International Trade Committee on May 13th, 2014

[Jim Quick, President and Chief Executive Officer, Aerospace Industries Association of Canada]

Thank you, Mr. Chairman, and honourable members.

The Canadian aerospace industry is the fifth largest aerospace industry in the world. It's made up of over 700 Canadian companies coming from every province and every region of the country. We are responsible for employing roughly 170,000 Canadians. Our industry generates $42 billion in annual revenues and we contribute about $27 billion a year to our GDP.

Aerospace is a very global industry. Of the aerospace revenue, 80% comes from exported products that are destined for locations across the globe, from the United States, to Europe, to China, Russia, the Middle East, and Latin America, to give a few examples. Out of those exports, 60% go directly into the global supply chain.

In 2012, the Government of Canada asked the Honourable David Emerson, the former industry and international trade minister, to lead a review of all government programs and policies related to aerospace aimed at increasing Canadian global competitiveness, which included several recommendations related to international trade.

The global markets action plan, or GMAP, which was introduced in 2013, contains direct responses to Mr. Emerson's recommendations. Every section of GMAP contains elements that will help enhance our industry's international business development. What l'd like to do today is briefly highlight some of the key elements of GMAP and explain what these initiatives mean in the context of the Canadian aerospace industry and our global market access and business development strategy.

Canadian aerospace markets can be divided into two categories: established markets, such as the United States and European Union, and emerging markets, like Asia Pacific, Latin America, the Middle East, and North Africa.

As emerging markets continue to grow, we expect that demand for aircraft will exceed domestic supply. As a result, we believe that public policy should focus on viewing emerging markets as a net opportunity rather than a threat to Canadian aerospace manufacturing

. AIAC's market access strategy combines a commitment to continuing the strong business relationships we have with developed nations over the past decades with the establishment of global aerospace partners, with a strong focus on capitalizing on the many new opportunities that exist in emerging markets around the globe. The balance between established and emerging markets aligns very closely with the priorities set out in GMAP. That's the industry priorities, I should mention. In fact, many of the key markets identified in GMAP are also priority markets for the Canadian aerospace industry, including markets like China, India, Brazil, Mexico, UAE, Russia, the United States, France, Germany, the U.K., and Japan.

In one of the key recommendations of his report to government, Mr. Emerson noted that it is a common business practice for foreign diplomats and senior political officials to aggressively promote their countries' industrial capabilities and interests as part of diplomatic negotiations and relationships. David wrote, “...governments have taken notice of Canada's relatively passive approach and have sometimes interpreted it as a lack of enthusiasm for, and commitment to, Canadian products.”

We are very pleased that Mr. Emerson's recommendation to strengthen Canada's approach to economic diplomacy was included in GMAP. We are confident that this critical change in the approach in the way we do business diplomatically will be of direct benefit to Canadian aerospace and, ultimately, our ability to drive revenues, employment, and contribution to the Canadian economy. Canada has significantly upped its game in this regard, and we must continue to emphasize these kinds of measures to be successful globally.

Another key component recognized in GMAP is the trade commissioner service. AIAC and our members are primary users of the trade commissioner service, and we have developed an incredibly close relationship with trade commissioners all around the world as part of our international business development activities. Trade commissioners are a vital on-the-ground resource for our members who are looking to expand their global presence or navigate the details of doing business in foreign countries. In addition, the TCS has worked very closely with AIAC to facilitate industrial participation in targeted trade missions and key industrial trade shows, including bringing foreign delegations to our own aerospace summit here in Ottawa.

As a long-time supporter and beneficiary of the trade commissioner service, we commend the government for including the trade commissioner service in GMAP. We can say with absolute certainty that when it comes to Canadian international business, the trade commissioner service is one of the most essential tools that we have in our tool box. Particularly the commitment in GMAP to focus on the trade commissioner service in key sectors in key strategies, including aerospace, will only help them be more effective in executing their mandates going forward.

