International Trade Committee on March 12th, 2008

[The Chair, Conservative, Lee Richardson]

We are coming to order now that we have the presence of the honourable Mr. Bains.

Before we proceed, I want to run over a bit of the agenda for today. I will discuss this later when we have concluded our examination of these witnesses, because I don't think it's going to take a long time today. We do have votes. At 5:15 the bell will ring.

My suggestion is that we go probably to 4:30 with the witnesses, and then we'll revert to committee business. I want to talk about this report on the free trade agreement between Canada and the states of the European Free Trade Association and just what the intent of the committee is--whether or not we want to continue to hear witnesses, how many more we want to hear, and whether or not we want to do a full report on it. I just want to get a sense from the committee.

We can do that, as I say, at perhaps 4:30, 4:35, if members have sufficiently examined the witnesses at that point.

So with that, I'm going to welcome our witnesses today. Thank you for coming, and in some cases on short notice. I do appreciate it.

We have Cyndee Todgham Cherniak, counsel for the international trade group of Lang Michener. Thank you for coming.

We have George Haynal, vice-president, government relations with Bombardier, who has been with us before. We're delighted to have you back. Thank you for coming.

Because of the short time for the appearance of the witnesses...we don't have full statements that they want to make beforehand, but I'm going to ask each of our witnesses today just to briefly give a little background--perhaps pick an area. I know the shipping law area is one you're particularly familiar with, Ms. Cherniak, and maybe you might have a few comments on that. Mr. Haynal, you could speak just broadly on your impression of this agreement as you know of it. Then we can proceed to questions.

If that's agreeable to everyone, I'll ask Ms. Cherniak to proceed.

[Cyndee Todgham Cherniak, Counsel, International Trade Group, Lang Michener LLP]

Thank you very much, Mr. Chairman and honourable members, for inviting me today.

First, I should let you know my background. I am a lawyer. I am a counsel at Lang Michener in their international trade group. I am also an adjunct professor at Case Western Reserve University School of Law in Cleveland, Ohio, and I teach a course on NAFTA, on bilateral trading arrangements. I'm also a consultant to the Asian Development Bank, and in 2007 I reviewed 100 free trade agreements around the world for the Asian Development Bank, created a matrix on all those free trade agreements and the various provisions, and drafted an 800-page report that is currently in the process of being turned into an e-book.

So I read free trade agreements for fun.

In looking at the Canada-European Free Trade Association, which I call the CEFTA, I see it's just your basic trade-in-goods agreement. When I look at the agreement in the context of the shipbuilding industry in Canada, the one question I have that I think all of us want to answer is whether it meets the requirements of GATT 1994, article XXIV, paragraph 8(b). Is it a free trade agreement in the context of the GATT?

The provision of the GATT is that:

a free trade area shall be understood to mean a group of two or more customs territories in which the duties and or other restrictive regulations of commerce (except, certain ones where necessary...) are eliminated on substantially all the trade between the constituent territories.

So we need the elimination of all duties and all other restrictive regulations of commerce on substantially all trade. There's no definition in the GATT of what “substantially all” means.

Also, this provision doesn't give us a timeframe. We have a timeframe when we enter into an interim agreement to enter into either a free trade agreement or a customs union, and under an understanding on the interpretation of GATT article XXIV, that has to take place within 10 years. That's the limitation period, or it can be extended in exceptional circumstances, and the WTO member has to justify how this is exceptional. But we don't have that 10-year limitation period for a phase-out or elimination, reduction of duties, and other restrictive regulations of commerce.

What's generally understood is that “substantially all” means 90% of the trade, and there is a requirement under a transparency mechanism called the transparency mechanism for regional trade agreements that each country, after it enters into a free trade agreement, has to go over items line by line to demonstrate that the “substantially all” threshold has been satisfied.

I think Canada should be concerned for the shipbuilding industry that China and Korea will be watching to make sure we meet that threshold. I expect some of our hardest questions at the WTO, in the committee on regional trade agreements, would be with respect to the shipbuilding and justifying why it's taking 15 years in certain cases for the phase-out to occur, because that is abnormally long in the context of free trade agreements.

