International Trade Committee on Feb. 28th, 2012

[The Chair, Conservative, Rob Merrifield]

Do you have anything to add, Mr. Hodgson? No? Okay.

I want to thank the witnesses for a very interesting hour.

We appreciate you in Saskatchewan. I see the sun shining through the window on your face there, so it must be a great day.

Thank you.

[Murad Al-Katib]

It's always a great day in Saskatchewan.

[The Chair, Conservative, Rob Merrifield]

Yes, I know. It's almost like you're an Albertan these days.

Thank you for sharing with us through the teleconference, Mr. Al-Katib, and thank you, Mr. Hodgson.

We will suspend now to set up our other panel.

Thank you.

I call the meeting back to order.

We have two witnesses for this hour. We'll start with Mr. Poloz, the president and CEO from Export Development Canada.

Thank you for coming. The floor is yours, sir.

[Stephen Poloz, President and Chief Executive Officer, Export Development Canada]

Thank you very much.

Good afternoon, everyone. I appreciate the opportunity to be here today.

I recognize some familiar faces around the table from my previous appearances, but this my first time here since being appointed EDC president.

I have just a few opening remarks; I'd rather focus on your questions. Please feel free to pose those questions either in English or in French.

Here is a brief introduction to EDC as a lead-in to how we interact with the Canadian Trade Commissioner Service, if I may. Obviously EDC is Canada's official export credit agency. It's a crown corporation, but importantly, it's a commercial export credit agency, which means it's self-sustaining; it earns a profit each year. It provides trade finance and insurance services to Canadian companies so that they can grow their international business with lower risk.

“Commercial” is quite literal. It means that we price our services according to market prices, whether it's a loan or whether it's insurance. The profits we earn doing that, of course, are automatically folded into the government's fiscal statements. EDC pays a dividend to the government quite frequently and has cumulatively paid over $1 billion in dividends.

We also operate under what I call a partnership-preferred philosophy. This is in the sense of partnering with the private sector whenever possible so that we ensure we are complementing the private sector's own products and services in the marketplace, not stepping on its toes, crowding it out, or doing things that the private sector otherwise would do. To me this represents good basic policy-making. It means we're complementing the private sector in a way that allows the private sector to evolve through time and do, perhaps, more and more of the activities in that space as it develops its business. It allows the policy-maker to back away and do other things that therefore need doing.

If I could give you an illustration, last year EDC did approximately 1,000 new loans. I think the number actually, for the record, is 937. I hope I'm not misspeaking, Mr. Chair. Of those 937 loans, 86% were partnered with the private sector, so some of the risk was borne by the private sector, and the private sector institution was the face of the transaction with the exporting company. We think that's a very important way to operate.

EDC does a lot of facilitation of Canada's trade, but we also use our tools and our networks to create Canadian trade. There's an important distinction between those two things. It's in that space where we work most closely with the Trade Commissioner Service. We work very closely with it every single day, both abroad and domestically. This activity is highly complementary between the two organizations. We're combining market intelligence with networks, with relationships with foreign companies or with domestic companies, and combining all those things together in a matchmaking kind of process, which means more Canadian trade tomorrow. Along that way, eventually someone may need a financial solution, and that's where EDC brings comes into play, but a lot of the front end is done very intensively in collaboration with the Trade Commissioner Service.

I'll give an example and then I'll stop. EDC will build a financial relationship with a big foreign buyer in a country like, let's say, India. We'll establish that relationship first of all in a collegial manner, but eventually in a financial manner, and in exchange for an understanding that the foreign buyer will build its Canadian trade linkages—in other words, it will add more Canadian companies to its procurement list and actually procure from them. Working with the Trade Commissioner Service, EDC, both here and abroad, will then bring targeted Canadian companies to the attention of that foreign buyer with whom we have established this financial relationship. That, of course, builds a bridge along which trade happens year after year afterwards.

We operate in 16 foreign representations, which is a very small number compared to where our trade commissioners work. They have a much greater reach than we have, and so we go to them in the vast majority of cases, but when we are in the same city, we work in the office right next door and work together at the same receptions, the same trade shows, the same companies, etc.

