International Trade Committee on Feb. 24th, 2009

[The Chair, Conservative, Lee Richardson]

I now call to order the fourth meeting of this session of the Standing Committee on International Trade for our ongoing review of Bill C-2, an act to implement the free trade agreement between Canada and the states of the European Free Trade Association.

Appearing as witnesses today are Jean-Michel Laurin, vice-president, global business policy, Canadian Manufacturers and Exporters; David Stewart-Patterson, the executive vice-president of the Canadian Council of Chief Executives; and Sam Boutziouvis, vice-president, economics and international trade, at the Canadian Council of Chief Executives.

We have been here before. I think everybody knows the procedure. We're going to ask Jean-Michel Laurin to begin with an opening statement of five to ten minutes, followed by Mr. Patterson, after which we will go to rounds of questions. I'll begin first with a seven-minute round by Mr. Cannis and then we'll proceed around the table for the first round. Seeing that we have a little bit of business towards the end of the meeting, I'm going to suggest that we try to wrap up by about 10:45.

If that's all in order, then I'm going ask Monsieur Laurin to proceed.

[Jean-Michel Laurin, Vice-President, Global Business Policy, Canadian Manufacturers & Exporters]

Thank you, Mr. Chair. Bon matin, tout le monde.

As the chair indicated, my name is Jean-Michel Laurin. I am with the Canadian Manufacturers and Exporters Association. I thought I would just give you a little bit of background today in terms of the business context that manufacturers are facing these days, but also some of the business opportunities we see out there and in which this proposed free trade agreement fits.

As you know, the manufacturing and exporting sector is a significant part of our economy. You know that 16% of GDP is directly accounted for by the manufacturing sector. When you take exports into account, it's more than one-fifth of our economy that depends on our ability to trade across the world. Manufacturing is a big business in Canada, with over $600 billion in sales last year and more than $400 billion in export sales. So it's an export-driven sector. It has almost two million jobs, so it still employs a fairly large number of Canadians. These are the innovative companies. More than 75% of our private sector research and development in Canada is done by manufacturing companies. So in a large part the innovation that drives our economy originates from the manufacturing sector.

We've heard a lot in the media and in the House of Commons about the challenges that manufacturers are facing these days. It seems that we've had bad news after bad news over the last couple of weeks, whether it was the announcement just yesterday about retail sales plunging in Canada, or the previous week that Canada was in a trade deficit last December for the first time in I don't know how long. We heard as well about significant job losses in December, with 5% of manufacturing jobs shed in December, in large part due to the downturn in the market. So the challenges are there. When you talk to companies that are managing manufacturing companies these days or are doing business outside of Canada, you hear them talk about how difficult it is to manage a business when there's so much uncertainty in the market, when there's so much volatility, whether it's with currency markets or commodity markets and energy prices. There's a lot of over-capacity in the market right now for industrial goods, so I think people are concerned right now. Everybody wants to know when the market will rebound and especially when we will see a rebound in industrial goods in the United States.

One of the key issues that our members have been facing lately is access to credit. I'm sure that you've heard some of our positions leading up to the federal budget. We hope that some of the measures that are in the budget bill will be approved very soon. I think there are some significant opportunities in markets right now, but we want to make sure that our farms and our companies are in a good position to take advantage of them.

On the challenges, we'll be releasing a survey tomorrow that we did of manufacturers and exporters across Canada. One of the questions we asked them was do you expect new orders in the next three months to increase, to decrease, or to stay the same? We're quite concerned with the results. Although 18% of companies are saying they're expecting orders to increase, which is good, 27% think orders are going to stay the same, and the rest, or 56%, expect a downturn. What's even more of a concern is that 15% of companies are expecting a downturn of more than 20% in sales over the coming three months, despite the fact that sales already declined quite significantly over the last three months. So if you're looking at what's ahead in the next couple of months, I think we're going to see more job losses, more bad trade numbers, more bad news originating from the manufacturing sector, just because the demand isn't there any more for a lot of our industrial products.

Obviously, we're hoping that the stimulus package in the U.S. and the federal budget here in Canada will jump-start the economy and help us to regain some of that market. On the other hand, I think credit is the key issue, especially for Canadian companies right now, in light of the opportunities that we see in markets here in Canada, but also around the world. That's what I hope we're going to be spending more time talking about today.

