International Trade Committee on June 5th, 2012

[The Chair, Conservative, Rob Merrifield]

I'd like to call the meeting to order.

I want to thank our witnesses for being here. I see we have enough members at their seats and witnesses at the end of the table, so we'll start.

We're going to continue on with the study on a comprehensive, high-level economic partnership agreement with Japan. We have with us two witnesses in the first hour and two in the second. The two in the second will be video conferenced. With us right now we have Factors Group of Nutritional Companies.

Mr. John Tak, thank you for being here.

We also have Boulanger Bassin Bed and Breakfast.

Mr. Ken Ilasz, thank you for being here. We'll start with you, Mr. Ilasz. The floor is yours. We're looking forward to your presentation.

[Ken Ilasz, Owner, Boulanger Bassin Bed and Breakfast]

I have a little introduction here.

This activity of mine with Japan began four years ago, following a holiday trip to visit friends. I learned quite quickly that one aspect of the culture in Japan is gift giving. It's intertwined in the society. For many years in my B & B I had made fruitcakes, and I brought some of these cakes to the Japanese, to my friends, and they loved them—and they did know about fruitcakes. The Japanese import approximately 60%—

[The Chair, Conservative, Rob Merrifield]

You never brought samples for the committee?

[Ken Ilasz]

I did, as a matter of fact.

[The Chair, Conservative, Rob Merrifield]

Oh.

[Voices]

Oh, oh!

[Ken Ilasz]

I did. I thought maybe I could get on that wagon there.

[A voice]

Okay. We are making headway—

[Ken Ilasz]

Yes. I'm going up in the world.

[Voices]

Oh, oh!

[Ken Ilasz]

Just to reiterate, I brought a few cakes, and even though people did know about fruitcakes—they import 60% of what they eat into the islands of Japan—most of those cakes were coming from Germany and England. They had never tasted such a good one from Canada.

To modify this cake, which was originally a product from my great-great-grandmother, who came from Austria, I designed a fruitcake that I thought the Japanese would enjoy. I suppose I've been quite lucky, because this is really a micro-operation. I'm a one-man operator. I make 3,000 cakes a year, a third of which are sold in Japan. Another third are sold in retail outlets in the province of Quebec, and the rest I sell out of my little operation in Montreal.

I guess my interest in Japan—I'll make this quick—maybe goes back to when we were children, when my mother would collect these porcelain salt and pepper shakers with this “Occupied Japan” on it. We used to laugh; you know, we thought it was so funny, “Occupied Japan”, but that was back in the 1950s and the 1960s. Since then they've shown us what they were able to do.

Basically, the process to get there was through MAPAQ, which in Quebec is the ministry of food and fisheries. The Montreal office put me in contact with the commercial attaché in Tokyo, who I pitched to, and after opening a dossier, this commercial attaché introduced me to the people I do business with, who are food importers based in Osaka. They import mostly maple syrup, and they took on my cake about three and a half years ago.

Following our agreement, we decided to get the product approved. One of the biggest challenges in Japan is getting any item, but especially a food item, a certificate of approval. Of course the import duties are part of that process. Much depends on the custom officer's knowledge of the product.

In my case, there are more than 20 ingredients in the product. The ingredients come from every part of the world. In order to satisfy the requirements, there were all kinds of letters of guarantee that the products were not only fit for consumption but also wouldn't make people sick.

That was a lengthy process to get, not only from the distributors from whom I purchased my ingredients but also from their suppliers. This was something the Japanese were very centred on. They wanted to know exactly where everything was coming from.

I would say that another preoccupation they had, something that needed to be dealt with and that initially gave us some challenges, was their concern about freshness and the “best before” date. My product is good for two years. It doesn't have any artificial preservatives in the cake. People there couldn't understand how a cake that was two years old could be good to eat. This was also a challenge.

