International Trade Committee on May 14th, 2009

[Serge Cardin, Bloc, Sherbrooke, QC]

Mr. Caron, the industry has refused to file complaints about black liquor subsidies. It certainly isn't a green policy; these are really subsidies. You've refused to do so. The subsidies are to expire in late 2009. Some of you have said it is unlikely that will occur.

We know that American industries are quick. If something doesn't work, they react quickly. For example, Dow Chemical reacted quickly under chapter 11 of the agreement. As soon as we talked about loan guarantees in the softwood lumber sector, a lot of people stood up and threatened to file complaints. Give me the industry's position.

I would also ask Mr. Feldman, based on the measures currently available under NAFTA, how would the complaint be filed under the various chapters so that we could win our case?

[Guy Caron]

Thank you for your question. You've given a good summary of the industry's position. I would point out that we have done a lot of work with the industry on this issue. We attended various internal meetings in an attempt to develop a common position. We've agreed on a lot of issues, on the fact that this is a major problem that must be discussed immediately.

We also took part in the industry call to Minister Stockwell Day to urge him to take action with U.S. representatives to close this loophole. We differ from the industry in that we would like stronger solutions. We and the industry would prefer that the White House change its position, that Congress eventually vote to close the loophole.

Based on what I've heard, some supporters of closing the loophole, such as Senator Baucus, are making quite a noise. From what we can see thus far, it will be extremely difficult. Time is now of the essence. The industry itself acknowledges that, within two months, if nothing is done on the black liquor issue, the Canadian industry could well disappear. We're already seeing the initial symptoms: we've seen it in Thurso, we're seeing it in Espanola and in Edmundston. One by one, we can see these mills closing. We therefore have to have an immediate reaction within two months. If, by then, we can't convince Congress or the White House to change their position on this loophole, we'll have to consider alternatives. That's why we can't wait two months to prepare options. We have to prepare them now. The best one that comes to mind at the present is that we ensure we are on a level playing field at least until late 2009, to assist the industry in staying afloat in stormy waters. Then, after December 2009, we'll see.

[Serge Cardin, Bloc, Sherbrooke, QC]

I'm going to take advantage of the fact that there is a lawyer here. Time is of the essence. What do we do?

[Dr. Elliot Feldman]

May I interpret your question as going back to Mr. Brison's, whether one should be going about these things in a different way in Washington? And I think the answer is yes. But it's not automatically.... Also, what I interpreted Mr. Brison perhaps to mean is this. Your solution is not in lobbying in the conventional way in Washington; it's not throwing your money away on former ambassadors. It really requires the building of allies, as Mr. Myers has addressed.

There was an opportunity to do this in softwood lumber. There was a group, and there were significant American allies involved, like Home Depot. But it wasn't cultivated. The government didn't want to put any money into it. It was done principally by the industry on a very small budget. It was an opportunity lost. Initially it was missed; now it has been lost.

That kind of lobbying builds friends and allies. The importers of raw goods that come from Canada, the people who need your products--those are the people with whom you need to be in touch. And there are people in Washington who can help you to do that. You have to change that form of the business.

I'm not as pessimistic as Monsieur Caron is about the black liquor issue, but I do think nothing will be done about it until it expires at the end of 2009. I'm not as pessimistic about its renewal or extension, because I think the White House sees too much revenue lost in it, and the White House doesn't welcome all that lost revenue. So I think it would be very hard to stop now, but I don't think it will then resume. It's a very good example of where, if you had allies.... And you have allies. There are lots of Americans who don't like this tax break. But you're not cultivating them or working with them.

[The Chair, Conservative, Lee Richardson]

Monsieur Cardin. Next round? Thank you.

Mr. Julian. We're doing fairly well today—or your colleagues are--in terms of time. You have seven minutes.

Welcome back, incidentally.

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

Thank you, Mr. Chair. I enjoyed election night in B.C., but not as much as I had hoped.

I appreciate this panel. This is, by far, the strongest panel we've had on Canada-U.S. relations. I'm disappointed that the parliamentary press gallery is not here. They could do a much better job of covering economic issues. But we'll make sure we get this information out so they understand the strength of the witnesses we have today.

