International Trade Committee on April 24th, 2018

[The Chair, Liberal, Mark Eyking]

Good morning, everyone, and welcome.

Before I get started with this meeting, on behalf of the committee I'd like to pass on condolences to our Ontario colleagues, and of course their staff, who are going through a rough time following the tragedy in Toronto. It's going to be a rough few days, so our thoughts are with you, and we'll work together on getting everybody through this.

We're going to continue with our study today. It's our third meeting on Mercosur and the opportunities and challenges of a potential agreement with those countries. We're honoured to have with us three different stakeholders.

By video conference we have the Fisheries Council of Canada, and at the table we have the Canadian Vehicle Manufacturers' Association and Armstrong Fluid Technology.

Welcome, gentlemen. If this is your first time at a committee, we like to keep it to five minutes or under if you can, so we can have lots of room for dialogue with our MPs.

Without further ado, we're going to go right to Mr. Robert Dietrich. Welcome, sir, and you have the floor.

[Robert Dietrich, Chief Financial Officer, Armstrong Fluid Technology]

Thank you.

I'm Robert Dietrich. I'm the Chief Financial Officer of Armstrong Fluid Technology. Armstrong is a Toronto-based, family-owned, global manufacturer of heating and cooling equipment, which we call HVAC. That's the term I'll use. Throughout our 80-year history, Armstrong has introduced groundbreaking innovations that have elevated industry practice and substantially improved the quality and performance of pumping and HVAC installations around the world.

For those in the room, this building is heated and cooled through the pumping of water. Quite simply, we pump water through buildings.

With over 1,000 employees worldwide, we operate eight manufacturing facilities on four continents. Armstrong utilizes a global supply chain to ensure consistent quality and performance from our products regardless of the plant's location. This is delivered through a global IT infrastructure and standardized software applications in all of our facilities.

Like most industries, HVAC equipment markets are global, with a small number of dominant players. Armstrong's competitive advantage is built upon innovation, leading our industry in energy efficiency. Armstrong innovations include vertical in-line pumping, integrated motor control, parallel sensorless pumping, and, most recently, Internet connectivity to provide lifetime performance management. All these are industry terms and I don't expect that you would understand them; it's just to illustrate that to be competitive in a global market, you have to be innovative and you need to use technology. These innovations cut across global markets, providing us with a global brand equity.

HVAC plants in buildings such as this are one of the leading consumers of energy in the world. Reduction of this consumption is a primary goal of most countries. This is through modification of the building code or adoption of energy-efficient designs for new construction, and acceleration of replacing energy-obsolete HVAC equipment in the built environment.

Current policies and practices in Mercosur countries, Brazil and Argentina, for example, are insufficient to meet their country's stated climate objectives under the Paris accord. For Armstrong, this indicates an attractive market for retrofitting energy-obsolete HVAC equipment and is one of the drivers for our ongoing investment in Brazil.

Armstrong established a subsidiary in Brazil in 2012 and began operations in 2014. The decision to establish an assembly operation in Brazil was contentious for us, as it added significant overhead to the company. However, duties and customs clearance procedures and local content requirements outweighed our preferred approach of exporting from Canada. Four years later, we have a business with approximately $2.5 million in revenue. We have yet to receive any payback on that investment.

As previously mentioned, Brazil is an ideal market for Armstrong's focus on energy efficiency. Given the slow economic climate in new construction, it is an ideal time to be focusing on energy retrofits. Substantially all of our business in Brazil is from this source of business. Electricity rates in Brazil are higher than we experience in Ontario. This is a favourable environment to encourage energy conservation and abatement through adoption of new technologies. As we bring Brazil to a profitable operation, we will begin to develop business in Argentina with electricity rates similar to those in Canada. Given the climate tracker position of Argentina, as was mentioned earlier, energy abatement will also be attractive in that market.

Armstrong has modelled its business to benefit from freer trade in the world. We create and develop technology in Canada, often utilizing Canadian-based technology suppliers. We first introduce new products into the Canadian market, where we have a strong market position and the customer base is sophisticated. Additionally, governments, including the health care and education sectors, comprise a large segment of the Canadian building landscape and are important reference sites for us to develop international customers.

Armstrong is a strong proponent of Canada's policy of entering into multiple multilateral trade agreements. The benefits for a company of our size are numerous. It enables access to a global supply chain, with the attendant advantages of longer production runs, standardizing on designs, accessing centres of excellence, and attractive competitive costs. It lowers duties and accelerates customs clearance.

It encourages the rationalization of standards and building and electrical codes. It enhances protection of intellectual property and normalizes dispute mechanisms. It often leads to more efficient capital markets, cross-border banking services, and better opportunities to manage customer credit and lower credit risk.

In particular, Armstrong is supportive of negotiations to establish a trade agreement with Mercosur. This will provide us with opportunities to broaden our product offering in Brazil, for example, without having to expand our facilities. We also expect that Brazilian firms could join our global supply chain, reducing our reliance on India and China. Today we import some motors from Brazil from a company called WEG, which is one of the largest motor suppliers in the world. It would also enable us to better support an expansion into other Mercosur countries, leveraging the investment we have already made in other Spanish-speaking countries, such as Mexico and Colombia.