GMAP's commitment to attracting foreign direct investment, FDI, is also critical to Canadian aerospace. FDI offers our industry an opportunity to fill the gap that currently exists between our own supply chain, the large OEMs, and smaller companies that manufacture parts and systems. As we move forward, it will be very important to ensure we attract investment to Canada in such a way that we are augmenting existing Canadian supply chain capability.

Economic diplomacy also means promoting our innovation capacities and capabilities. Canada leads the globe in the aerospace industry in several key niche areas, including business jets, engines, landing gear, and simulation, just to name a few. Almost all of those are tied closely to our ability to innovate. In fact no other industry in Canada invests more in R and D than aerospace does. Twenty per cent of all of our activity and $1.6 billion of our activity in 2012 was in R and D.

Innovation is essential to our competitive advantage, especially when competing with emerging players who don't have the same innovation capacity and heritage. Thanks to GMAP, we are already seeing our doors open on this front. This fall the Canadian aerospace companies will be able to participate in the EU's Horizon 2020 initiative, a significant opportunity for our companies to develop new research and technology development in partnership with the EU.

GMAP also prioritizes trade and trade-related agreements, another focus of the Emerson report. As Mr. Emerson noted, for an industry heavily reliant on exporting products at competitive rates, multilateral and bilateral agreements that support free trade and access to priority markets are absolutely critical.

The recently concluded Canada-Korea free trade agreement is an excellent case in point. When Korea signed the FTAs with the United States and the European Union, Canadian aerospace companies were disadvantaged. We saw our exports to Korea drop by 80%, from $180 million to roughly $35 million in 2012. Our agreement with Korea eliminates the current tariffs up to 8%, creating a level playing field for our companies. As a result, we are confident we will be able to make up our lost market share and increase our presence in Korea and the Asia Pacific more broadly.

As innovation leaders who employ tens of thousands of Canadians in highly skilled, highly paid jobs and contribute billions to economic development each year, we believe we are in a critical sector for the Canadian economy. We were very pleased to be recognized as such as part of GMAP.

Major global integrated industries, such as aerospace, with a significant stake in international market access and trade issues will be at our most competitive when industry and government work closely together to develop targeted strategies that help us use our competitive edge over our competitors.

Ultimately the long-term success of Canadian aerospace is linked with Canada's trade and market access policies. As you've heard, the priorities outlined in GMAP are closely aligned with those of the aerospace industry's overall market access and development strategy. In particular, they reflect the key recommendations outlined in Mr. Emerson's report on competitiveness for the global aerospace industry.

The report makes it clear it is possible for government and industry to be closely aligned when it comes to creating opportunities for Canadian businesses to thrive. We believe GMAP demonstrates this kind of collaboration and the success that can result from it.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move to Mr. Cameron. Mr. Cameron, you come from an academic perspective. The floor is yours, sir.

[Dr. Duncan Cameron]

Thank you very much.

It's a great honour for me to present to a House of Commons committee. In fact, there's really no greater honour for a citizen than to have the chance to speak to our representatives.

My observations here are based on Canadian economic history. I think I share an interest with the rest of the people in the room for creating a better quality of life in Canada: good jobs, sustainable growth, and shared prosperity.

For reasons I hope to make clear, I'm out of sympathy with Canadian trade policy and have been for about 30 years, for reasons that are similar to those that led the late associate deputy minister of international trade, Minister Mitchell Sharp, who was my boss when I joined the Department of Finance in 1966, to oppose the Canada-U.S. agreement. For the same reasons that led him to oppose the Canada-U.S. agreement, I also opposed it. My preferred approach is multilateral trade, sectoral-based. I have problems with a trade policy that is industry and trade association driven, and I also have trouble with bilateralism.

I want to make three brief points: first of all, that trade policy needs to follow economic policy and needs to follow the kind of industrial policy that David Emerson was talking about in his report, not drive it; second, that trade policy is fundamentally about investment—Canadian investment and Canadian industry—and not about exports; and third, that bilateral trade negotiations are costly because we have to give up more in head-to-head negotiations than in multilateral negotiations, and in multilateral negotiations we get the benefits of what anybody else manages to negotiate.

