International Trade Committee on March 10th, 2008

[The Chair, Conservative, Lee Richardson]

We are prepared to begin the nineteenth meeting for this session of the Standing Committee on International Trade.

We are going to open our discussion today with the free trade agreement between Canada and the states of the European Free Trade Association--that's Iceland, Liechtenstein, Norway, and Switzerland. We have basic parameters for that discussion, and to begin that investigation, we're asking the department to provide some background today on that agreement.

Let me say we're going to reserve some time at the end of the meeting for committee business, so I'd like to wrap this up no later than 5:15, if it goes that long.

We'll begin, and first of all I'm going to introduce our witnesses today. We have the director general of bilateral and regional trade policy, David Plunkett. David will be opening with his comments in just a moment. We have Aaron Fowler, who is the deputy director of bilateral market access; and Ton Zuijdwijk, general counsel, trade law bureau. Also, we have Frédéric Seppey from the Department of Agriculture and Agri-Food. He is the executive director, strategic trade policy.

The process I think we've agreed on is that Mr. Plunkett will begin with an opening statement and then we'll open it to questions by the members of the committee. The questions could be addressed to any of our witnesses, or Mr. Plunkett, you might direct traffic there by passing them on, if you care to do that.

I'll let you begin, Mr. Plunkett.

[David Plunkett, Director General, Bilateral and Regional Trade Policy, Department of Foreign Affairs and International Trade]

Mr. Chairman and Honourable Members of the Committee, thank you very much for allowing me the opportunity to provide you with an overview of our free trade agreement with the member states of the European Free Trade Association — Iceland, Liechtenstein, Norway and Switzerland.

On January 26, 2008, Minister Emerson signed Canada's first free trade agreement in over six years, and the first such agreement with European countries. The Canada-EFTA free trade agreement, which I'll hereafter refer to as EFTA or the CEFTA, is also the first treaty to be tabled in Parliament for 21 sitting days under the new treaties in Parliament process. The government will be able to introduce implementing legislation once these 21 sitting days have elapsed. The intention is to implement the agreement by January 1, 2009.

Canadian exporters and producers are expected to benefit considerably through the reduction and elimination of tariffs under CEFTA. Specific benefits include the elimination of duties on all non-agricultural goods, the elimination or reduction of tariffs on selected agricultural products, the elimination of the EFTA countries' agricultural export subsidies for products covered by the free trade agreement, and a level playing field with the European Union exporters in EFTA markets with respect to tariffs on a significant number of agrifood products. These are set out in annex G.

Iceland, Liechtenstein, Norway, and Switzerland are sophisticated and wealthy economies driven by technological innovation. Together, they offer huge market potential for Canadian firms. In fact, our economic links to these four countries are already well entrenched. CEFTA will build on this success. It will provide Canadian business and investors with access to some of the wealthiest and most sophisticated economies in the world, as well as a platform to tap into European value change.

The free trade agreement with the European Free Trade Association (EFTA) is the outcome of lengthy negotiations that proceeded in tandem with extensive stakeholder consultations, and thus delivers benefits reflective of the interests of Canadians. Notably, several Canadian agriculture exports will enter EFTA markets duty free while others will receive a margin of preference, with immediate benefits of 5 million dollars in annual duty savings on Canadian agricultural exports. Furthermore, the free-trade agreement provides for the immediate elimination of duties on all non-agricultural goods, the only exception being Canadian ship tariffs.

The CEFTA will give Canada advantages in EFTA markets ahead of the United States and will put us on an equal footing with countries that already have free trade agreements with the EFTA states, including the European Union, Mexico, Chile, and Korea. The EFTA states are already a significant economic partner and include some of the wealthiest and most sophisticated markets in the world, ranking among countries with the highest GDP per capita in the world.

Taken as one, the EFTA countries are the world's fourteenth largest merchandise trader and were Canada's fifth-largest merchandise export destination in 2007. They're closely integrated into EU markets through their membership in the European Economic Area; thus CEFTA will allow Canadian companies to expand commercial ties both with the EFTA countries themselves and with the European Union more broadly.

Two-way non-agricultural merchandise trade in 2007 was valued at $12.6 billion, with Canadian non-agricultural exports at $5.1 billion. Canada exported agrifood products worth more than $101 million to EFTA countries, while importing approximately $121 million. In addition, two-way investment stocks reached $24 billion in 2006.