Canadian businesses can now pursue business opportunities in the countries named in this free trade agreement. Currently, businesses are having to abandon market shares to competition, as some of these businesses have been more weakened by the economic situation. Many businesses believe that today's market is conducive to takeovers. In the last six years that I have been working for the association, I have never seen so many manufacturing businesses so eager to develop new export markets. It's unbelievable the number of calls we are receiving. People are seeking information and are willing to invest even if they do not have money now. Everybody is betting on developing new markets and new products. There is a realization that demands of the traditional clientele in Canada and the United States are not what they used to be; yet, there are still foreign markets which are expanding significantly. As you know, international trade data proves that very fact. Our exports towards other markets tend to grow a lot quicker than exports to the United States. I do not want to say that the United States is not important, but I believe that Canadian businesses have many growth opportunities beyond North America.

As regards specifically the proposed free trade agreement, 35% of the growth in value of our exports in the last 10 years can be attributed to trade with the countries that make up the European Free Trade Association. For last year alone, growth in value was 7%. This is a small figure relative to total trade, since a large portion of our exports goes to the United States. The European market is still expanding, which is rather interesting, because that's where different types of exporters will be doing business. We export a lot of raw materials, but also a lot of manufactured goods. A few examples are aeronautics material and pharmaceutical products, etc. Those markets are diversified and developed. They are markets in which there is a demand for our products and services.

Each year, our association carries out a survey among our members to set and validate our priorities and policies. When the time comes to talk about our international trade priorities, our members always mention the signing of bilateral and multilateral free trade agreements under the WTO. This has always been a priority for our association. Certainly, our members believe that what is most important is for the government to assist in improving access to foreign export markets.

To conclude my opening comments, I want to say that CME is supportive of open markets. We need to help our exporters do more business internationally by negotiating trade agreements and by taking down trade barriers, especially in today's context.

I think that beyond the current economic circumstances we're in, companies are looking to expand in global markets. They're seeing their market increasingly as a global market rather than as just a North American market. I think this free trade agreement and the free trade negotiations about to be launched with the European Union are a huge opportunity for us in Canada to improve the competitive position of Canadian products and Canadian companies, especially when we consider our main competitor to be the United States. This is a huge opportunity for us to improve our companies' competitive position in the European market, which is a very important market.

Obviously, we also need to make sure that we have a level playing field and that we provide, here at home, the right conditions for our manufacturers and our businesses so that they flourish. Again, we have high expectations with regard to the European Union deal. We're seeing this as another deal with a European free trade area, and we're hoping that it's going to pass very soon so that we can focus our efforts on the bigger picture, which is the free trade negotiations with Europe.

Just to conclude, I think this free trade agreement is a step in the right direction. A free trade agreement with the European Union would be another great step in the right direction, but we shouldn't say that once we've done that, we're okay. I think we need to work more closely with the government to make sure that the resources are out there to help exporters get into these markets. Obviously, if you have, for example, tariff reductions or tariff eliminations for industrial goods, that is a huge plus for companies that are trying to get into that market, because they will be more price competitive. On the other hand, there are a lot of small and medium-sized companies right now that are looking to expand beyond their traditional markets. The free trade agreement is, as I said, a good step in that direction. But we need to pull more resources together to actually help companies get over there and grow into that market. Our economic future depends on our ability to trade globally, and the European market is a significant part of that.

Thank you.

[The Chair, Conservative, Lee Richardson]

Thank you, Monsieur Laurin.

Mr. Stewart-Patterson.

[David Stewart-Patterson, Executive Vice-President, Canadian Council of Chief Executives]

Thank you, Mr. Chair.

I'm probably going to repeat some of the same sentiments that my colleague here has expressed, but I do appreciate the opportunity to appear and talk about this bill and the free trade deal with the European Free Trade Association.

I know that a lot of people are going to ask if the years of negotiations we've spent getting to this deal are worth the trouble. I suspect that a lot of Canadians would be hard-pressed just to name the four members of the EFTA, but I do want to make the point this morning that this deal matters, and it matters for three reasons, one of which my colleague here has touched on and I'm going to come back to.

