interests as required. But they do not define the relationship, and both sides continue to work collaboratively to achieve results.

Our trade relations with Mexico are also strong. This is now a well-established economic relationship and we are working with Mexico to advance issues of common interest, including through the Canada-Mexico Partnership.

It is, however, important not to take all this success for granted. With the emergence of global competition by countries like China, India and Brazil, we need to work with the United States and Mexico to further increase North American competitiveness and prosperity, so that we are well positioned to compete in the new trading environment.

To this end, at the last NAFTA commission meeting in March 2006, the three ministers of trade directed officials to identify opportunities to achieve concrete, commercially relevant results that will continue to ease the flow of goods, services, and capital between our three countries.

Specifically, they initiated work that will focus on sectors and the removal of impediments to the free flow of goods, services, and capital. They mandated officials to conduct a thorough review of the operations of the NAFTA working groups and committees to see if the efficiency of these institutions could be further improved. Finally, they also asked officials to examine how our three countries might collaborate in trade agreements with other countries, and how elements of new FTAs might inform improvements to NAFTA practices, such as transparency and trade facilitation. For example, there have been incredible advances in communication technology, such as the Internet, since NAFTA was developed, and the agreement's practices could be improved by making better use of such technologies.

Overall, the North America trade environment has changed significantly during the last decade. While there have been important improvements, and NAFTA is still a crucial instrument, we must ensure that we continue to work together to meet tomorrow's challenges.

To summarize, through our efforts on advocacy and trade policy, and through the services we provide to Canadian businesses, both in Canada and with our network of missions, we are helping them succeed in an increasingly competitive global marketplace. As a result of these ongoing efforts, we will continue to work to achieve sustainable prosperity for all Canadians.

Thank you. We would now be happy to take questions from the Committee.

[The Chair, Conservative, Leon Benoit]

Thank you very much, gentlemen, for your presentations.

We'll get right to the questioning now.

From the official opposition, Mr. Bains, you have seven minutes.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Thank you very much, Chair.

I appreciate the presentations and the fact that you collaborated together. It gives us an opportunity to ask our questions, because we have limited time during this committee meeting.

There's general recognition amongst all committee members, and the vast majority of Canadians, of an appreciation of our relationship with the United States in terms of our economic ties. Especially with NAFTA, it's become very popular. Ever since it was debated earlier on in the House of Commons, it has been a contentious issue. A great deal of education on the importance and the role that NAFTA plays in developing an economic relation has taken place. As well, we have cultural and historical ties.

Post-9/11, there has been a recognition that security is a top-of-mind issue for many Canadians and Americans. So we understand the importance of those issues, and therefore the creation of the SPP came into play. But there's been harsh criticism of the security and prosperity partnership setup. That criticism hasn't necessarily come from Canada, but I've heard and seen it coming from the United States, especially now with a Democratic government.

Initially I want to hear from you if that criticism exists in the United States, and is that something that's been brought to your attention?

[William Crosbie]

Are you referring to criticism of the security and prosperity partnership in the United States?

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Yes.

[William Crosbie]

I read the media the same way as you have. I know that through its website, the United States government has attempted to address criticisms of the SPP. Similarly, the Canadian government website on the SPP attempts to address questions that have been raised. I know that on its website, the Mexican government has tried to ensure that its populace is informed of what's going in their SPP engagement.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

In fact, the reason I mention this is that it's not simply criticism amongst ourselves here in terms of some of the concerns that will be raised. But there also seems to be criticism in the United States and Mexico.

One of the criticisms we've heard consistently in all three countries is a lack of transparency and accountability, especially regarding civilian involvement and oversight. To what extent have efforts been made to include or involve civilian oversight in this process?

[William Crosbie]

Thank you.

On one point, the security and prosperity partnership is not an agreement. There is a misunderstanding among many that the governments have a legally binding agreement,or an agreement of any kind, that defines the partnership. In fact, it is a process by which governments seek to cooperate more fully on a range of issues.

With respect to each government, we have our own processes to engage the public and the stakeholders if we're talking about a change of policy, law, or regulation. Through the partnership, we are attempting to identify areas where individually we might choose to make changes that would work if they were done together. But they are subject to the usual oversight that all of our changes would have.

As I say, if it's through Parliament or a regulatory process, that's how citizens are able to be engaged in the work of the SPP.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Who are the key stakeholders or players in the SPP?

[William Crosbie]

The SPP covers a broad range of activities. Regarding energy, Natural Resources Canada has the lead. Then our energy ministers have their own processes to engage with the stakeholders who are particularly interested in energy. Similarly, if you look at some of the other areas covered by trade policy, for example, that are the subject of discussion in the SPP, the trade policy community, the stakeholders with an interest in Canada trade policy, and trade negotiations are also engaged in the department's processes.

There is not one overriding, umbrella way for engaging with stakeholders on the SPP, because the sheer variety of different issues being discussed is addressed through specific processes.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

How do you engage the general public through those specific instances? Is there an avenue for them? That's what I'm trying to get at with this line of questioning.