My first point is really something that was clear to me when we negotiated NAFTA. I was in Mexico about three times to talk with the Mexicans. For a company to be successful in Mexico or anyplace else, it needs a desirable product. It needs a client. It needs financing. It needs infrastructure to deliver its goods on time. As important as trade strategy might be, it can't do any of these things.

Trade agreements do not create the conditions for good business-government relations. The former chief economist, Dan Ciuriak, from international trade, has talked about the “sunk costs” that are required to trade and how steep these are for many small and medium-sized businesses. Exchange rate fluctuations create great risks and perhaps temporary opportunities.

Successful economic policy requires companies that normally have a strong presence in the home market, with the possible exception of the entertainment industry, where you start abroad and then become successful at home. Trading companies are companies that have a strong research and development base, domestic manufacturing, superior transportation facilities, green production practices, safe working conditions, and good relations with their trade unions. Those kinds of companies should be the objective of Canadian economic policy. With those companies, we have a chance to be successful internationally.

My second point is that it's commonly said that exports create prosperity, which is true. But if that's true, does that mean imports destroy prosperity? My reading of the global markets document is that it has much in common with the doctrine known as mercantilism. Mercantilism said that if you have a strong presence internationally, you can accumulate what at the time was gold and now would be profits from exports, and that's what equals prosperity.

Now, Canada has profitable corporations. In fact, the retained earnings—the cash on hand, the “dead money”, as Mark Carney called it—now exceed the national debt in Canada. I'm not sure how that benefits Canadians directly.

When I look at exports, what I conclude is that in fact we export in order to import. We can build television sets here, or we can grow wheat and buy television sets with the proceeds. So why would we trade at all unless we gained value from imports? Canada became a very rich country by exporting goods with a low labour content, such as wheat and oil, and importing goods with a high labour content, like consumer electronics. We've paid a price for this, in that our unemployment rate has persistently been higher than it probably should have been, and certainly was, compared to the United States.

Moreover, if we become very export orientated, we become very vulnerable to downturns in the export market. If you go back, from the time of the fur trade, every successive staples product that Canada has exported—and we've become very profitable in doing that—has culminated in some kind of a major downturn. The most dramatic was the 1930s, when we lost our world market for wheat. There were 50% of the people in Saskatchewan who lost their employment prospects, and farmers started the On to Ottawa Trek.

The basis of exports is investment, and quite often in Canada we've had large foreign investments, like in bitumen today. Those foreign investments have to be serviced by sales abroad, which require pipelines, facilities, and strong markets. If those markets, for whatever reason, dry up, then it becomes impossible to service the costs of those investments. The entire industry gets into deep trouble, and the entire Canadian economy gets into deep trouble.

To build an economy around growing exports as a share of GDP is to make yourself increasingly vulnerable to world economic conditions.

All the members of this committee will be familiar with the Canadian current account deficit, which turned negative in 2008. It was about $60 billion last year and the year before, and has totalled about $275 billion for the last five years. It is our deficits and services and investment income, of about $25 billion each, that explains this, and this issue needs to be addressed in the trade strategy document. How do we deal with our current account deficit?

What we are doing now is allowing the Canadian dollar to sink, which will help to balance the external accounts. Of course, it decreases the Canadian standard of living at the same time. Canadian resource exporters will get more in Canadian dollars for their foreign currency sales at the same price, but also mergers and acquisitions—Maclean's magazine was talking about it this morning—will go up as well. People in Hamilton will remember when U.S. Steel bought up Stelco, it promised to maintain 3,000 jobs, and then it shut down the steelmaking operations. Now it looks like they're going to wind up the economy.

We have problems that are linked to foreign investment when it comes to the export sector, and in fact when it comes to the domestic economy. We've entered a world of footloose corporations. They are eager to seek out the lowest possible cost for labour, and to adopt measures such as importing temporary workers, or depressing wages through cuts to employment Insurance, or, as was done in the 1995 budget, eliminating the Canada assistance plan and therefore federal dollars going into welfare. Those measures may serve to reduce Canadian wages, but they don't necessarily make the Canadian economy stronger or create more for exporters.