I looked at my 100 free trade agreements, and the longest one I've come across is the United States-Australia free trade agreement. There's an 18-year phase-out for duties on beef. That was considered to be exceptionally long, and it actually has created some tension in the trading relationship between the United States and Australia. That's the longest I can find in the books. I can't even find something of 15 years.

So I kind of look at it from an academic perspective. We've got developed country to developed country in the Canada-Australia free trade agreement. Canada-EFTA is developed to developed, and we're having the longest phase-out, as opposed to the developed country to developing country, which is where I would have expected to see these longer phase-outs occurring.

I also looked through the various EFTA free trade agreements, and when I look at the EFTA-Chile free trade agreement, I see it has immediate phase-out, four-year phase-out, or six year phase-out. It doesn't have anything as long as 15 and 10 years. It does have a provision that allows them to dismantle, which means they can go back and talk about the phase-outs. But to my knowledge, none of the phase-outs have been in excess of 10 years under the EFTA-Chile free trade agreement.

When I looked at the EFTA-Croatia free trade agreement, category A was two years, category B was five years, category C was four years, and table B included some of the ships in chapter 89. So the phase-out for ships under the EFTA-Croatia free trade agreement was either immediate or in five years.

For the EFTA-Egypt FTA, category A was one year, category B was six years, and ships fell within categories A and B.

For the EFTA-Israel FTA, all duties were removed immediately. It was the same with the Singapore-EFTA free trade agreement.

With Jordan, category A was four years, category B was seven years, and category C was a re-examination over four years for particular goods. But ships and yachts were in category A, and there were no ships or yachts in categories B or C. They were positive lists.

For the EFTA-Korea free trade agreement--and we know from the WTO case relating to China and Korea that both have shipbuilding industries--they had B1 at three years, B2 at five years, and category B3 at seven years. There were a few other vessels in B3 for the seven years, but on almost all the ships the duties were eliminated immediately.

Lebanon had a seven-year phase-out period. The table for ships had them either immediately free or they started at 15% or 5% and went down to zero within seven years.

In Mexico there was immediate duty relief for all ships and boats.

In Tunisia, category A was immediate duty relief, category B was in three years on 20%, 12%, 4%, and 0%, and ships fell within that category.

The last thing that's interesting in the Canada-EFTA free trade agreement is the safeguard mechanism. In article 25 there is a transition period for the shipbuilding industry at five to 15 years, depending on the goods, but there's an ability to use the safeguard mechanism if serious injury is shown. The duties can go back up to the MFN rate either when the case was brought or immediately before the agreement came into effect. That gives a three-year adjustment, so it's conceivable that we could go down close to zero if serious injury is felt by the shipbuilding industry. The duties can go back up to the original rate for a three-year period to allow the shipbuilding industry to adjust.

It looks as though the negotiators have done more than other negotiators in free trade agreements have for this particular industry, so from an academic perspective this is theoretically a good agreement in terms of this phase-out. The shipbuilding industry is the only one that has this phase-out period.

Rather than rambling on, I'll leave it up to you to ask any questions you may have. Hopefully this helps you factually.

[The Chair, Conservative, Lee Richardson]

Mr. Bains.

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

I think we should continue with the practice of hearing from witnesses first and then members.

[The Chair, Conservative, Lee Richardson]

All right. Thank you.

Mr. Haynal.

[George Haynal, Vice-President, Government Relations, Bombardier Inc.]

Thank you very much, Mr. Chairman.

My comments will be very brief and, in some respects, impressionistic. It's worth noting that the EFTA with which we're negotiating is a smaller group of countries than the one with which we started out negotiating. That may reflect how long it takes to negotiate agreements between parties that have sometimes contentious issues between them. I'm glad the negotiations have concluded, because although this is a smaller group of countries, it's a very important one, and it is a group of countries that have for one reason or another quite self-consciously decided to stay out of the European Union for their own reasons. I think that makes them also quite interesting from the point of view of Canada, which of course has a deep interest in a deeper relationship with the EU as a whole.

From the point of view of the company for which I work, which is Bombardier—I will not bore you with more background on the company than you already have—these are significant economic partners. We are established as quite important manufacturers in the rail sector in Norway and in Switzerland. We have aircraft flying in all of these countries except Liechtenstein; I assume they fly through Liechtenstein quite a bit. That presence includes Iceland, whose coast guard uses our aircraft for coastal patrol and surveillance.