I'll start with Mr. Myers and Mr. Weir. Both of you have spoken about putting forth a buy Canada strategy. I know for the Canadian manufacturers and exporters, you've been saying for a long time that we need a domestic buy Canada program, particularly to negotiate the reciprocal access agreements we need to have, given what's happened in the United States with buy America.

Mr. Weir, you've also spoken to this, and I know Ken Lewenza has as well. We need to put in place buy Canada provisions. That's the NDP position. We've been pushing it in Parliament as well. So the government is not ignorant of the importance of putting this into place.

Mr. Weir, I'd like to ask you why you think the Conservatives have refused to implement something that is common sense and that has a broad degree of consensus on both the industry side and the labour side.

[Erin Weir]

The Government of Canada position, up to this point, has been to really lecture the Americans about the virtues of global free trade and to assume that Canada's interests are best served by getting rid of buy America policies.

I guess the way I'd frame it is that Canadian producers certainly do need access to the American market, but the best case scenario for Canada is not actually a removal of buy America provisions but rather a specific Canadian exemption from those provisions, because then our producers could sell into the U.S. market with less competition from offshore producers.

I don't think this is a totally unrealistic goal. When the United States put tariffs on steel imports in 2002, it actually did exempt Canada from those tariffs. That's the position my union has put before Congress in the United States: we support buy America, but we'd like to see Canada exempted.

And certainly, you're right that a buy Canada policy would provide a very valuable negotiating tool, in the sense that we could say to the Americans we'll exempt you from a buy Canada policy as long as you exempt us from a buy America policy. I think that's the way to go.

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

Thank you.

We could definitely ask you questions for two hours. Mr. Caron, you mentioned Edmundston, but how big are the job losses caused by the black liquor subsidies, in the current operating market? Do you know how many jobs are in fact threatened if nothing is done?

[Guy Caron]

I don't have the exact figures here. Perhaps I should have brought them, but I don't have them.

With regard to Edmundston, you have to understand that the situation is particularly difficult. In Maine, on the other side of the border, Senator Olympia Snowe is in favour of maintaining the tax credit. Maine and New Brunswick sometimes complement each other, in that wood from Maine may be milled in New Brunswick, but they also compete with each other.

For example, at the Fraser Papers mill in Edmundston, I believe there are 400 or 500 employees, 50 to 75 of whom have already been laid off. In addition, Peter Gordon, President of Fraser, has said that the Edmundston mill could be the next one to close down. We're not talking about a few jobs. It's the entire industry that is currently at risk if nothing is done within two months.

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

Merci beaucoup.

Mr. Feldman, welcome back to the committee. You've been very prescient in your comments around the softwood lumber agreement. I wish the committee had actually listened to you when you came forward, because tens of thousands of jobs have been lost by the stupidity of that agreement.

I'd like you to answer two questions.

What happened on October 13, 2006? That happened after your appearances before the committee on softwood lumber and the day after the implementation of the softwood lumber agreement in the Court of International Trade. I think it would be helpful, particularly for new members of the committee, to understand what transpired with that decision on that day.

You mentioned in your comments that we have a $68 million arbitral fine that Canadian taxpayers are going to have to pick up because of the incredible irresponsibility of the government, and you said that others were likely to follow. What are the other fines that Canadian taxpayers will have to pick up in addition to the massive loss of jobs that have come out of this egregiously bad softwood lumber agreement?

[Dr. Elliot Feldman]

Thank you for those questions. I was not saying too much about the softwood lumber agreement today, but I was pleased that Monsieur Caron did.

The agreement was rushed into force on October 12 because both governments anticipated a decision coming from the Court of International Trade. They were concerned that the decision would torpedo the agreement, which perhaps it would have and should have done. So in the dead of night that week, the agreement was amended--18 pages of amendments done secretly--in order to enable the agreement to be brought into force. Under its original negotiated and public terms it couldn't be, because it didn't have industry support, notwithstanding that, including when I appeared before this committee, there were members of this committee who insisted there was support for the agreement from the industry, which, it turned out, there wasn't.

The agreement was rushed in on October 12, and the very next day the Court of International Trade ruled that the Canadian industry was entitled to all of its money back—every penny, and not just the money that had been determined in July. The Court of International Trade had bifurcated its decision process. It ruled that there was no injury or threat of injury found and that therefore there was no underlying premise for orders to collect deposits, but it left open the question whether money should be returned only from the date forward from that decision or going back ab initio.