Norway saw the second largest growth globally in Canadian exports last year in dollar terms. Also in 2007, Canadian merchandise exports to Switzerland grew by 35.6%. In fact, Canada exported more to the EFTA countries than to the so-called South America 10—which is Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay, and Venezuela—combined. The implementation of CEFTA will build significantly on these already impressive numbers.

Negotiations began in 1998. Canadian negotiators consulted extensively with both industry and provincial and territorial stakeholders to ensure that their concerns and interests were fully understood and taken into consideration during the negotiations. This initiative was supported by a broad cross-section of Canadian stakeholders.

In particular, government officials consulted extensively with Canadian marine industry stakeholders throughout the negotiations and explored with industry representatives how shipbuilding sensitivities could best be addressed in the negotiations.

CEFTA is a first-generation agreement that is primarily focused on the liberalization of trade in goods: non-agricultural goods and various agricultural products. Its coverage could be expanded later to other areas, including services and investment.

It consists of four linked agreements: a main free trade agreement and three bilateral agreements on agriculture signed with Norway, Iceland, and Switzerland respectively. Switzerland and Liechtenstein have a customs union, and therefore the agreement with Switzerland covers both. These four agreements together operate to establish a free trade area.

In the preamble, parties commit to sustainable development, the mutual supportiveness of trade and the environment, and respect for labour rights. And they reaffirm their commitment to existing international obligations such as the WTO, the Universal Declaration of Human Rights, and the ILO Fundamental Principles and Rights at Work.

Other important provisions, such as regular safeguards, anti-dumping, countervail, and so on, continue to be addressed under the WTO.

Our cultural exemption is maintained under this agreement.

Several agricultural exports will enter EFTA duty free, while others will receive a margin of preference. Exports of processed agricultural products from Canada covered by the agreement will now face the same tariffs as those benefiting the European Union.

As I've said, it's estimated that the immediate benefits accruing from the tariff reductions will result in over $5 million in annual duty savings on Canadian agricultural exports. The FTA will also create new market opportunities for Canadian products not yet being exported to these countries.

I should note that Canadian supply-managed programs are maintained under this EFTA and were exempted. Mr. Seppey could respond to any detailed questions on agriculture, as the committee wishes.

With respect to non-agricultural products, CEFTA provides for the immediate elimination of duties on almost all non-agricultural goods, the only exception being Canadian ship tariffs.

Canadian business will also benefit from more competitively priced production inputs resulting from the elimination of Canadian tariffs.

While the benefits of tariff reduction under CEFTA will likely be less evident on the industrial side, given that the average tariffs are already quite low, there will be new opportunities arising from this agreement for Canadian exporters in a number of industrial sectors. For example, for Canadian exports to Iceland, which currently face relatively high tariff rates, benefits are expected in the areas of prefabricated buildings, cathode ray tubes, steel structures, aluminum structures, and doors and windows.

For Canadian exports to Switzerland, export products that currently face relatively high tariffs include cosmetics, aluminum bars, tufted carpets, and some apparel items.

It's also notable that 39% of all non-agricultural tariff lines in the Swiss customs union have tariff rates of 2% or less. While not a significant financial burden, these numerous small tariffs impose an administrative burden on Canadian exporters that will be eliminated under the FTA.

For exports to Norway, apparel is the only dutiable industrial sector. However, Canadian firms also have the capacity to export a number of non-agricultural products that would face a tariff in Norway, such as fish fats and oils for use in animal feed.

Let me turn to ships, because I know there have been some concerns raised on this particular file. In response to the concerns expressed by Canada's shipbuilding industry, the CEFTA includes the following ship-specific provisions.

First, there will be a 15-year phase-out for Canada's most sensitive shipbuilding products, which is, I would note, the longest phase-out Canada has ever negotiated in an FTA. Second, there will be a 10-year phase-out on top of that for other sensitive shipbuilding products. Third, there will be a bridge period of three years, as part of both these phase-out periods, during which tariffs will be maintained at the MFN level. Finally, there will be special provisions on vessels repaired and altered in EFTA countries such that tariffs will apply upon their re-entry into Canada in accordance with the tariff phase-out schedule.

The agreement also includes rules of origin for ships that were renegotiated in Canada's favour. And there is no obligation to modify the government's buy-Canada procurement policy for ships.

Some stakeholders and others have claimed that Norway's shipbuilding industry benefits from direct government support. This is no longer the case. Norway advised the WTO that as of March 2005, they no longer provide such subsidies, and we are not aware of any evidence to the contrary.

In addition, Canadian officials worked throughout the negotiations to ensure that to the greatest extent possible, stakeholder interests and concerns were taken into consideration in developing Canadian negotiating positions. We obviously will continue to monitor the subsidy situation in Norway.