[William Crosbie]

In terms of how our government is organized, we have a website run by the Department of Foreign Affairs and International Trade. We have two lead departments, Public Safety and Industry Canada, for the pillars of security and prosperity. And each one of our departments has invited the public to be engaged with us on the SPP and on particular issues of interest to them, either through the website or meetings with officials. So we're certainly open and willing to talk to people about the security and prosperity partnership.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

With respect to the SPP, in your opening remarks you referred to the NAFTA being a mature agreement now, that it has reached a point of maturity, and that there is a general understanding that the security and prosperity partnership is maybe an additional phase to that in order to further enhance integration between both countries.

Do you see the SPP evolving into anything else going forward, or is it simply a short-term arrangement?

[William Crosbie]

Again, I would make a bit of a distinction between the NAFTA process, which is a legally binding process engaging the three governments, and the discussions that take place in the SPP. The intention of the SPP was not to replace the NAFTA or to replace other processes. So the SPP, in and of itself, is not the place where we would negotiate new obligations in the trade area.

My colleague Paul might want to comment a little bit on what they're doing in terms of the NAFTA and in looking at potential areas where they may be building on the commitments we've already made.

[The Chair, Conservative, Leon Benoit]

Mr. Robertson.

[Paul Robertson]

Thank you, Chair.

I guess the first point to make is that the processes aren't mutually exclusive. As a work program, the NAFTA, of course, reinforces and takes into account activities. When I said, for example, that there's a maturity in the NAFTA relationship, that's why trade ministers at the last commission meeting tasked officials basically with looking at NAFTA in the next decade and at new initiatives that could be taken in that framework.

For example, ministers have now identified their interest in looking at sectors as a whole in order to understand what type of government-initiating problems can be removed to facilitate a greater flow of goods, services, and investment. That is a sectoral approach, as opposed to a specific issue approach, and looks at the whole economic relationship and how it's working within each of the sectors. So that's a new initiative being taken.

Other elements of rejuvenation, as my colleague Tony has mentioned, include a recognition that we're looking not just for increased activity within North America, but also at using the North American platform to compete more effectively in the world. As you know, we face many challenges in terms of new economic competitiveness in Asia and Latin America and elsewhere; therefore, this is also being viewed as a new priority when we view the NAFTA work program. Things such as how we deal with third country foreign trade, or FTAs, free trade agreements, etc., are the types of initiatives now taking NAFTA into the next decade. So we're looking at what we can do to facilitate the freer flow of goods, services and investment to increase not only intra-NAFTA trade but also North American trade with the world.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Bains. Your time is more than up.

We'll now go to the Bloc Québécois, and Monsieur Cardin, for seven minutes.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chairman.

Good morning, gentlemen. It is a tremendous pleasure to have you here to discuss Canada's trade policies.

The Security and Prosperity Partnership of North America, or SPP, raises a certain number of questions. I suppose that it is an important forum for discussion, but it is not a treaty per se. To what extent are the decisions or policy directions developed there official and mandatory? I imagine that there were and still are sectors or organizations with prime responsibility for activities such as security and trade.

Has the SPP come to replace other working organizations in which the three countries are involved?

[William Crosbie]

No. The partnership process is really a complementary one. Its purpose is to engage officials so they can gain a better understanding of the commitments made by other governments in different areas.

For example, in the area of regulation, by working together, the officials from the three countries have attempted to identify areas where we might be able to reduce barriers that could impede the good flow of products or services, but have done so in ways that continue to respect our national interests and national priorities.

For example, it's a cooperative framework, where we don't agree as three governments that we're going to do something in the SPP, but look individually at whether or not we might make changes to our approach. So if you're in Health Canada, you have your own process, and if you wish to make a change to your regulations, then you will go through the process of consulting with your own stakeholders and citizens on that.

So the SPP does not replace any of those existing ways in which departments advance their mandates.

[Serge Cardin, Bloc, Sherbrooke, QC]

It's an opportunity for a number of people to get together and discuss economic development and prosperity in the context of security. Quite a few border crossings in Quebec that were previously controlled by the Royal Canadian Mounted Police have been shut down. Would these kinds of decisions be made as a result of discussions under the SPP with people responsible for security and trade? The elimination of these border crossings must in some way have diminished or weakened security at the border. Is this the kind of thing that is discussed through the SPP?

[William Crosbie]

I should point out that our department is not responsible for SPP working groups. Those questions should be put to our colleagues at the Department of Public Safety. As regards prosperity, you would need to talk to our colleagues from Industry Canada. If the Committee is interested in broadening the discussion on SPP, it could invite our colleagues from those two departments to come and explain exactly what each working group is doing.

[Serge Cardin, Bloc, Sherbrooke, QC]

Let's take another example that has more to do with trade. Canada had signed an aeronautics contract with the United States, and we have had to suspend employees because of their origin, if they were something other than Canadian or American. That is probably an important irritant in economic transactions involving the two countries.