Let me deal first with the significance of this agreement in itself. Canada's commercial relationship with the EFTA is actually more significant than a lot of people realize. We're talking about two-way trade worth $12.9 billion in 2007. It's our fifth-largest export market. Canadian companies sell more to these four countries than to all of South America. I think we ought to keep that in mind.

Even though this agreement is limited to trade in goods, it's remarkably complete. It's eliminating all tariffs on industrial goods immediately, with the single and important exception, of course, of Canadian imports of ships, where duties are going to be phased out over an extraordinarily long 15 years.

We've also been able to negotiate deals on agriculture with the individual members of EFTA. I think that's important, given the problems we've had over the years in trying to do that at the multilateral level.

The signs of progress in this deal are important. It's going to save Canadian exporters in the agricultural sector $5 million a year.

The second reason that I think this matters to Canadians comes back to what my colleague touched on here: it represents our first bilateral trade deal with European countries. Given the EFTA's close relationship with the European Union, that in itself is going to help Canadian companies plug into supply chains with the broader European Union.

It also, I think, offers huge symbolic value at a time when Canada is finally engaged in serious discussions with the European Union. The 27 member states of the EU represent the world's largest market, of course, if you measure it by GDP, and also the world's largest exporter, largest importer, and largest investor.

At the October 2008 summit in Quebec City between Prime Minister Stephen Harper, European Commission president José Manuel Barosso, and French president Nicolas Sarkozy, in his role as president of the EU at the time, the leaders agreed to launch discussions that could lead to a truly groundbreaking agreement.

We've been working with our colleagues in the European business community. We've been calling for a wide-ranging accord with the European Union, one that could include, for instance, the elimination of all remaining tariff and non-tariff trade barriers; the opening of financial and other services markets; broader reciprocal access to public procurement; mobility of skilled people; stronger intellectual property protection; a sustainable energy and environment agreement; an ambitious regulatory cooperation agreement; convergence in competition policy and tax administration; and a binding dispute resolution mechanism. In other words, we're calling for an agreement that will go well beyond the traditional notion of just a free trade deal.

Government officials from Canada and the EU are currently working out what will and will not be included in the negotiations. We are hoping to see a report back from officials on that scoping exercise very soon and a formal launch of negotiations later this spring. We've already had one important step forward with the groundbreaking open skies agreement that was signed in December. It's going to increase labour mobility, lower barriers to investment, promote more competition in that industry, and also stimulate tourism in both directions.

Obviously, a broad Canada-EU agreement could have significant benefits to Canadian enterprises across a lot of sectors, especially, I think, if the recession in the United States proves deeper and longer than we're currently expecting. In this context, failure to ratify the Canada-EFTA agreement now would send a profoundly negative signal about Canada's interest in pursuing closer ties with Europe as a whole and about our ability to follow through in ratifying a successful negotiation with the European Union.

That leads me to the third and final point I want to make this morning. We are now in the throes of what is clearly a severe global recession. There is an understandable temptation in any recession to turn inward, to react to a downturn by shutting out competition from abroad in an effort to save jobs at home. The world learned the hard way during the 1930s that putting up walls offers only false hope. I think that lesson is even more important today, because countries around the world are more dependent than we were in the 1930s on the smooth flow of goods and services across borders.

We've seen a clear example recently of protectionism in action in the United States Congress, which insisted on including a “buy American” clause in its economic stimulus package. Obviously Canadians were greatly concerned about the potential impact of that protectionist measure on our companies, on our exporters, and both we as Canadian business leaders and our government were working hard to dilute, even if we didn't succeed in eliminating, that provision.

I want to point out that the strongest opposition to the “buy American” clause in the American stimulus package came from the American business community itself. To cite one example, 50 business associations and 50 individual companies signed a letter to the Senate leaders while this debate was going on. It stated bluntly that, if enacted, these provisions would backfire and harm American workers and American companies across their economy. I quote:

The resulting damage to our export markets and the millions of high-paying American jobs they support would be enormous.