Those are my brief opening comments, and I'd be happy to answer any questions.

[The Chair, Liberal, Mark Eyking]

Thank you.

We're going to our next witness, Mark Nantais from the Canadian Vehicle Manufacturers' Association.

[Mark Nantais, President, Canadian Vehicle Manufacturers' Association]

Thank you, Mr. Chairman.

Good morning, honourable members.

The members of the CVMA are supportive of fair and balanced trade opportunities. To achieve this, we submit the following as key provisions necessary to create the proper foundation for free and open trade in automotive goods: first, that there be no differentiated outcomes between Canada and the U.S. with respect to automotive trade, with FTAs that are favourable to the industry and to our economy; second, free trade agreement rules of origin must fully consider and align with our strong dependence and ongoing reliance on sourcing within North America; and third, currency disciplines are required to ensure that market access provisions in the final agreement are not undermined by a country's inclination to manipulate its currency, given the intersection of trade and finance.

The CVMA appreciates government's continued focus on the NAFTA negotiations, as indeed, these are central to Canada's automotive manufacturing footprint. NAFTA must remain the number one focus. The high level of consultation with the industry as part of the NAFTA negotiations has been, and is, very helpful, and we would in fact recommend that it be a model that is to be extended to all FTAs that Canada pursues.

Trade agreements have a significant role in determining where companies invest and where jobs are created, maintained, or lost. As complex as these trade agreements can be, they have traditionally been focused on reducing tariffs. The reality, however, is that some nations—for example, Japan and now Korea—don't have any automotive import tariffs. Instead, they maintain a long-standing industrial strategy that uses other non-tariff protectionist measures or barriers to protect their markets from vehicle imports regardless of trade agreements. They have a strategy to keep their automotive market largely to themselves, while also tooling up their factories for vehicle exports to North America.

Trade agreements help them reduce our auto tariffs to accelerate a one-way flow of exported vehicles, while protecting their jobs at home. As we sign trade agreements that unilaterally bring down Canada's remaining auto tariffs, we essentially hand an incentive worth hundreds of millions of dollars annually to automobile importers who produce nothing here. They don't use our Canadian auto suppliers and they don't generate Canadian production jobs.

In Canada, when we sign trade agreements that incentivize more access to our rich and lucrative Canadian auto-buying market for Korean and Japanese vehicle exporters that do not manufacture in Canada, it reduces the incentive for auto manufacturers that do produce and employ people here. I'll say that again. When we sign agreements that give hundreds of millions of dollars of new incentives for car companies that do not produce any vehicles or manufacturing jobs here, that reduces the incentive for our manufacturers to keep producing here and keep employing here.

That is your policy. Despite all the intentions and efforts, that is what Canada is doing with the CPTPP. Like CPTPP, Mercosur represents a potential opportunity for increased Canadian vehicle exports, but also represents significant market access challenges to broadly apply protectionist domestic policies in those countries.

Let me give you an example. Argentina continues to apply a 35% tariff, the maximum common external tariff allowed in Mercosur, to passenger cars. Until December 2017, tariff rates for vehicle imports to Brazil were 30%. Details remain forthcoming regarding Brazil's new Rota 2030 program, which is designed to replace the country's Inovar-Auto incentive program. The Inovar-Auto program came under WTO criticism as it unfairly favoured automakers with plants in Brazil. Brazil is now finalizing the new Rota 2030 program, which we understand is a 12-year incentive program that will offer millions in annual tax credits for automakers and auto parts manufacturers doing business in the country.

It doesn't stop there. Non-tariff barriers, including complex federal and state tax regimes, import licensing requirements, and complex legal and custom procedures, are creating significant challenges for countries exporting vehicles to existing Mercosur member countries. This is illustrated by the marked decrease in the value of Canadian vehicle exports to key Mercosur markets since 2014. For instance, Argentina went from $1.8 million in value down to $623,000. In Brazil, the market went from just over $23 million to $235,000 in 2017.

Acceptance and recognition of technical and safety standards pursuant to the Canadian motor vehicle safety standards and the federal vehicle safety standards in the United States, to which they are aligned, will also be critical to access Mercosur markets. Alignment with and recognition of North American regulatory standards, which are underpinned by scientific evidence and rigorous compliance requirements, would encourage more automotive trade and create new supply chains between the North American trade bloc and Mercosur countries.

In summary, it is paramount that both existing and future non-tariff barriers are addressed to achieve reciprocal market access for the Canadian industry. Companies expend significant resources in both time and dollars to address non-tariff barriers, often with very limited results. Related to this, dispute settlement mechanisms need to be rigorous, time-efficient, and legally binding. The members of the CVMA provide quality middle-class jobs for tens of thousands of Canadians. It is very important that Canada demonstrates its commitment to the automotive manufacturing sector by achieving trade outcomes that do not reduce the incentive to keep producing and employing here in this country.