The bilateral treaties that Canada signed with the U.S. provided American companies with what they were seeking in protecting overseas investment, opening up services, trade, protecting intellectual property rights, and gaining the right to sue Canadian governments. I'm not so sure that Canada has done that well. We still have the same protectionist legislation. We gave up a lot of strategic tools for upgrading and processing raw materials. We gave up government procurement. We gave up export taxes. We gave up sector-specific programs, other than in national security or, ironically, energy.

I read Jean Chrétien's memoirs, and he talked about the low-cost industrial strategy of tourism. Well, our free trade partners now require American citizens to return to the United States carrying a U.S. passport, and that has hit the Canadian tourism industry—those foreign exchange earnings from tourism—quite badly. I live in Quebec City. The American tourist hotel, Hôtel Loews Le Concorde, is closed, and Quebec City is a world-class tourism destination.

With regard to bottlenecks, trade treaties don't build you a bridge to Detroit, and they don't build you a Keystone XL pipeline, it seems, either, so I'm going to argue that trade policy has to be based on a strategy of ensuring investment in Canada. Canadian investment, for most world product mandates, has worked for the aerospace industry, as David Emerson pointed out in his report; they don't seem to have worked as well in other sectors, which is too bad.

Finally, if you'll allow me to indulge, I just want to talk a minute about multilateral trade agreements, which Canada really invented in the 1930s prior to the Second World War, in the Ottawa Agreements.

The failure of the International Trade Organization to get through Congress meant that we ended up with the General Agreement on Tariffs and Trade, and after the Second World War, industrial tariffs were in the 50% range. We negotiated those down to a much lower—less than 10%—range when we were into the bilateral negotiations. In those negotiations, because Canada had 80% of its exports going to the United States, and it was taking about 60%—and now 50%—of its imports from the U.S., when we sat down to negotiate, most of our concessions were made to the United States, and we had to make major ones in order to increase our market share in the United States.

Then the Americans, 20%—and now 15%—of whose market came to Canada, had to sit down, negotiate, and give concessions on 85% of their domestic market to other countries. Under the most favoured nation policy, Canada got every one of those concessions, irrespective of the amount we had to pay to get concessions on our bilateral.

I would just conclude by saying that the benefits of multilateral trade in negotiating with other countries are considerable, and that should be the priority for Canada's trade policy.

Thank you very much.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move to questions and answers.

We'll start with Madam Liu.

[Laurin Liu, NDP, Rivière-des-Mille-Îles, QC]

Thanks to both of our witnesses.

Thank you, Mr. Quick, for coming into committee. I know you come in quite often, so thank you for that.

Thank you, Mr. Cameron, for your articulate testimony.

I'd like to start off with Mr. Quick.

Last week we heard from Ms. Joy Nott of the Canadian Association of Importers and Exporters, who talked to us about the complexity of supply chain integration. Considering that close to 60% of Canada's aerospace product exports are intermediate outputs supplying global supply chain activities, and you mentioned this in your presentation as well, how can the government facilitate this sector's performance on value chains?

[Jim Quick]

In my view, they're doing it by responding to David Emerson.

One of David's recommendations was to create a national supply chain initiative. The government is working with us right now to work out what the final details of that national initiative will look like.

This is really designed towards having small and medium-sized businesses being mentored by larger businesses, to get them ready for the global supply chain. This is probably the single biggest initiative we can undertake to help small and medium-sized enterprises in Canada become global supply chain ready.

[Laurin Liu, NDP, Rivière-des-Mille-Îles, QC]

Does the GMAP address this issue? In what other ways is the GMAP addressing international trade issues related to the aerospace sector?

[Jim Quick]

When you look at the different elements of the GMAP, things like free trade agreements do have a positive impact on small and medium-sized enterprises. They open up a market for them that they traditionally would not have. I think that would be one of the direct things.

The emphasis on economic diplomacy will help small and medium-sized enterprises. We see world leaders across the globe going with their industry into other markets and sealing deals on aircraft and aircraft products, and this will be a great help.

