International Trade Committee on Dec. 11th, 2007

[Dr. Jim Stanford]

I received my doctorate from the New School for Social Research in New York City in 1995.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Thanks.

I agree it's important to analyze all the reports. We can sit here and pass each other reports until the cows come home, and we could have four economists pile up here with five different opinions. In fact, we've had some witnesses, who have already presented to our committee, state in no uncertain terms that there are all kinds of flaws in the methodology and the theoretical foundation specifically of the CAW study. The study assumes that all trade changes as a result of free trade agreements, and in doing so it disregards GDP growth, interest rates, exchange rates, and the rise of China and India. It assumes that Canada does not trade with any other nation, and so any additional import is at the expense of domestic production. It does not consider the current features of Canada-Korea trade like the specific tariff rate.

Ian Burney, the chief bilateral trade negotiator, said last Thursday that the study assumed that 12,000 of those jobs would be lost in the electronics and computer sector, which is already largely tariff-free between Canada and Korea. So it's illogical to assume there will be 12,000 job losses in those sectors. The study also disregards the agriculture industry, ignores notions of longer-term efficiency gains, and dispenses entirely with consumer welfare.

So as I suggested to you, you can have all kinds of individuals who will show more holes than Swiss cheese in your report, and you want to come back and shoot ours down. I think the fact is that we're here to work together. As Mr. Fedchun said, we have to be boy scouts--I have three daughters, so we have girl guides here too--and work together. We believe in fair trade and free trade.

Specifically looking at the Canadian dollar and the increase we've had over the last five months, we've heard from manufacturing sectors across the country--I represent a riding in the interior of British Columbia where we see some real benefits from the Pacific gateway initiative--and the forest sector. Mr. Woo, who spoke to our committee as the president of the Asia Pacific Foundation of Canada, stressed that this is a good deal for all of Canada. Another individual witness, Joan Baron, who is with the Canadian Chamber of Commerce in Korea, alluded to the fact that there are great opportunities in a million-cars-per-year market in Korea if the industry is willing to adapt itself to meet the Korean specifications.

I guess my question would be, as the major currencies have also appreciated relative to the U.S. dollar, should the auto industry not diversify its export markets? How would you suggest the Canadian manufacturers reorient their strategy in order to export to Korea? That's assuming you're interested in it.

I'm looking at the librarian's report, which said the United States accounted for 96% of the Canadian motor vehicle exports in 2006, which has been pretty consistent since the nineties. So if you're investing and you're looking to broaden your market, it's no different from the case for our own personal investments--you don't put all your eggs in one basket. Canada has fallen behind in foreign trade agreements, so I'd like to hear your thoughts on expanding and looking at the potential market, if that is of interest to you and the industry representatives.

I open the floor to the witnesses, and if I have a few minutes, I'd like to allow my colleague Mr. Miller to ask a couple of questions as well.

[Gerald Fedchun]

Let me start from the parts side. First of all, as our wage rates are substantially higher than Korea's, it's very difficult to export to Korea. For parts, it's difficult to do that, so we'll only get them exported if they go in finished vehicles. To have a competitively priced product to service Korea, there will be a relatively small number.

We can do that. We can do that now with various parts, but the Koreans won't let us. They have non-tariff barriers. They make life so difficult that people don't buy our product. I think 5,000 or 6,000 foreign vehicles were bought in Korea, in a more-than-a-million-car market. Now, that's not by accident. That doesn't happen because things look bad; it happens because the government has a very firm and very strategic policy to make sure foreign vehicles don't get bought in Korea or imported into Korea. Until they stop doing that, we'll get zero benefit out of a free trade agreement with them. They've been doing it for years, and they're not about to stop. That's what they do, and unless you say, “We won't sign until you get rid of these barriers”, they're not going to stop. They couldn't care less.

So I think we have to be really hard on them and tell them, “Don't do it,” and “Nothing happens until you stop”. It's pretty simple.

Then I'll tell you my real opinion later.

[Voices]

Oh, oh!

[Mark Nantais]

If I may, Mr. Cannan, you mentioned that maybe Canadian industry needs to diversify its approach. As I mentioned in my remarks, and I think it should be well documented in the papers we've provided, the profile of the Korean market is very similar to that of Canada. The products we build in Canada can compete head to head with the market segments in Korea.

As Mr. Fedchun has just pointed out, we continue to be faced with these non-tariff barriers to trade. They have included not just a constantly changing landscape in terms of non-tariff barriers but things like higher consumer taxes on imported vehicles and mandatory government testing on specific vehicles, like 4x4s, when in fact they didn't have the test facilities in place for two years after they imposed that. We cannot send vehicles over to that market only to have them sit on the dock for a month, let alone two years.