So these are not unimportant economic partners, and from that point of view, too, I think we welcome this agreement, not so much because the tariff reductions that are implicit in this agreement are particularly important for our sectors--although they obviously have implications in other sectors--but because an agreement like this creates a level of confidence among investors even if the text itself is a classical tariff-oriented one.

The notion that there is such an agreement between Canada and the countries of EFTA establishes that there's a community of interest, even though it's not necessarily exactly congruent; that there is a level of confidence between the governments of these countries that allows us to work on issues when they do arise; and that investors, both Canadian in EFTA and EFTA investors in Canada, have the assurance of an intergovernmental agreement that governs the relationships and the economic sphere. Norway and Switzerland, of course, are important investors globally, including in sectors of some direct interest to the Canadian economy. So it is important from that point of view.

My last comment would be that this agreement is also to be welcomed from the point of view of the relationship with Europe more widely. We have managed to find common ground with advanced European economies in this case. That should be a help in the effort to find common ground with a much larger and much more heterogeneous European Union in the future. And to the degree that we can find common ground with that enormous trading and economic block, Canada will benefit, and I think Canadians will welcome it.

That would be the end of my introductory comments, Mr. Chairman.

Thank you.

[The Chair, Conservative, Lee Richardson]

Thank you, Mr. Haynal.

I think we'll just begin the rounds in the normal way.

Mr. Bains, would you like to begin?

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

Thank you very much, Chair. I appreciate that.

I would like to thank both the witnesses. It's nice to see some familiar faces back at committee.

I want to say, Cyndee, that your presentation is a bit technical, so I'm going to try to follow along. I know you mentioned a few areas. But my specific concern--and I mentioned this to departmental officials whom we met with on Monday as well--is with respect to sensitivities around shipbuilding. With this particular free trade agreement, CEFTA, there's been a lot of concern raised within the shipbuilding sector. The primary concern most of them have is with Norway and the fact that they have heavily subsidized their shipbuilding sector; up until 2005, until they declared that was no longer the case, that's allowed them to gain a competitive advantage.

In the department, they go through some of the areas where the subsidies were received. They try to downplay, in my opinion, the degree of the subsidies that were received in Norway. I think those subsidies did give the Norway shipbuilding industry a competitive advantage.

I know you alluded to, except for Australia and the United States, an 18-year phase-out of tariffs. I forget what sector that was, Cyndee.

[Cyndee Todgham Cherniak]

That would be beef.

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

Except for that exception, this seems to be the longest phase-out period, and unprecedented, in any free trade agreement.

In your opinion, is this 15-year tariff reduction sufficient to offset the subsidies that the shipbuilding sector received in Norway, to level the playing field?

[Cyndee Todgham Cherniak]

Thank you for your question.

Since we have three years before the phase-out starts, there is the potential that the subsidies will diminish in their importance and effect within the next three years, so we're at the exact same level for the next three years that we are today or we were yesterday. That's a great plus, and that's unusual as well in free trade agreements. Normally the reductions start immediately, but we have things that remain the status quo for three years, and then we start into the phase-out.

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

So effectively it's 18 years, then, if you take the three-year start. Is that a three-year start plus the 15 years, or is it three years?

[Cyndee Todgham Cherniak]

It's three years, and then there's a phase-out over the 12 years, which gets you to the 15-year time period.

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

But it doesn't kick in until three years from now.

[Cyndee Todgham Cherniak]

Yes, it doesn't start in its equal reductions for three years. In addition to that, if the subsidies are having an effect and they're causing material injury to the domestic producers, there is a potential to bring a countervailing duty case against Norway. That's not precluded by the agreement. If the CBSA, Canada Border Services Agency, finds that there has been subsidization, and the Canadian International Trade Tribunal finds that there has been injury, then duties can be put in place to counteract the effect of the subsidization for a period of five years, and then it can be renewed for another five-year period. That's not prevented by the free trade agreement.

If we also find that there is illegal subsidization, we can always go to the WTO under the SCM agreement. That being said, we've been through Brazil aircraft, and when you suggest that one country has illegal subsidies, you might bring a claim against yourself as well. But that's always an open avenue in order to get the subsidies to stop if they are still going. Hopefully over this time period the effects of the subsidies back in time will have diminished.