Now I'll turn to the variations in duty. The import duty on my product is levied at 30%. I use pure maple syrup. If I used maple sugar, the import duty levied would be 17%. If there's one gram of sugar in any of the dried fruits, the duty increases immediately to 50%. Otherwise it's 30%.

A 25-kilogram bag of flour from Saskatchewan, which in Montreal costs me $19, is $40 there, plus transport, port fees, and the overall 5% tax. So if you add up all of those things, it makes a lot better sense at this present time to keep making the cake in Canada, because it would be even more expensive to do it the way things are in Japan. I don't know if you need to know this, but I wholesale that for $27 FOB in Montreal, and that is equal in terms of import duties. The import duties, on a percentage basis, are equal to the cost of the ingredients of my cake, so it's quite considerable. Not only do I have one or two partners, but I have quite a considerable silent partner over there.

I'll read you a couple of quotes from people who I do business with. I don't know where the quote is right now—excuse me—but I'll tell you that what I wanted to quote was from the commercial attaché who wrote to me a couple of days ago and said that a lot “depends on the custom office at airport or port”. For example, he said, for maple spread, the customs officer charged 35%. He thought it was dairy butter, but he's referring here to maple butter. Therefore, he said, the importer changed the port from Kobe to Osaka and then the import duty became 17%.

These kinds of things happen on a regular basis. In the quote from the importer, the people I do business with, they say, “In general, the duty on sweets is very high...”. His appreciation of this is that the Japanese want to protect a confectionery industry that is of very high quality. But indeed, he feels that a new deal with lower tariffs would be good for everyone involved.

In conclusion, I believe that a new deal would not only improve the flow of goods but would also aid the Japanese in attracting the foreign investment they seek. A lower tariff would perhaps entice companies to set up production there, and specifically in the affected part of the country that was ravaged by the tsunami.

In general, then, that's basically my presentation.

[The Chair, Conservative, Rob Merrifield]

Thank you very much for that. We appreciate you being here and sharing that, and I'm sure there will be a lot of questions that will come out of it.

We'll now move to Mr. John Tak, the vice-president of international business for the Factors Group of Nutritional Companies Inc.

The floor is yours, sir.

[John Tak, Vice-President, International Business, Factors Group of Nutritional Companies Inc.]

Thank you.

First of all, let me say thank you to the Government of Canada for holding these meetings and for inviting me to comment on the Canada-Japan partnership agreement.

I also thank the committee members for your hard work on these public hearings and for your valuable and admirable service to Canada and to Canadians. I really do thank you. I really appreciate your long hours and your dedication.

In opening, I’d like to give you some brief insight into my background. It's unique, of a sort. I studied business at the British Columbia Institute of Technology and then graduated from the University of British Columbia, in 1982, with a B.A. in Asian Studies and the Japanese Language. While my last name sounds Asian, it’s actually Dutch. I get all the mailings from the Chinese legal association in Chinese, because many people think I'm Chinese.

Following graduation from UBC, I studied in Tokyo at Stanford University’s centre for advanced Japanese and did postgraduate research in the economics department of Kyushu University, in the south of Japan. My postgraduate education in Japan was financed by a $30,000 scholarship kindly provided by the Japanese ministry of education and the Japan Foundation.

I speak and read Japanese, and I used these skills to open and manage Magna International’s first office in Tokyo. I also spent five years in Tokyo as the senior representative managing British Columbia’s trade and investment office. While at Magna, our exports of Canadian-made auto parts sold to Japanese automakers increased to $90 million. Since then, Magna has grown those exports to hundreds of millions of dollars, including expansion to other tough, competitive auto markets, such as Korea.

After Magna, I joined Mitsubishi Corporation, following their $50 million investment in Magna.

Let me say that from that experience, Canadians can successfully export value-added, manufactured products to Japan, and we absolutely must do so to improve our economy and to create jobs. Therefore, on a personal basis, and also in my role as vice-president representing the Canada-Japan Society of British Columbia, and as the vice-president of international business for the Factors Group of Nutritional Companies, which is Canada’s largest manufacturer of health supplements, I strongly encourage the Government of Canada to negotiate and sign a bilateral trade agreement with Japan.