It was already known that at least $3 billion was coming back, and probably at least $4 billion—it's hard to measure exactly because of the interest analysis—but the rest of the money was to be determined in a subsequent decision. That was decided on October 13: every penny was to be returned with interest. Instead, the day before, $1 billion was left on the table. That's what happened on October 13.

As to the other risks, this first arbitration on the $68 million was the consequence of an error made by the federal government in managing the quota. There had been reports by various politicians, I'm afraid, saying that this was a punishment for Quebec and Ontario programs trying to offset the impact of the softwood lumber agreement. That's not the case. The $68 million was the product of a mismanagement of the quota.

But the next round is an arbitration already under way that is about Ontario and Quebec programs that are alleged to offset the agreement. The estimates I hear are that the fines associated with an adverse finding on that subject could be in excess of $400 million. That consequence is multiplied because the new arbitral system that was invented for the softwood lumber agreement, setting aside chapter 19, is a system that's based on commercial law and not on trade law. One of the consequences of that difference, it would appear, is that the first tribunal, which decided on the $68 million, applied essentially a tort theory. In applying a tort theory, it applied a theory of monetary damages, which is completely outside the trade law. Should the second tribunal do the same thing--and now there's some precedent in effect for it to do so--then these become monetary damages that are owed even if the agreement were then to be terminated. The damages finding would survive the agreement.

Then there's a third arbitration that we're all waiting for. We don't know when it's going to be filed, but everyone anticipates that any time now an arbitration will be filed about stumpage fees in British Columbia. The argument runs that they've been grandfathered because the beetle infestation was known before the agreement was entered, and the auction system was expressly grandfathered in the agreement. But it's not so clear that the price for the beetle infestation wood has been grandfathered. If not, then the estimates I hear as the potential penalty for that are between $500 million and $1 billion.

[The Chair, Conservative, Lee Richardson]

Thank you.

Thank you, Mr. Julian. That's nine and a half minutes.

We'll now go to Mr. Keddy.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Thank you, Mr. Chairman.

Welcome to our witnesses.

It's an interesting discussion here this morning—quite enlightening. I don't know where to start.

I think I'll start with black liquor. We on the government side and the industry side and most Canadians believe that it's an unfair subsidy. We just returned from three days in Washington with the entire committee. We spoke to probably most of the congressmen we could approach who were on the ways and means committee, both Republicans and Democrats. None of them, not even the newly elected members, was thinking that the black liquor subsidy would continue. I think the main reason for that is that they simply see it as beyond bad policy, but also detrimental to the entire intent of their biofuels bill and good environmental policy. It's terrible environmental policy.

But it leads to a greater issue. The Americans can be difficult trading partners—we're all aware of that—but the greater issue is how, in that type of legislation, those loopholes are found to begin with, and how we have to deal with them. That, I think, is what Mr. Feldman has been talking about.

I'd like from Mr. Caron a statement or a comment on the Canadian industry, because black liquor will be finished, I certainly believe, by December 31. I realize that Canadian industry is under pressure now, but a number of the comments we've been getting from the Canadian industry are that if they see the tariff gone as of December 31, 2009, then we're back on a level playing field. We don't have much time to put anything in place to counter it or do anything about it, so I think we have to live with it for the next nine months or eight months.

[Guy Caron]

Perhaps I will reduce the intensity of what I've been saying. I rather agree that there is a strong chance it will be allowed to die, because it was actually on Mr. Obama's list of eventual tax cuts released a week ago, I think. That makes it a stronger possibility. But we shouldn't be discounting the strength of the lobbying of the U.S. industry. That strength is being deployed in full force right now.

I certainly hope you're right, and I certainly hope it will be the will of Congress not to prolong this loophole. It really is a loophole; it was never conceived to pay for or give subsidies to a fuel that has been used for decades in the industry.

But I have Canadian industry documents in which the Canadian industry is agreeing that if nothing is done in the next two or three months, damages to the pulp and paper industry might be irreversible. That doesn't mean that every single mill in Canada will actually close, but it means that the ability of Canadian industry to compete, even after December 2009, will be impaired. If nothing is done, this is the risk we're running right now, for something that the U.S. administration should never have done in the first place.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

I appreciate that.