The free trade agreement establishes a joint committee, consisting of representatives of Canada and the EFTA states, and a subcommittee on rules of origin and trade in goods. The joint committee may establish additional subcommittees and working groups.

The mandate of the joint committee includes the supervision of the implementation of the free trade agreement, overseeing the further elaboration of the agreement and the supervision of the work of all subcommittees and working groups established under the agreement. The joint committee may also serve as a forum to try to resolve disputes before the dispute settlement mechanisms of Chapter VIII are employed.

Finally, the dispute settlement chapter applies to all provisions of the FTA except those that have been explicitly excluded. It has been incorporated and made part of the bilateral agreements on agriculture. This means that the bilateral agreements are equally subject to the binding dispute settlement. The dispute settlement chapter follows the usual sequence of consultations between the parties that have a disagreement; the establishment of an arbitral tribunal to adjudicate any dispute that was not resolved through consultations; and proceedings before the arbitral tribunal, resulting in a report by the tribunal containing conclusions regarding the consistency or inconsistency of a proposed or actual measure with the FTA.

Mr. Chairman, I will end my comments here. Thank you for allowing us to provide a brief overview of the CEFTA. I welcome questions from you or honourable members of this committee. Either I or my colleagues will do our best to answer the questions that are posed.

Thank you.

[The Chair, Conservative, Lee Richardson]

Thank you, Mr. Plunkett.

We'll begin this first round of questioning with seven minutes each.

Mr. Bains, you may begin.

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

Thank you very much, Mr. Chair.

I'd like to thank the department officials for coming before us here in committee and providing us with their opening remarks. Again, I thank you for your cooperation in the past. You've been very accessible when we've had questions and you've helped us to understand the agreement in a fair amount of detail. We appreciate that very much.

In the past, we have talked about this in committee and in private, and this particular debate around EFTA has been going on for quite some time, prior to my coming to the House of Commons in 2004.

My first question has to do with--and you mentioned in your presentation--the fact that this agreement allows better access. But we also recognize that this is a generation one agreement, where it's fairly limited. In my opinion, with these mature and developed countries that we are dealing with under CEFTA, there's a lot to be gained through the service side of it as well.

My question to you is, how much do we lose from not engaging the service component, and have we done any type of economic assessments or analysis to identify what opportunities have been lost because this is a generation one type of agreement?

[David Plunkett]

Thank you.

Let me put in context why it's largely a generation one agreement. This agreement stems back to 1998, and it was one of the early free trade agreements that were made at the time, so there was an extended period. I think I'm the seventh or eighth chief negotiator, so this has a long history along the way. There may be instances where I just may not be aware of some of the details here.

At the time this was started, I think the parties involved had decided that, given the lay of the land at the time, we would make an effort to have a goods-only treaty with areas around it. My understanding is that it was felt that, for either side, it was not worth pursuing the services and investment at the time. Fast-forward a few years and we hit a road jam, and the negotiations lay dormant for quite some time as we were looking for ways to proceed. In the second half of 2006, we were continuing to talk, because this was an ongoing bilateral issue with us and the four parties--

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

I'm sorry to interrupt, but just quickly, was the main sticking point in those discussions shipbuilding? That's one clarification, because you're giving the timeline. What was the issue on which the hesitations occurred and the reason the agreement wasn't signed? What was the key area of it?

[David Plunkett]

The major issue that was hanging up the negotiations for all that time was ships.

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

Just along those lines, you indicated in your opening remarks that Norway--which is a country we're very concerned about because the subsidies in their program allowed the shipbuilders not only to become competitive but to gain an added advantage in the international community--indicated in March 2005 that they no longer had a subsidy program. Subsequent to that, I believe the ambassador came before committee and reiterated the same remarks here.

My concern is that if a country subsidizes and continues to pump money into a particular sector—in this case we have shipbuilders—and allows them to purchase equipment, gain synergies and efficiencies, and really gain a competitive advantage to market access, and then says they want to do free trade and they want a level playing field, is that really levelling the playing field? A lot of the concern shipbuilders have presently is specifically with a country such as Norway. Up until 2005 they heavily subsidized the shipbuilding sector, and now that they are at an advantage, they want a level playing field.

So the question I have is, do you genuinely believe—we've had many sticking points in the negotiations—that this particular issue has been addressed? You've talked about the tariff reduction, a phase-out of 15 years, and then again a bridge, another 10 years. Those have been mentioned as a means to address this issue. But do you think it's been sufficiently addressed, specifically vis-à-vis concerns that shipbuilders have expressed regarding Norway?