There are many strong reasons to complete such an agreement, and I believe that there are few to argue against it.

I often look at Australia with envy. Australia shares many similarities with Canada, including an economic structure based on a wealth of natural resources. As well as a British colonial history, we share the leading international language of business: English. But Canada also benefits from our other national language: French.

Where we differ from Australia in regard to Japan is in the effort Australia puts into selling into and penetrating the Japanese market. Japan is Australia’s second-largest export destination. It is number two for Australia. Australia is Japan’s third-largest source of imports.

For Canada, Japan has fallen to be our fifth-largest export destination. On the other side of the ledger, Canada is only Japan’s 14th-largest source of imports. The actual trade numbers are compelling. In 2011, Canada exported about $11 billion in product to Japan, while in the same year, Australia exported over $50 billion in product to Japan.

The math here says that we can do better. We should do better, and I believe that with an EPA, we will do better. We can do a better job in selling to the Japanese in a way they want to be sold to. If you ask a lot of Japan market experts in Canada what they think of how we sell in Japan, they will share a common view that the majority of our $11 billion in exports to Japan were purchased from us by Canada experts in Japan. We weren't doing the selling; we were basically purchased from. We have an opportunity to increase our exports by selling—really selling—in Japan.

A free trade agreement with Japan would act as a strong catalyst. It would promote Canada and Canadian exports by removing trade impediments such as tariffs—certain tariffs do exist—and certain non-tariff impediments that do exist, and by raising the profile of Canada, and Canada in Japan.

A free trade agreement with Japan is not without risks, but they must be objectively analyzed.

The auto sector has expressed concern about liberalized trade with Japan in this sector. However, when you look at it, Japanese cars are imported into Canada at a tariff of about 6%. There is some concern that a free trade deal would reduce this tariff or eliminate it completely, and therefore, conceivably, Japanese cars would have a stronger competitive advantage in Canada. Many Japanese cars are already manufactured in Japan, but yes, removing the tariff would provide them with an advantage.

However, when we export our Canadian-made cars to Japan there is no tariff—no import tariff—and in spite of that North American automakers have hardly gained a sliver of market share there. While claims are that there are all these tariffs and non-tariff barriers, that, quite frankly, doesn't stand the test of close examination.

I pointed out earlier that Magna, when I was there, exported $90 million worth of auto parts to the Japanese market, and other Canadian auto parts makers are also doing the same. In addition, we sell hundreds of millions of dollars into other tough markets like Korea and China.

I would also give one other example of a sign of how that market is more open for automotive sales than we might think. Look at Harley-Davidson. Harley-Davidson is selling its North American-built motorcycles in Japan. They have a large market share. Why did non-tariff import barriers not prevent Harley-Davidson from gaining the market share that they have to date? When I worked in Japan I was able to work in trade shows. I was able to go to head office meetings at Japanese corporations and operate freely in Japanese, and they appreciated that. I was able to understand how they do business there, how they want to do business there, and we were successful. We were not always successful, but we proved that we could do business there. So I think there's a real opportunity for others to do the same.

One cannot ignore the opportunity to trade with China. It is now our number one trading export destination for Canada. But I think we also have to recognize that engaging in trade with Japan is somewhat less risky than trade with China, given that Japan is more familiar with and accepting of western trade negotiating styles, contracts, and dispute resolution mechanisms such as binding international arbitration. An EPA with Japan would enhance this even further.

Along with an EPA, the Government of Canada should reopen its consulate general and trade office in Osaka, which was closed a few years ago, along with the immigration and visa office that was just closed. I realize there are cost restraints. I would encourage just a second look to see what the dynamic is there. Maybe it is worth it for our trade. If we want to go from $11 billion to $20 billion, how do those offices play a role? I'd really encourage taking a second look. Again, I want to do what the Australians are doing, get to $20 billion and eventually get to $50 billion in sales.