The business community in the United States recognizes that the “buy American” protectionism is counterproductive. United States President Barack Obama made that clear during his visit to Ottawa last week. He acknowledged the universal tendency to push what he termed beggar-thy-neighbour policies, but he stated unequivocally that trade ultimately is beneficial to all countries and assured Canadians that he wants to grow trade, not contract it.

As a trade-dependent economy, Canada has every reason to work with our partners in Europe, in the United States, and around the world to keep trade flowing as smoothly as possible. I can think of no better way right now to do that than by moving ahead quickly with agreements, such as the Canada-EFTA deal, that bring walls down instead of putting new walls up.

Thank you very much, Mr. Chair.

[The Chair, Conservative, Lee Richardson]

Thank you, Mr. Stewart-Patterson.

We're going to begin the first round of questioning. I think everyone is familiar with it. We'll go in order and try to keep the questions in the first round to seven minutes for the questions and answers.

I welcome Mr. Dechert and Mr. Garneau, who are joining us today.

We'll begin the questioning with Mr. Cannis.

[John Cannis, Liberal, Scarborough Centre, ON]

Thank you, Mr. Chairman.

Mr. Stewart-Patterson, I appreciated your closing few words, that we move quickly and bring walls down. I'm not quoting you verbatim, but I think they were along those lines, and I couldn't agree with you more. I think part of the success that previous governments had, in the early 1990s, was from being very proactive in getting out to seek markets.

I had the privilege of chairing this committee under Jim Peterson a couple of years ago. Part of the efforts were to make sure that the commercial attachés or trade commissioners, or however you want to title them, had extended tenures so that they could become more effective.

As a start, have you seen change in that area, from your perspective?

[David Stewart-Patterson]

To make a general comment, we've always paid close attention to the impact our commercial representatives have abroad. Different governments have made different decisions over the years about where to focus efforts, sometimes putting more effort into the United States, for instance, sometimes more effort into trying to diversify away from there. I think Canadian companies consistently take advantage of the assistance government is able to provide in helping to open up new markets.

[John Cannis, Liberal, Scarborough Centre, ON]

Allow me to pick up on what you just said, about Canadian companies sometimes picking up or taking advantage of....

First of all, we all know on the government side that we're more than willing, whether it be through legislation or representatives' offices or putting in more money. We heard the other day that government is planning more offices in China, for example. We're very onside, on the government side.

But we've heard from witnesses in the past that Canadian companies would go out and just go it alone at times. I'm sure you've heard of this, and Mr. Laurin might comment as well. They were out there on their own, plugging away. They might or might not secure business, but government and organized businesses didn't seem to be on the same page. Have you sensed that yourself?

[David Stewart-Patterson]

What you may be dealing with here is perhaps a differentiation of the capabilities and knowledge base of individual companies. Some of our member companies are already active in dozens of markets around the world. They have their own networks in place, and so on, and perhaps don't need the assistance of embassy posts to the extent that small or medium-sized enterprises breaking into export markets need them.

My colleague may want to speak to that.

[John Cannis, Liberal, Scarborough Centre, ON]

I was going to ask Mr. Laurin whether there is something we could do. Is there something we are not doing as a government? Is there something you could suggest that we can do? We're trying through legislation, but is there something else we can do to enhance your position, so that Canadian manufacturers or businesses can have an equal kick at the can?

[Jean-Michel Laurin]

I can say we're in constant discussion with the Department of Foreign Affairs and International Trade. They actually seek feedback because they want to continuously improve their service, and as you mentioned, they have opened some new offices abroad. One thing we're certainly very happy about is that they've also opened new offices in different regions in Canada. I know, for example, they just placed somebody in Windsor, and they just placed somebody in Kitchener. This is very good, because they're closer to the local business community and can establish connections with local businesses in these different areas. When you go abroad, as my colleague indicated, different companies have different capabilities.

I think we can say in some cases that there are some trade commissioners abroad who might not necessarily have been able to provide the level of service that some companies were expecting, but they could also come back to us and say that they've seen some companies go out there, and they could have tried to help them, but the companies weren't ready and actually hadn't done their homework.