[David Plunkett]

Just for the record, as far as I'm aware, between 1995 and 2000 Norway, following EU regulations—because there is a link between Norway and the EU as a whole—allowed for two types of shipbuilding subsidies. One was indirect subsidies in the form of loans and guarantees compatible with the OECD understanding on export credits for ships. A second was direct subsidies for research and development in the shipbuilding sector. These programs expired in 2000. In the early part of 2000 a policy came in about a temporary defensive mechanism related to Korean subsidies.

Basically, those are the ones we are aware of. As I said, they have advised the WTO that they have walked away from these subsidies and have no intention to implement other programs to fund domestic production of ships.

I know where you're coming from—

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

That's the point, yes.

[David Plunkett]

—but I would also note that, as I said earlier, as part of this process we have managed to negotiate the longest tariff phase-out for industrial products in history, up to 15 years. Whether or not all of these subsidy effects will be washed out over a period of time, it's impossible to know whether any of these subsidies are necessarily ending up in ships linked to our particular market. In any event, if you couple the up to 15 years plus the 10 years of negotiation itself, plus the year or so of the parliamentary process to get the agreement up and running, you are looking at more than 25 years of protection.

Will all the benefits of this limited number of subsidies be washed out, in the event that they happen to be associated with us? I can't say that every last component of them will be, but I think by this point it would be fairly minimal. That would be my view.

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

You say it would be fairly minimal, but have you done any type of economic analysis or assessment to indicate the number of jobs that may be lost or the number of jobs that may be impacted? What is the scope of the shipbuilding industry in Canada, and how will this free trade agreement effectively change that scope on a going-forward basis, specifically with jobs and job losses—or even job gains, if that's the case?

Has that analysis been done? Has the economic impact assessment been done?

[David Plunkett]

We didn't do an economic analysis per se. Instead, we sat down and consulted with the industries, because it wasn't just the ship industries. We had thorough consultations with the industries throughout this period.

With respect to the shipbuilding industry per se, consultations had begun in the late 1990s. Since late 2005 we, along with our colleagues from Industry Canada and others, held roughly 12 consultation meetings with various shipbuilding industry representatives in various combinations and fora—together as a group with owners, builders, and others, as well as a lot of one-on-one or group discussions—trying to make sure we had a thorough sense of the concerns the industry had in this area.

Those concerns are reflected in annex F, which sets out the terms of the agreement in the ship areas and identifies which ones are eligible for the up-to-15-year phase-out and which ones are 10. We feel very confident that the consultation process we did gave us a very strong understanding of the concerns of the industry, of where their wiggle room was, and of what their long-term planning was as an industry.

[The Chair, Conservative, Lee Richardson]

Thanks, Mr. Plunkett.

I want to clarify something I think you just said to Mr. Bains, and that is on the phase-out for the building of ships, the phase-out of Canada's most sensitive vessels: 15-year and 10-year phase-out on sensitive. Is that 25 altogether, or is it 15...?

[David Plunkett]

No, what I was saying is, if you add on top of that, from the moment we started the negotiations—

[The Chair, Conservative, Lee Richardson]

I see. Okay.

[David Plunkett]

—then you are looking at effectively more than 25 years from the point we first started to look at this to when the implementation would be complete.

[The Chair, Conservative, Lee Richardson]

I'm sorry, I was just confusing the numbers. Thank you.

Monsieur Cardin.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chairman.

Welcome, gentlemen.

I would like to follow up on the shipbuilding industry. The 10 to 15-year period, if we subtract the three-year period where nothing will change, is really only of 7 to 12 years. You say this will allow the shipbuilding industry, both in Canada and in Quebec, enough time to adjust.

Under the agreement that you negotiated and in view of the potential impact in a rather short period of time — 10 or 15 years is relatively short term — would it be possible for the government to take measures to help the industry to modernize, to implement technological innovations and to take advantage of this adjustment period in order to become competitive on the international market and in the countries covered by the agreement?

[David Plunkett]

With respect to the first part of your question, just so it's clear, for the most sensitive—which are things like ferries, cruise ships, offshore supply ships, and lakers—if you look at annex F, you will see a table, and these are all referred to as B15. For those products that are covered by B15, the tariffs shall be gradually eliminated, in 13 equal annual reductions, beginning three years after the date of entry into force of the agreement. In this case, 15 years after the entry into force, the customs duties would be completely eliminated.