There are other things, like different licence plate requirements, which are what I call Frankenstein regulations. They cherry-picked emission standards from around the world and put them into their regulations, which is why virtually no vehicle manufacturer could meet those standards. These are all typical non-tariff barriers.

I might add that I've appeared previously before committees on this issue. I've been flanked by both the beef and pork industries, and they too have experienced non-tariff barriers. So this is something that is not specific to autos. Many different sectors, and certainly our own sector, experience these ongoing shifting lists of barriers as we go forward.

As I mentioned, no vehicle manufacturer, regardless of where they produce in the world, has had any major success in this market.

[The Chair, Conservative, Lee Richardson]

Thank you.

Thank you, Mr. Cannan.

That's not bad. That was seven minutes and twenty seconds. It's the best yet.

We'll go to Mr. Julian.

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

Thank you, Mr. Chair.

I won't ask Mr. Cannan for his credentials, because I know that the text he read out didn't come from him; it came directly from the PMO.

I'd like to thank each of the witnesses for coming forward.

I'll start with you, Mr. Stanford.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

On a point of order, Mr. Chairman, could I have an apology from that gentleman across the way for making those comments? His comments were on my pieces of paper here, my research.

If you want to take shots at me, we can go outside afterwards.

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

I'll continue with the witnesses.

[The Chair, Conservative, Lee Richardson]

Perhaps we'll start again at seven minutes for Mr. Julian. Go ahead.

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

Thank you very much, Mr. Chair.

Mr. Stanford, you prepared a very detailed criticism of the study that came out from International Trade. I won't go into the details, but one of the aspects you touched upon in your presentation was the fact that there are constant returns to scale. So regardless of whether a factory's producing 200 or 200,000 vehicles a year, they just assume that there is the same level of cost competitiveness.

Your criticism is very detailed. The criticism of the CAW report that we heard from the minister and from International Trade officials was largely superficial. The language they used was very strong, but the only element they seemed to point to was the issue around computer and electronic products, that somehow, because they're tariff-free, the job losses estimated by the CAW study in that sector are not legitimate. That's what they pretend, anyhow.

I'd like you to explain those figures--12,556 net jobs lost--and also explain the estimates for the auto industry and auto parts. I believe they're contained within the transportation equipment manufacturing section, but I could be wrong. Please explain those figures as well.

If you have time, could you come back to any studies done by the CAW, or anyone you know of, of past comparisons of International Trade projections and the actual net results of our bilateral agreements?

[Dr. Jim Stanford]

Thank you, Mr. Julian, for that question.

In terms of the methodology that we've used in our study, it's fundamentally different from the computable general equilibrium approach that the government has used, and that the government has used in the past to justify other free trade agreements that we were entering into. Our approach has been rooted in historical data. Rather than making particular assumptions about how markets work and equilibrium conditions like full employment and so on, we have simply gone back and looked at the historical record of free trade agreements, how much of an impact they had on exports and imports, and then assumed that the Korean case would be similar to that.

If anything, I'd suggest that's a conservative impact, because we have never signed a free trade agreement with an Asian economy that typifies that very state-directed model of economic development that the Koreans have followed. If anything, I think our experience in Korea will probably be worse than the average, but our model assumes it will just match the average of those other five agreements.

What we find in practice, looking at the history of free trade agreements, is that they have a much larger impact on trade flows than just tariff reduction alone would seem to justify. Tariffs are not that large; they are only 5%, 6%, or 7%, even lower in some industries, so you wouldn't expect the dramatic changes in the wake of a free trade agreement that you actually have seen in our other cases. That suggests that there's a structural change in business strategies, market awareness, and the ability to export to a new market that is quite independent of the size of the tariff in the first place. That's the justification for why you could have a major impact in a sector like computers and electronics that have lower zero tariffs anyway, simply because the structural change in bilateral trade, which is opened up by the free trade agreement, leads to much larger trade flows on the basis of what footprint that trading partner already had in our market.

In terms of how we justified the auto industry case, we did include auto within the broader transportation equipment sector, but we did separately model the vehicles and parts flows. We anticipate a total impact of something like 4,000 lost jobs. Again, this is going to build into it investment reactions to the free trade agreement of the type that the CEO of Ford Canada was hinting at.

Again, the DFAIT study and the Industry Canada and the University of Toronto studies, as well, all assumed there'd be no impact whatsoever on Canadian auto investments as a result of the free trade agreement, and I think that's a very unrealistic assumption.

So our approach takes an actual look at history and assumes that something like that will occur in the Korea case. That's a very different methodology from what any of the government-sponsored studies used.