Mr. Chair, I'll stop there.

Thank you for your attention. I will be pleased to respond to your questions.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We now have Mr. Peter Clark, who is the president of Grey, Clark, Shih and Associates Limited.

Thank you for coming in. The floor is yours.

[Peter Clark, President, Grey, Clark, Shih and Associates Limited]

Thank you, sir.

I would like to talk to you a little bit today about the Trade Commissioner Service and its evolution in the ever-evolving trade dynamics around the world that Canadians have to cope with and that they have to cope with. You have heard good things about the Trade Commissioner Service in your earlier meetings. I really don't have anything to contradict that, and wouldn't want to.

I have been working with trade commissioners for many years. It has been interesting to see how the service has evolved. Strangely enough, for a former officer of the Department of Finance, I think that there is a serious risk that if you try to cut back budgets for the Trade Commissioner Service, it will be very penny-wise and pound foolish. The Trade Commissioner Service needs more resources, not less.

We have a basic change in the focus of our exports in terms of what's happening in the United States. The weak economy is only one part of it. The strong loonie you have heard about already, so I won't go into that. That's a particularly dangerous problem in the United States. The other side of it is the United States' very aggressive export policies. When President Obama says he's going to double exports in four years, trade isn't increasing at that rate. Those increased exports from the United States are going to come out of somebody else's hide, and we're the closest available hide. We need to look at that.

We also need to look at what the United States is doing to attract manufacturing jobs and manufacturing back to the United States through tax policies, if they ever materialize, because essentially that's a beggar-thy-neighbour policy. We've seen it happen not so much on the tax side but on locational subsidies, such as the Electrolux plant being pulled out of l’Assomption and moved to Memphis. They gave them $179 million to build a $181 million plant. It's pretty hard to compete with that.

We need a strong Trade Commissioner Service to help us to attract exports. We need it to help track investment. We're also in an environment where if you're not inside a big trading group, you're outside. You're at a disadvantage. You're being discriminated against. You are a least-favoured nation. That hurts a lot, if you are an agricultural or commodity exporter. If it's rocks and logs, it doesn't hurt at all, because they are mostly duty free, but when you get into products like beef and pork, it's a really serious problem. We were in a coma with Korea for three and a half years; the United States, which was there with free trade, is now eating up our $250 million in exports. Commodities are very tough.

Where the Trade Commissioner Service can help is with small and medium-sized businesses. It can help with businesses that have innovative products, that have high tech, that have high value-added where the tariff is either lower than it is for agricultural products or where the uniqueness gives us an advantage that puts us back on an even footing.

The Trade Commissioner Service on the ground, supported by locally engaged staff, is essential. We really do have to take a look at where we place our resources. We have to make sure there are enough jobs out there to train the new people. A lot of the people who have been there are baby boomers. They are getting ready to retire. How are we going to pass on the expertise? How are we going to pass on the institutional knowledge? There need to be resources.

A question was asked of me: “Why should we do this for business?” My answer is, because everybody else does. If we don't do it, we're going to be at a serious disadvantage. Big companies can look after themselves, but they still find the TCS very helpful to them. I look at things from these perspectives.

Who are we competing with in the United States on agriculture? The Foreign Agricultural Service is massive. It produces reports on countries and products. Now the U.S. Commercial Service in the Department of Commerce is being beefed up, and they play hardball.

We've also had clients who have been trying to get into the Russian market, and they have complained that the Europeans have much better commercial services on the ground in the Russian market than Canada does. That has improved; I used to get a lot of grumbling about our staffing in Russia, but I don't get it anymore. I understand the people who are saying, “Don't rock the boat in Russia; just put some more resources in there.” We need it.

That's generally where I'm coming from on this issue. I'd be happy to answer questions for you.

[The Chair, Conservative, Rob Merrifield]

Very good. I'm sure we'd be interested in hearing more dialogue.

We'll start with Madame Péclet.