The planned trade commissioner service will be a tremendous help to small and medium-sized enterprises. Our industry works very closely with the trade commissioner service, and we're probably one of the largest users of it. Companies come back to me all the time saying that they have a new partnership agreement as a direct result of what they've been able to do through trade commissioners.

[Laurin Liu, NDP, Rivière-des-Mille-Îles, QC]

Thanks. I know there's a lot more to say on that topic, but unfortunately my time is limited, and I want to move to Duncan Cameron.

We've heard a lot from witnesses about what economic diplomacy means. This, notably, as you mentioned, is something that's been criticized, and is an issue that many critics of GMAP have had. Could you give us your understanding of what economic diplomacy means and what it means for Canadians?

[Dr. Duncan Cameron]

First of all, the trade commissioner service is a very valued and independent operation, but it needs to be seen in conjunction with the work of our Canadian embassies abroad, which includes political reporting. Our political analysts are very important. If we have mining operations in countries that are dangerous for the Canadians working there, or if we have mining companies that are planning on investment in a country that is politically unstable, we need specialists who can talk about human rights violations in that country and who can assess for the Canadian government what the actions of Canadian companies are abroad.

Economic diplomacy is just one aspect of what we expect. We have immigration people who look at potential immigrants to Canada. We have development assistance people, people whose primary interest is increasing the capacity of countries to reduce poverty and to meet basic needs for education, health care, water, and so on. We've had programs of Canadians going abroad and of students from other countries coming to Canada. These require specialist people, specialists in their national development. It would be a huge mistake to throw away our political specialists, our immigration specialists, and our international development specialists and say that the only purpose of Canadian embassies abroad is to promote Canadian business. That's simply much too narrow and it's wrong, simply.

[Laurin Liu, NDP, Rivière-des-Mille-Îles, QC]

In one of your articles that came out on December 3, 2013, you say on the same topic, “Canadian embassies will now become a branch of Canadian industry”. Then you go on to say, “The issue of how 'Canadian' are foreign-owned firms which dominate some of these sectors...”—where Canadian firms are said to be world leaders—“and how much foreign firms intend to go abroad for Canada, create jobs here, and remit profits here, is ignored.”

Could you expand on that idea of what Canada stands to benefit?

[Dr. Duncan Cameron]

When Canada signs a foreign trade agreement, what we're essentially doing is we're giving foreign companies and competitors for Canadian companies rights in the Canadian marketplace. We're saying to them, “You can come to Canada and be treated like a Canadian company. You can have access to the same benefits that Canadian taxpayers are providing Canadian companies.” If they come in and end up in the retail sector destroying Canadian small businesses and small towns because it's a Costco or a Walmart or something, well, we're paying for that through those trade agreements where we've given those rights away. We haven't provided to our Canadian companies the kind of support they need to be able to compete in their own market.

I watched Jean Chrétien do these Captain Canada tours around the world. What he was really doing was he was attempting to create Canadian economic activity outside of Canada, exporting Canadian capital and exporting potentially Canadian jobs into other countries. That's what those countries are doing when we sign foreign trade agreements with them: they're looking for investment rights in Canada; they're looking to have their intellectual property rights protected; they're looking to have privileged access to the Canadian market. When we signed a bilateral agreement with the U.S., they wanted better access to our market than the Europeans got or the Japanese got.

This is a very dangerous game when you have a population of 30 million.

It's not a game that you can win.

[Laurin Liu, NDP, Rivière-des-Mille-Îles, QC]

Thanks. You also mentioned the issue of—

[The Chair, Conservative, Rob Merrifield]

I'm sorry, I thought I indicated to you that your time was gone.

[Laurin Liu, NDP, Rivière-des-Mille-Îles, QC]

All right, thank you.

[The Chair, Conservative, Rob Merrifield]

Mr. Hoback, the floor is yours.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, witnesses, for being here this morning. It's great to talk to you. It's always good to have debate with people who look at things in a different light. It's always interesting to try to understand where they're coming from. I try to take a broad approach in how I look at things.