This is more hypothetical, Mr. Feldman.

I'm not trying to say that NAFTA is perfect. I don't think any of us believe that. I don't know if there are any trading agreements that are perfect. But the difficulty is that without it we don't have rules-based trading. If you look at the black liquor issue, what do you see under the existing agreement? Whether it's a chapter 11 challenge or a countervailing tariff because we claim damage against the Americans, it still doesn't do anything in the short term. These are notoriously long-term, and your graph shows that the terms are getting longer.

Do you see a legitimate Canadian challenge there or a countervailing duty?

[Dr. Elliot Feldman]

I see a legitimate challenge, but not a lawful one.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

That's the question.

[Dr. Elliot Feldman]

That distinction is made because the trade remedy law is not designed for this purpose. You can use your countervailing duty laws—which are all organically derived from the WTO—but they have to be in reference to imports from the United States of subsidized product. You don't have enough of that to be worried about. What you're worried about is that you can't penetrate the American market and compete there, and it's because of the subsidies. So the countervailing duty law doesn't help you. I don't think chapter 11 is much help either, certainly not as designed.

I'm not calling for the abolition of NAFTA.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

No, I'm not suggesting that you are.

[Dr. Elliot Feldman]

Nor do I favour the abandonment of NAFTA. I'm simply saying that if you keep looking for solutions in NAFTA, you're not going to find them. I'm saying that you need to be looking at something with more imagination and doing something new.

Your industry is hurting not just because you can't penetrate the U.S. market or because of the limitations that have been imposed by the softwood lumber agreement, but also because of this excuse that anything you might do to help your industry violates the softwood lumber agreement. You've let that act as both shield and sword, and that shield and sword, it seems to me, is destroying your industry—not just the lumber industry but your whole forest industry. So using this as shield and sword is a madness.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

I read your brief with quite a bit of interest, and I think it's an important discussion. I don't think we're going to finish it here today, but I was quite interested in Mr. Julian's repudiating his party's buy Canadian policy and the whole idea that we can carry on a trade war. You have buy American; we have buy Canadian. We can buy Canadian with 33 million people all we want, but that's not going to take us far in the world economy.

This relates to the whole issue of reciprocity. We have tried to find a mechanism within the NAFTA agreement. One of the challenges is that with the advent of NAFTA and the tripartite agreement between Mexico, the United States, and Canada, we seem to have been left out of the agreement more. We are continually pushed to find bilateral answers to trilateral trading agreements.

I'd like some comments from any of you on this.

[Dr. Jayson Myers]

I think the buy American issue is a good one to discuss.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

It's one that we need to do a lot more work on.

[Dr. Jayson Myers]

It cannot be handled within the institutional context of NAFTA, although I would argue that there are grounds for doing so, because this is federal legislation imposing federal conditions on how federal money is being spent. You could argue that this should be tied to the federal procurement arrangements under NAFTA. We're seeing that the American government is open to a proposal coming from Canada to negotiate some form of a procurement agreement that goes beyond the existing agreement under NAFTA. I think we should be grabbing that opportunity.

I would like to clarify our position on buy Canadian. We've never advocated a total buy Canadian restriction. I think it makes sense for us to look at local preferences and local content provisions, as most other countries do. State and local governments in the United States have done this for many years. What I think is important about the Halton Hills resolution is that it brings reciprocity into the market access agreement. You can read this both ways. In its fundamental form, if Americans restrict access for Canadian suppliers in the United States, we are prepared to restrict here. However, you could also see it as an open market resolution. If you allow free market access into state local procurement markets in the United States, we're going to do that here too. I think there's widespread agreement among municipalities that the Canadian government should be using this as a tool for negotiating some form of new procurement arrangement with the United States, at least federal to federal, where both federal governments would agree not to impose restrictions on how federal money is being spent at state and local levels.

[The Chair, Conservative, Lee Richardson]

Thank you.

We're going to move quickly to five-minute rounds. I'm going to ask the witnesses again to try to keep their answers tight and the questions as well.

Mr. Silva, five minutes.