[Ève Péclet, NDP, La Pointe-de-l'Île, QC]

Thank you very much, Mr. Chair.

My questions are for Mr. Clark.

On October 19, 2011, you issued an opinion letter on the free-trade agreement with the European Union. You provided certain opinions about the negotiations.

For example, concerning the rules of origin, you've said that the EU is really not flexible on this issue and that it could deny Canadian products the European Union market. You also mentioned the subsidies.

I would like your comments on what you think of the negotiations and the difference between these and the negotiations during NAFTA, where everything was made public and all the information was given to the public. Now that we don't really know what's being negotiated, I would like to know what Canada will pay. What are the consequences going to be for Canada and for small businesses in Canada?

[Peter Clark]

I've said a lot of things about CETA—

[Voices]

Oh, oh!

[Peter Clark]

—then and since then. As a former negotiator, I know that the more you want something, the more you're going to pay for it, and Canada badly needs an agreement with Europe, because there are 27 countries there. It's a major market, and if we're outside, we're least favoured.

Will we pay more? Probably, because we're the demandeur, and the demandeur always pays more, but what I've also said is that we need the deal. It's short-term pain for long-term gain, because we can't afford to be looking at other people in that market who are ahead of us with preferences. It's the same as in Korea.

What about subsidies? Well, I asked the European negotiator whether they were going to put the common agricultural policy on the table, and he said no. When you don't put the common agricultural policy on the table, then all the Canadians who have to cope with those subsidies are going to be at a disadvantage.

As for the rules of origin, I think Jim Sanford is right. If we don't have a cumulative type of rule of origin allowing us to mix our origin with that of the United States, then there are very few products that we're going to be able to cope with in terms of meeting origin. You might get the duty down to zero, but if you can't meet the origin rule, then you're out of luck.

Now, on NAFTA, we only really use NAFTA rules for about 50% of the products that we send to the United States. Some of them are already duty free and we don't have to. For some of them, we can't meet the origin.

As for the issue of government secrecy, it's very difficult to conduct a negotiation in secret.

[Ève Péclet, NDP, La Pointe-de-l'Île, QC]

But only 9% of Canadian companies are exporting, actually, as was said

…in a report from the Small Business Branch, released in June 2011.

For several years now, our trade balance has been negative. Our exports have dropped. You also mentioned that the small and medium enterprises will have a lot of difficulty adapting to the European Union's regulatory regime, and certainly others will have difficulty competing with the large European companies that will be able to.

I would like to make a connection with the Canadian Trade Commissioner Service. What can it do to help the small and medium enterprises get into the European market? As we know—and we hear it often—one job out of five is related to international trade. What about the other four?

I would also like to mention that Bombardier, which is a large company doing a lot of business with the European Union, has commented on the possibility of positive discrimination. Do you know what that involves? When an invitation to tender is made, positive discrimination is used to give jobs to local companies, which will be impossible under an agreement with the European Union if European regulations are in place. So what will the consequences of this be on small and medium enterprises in Canada?

[Peter Clark]

I've never seen Bombardier really stuck to compete in any market in the world, because they're pretty inventive and pretty adaptable.

The Trade Commissioner Service on the ground in Europe can certainly help people cope with European regulations. I didn't say Canadian small and medium-sized business couldn't, but they would have some difficulty adjusting, because there's a lot of regulation in Europe, and it's different. Small and medium-sized businesses in Canada need the help of duty-free access, to start, and they need the help of a Trade Commissioner Service. Without a Trade Commissioner Service it would be even more difficult for them, because they can't do it on their own resources.

In terms of your question about the jobs and the market, what we do have now is billions and billions of dollars of trade in the European Union. If other people do free trade agreements with Europe, then we're going to be at a disadvantage. Getting there early is first. It's like the first company having dry beer, a long time ago: you got the shelf space, you sold the dry beer, and everybody else played catch-up. I'd rather be first on the shelf than second.

I look at things from the perspective of the glass being half full, not half empty.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Cannan is next.

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

Thank you, Mr. Chair.

You mean especially if it's a beer glass, right?