There are some growing pains when you're trying to grow into new markets, but I think overall the trade commissioner service is an excellent service, and we actually refer members to them all the time. If you know that you want to go into a specific market, the service can be a valuable resource. A few bad examples may have been reported to you, and that's often what happens, but I know they've been very helpful for a lot of our members in many areas.

[John Cannis, Liberal, Scarborough Centre, ON]

I have two more questions, if I may.

[The Chair, Conservative, Lee Richardson]

John, I think Sam wanted to say something.

[John Cannis, Liberal, Scarborough Centre, ON]

Oh, I'm sorry.

[Sam Boutziouvis, Vice-President, Economics and International Trade, Canadian Council of Chief Executives]

It's just a quick comment, Mr. Cannis.

The Department of Foreign Affairs and International Trade has made great efforts to improve their services under the auspices of their global commerce strategy, which we have strongly supported.

Secondly, the Canadian Council of Chief Executives is on the record calling for more resources to be put into the international trade and foreign affairs sides, basically saying that this is an area where we need to have more money if we can.

Finally, I'd say that the CCCE experience with respect to the posts abroad is extremely positive. Whenever we get in contact with a post, whether it's a consulate or an embassy, there is very much an open-door policy, and they strongly support whatever missions the CCCE has taken abroad or help whenever individual CEOs request help. As you know, people feel that large corporates don't need help in going abroad. That actually is not the case. Our large corporates, our membership, and our CEOs really do need to be able to have access to the consulates and the embassies abroad. They rely on them, and by all accounts, they are very strongly supportive and have nothing but positive comments.

[John Cannis, Liberal, Scarborough Centre, ON]

I'm pleased to hear that, only because, as the saying goes, you have to invest a dollar to make a dollar, or invest an effort to get a return.

I have just two last questions, if I may.

Mr. Laurin, you talked about credit and access to funds, without which, of course, efforts to do anything, and especially in this area, will be impeded. What support systems are there to help? I know globally everybody's going through some turmoil at the moment, but obviously governments have other mechanisms to create or help grow the economy, etc., through various organizations. I'm not going to name them; I leave that up to you. But are those organizations there, on the government side or whatever? Is the mechanism there? Is it satisfactorily accessible so that we, as Canadian companies, can make a good go of it when we're out there?

[Jean-Michel Laurin]

If I had been here six months ago I would have said the credit market is working fine. When there are some issues that need to be resolved, we can take them to the private sector institutions or to EDC. I don't know if that's the institution you were alluding to, but EDC plays a significant role helping Canadian exporters grow into international markets.

I would say that the situation since October has changed dramatically. Access to credit is a big issue for our members, and it's not necessarily anybody's fault, it's just that circumstances are like that. We have to keep in mind that almost half of the credit that was provided to our members was provided by foreign institutions. We've talked about asset-backed commercial lending. A lot of that has disappeared. Venture capital has pretty much dried up in Canada. There are a lot of credit facilities or different types of credit that are just not available right now, so I think there's a strong role for the government to step in and take some of the risks that the traditional banks are not able to take right now and get into some of the markets that some institutions are getting out of in the Canadian market.

So yes, I think there's a very strong role for the government to temporarily occupy the space that the private sector has left void. That's why we made our first request for the federal budget to ensure access to credit for competitive companies. We're not asking to put money in failing companies, but some of our members are in a good position to grow in international markets, and just because they happen to be in the wrong industrial sector or in the wrong area, they're not able to access credit and that constrains their growth as a company.

What was announced in the federal budget was a significant step in the right direction. As far as I've heard, the bill that those measures are in has not been adopted yet, so I don't think BDC and EDC can actually go out and put new products and services on the market. But we're working with them very closely to make sure that whatever they come up with is going to respond to the needs of our members.

[John Cannis, Liberal, Scarborough Centre, ON]

Thank you, Mr. Chairman.

[The Chair, Conservative, Lee Richardson]

Thank you, Mr. Cannis.

Monsieur Cardin.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chair.

Good morning, gentlemen, and welcome. Each one of you talked about what we are currently experiencing: this economic crisis is perhaps the most severe we have ever experienced. Today, there are various tools at our disposal that were not available in the past. Relatively speaking, the current crisis is an extremely significant one.