In negotiating the EPA, Canada should have Japan eliminate its current 12.5% duty on health supplements. Currently, companies like ours—we are the largest manufacturer of health supplements in Canada—are importing health-supplement ingredients from Japan. They pay no duties when they come in. We build them into products and when we send them to Japan for export we get slapped with a 12.5% duty on stuff that we got there for free, with no duties coming into this country. It makes absolutely no sense to have that duty. We strongly encourage you to look at that 12.5% duty and request that it be removed.

In short, I would say that I support comment to date that an EPA with Japan would offer a platform for further deepening the already well-established strategic partnership between Canada and Japan. It would be an important step into the two countries' shared aspiration to foster further regional economic integration based on market principles towards a free trade area of the Asia Pacific, which is extremely important for us, and deliver substantial economic gains for both countries, including increased economic growth, production, national wealth, and consumer welfare. Finally, it offers stable access to reliable supplies and demand of resources such as energy and other natural resources as well as food products.

Thank you for your time and attention.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move to questions and answers.

Mr. Davies, the floor is yours for seven minutes.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you, Mr. Chairman.

I'd like to first welcome both of our witnesses to the committee and thank them for their testimony.

On a personal note, I want to say how impressive I think both of you are in terms of the way that you've conducted yourselves and built these bridges to Japan and Canada on personal levels. It's very impressive.

Mr. Tak, if I could, I'll begin with you. We've heard a lot about non-tariff barriers. We've had some testimony at this committee about what those are, and certainly some exist, but with your experience in Japan, having done business there, studied there, and having been able to conduct your affairs there in Japanese, I'm wondering if you could explain more to us about difficulties in just doing business there—difficulties that are not non-tariff barriers but are just regular commercial issues that you think would help Canadian business understand better, appreciate better, and penetrate the Japanese market in a better manner.

[John Tak]

Yes. One thing that jumps to mind that you could call a non-tariff barrier and that you could say is a cultural barrier.... I tend to think they're more cultural barriers, but the Japanese do have, typically, a just-in-time delivery system, so it pushes back to our production system. We're saying that we have to produce more often and in smaller lots, get those lots over to Japan, have them warehoused in Japan, and allow our retail distributors there to draw off that inventory we're keeping there, constantly rotating that. This is not something that we normally do. They do it there and they do it all over the place, but it's not something that we normally do.

However, as a result of investing in it—and initially we weren't really making money—we started to make money and we were able to use the improvements in our production and inventory control in other countries. So there was actually a broader benefit from it.

So I would say that's.... Call it a business style barrier that is surmountable, but it's not easy to break into that market.

[Don Davies, NDP, Vancouver Kingsway, BC]

You mentioned decisions of the government in the last three years to shut down the Osaka consulate—I understand there was a commercial side at the Osaka consulate that was shut down three years ago—and the recent decision of the government to shut down the immigration office in Tokyo. I understand that things such as student visas will now have to be processed through Manila.

I'd like your opinion on what effect that may have, as viewed by the Japanese. Second, I'd like to know if you anticipate any reciprocal action by the Japanese government in Canada.

[John Tak]

Thank you. I will preface any remarks I make by saying I completely understand that when you're looking at the finances of the country you have to assess where you can cut costs, and then you have to do it across all departments. I applaud the government for doing that, but when that happens, it's hard not to avoid sometimes putting out the baby with the bathwater. Hopefully we can take a second look and say that maybe in this case, yes, this is something that is worth it because it provides us a leveraged financial benefit that is more than going to pay for the investment.

I would say that in Japan you have two huge economic areas. You have the Tokyo area, which is called the Kanto, east of the barrier—the whole mountain—and then the Kansai, which is west of the barrier, and that's the whole Osaka area. They're huge economic generating areas and they compete very strongly.