[Peter Clark]

Well, I'm diabetic now and can't drink it anymore, but I used to.

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

Thank you, gentlemen, for being here today and for sharing your wisdom.

As we were talking about the Trade Commissioner Service, I just wanted to compliment Mr. Poloz and EDC on an excellent year. I see from your report on February 27 that you're up 9%.

I represent the Kelowna—Lake Country riding in the Okanagan. It's in central British Columbia, in the southern interior, and we have a lot of small businesses. We have an excellent trade commissioner whom we work with, but the companies could be five to ten employees—they're not billion-dollar companies— so could you clarify the size of SMEs you're working with, some of the services you provide versus what the Trade Commissioner Service provides, and whether there's any overlap? Are there are some areas that we might be able to recommend the TCS refine and be more focused on?

[Stephen Poloz]

Certainly, and thank you.

Over 80%, possibly closer to 90%, of the companies we work with in a year are SMEs, the small ones probably being around 80%. The number of medium-sized companies is a fairly small relative to the very large number of small companies that use our services.

Primarily the service they use is what we call accounts receivable insurance. When they have a sale, they may not know the buyer all that well; they're shipping more or less in blind faith, and they may wait 60 to 90 days, sometimes longer, for payment. Effectively, the small company then has to give credit to their buyer during that period while they're waiting for the money, and they don't have the money available to make their next order.

If they approach EDC, EDC can check out the foreign buyer and insure that receivable for a commercially oriented fee. That, of course, takes the risk off the table. The company then is liable for only 10% of that outstanding amount should something go wrong. EDC will pay them 90% of the value of that contract if the buyer fails to pay, and then EDC will go after that buyer to recoup the money if possible. Meanwhile, the company can go to its bank with that insurance policy and receive credit from its bank, because that was an unassured piece of collateral at that point. You can see that the triangular relationship between the exporter, EDC, and their bank works well to help them grow their business.

In terms of overlap with TCS, in the very basic sense there's complete overlap, because they're exactly the same companies. A trade commissioner would ask if they knew about EDC's service; conversely, we'd be suggesting they talk to the trade commissioner down the street or in the next building to grow their sales. There's a very collaborative effort, but what we actually deliver to the company is quite different. It's carefully identified who does what for them.

I hope that gives you a cleaner picture of what we're doing at that small end. As a small company—and I mean really small—you can insure as small a transaction as you like, while if you were to go to a private sector insurer, you would normally be up against having to do a certain amount of business per year or that kind of thing. This is where EDC is filling a gap in the market space.

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

Thank you. That's a great overview. How many countries did you say you focus on mostly?

[Stephen Poloz]

What I said in my remarks—

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

It was 16, wasn't it?

[Stephen Poloz]

We have 16 foreign representations. We actually have people on the ground in 16 cities around the world. We're always housed in a Canadian consulate or a high commission or an embassy. In fact, usually the office is right beside the trade commissioner's office in that foreign country.

If an exporter would like us to work with them in a country that does not have one of our representations, we go somewhere every day with them. When we arrive in town, it may be a town that does not have an EDC representative, but it always has a trade commissioner, so we're immediately connecting with them on the ground in that broader reach of countries.

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

Maybe both of you could answer. Do you think our trade commissioners are located in the right countries?

[Peter Clark]

They're all over the place. If you asked me where I thought we should have more, I'd say China, even though they're beefing it up. I'd say we should probably take another look at Russia now that they're in the WTO. I would be looking at more in Brazil. Where we need them is in the emerging markets.

I would think we have good representation in the United States, but we're looking at rationalizing it. I think you put your money in expanding markets, not shrinking markets.

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

I appreciate that and I agree.

Just to follow up, my colleague Mr. Hiebert had an excellent observation on dealing with the South Asian markets. Doing business with those countries is based on relationships. If you have a good relationship, then you do business, whereas in the western world, you do business and if you have a good business relationship, then you build that personal relationship. If you don't, then you sue each other.

With regard to the timing of the trade commissioners in Asia, do you think they should be longer terms or placements?