People working within your respective organizations are constantly on the lookout and monitoring events. Did you see the crisis coming? If so, since when?

[Jean-Michel Laurin]

That is a good question.

I'll give my colleague some time to think.

I think we saw it coming. I don't think anybody was expecting it to be....

I don't believe that anyone was able to predict that the crisis which has struck us so quickly would be so severe. Especially if we consider the sources of growth for the Canadian economy over the last 5 to 10 years... But when we get back to the basics, an economy grows when we create value. Value emerges from the creation of value-added goods and services.

The manufacturing crisis did not occur overnight. The peak in employment was reached at the end of 2002. Since 2003, Canada's manufacturing sector has undergone significant restructuring. There were rather important problems. Your colleagues from the industry committee have delved into this issue extensively.

In recent years, a good portion of our economic growth was due to high commodity and energy prices which, in a way, inflates our figures on exports and economic growth. The fast appreciation of the Canadian dollar struck our goods and services exporters very hard. This had a direct impact on profitability, as the statistical data shows.

We saw it coming. It was just a matter of time before reality struck us. We were very much aware of what was happening to the real estate market and the boom in energy and commodities was not going to last forever. What would remain once everything tumbles? Manufacturing and production of value-added goods and services. Today people realize that these sectors are the pillars of our economy. We have to be concerned. We have to make sure that businesses are successful and are able to develop new markets outside of Canada and North America.

[David Stewart-Patterson]

Well, perhaps I'll make just a couple of comments.

I think with any situation like this, by definition, people don't see it coming. I think we had some indication ahead of time. Certainly when our members met in October of last year, we were already having discussions among ourselves. It was clear things were going to get worse, but I think the speed with which the economy has gone down has caught everybody by surprise. If you look at the economic forecasts, everybody pretty much got it wrong.

That said, I think we can overreact on the other side too. I mean, every downturn comes to an end sooner or later. The only questions are how bad it is going to get and how long it is going to go on. So I think there has been a considerable amount of surprise around the event.

On the other hand, I have to point out that a lot of this crisis has to do with financial markets. Canadian regulators and Canadian financial institutions were much more prudent than the rest of the world coming into this crisis, and the result is we are actually, relatively speaking, in a much stronger position to get through the crisis and come out the other side of it.

I think, if I can speak for the Canadian economy as a whole, we did some important things right.

[Serge Cardin, Bloc, Sherbrooke, QC]

Let me reassure you right from the outset. The Bloc Québécois believes in this free trade agreement, obviously. However, there are two points which we believe are worth mentioning: the shipbuilding industry and supply management in the agricultural sector. You probably have members or businesses that work in the shipbuilding industry or in the agrifood or agricultural sectors.

What is the feedback your people are giving you on this free trade agreement, as concerns specifically shipbuilding and the safeguarding of supply management?

[David Stewart-Patterson]

Mr. Laurin.

[Jean-Michel Laurin]

There are numerous products that are subject to supply management but there are many others that... Some of our members want free trade agreements such as these to open new markets. There is a lot of innovation in the agrifood sector, in Quebec and elsewhere in Canada. Businesses are a bit disappointed that the agrifood debate is dominated by sectors that are subject to supply management. I'm not saying that we have to set supply management aside, but I believe that the overview of the agrifood sector is much more complicated than the media would have us believe.

When it comes time to review the Free Trade Agreement and specific provisions for these two sectors or other sectors, our association has always advocated for greater openness in markets for industrial products and Canadian goods and services exported abroad. However, there has to be equal footing for everyone. The two sectors that I mentioned, shipbuilding and agricultural products, do not really exist in a free market, in every corner of the world. The agricultural sector is hugely subsidized. The shipbuilding sector is perhaps even more complicated.

On the one hand, we cannot take these two sectors and decide not to open our markets because certain sectors of our economy are perhaps not ready to face competition, or are in a good position to develop these markets. On the other hand, we have to reassure these industries that the business climate in Canada and Quebec is good, and that they will be able to compete in the same environment as their foreign competitors. This applies just as much to the shipbuilding sector as it does to the agrifood production sector; in addition to other sectors such as steel, and ones that were not mentioned. These are subject to a high degree of protectionism.