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

You're saying it's a more practical approach. Are you aware of any studies of past discrepancies between International Trade's projections and what the actual results have been?

[Dr. Jim Stanford]

To answer that part of your question, there were a number of those studies in relation to the Canada-U.S. Free Trade Agreement. There were many economic models put in place to study the impacts of the free trade agreement. Those who were around for those debates will recall predictions of significant productivity gains, a harmonization in productivity levels between Canada and the United States, and a significant increase in GDP. Of course none of those did prevail. We actually fell further behind the Americans in productivity terms after the free trade agreement.

In terms of the scale of the impact on exports and imports, however, the free trade agreement had a much larger effect than any of those computer models indicated. That supports the hypothesis that a structural change occurs once you have implemented a free trade agreement. The amount of trade going in both directions grows much faster than you would expect looking only at the tariff rates.

The problem for Canada is that in four of the five cases our imports grew more than twice as fast as our exports grew. That's where the job loss comes from.

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

I have a final question then to our other two witnesses. If the study that Mr. Standford's referring to looks at a net job loss of about 4,000 jobs in the auto sector, is that congruent with what your estimates are?

[Gerald Fedchun]

From the parts side we have not done a study, but we simply do know there will be lost jobs, because for every auto that we don't build but import instead.... I mean on the ratio of jobs at the assembly plants; there are three jobs in an auto parts plant for every job in an assembly plant. So it's a very simple ratio. We haven't done a study to do the actual analysis.

The other point I'd like to make to Jim's argument on the investment is that Bill Osborne, the president of the Ford Motor Company of Canada, Limited, last week said that if there is a free trade agreement, they'd have to seriously consider their investment in Canada. He made that statement in a public forum. So we know that investment is seriously being considered. And a similar statement, not quite exactly the same, was made by Reid Bigland, the head of Chrysler Canada: it's very simple--if we can't get return here, then maybe we don't invest here.

So investment is in jeopardy if we go forward with this agreement, as presently constituted.

[Mark Nantais]

We haven't done any specific studies either, but I certainly concur with Mr. Fedchun on the reality of what chief executive officers are saying.

As I mentioned before, we've invested $8.5 billion in the last few years to upgrade plants and make them the most productive, highest-quality plants we can. Obviously if we don't have markets for our products, the decision-makers who are not locating in Canada will decide one way or the other on the best place to produce those vehicles.

Canada has become for some companies the highest-cost jurisdiction in which to produce. That does not bode well for future investment. We have to look to every possible avenue to maximize the utilization of these plants and find ways to keep these global mandates here in Canada. We have a tough job ahead of us.

I appeared before the industry committee last week, and when you look at all of the factors that we as an industry are faced with now, whether it's the Canadian dollar, the high-cost jurisdiction, or the Korea free trade agreement, all of these things are now being factored into decision-making. We can't respond to one or the other because we look at things in totality, in an aggregate form, and that determines whether new product mandates are going to be established for the future.

[The Chair, Conservative, Lee Richardson]

Thank you, Mr. Julian.

We're now moving into the first five-minute round. We'll begin with Mr. Temelkovski.

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

Thank you very much, Mr. Chair.

Last week the Minister of International Trade stated that he was worried about the consequences for Canada if the U.S. ratified a trade deal with Korea before Canada. Are his worries warranted? This is to Mr. Fedchun and all three of you.

[Gerald Fedchun]

We have relations with our equivalent organization in the United States. Certainly the reading we get from them is that the probability of ratification of the U.S.-Korean free trade agreement is almost nil. All of the parties and leading candidates in both parties in the United States have said they will not ratify it. So we cannot see that happening.

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

Mr. Stanford.

[Dr. Jim Stanford]

Even if the Americans ratify--and I agree with Mr. Fedchun that it is increasingly unlikely by the day--I don't expect it will have any significant impact on Canada's economy.

Most of Canada's current exports to Korea--and this is very interesting and surprising--actually enter Korea under very low tariffs. On the aggregate weighted average tariff rate that Korea imposes on our sales to Korea today, other than a small number of high-tariff agriculture sectors, the vast majority of our exports to Korea enter under very low tariffs. The fact that the Americans would get tariff-free access to Korea in those sectors where most of our exports currently are would have no significant impact on us.

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

Mr. Nantais.

[Mark Nantais]

We agree with Mr. Fedchun's assessment. Ours is very similar as to the timing and the probability of that agreement being signed. I also agree with Mr. Stanford on his assessment.

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

What are the implications of a free trade agreement for Korean subsidiaries based in Canada? Will there be any impact on these subsidiaries if Canada does not sign a free trade agreement?