So closing the office there had a very big psychological impact, and it was broadly noticed. I would say that having the people on the ground there to help our business people and tell us what's going on there is definitely of benefit to Canada if we want to further increase our exports.

On the ramifications, well, we've closed the immigration office, and there were other trade offices that were closed. I'm hearing rumours that the Japan External Trade Organization will close its Vancouver office in the next few months. I don't think that's retaliation. I just think that everybody looks at their trading partners, and who's their most valuable and who isn't. You take all the information, you throw it into the bucket, and you make a decision. But those kinds of things—the fact that we're closing offices there—don't play well into their decision on what they do with their offices here.

[Don Davies, NDP, Vancouver Kingsway, BC]

What's becoming increasingly clear, to me anyway, is that international trade is inextricably linked to our industrial policy. So it's not just who we're trading with and on what terms, but what are we making to trade and what are we trading? That leads to decisions in Canada about, for instance, what we are incenting. What sectors do we want to grow and nurture? I'm just wondering if you could give us some sense of what Japan does as a government in terms of directing its industrial policy. Are there any lessons for us there?

[John Tak]

That question is for me?

[Don Davies, NDP, Vancouver Kingsway, BC]

Yes, please.

[John Tak]

I would say what other countries are doing, including China, Korea, and Japan, which are well known for using industrial policy to leverage the economy and create jobs, is not controlling business but working with business and saying, “Okay, where can we get the biggest bang for our buck given the current global situation, the regional situation, and our domestic situation?”

Japan came gangbusters out of World War II into shipbuilding, and when that matured and others started taking over, it went to Korea, and they actually had a strategy for getting out of shipbuilding and getting more into auto making. Auto making has been fantastic for Japan, and now if you talk to Japanese bureaucrats, they'll say, “We are moving out of automotive and we're going to be moving into aerospace, aircraft, and bio-life sciences.”

So they have these strategies. They talk to their main sector, business sector organizations, and they form these policies. They're not perfect, but they certainly have proven successful in Japan's economy. China does the same thing. Korea does the same thing. I think we could probably learn from something like that. Maybe we don't want to mimic it. All the work you do in developing those policies gives you a road map of what's going on in the global trade market. So the worst you can do is just have a great road map of what's going on, and the best you can do is actually adapt a policy that fits in and takes advantage of what you're finding out there.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move to Mr. Keddy.

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

Thank you, Mr. Chairman.

Welcome to our witnesses. It's very interesting testimony, and quite frankly, I think we have two contrasting but interesting witnesses here.

I do want to pick up, Mr. Tak, on just a couple of points while they're fresh in my mind. I appreciate your comments and your knowledge of doing business in Japan, and importantly, certainly your knowledge of the language and of the way business actually operates and the areas in Japan in which it operates.

I appreciate your comments on the visa office in Tokyo, but to be fair what the minister was doing here was replacing a system under which it takes 30 days to get a visa with an online system under which it should take 10 days to get a visa. If we can get through those hiccups, there really should be an improvement to the system, although I take your point that face-to-face contact, especially in Japan, is important.

I'd just like some clarification on your comments about the nutritional supplements coming out of Japan and then being taxed when they go back in, because it makes no sense whatsoever for us to be importing products from Japan and then paying a tax on those products when they're being shipped back into the country. I don't know if you have a specific recommendation on how to get around that. We can address the situation of those specific products in a free trade agreement.

[John Tak]

I would address them in the free trade agreement. Any part of that needs to be brought to the attention of the Department of Foreign Affairs and International Trade, the department that is responsible for negotiating tariffs. We are helping the Japanese economy by allowing these advanced health supplement ingredients, thinks like green tea extracts, or CoQ10. These are high quality, and they're backed by a lot of clinical trials done by the Japanese pharmaceutical industry, but they come in here tariff-free. We build them into products, and when we sell them there it's frustrating to be charged a 12.5% tariff. When we add on our warehousing costs and our distribution costs, it quickly creates a competitive disincentive.