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

The second question is with regard to meeting Canada procurement policies. The understanding we have from the department officials in the way the agreement has been set up is that essentially any made-in-Canada procurement policies with regard to the purchase of certain ships is consistent with the free trade agreement, that it's not a violation of a free trade agreement. Is that your interpretation of the agreement?

[Cyndee Todgham Cherniak]

Yes. My understanding of the agreement is that the government procurement aspects of the agreement say they are going to follow the WTO agreement. Canada is a signatory to the WTO agreement on government procurement and so are the EFTA countries. It's a plural lateral agreement; not all WTO members have signed on. In the agreement on government procurement, we exclude certain goods, so we haven't altered our WTO obligations that have been in effect since the Uruguay Round with respect to public procurement.

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

George, this is a question for you. You mentioned that we started off with a longer list and now we're dealing with a few select countries in this finalized CEFTA agreement and that this agreement could be used as a gateway for the European Union. I've heard that argument. Could you elaborate on what you mean by that?

How could this be considered a gateway? The European Union, in my opinion, has been fairly reluctant to deal with Canada because of the size of our market. They seem to be more preoccupied with Asia and America. How does this give us an added advantage? This is not part of the European Union. These are fringe countries, and this is a generation-one free trade agreement. It excludes service and investment, so it's really not a sophisticated free trade agreement in the current context that we are negotiating with other countries. How, in your opinion, does this act as a gateway into the European Union? I find that difficult to understand, and I'd like you to elaborate, please.

[George Haynal]

I'm not sure I used the term “gateway”, and if I did, my intention was not to indicate that this is a first step towards a Canada-EU agreement.

What I was driving at was a notion that we are able, in this instance, to demonstrate that there is enough of a community of interest with advanced European countries to justify a free trade agreement, even though it is a first generation agreement. This gives us a comparative advantage vis-à-vis these markets in Europe that we did not have before, which should in itself be a stimulant, though a modest one, for the EU itself to regard this as a competitive advantage to us that we did not have in markets that are very close to the EU economies.

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

Can you speak from Bombardier's perspective? If this free trade agreement is ratified by us, can you play out an example of how this would help your company?

Now that you have a free trade agreement with CEFTA, how did it help Bombardier, for example, with the European Union?

[George Haynal]

I would probably regard the comment I made as referring more to the general economy than to the company itself. We are established in these markets as we are in the markets of the European Union more generally. So for us, this is really potentially levelling a playing field if there's an agreement both with the EU and with EFTA. But that would be all I'd say.

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

Thank you very much.

[The Chair, Conservative, Lee Richardson]

Well done. Thank you, Mr. Bains.

We'll move along to Monsieur André.

[Guy André, Bloc, Berthier—Maskinongé, QC]

Thank you for being here with us today.

Mr. Chairman, I will be sharing my time with my colleague, Mr. Roy. My first question is for our witness from Bombardier. I was wondering whether you have evaluated the impact that this agreement could have on your sector in general, and the positive effect it could have on the development of your company specifically.

Ms. Todgham, we have studied the agreement between Canada and Korea in the course of our work as a committee. An impact study carried out by the automotive sector indicated that such an agreement would result in job losses. However, the government also carried out studies on the agreement, but reached different conclusions.

Do you know whether any impact studies have been carried out on the agreement with Europe, particularly with regard to shipbuilding? I raise shipbuilding as I think it is the main area of concern. Do you think that impact and market studies should be carried out to determine whether the shipbuilding industry, for example, will be threatened in the short-term?

A 15-year phase-out period has been planned to allow our industry to compete more effectively with these countries on the international market. However, would you not agree that establishing a phase-out period will be somewhat futile if the government does not use this time to further modernize Canadian industry?

[George Haynal]

My answer will be shorter than that of my colleague.

The benefits per se that Bombardier stands to gain are modest. However, as investors in two of the four countries involved in this agreement, we stand to gain a significant psychological boost. The agreement would give us, and other investors—be they Canadian or from EFTA countries—the option of calling upon our respective governments to resolve disputes. Nevertheless, this does not actually amount to much as we are already established in these economies and are domestic suppliers in the two most important countries for our sector, which is, of course, aviation and air carriers.