International Trade Committee on May 1st, 2012

[Jasbir Sandhu, NDP, Surrey North, BC]

Thank you for being here today.

I want to go back to the question my colleague had at the beginning. When any trade agreements are negotiated, obviously we're looking for a net benefit to Canada, and Japan's going to look for a net benefit to their country.

I didn't really hear a clear answer to this, but there must be some industry that is not going to benefit from this trade agreement. You pointed out that there were four submissions out of 32 submissions.... Did the department do any additional research, any additional digging around, to find out which industry, besides the automobile industry, will have a negative impact from it?

[Ian Burney]

As part of the joint study process, our chief economists on both sides did a comprehensive modelling of the impact of a free trade agreement. This was the source of the number that there would be a GDP benefit of $3.8 billion on the Canadian side and $4.4 billion on the Japanese side, and an expansion of exports of some 67%. That was the modelling work that was done.

In terms of the sector-by-sector impact, as I say, the only sector that has brought any concerns whatsoever to our attention is the American-owned automobile and vehicle manufacturing segment.

If you're trying to look at the impact, you look at areas where the tariffs are still significant and providing a high level of protection. In Canada, frankly, our tariffs are no longer that high, and there are not that many areas where the impact of tariff elimination would be significant in the Canadian economy. It's for this reason that we don't foresee negative impacts in other areas of the economy.

[Jasbir Sandhu, NDP, Surrey North, BC]

You're telling us that every sector in the Canadian economy besides the automobile industry will have some positive impact?

[Ian Burney]

And even in the automobile industry. What I'm telling you is that we've had some concerns expressed by stakeholders, but there will be positive opportunities as well, because the nature of the concerns that have been expressed to us has often been framed in terms of the challenge of penetrating the Japanese market. So my point would be that if the problem is the closed nature of the Japanese market, how better to address that than in the context of a free trade agreement?

I don't even take it as a given that the impact in the automotive sector would be negative in Canada. I think there actually would be some significant opportunities to be gained through better access into the Japanese market. Now, they don't have tariff barriers, but the argument from the Canadian industry is that through a range of non-tariff-related measures it's a difficult market to penetrate.

[Jasbir Sandhu, NDP, Surrey North, BC]

I come from British Columbia. Forestry is very important to British Columbians. Resource-based goods account for 56% of the exports to Japan right now. Have you looked at that impact? Are we going to be exporting more raw logs to Japan? Or, within this agreement, would we benefit from having value-added products that could be exported to Japan?

[Ian Burney]

We would be seeking a comprehensive elimination of tariffs and the reduction or elimination of as many non-tariff barriers as possible. This would have impacts across the entire economy. We think the positive impact may be greatest in the areas where the current levels of protection in Japan are highest, and those are agriculture, fish and forestry, and certain industrial areas, but we would expect the benefits to go beyond that.

There's an important point that I think is worth mentioning, which is that beyond the specific elements you have in a free trade agreement, you have positive momentum that is generated in a relationship by having a free trade agreement and all the publicity and attention associated with it. It often generates economic activity that isn't specifically related to any one provision in the agreement. Economists call that the gravity effect, and it's not inconsequential.

[Jasbir Sandhu, NDP, Surrey North, BC]

Do you see a trend that we will see more value-added goods being accepted by or exported to Japan as a result of this agreement?

[Ian Burney]

That's the current trend, and I think it's entirely possible that a free trade agreement would accelerate that trend.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Hiebert.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

To continue on this theme, the backgrounder information we have been provided suggests that Japan has a unique economic situation. In recent years it has seen a decrease of 5.5% in GDP, and then an increase of 4.5%, and then a decrease of 0.7%, and currently a forecast of 1.5% for this year.

To what degree do these economic forecasts have an influence on the potential upside for Canada? With those kinds of varied economic forecasts, and the joint study by the chief economists that you cited in your opening remarks, I'm imagining that the trajectories of those forecasts diverge or spread quite quickly over time. It's hard to know what Japan's economy is going to look like in the future. Do you have any comment on that?

In addition, it is becoming more widely known that Japan's gross public debt, which is currently valued at about 212% of nominal GDP, is the highest ratio in the developed world. When you look at that economy, the ups and downs, the extent of the public debt, to what degree does that factor into our negotiations and forecasts for growth?

[Ian Burney]

I would say that all else equal, the opportunities would be linked to growth levels in the Japanese economy. To be sure, it would be better for Canada for the Japanese economy to grow, and to grow vigorously. But even in the absence of that, it's important that Canadian companies have the best quality of access to that market that we can provide for them. At a minimum, we want to ensure that our companies can compete on a level playing field in important markets around the world. In the world we currently live in, where there frankly isn't all that much progress happening in the multilateral talks, the game has become competitive bilateralism. What we absolutely need to avoid is a situation where our companies are at a competitive disadvantage, particularly in huge markets like Japan's.

I think the initiative should be looked at from that perspective, that we don't want to find ourselves sometime down the road without preferential access in that market, after everybody else has gone ahead and negotiated preferential access. We still have an early mover advantage, and that's a fairly significant point.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

With our trade negotiations with the European Union, we've taken a negative list approach. Do you anticipate that a similar approach would be taken with Japan?

[Ian Burney]

If you're talking about services and investment, that's the approach Japan has taken in its negotiations as well. I see no reason why that wouldn't be the methodology we would pursue.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Also, as with the EU, the provinces and territories have played a greater role in these negotiations than we've seen in the past. Would you also see the provinces and territories playing a similar role in a Japan-Canada free trade agreement?

[Ian Burney]

I'm not sure that I would see a role in terms of direct participation in the negotiations. We would certainly consult the provinces and territories very closely at all stages. There were some unique circumstances in the Canada-EU negotiations stemming from the overriding priority the EU placed on issues that were within provincial jurisdiction. I don't see a replication of those circumstances.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Like procurement.

[Ian Burney]

Provincial procurement in particular was an overriding priority, and is an overriding priority for the Europeans.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

But you don't see that in the Japanese one?

[Ian Burney]

I don't see the same dynamic happening in this negotiation that would cause us to go down the same path in terms of model of representation.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

What opportunities would become available to Canadian businesses in the areas of services? I ask that question in the context of the fact that 75% of Japan's GDP is made up of services. The Japanese are experts in that field. Where do you see the opportunity for Canadian businesses to compete in that kind of environment?

[Ian Burney]

It's very substantial, and we have a very large presence of financial service providers already in the Japanese market. Manulife has a very large business, as do some of the major Canadian banks. We think there are opportunities for growth there. In terms of the professional service categories, architects and engineers and so forth, and in the whole range of energy services, to name just a few, we think there are enormous opportunities in the Japanese market.

Through a free trade agreement, we would be negotiating better access and more secure access across virtually the entire range of service categories. That would be one of the areas where we would expect to see significant benefit.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Davies.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you, Mr. Chairman.

Sorry, I didn't understand your answer to the question about the positive or negative list with respect to service negotiations. Is it a positive or negative list?

[Ian Burney]

It's a negative list.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

Mr. Burney, I want to explore the idea of the modelling. You've mentioned it. We've done some modelling, and it reflects net benefits of $3 billion plus for Canada and $4 billion plus for Japan. I know that economic simulation exercises are not an exact science and have some limitations.

There have been some important concerns raised regarding the assumptions made of previous CGE modelling exercises, so I want to explore that a bit. When you did the Japan modelling exercise, did we assume full employment in both countries as part of that exercise?