Likewise for B10, it will be eight equal annual reductions, beginning three years after the date of entry. Therefore, 10 years after the entry into force, you'd have the complete elimination.

With respect to your comment about whether this is a relatively short period of time, as I said, this is certainly, by far, the longest that we've ever had in a free trade agreement. If you look at other agreements, including WTO or whatever, you will see that 15 years certainly ranks right up there as a significant amount of protection, from that perspective.

The other side of your question relates more to the policies that the government is involved with, with respect to the domestic shipbuilding policy, and I think this would be better asked of our colleagues at Industry Canada.

There are issues or things out there, such as the renewal of the structured financing facility, and in addition, the government announced in its latest budget that it will be buying a new polar icebreaker. But in terms of the extent of the various elements that you may be looking at, I would recommend that you get in touch with our colleagues at Industry Canada, because they're best placed to give you a thorough assessment of what else is out there. Our focus is, frankly, on the terms of these agreements, and they may be doing things that we're just not even aware of.

[Serge Cardin, Bloc, Sherbrooke, QC]

If I understand what you are saying, while you were negotiating a free trade agreement and in particular the adjustment periods, the phase-out or elimination of tariffs, you had no formal discussion with Industry Canada in order to determine the potential impact of specific negotiations on our industry.

Would it not be normal to take steps to understand the situation of our industry in order to know what terms to negotiate?

[David Plunkett]

No, far from it. During the many consultations that we held with the industry, Industry Canada was very much part of that. They were also party to the negotiations. They were part of the overall team. There is a big team effort here.

If you are looking for the details of the information in terms of what the government is doing for this particular sector, all I'm suggesting is that the people who are best placed to answer your questions there are colleagues from Industry Canada. But I can assure you that I have been in close contact with them throughout this process, for the obvious reasons that you're suggesting. You obviously can't be rushing off without keeping them in close contact.

[Serge Cardin, Bloc, Sherbrooke, QC]

When we deal with potential free trade agreements, the committee asks questions as to how people generally view the negotiations, which industry will benefit and which industry might potentially be negatively impacted. The answers we get are that it is difficult to anticipate since we do not know what the precise terms of the agreement will be.

In this case, the agreement was signed in January. Did your group, or did other organizations, start to make assessments of the quality and the global value of the negotiated terms as well as of the impact they might have on the Canadian economy?

[David Plunkett]

In terms of trying to choose winners and losers for a particular trade agreement, this is a very difficult question to answer, because often what we do as negotiators is try to set what looks to be a very positive framework, sort of rules of the game for industries to work with. Obviously we try to make them as positive as possible for our Canadian companies.

But as my deputy minister said this morning in a different context, business does business; governments don't do business. We can set as much of a positive framework as we can, but it really is up to business to try to take advantage of what is there. They will put their assessment through variables that are distinct to their own particular sector and company.

In the course of my career, I have been involved with a number of negotiations where I have heard Canadian companies or Canadian sectors express strong concerns that if the government of the day were to liberalize or make a move in a particular sector, that would be the end of that particular industry. Those industries are very much alive and well, and in fact they're doing better now than ever before. Even industries that themselves thought a change of the policy framework would be problematic for them would now admit that, in retrospect, that did not prove to be the case. Again it gets back to the question, a very difficult question, of trying to identify exactly who might win and exactly who might lose, because companies are very adept at modifying their behaviour to take advantage of circumstances.

In tariff negotiations, often companies that will urge you to retain a tariff as high as possible for as long as possible, once they see the writing is on the wall and the tariff is coming down, are among the first to say, “Bring it down to zero because it's not going to help us any more and we might as well adjust. We've adjusted our business plan and our future accordingly.”

It's a bit of a mug's game to try to get into that sort of situation. On a general basis, looking at the impact of the economy more generally, given the dominance of the U.S. in our market—and I'm not an economist, so I'm wandering into some fields here that I'm not all that comfortable with—my understanding is that sometimes, given the size of these markets involved, the potential impact for the Canadian economy as a whole will be nil or point nil, nil, nil, whatever the exact number is. That's why I think it's more important for us to sit and talk to individual companies or individual sectors to find out what the potential is going to be for their particular needs, because any macro numbers, whether they're credible or not, are probably not going to be good enough in terms of giving you a real sense of what the impact for a particular industry or sector might be.

That's why we find it very important to go in and talk to industries, to consult as often as we can to make sure we're getting the facts from the people who are at the coal face in these sectors.

[The Chair, Conservative, Lee Richardson]

Thank you, Mr. Plunkett.

Mr. Julian.