Mr. Duncan, you talked about the difference between multilateral and bilateral trade agreements.

I come from the agriculture sector. I come from Saskatchewan. One of the problems we've had with multilateral agreements, of course, has been the supply management sector and how, as soon as we enter any multilateral agreement, that always comes onto the table; whereas in the bilateral agreements that we've been doing around the world with Minister Ritz and Minister Fast, we've actually been able to get great market access for our beef sector, great market access for our canola, for our grains and oilseed producers, without doing any type of compromise on our supply management sector.

How can you square that round peg in such a way to say that we shouldn't do bilaterals when in fact, if we had not done bilaterals, we would not have gained that market access for the canola or beef sectors, and would have actually had a situation where the Americans would be beating us to those markets?

[Dr. Duncan Cameron]

Thank you very much for that very well-thought-out question.

My father was born in Biggar, Saskatchewan, so I have a lot of affinity with Saskatchewan farmers. At the moment I'm in Quebec City, and when I go to avenue Cartier to do my shopping, I find a wonderful selection of Quebec cheese. Some of the Quebec cheese producers are not nearly as happy about the kind of access we're going to get to other markets and not quite as happy about the competition that we're going to face in our own market.

I believe that in the agricultural sector, we have to operate on a sectoral basis. But we had great success as part of the Karen group in providing for concerted measures to restrain what would be used to promote exports of grains worldwide.

The United States runs a cheap food policy. What it does is it then subsidizes its exports into markets in which we were competing with them. It makes it very difficult for us to do that. In fact, the way we competed was we went into their market, because we could compete in the U.S. market. We were having trouble against them in third markets.

I think having a sectoral basis, talking to the Europeans who have their common agricultural policy but who wants to produce good quality food on a sustainable basis, having those discussions with other agricultural companies is what we should be doing.

[Randy Hoback, Conservative, Prince Albert, SK]

I would argue that point is—

[Dr. Duncan Cameron]

Then do it multilaterally—

[Randy Hoback, Conservative, Prince Albert, SK]

I guess I'll just stop you right there because I only have—

[Dr. Duncan Cameron]

—and not have to trade agricultural gains against—

[Randy Hoback, Conservative, Prince Albert, SK]

I'm sorry, I only have a few minutes, Mr. Duncan.

The argument I make back is because of bilateral agreements, we've been able to do exactly what you said. We've been able to be more sector by sector in our approach to doing things.

The other question that you talked about is the collapsing of markets that we do business in. A good example would be in 2008, when the U.S. market collapsed for a variety of goods that Canadians shipped into the U.S. Now the answer to that was, of course, to look for other markets. At the time, we hadn't done a lot of bilaterals. We had put all our faith into the multilateral World Trade Organization-type talks. The results of that were basically nothing. They became so cumbersome and awkward that they couldn't produce results.

When you looked at what happened with the U.S. economy and how things had gone sour in 2008 and 2009 with the global recession, our Canadian businesses were saying, “Where are you, government? Why haven't you done more FTAs into Asia? Why haven't you done more FTAs into Europe? What have you done to give us this market access so we can ship our products to a wider range of customers, so we don't have to be solely reliant on one customer, that being the U.S.?”

How do we respond to that?

[Dr. Duncan Cameron]

If you go back to the 1982 recession, that's when the Canadian business community panicked and said that the world trading system was no longer going to provide us with a platform in which to do business, and we absolutely had to go into a bilateral agreement with the United States. We did that, and we gave up quite a bit of ground on services, intellectual property—

[Randy Hoback, Conservative, Prince Albert, SK]

Sir, if you talk to any economist or anyone who would go back and analyze our FTA with the U.S., they would say the results have been nothing but spectacular for Canada, and with NAFTA it would be even more so. My colleague just said “come to the Okanagan and have some wines”.

I guess it's maybe a different philosophy, but I look at it and say the overall good of Canada has definitely increased by having these FTAs than not having them. Would you not agree with me on that?