Thank you very much, Mr. Chairman. I would be pleased to answer any questions the members may have.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

We'll go to our third witness. Joining us via video conference is Paul Lansbergen, president of the Fisheries Council of Canada.

[Paul Lansbergen, President, Fisheries Council of Canada]

Good morning, and thank you for the opportunity to present. Since I am based in Ottawa, I apologize for having to do this by video conference. Other business brought me to Toronto today.

We submitted a letter, and I believe that may have been circulated to the committee, but I will highlight elements from our submission.

First I would like to start by telling you a little about the Fisheries Council of Canada and the fisheries sector. FCC has been the national voice for Canada's commercial fisheries since 1915, and our members include small, medium-, and larger-sized companies, as well as indigenous enterprises that harvest our fish on Canada's three coasts and in our inland waters. Our member companies process the fish and seafood, and FCC members are proud to be key employers in their community, providing jobs and an economic base for other local businesses.

Like any other renewable resource, sustainability is of paramount importance to us, and I'm proud to say that Canada is among the leaders in the world in terms of third party certification. This contrasts with the fact that only about 10% of the world's fisheries are certified.

The Canadian seafood industry creates 80,000 direct jobs annually, mainly in coastal and rural communities, and exports $7 billion of product to 139 countries annually. The largest export markets for Canadian seafood products are the United States at 63%, China at 14%, the European Union at 7%, and Japan at 5%. As such, the sector is extremely supportive of free trade.

Getting to the specifics of your study, the Mercosur bloc countries currently represent more of an import source rather than an export market for us. We export $3 million annually, but we import $39 million, for a net trade deficit of $36 million. Virtually all of our exports to Mercosur are to Brazil, and most of the imports from Mercosur come from Argentina. In the grand scheme of things, the two-way trade with Mercosur at $42 million is a mere drop in the bucket in terms of our total fish and seafood two-way trade globally, which is at roughly $11 billion.

However, there are two aspects that suggest there could be some significant export opportunities for us. One, Mercosur tariffs on fish and seafood range as high as 32%, so elimination of those tariffs could create some opportunities for Canada.

Two, and perhaps more importantly, Mercosur countries, which have a combined population of 260 million people, eat very little fish and seafood. Brazil's per capita consumption is just over 10.5 kilograms per year, Uruguay is at 7.5, Argentina is at just under six, and Paraguay is at just under four kilograms per year. By comparison, Canadian per capita consumption of fish and seafood is just over 22 kilograms per year. Even one additional kilogram in per capita consumption in Mercosur would equate to about 260,000 tonnes of fish and seafood annually. That equates to about 24% of our annual landings, which is a significant volume with just a small increase in per capita consumption.

In terms of other trade issues, of greater importance to Canada's fisheries sector are the successful renegotiation of NAFTA, full implementation of CETA, ratification and implementation of the CPTPP, and free trade negotiations with China.

In short, a free trade agreement with Mercosur could hold some potential for the fisheries sector, but it's currently not a big priority for us. If negotiations were successful, some market development for fish and seafood would be needed to encourage more consumption and to build a supply chain in Mercosur.

One final point I'd like to make in terms of negotiations is that an important element for us is sanitary and phytosanitary measures. The approach taken in the CPTPP is quite favourable. We like the rules and the measures that were put in that trade deal. If that could be modelled for negotiations with Mercosur, that would be good.

With that, I welcome any questions the committee might have.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

Before we move on to dialogue with the MPs, I'd like to welcome Ms. Rudd from Northumberland—Peterborough South to the committee.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

Thank you.

[The Chair, Liberal, Mark Eyking]

We're going to start off with the Conservatives for five minutes.

Mr. Carrie, you have the floor.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much to all the witnesses for being here. I'd like to start with Mr. Nantais.

Brazil's the second-biggest economy in the Americas. You would think opening up trade with Mercosur should be a good thing, but you mentioned the tariffs, and then also the non-tariff barriers. I wanted to explore that a bit. We are operating right now with the uncertainty of NAFTA. Global Affairs has said that an FTA with Mercosur could reduce the tariffs to the automotive sector, and you mentioned 35%, I think, in Argentina; 30% in Brazil.

You also delved a bit into the percentage of vehicle exports. I was wondering whether you could explain what percentage of Canada's exports are destined to Mercosur countries, and vice versa. How much business do we get from them, in actual numbers?

[Mark Nantais]

Actually, we ship very little. We roughly peaked in 2014 when these programs went into place. When I say Canadian exports, it's roughly about 23,000 vehicles, and that dropped precipitously in 2015, and further in 2016, for instance. We're now down to virtually zero exports. We're talking about probably fewer than 10 vehicles.

One of the key things here has been that Brazilians are facing a 40% to 50% tax on car imports. The reduction or exemption, for instance, of what we call the “industrial product tax” is something that would be very welcome and would help us in that regard. That's a clear example of the heavy taxation that takes place on vehicles coming into that country from abroad.

You have multiple layers of fees, multiple layers in terms of import licensing, and so forth, not to mention the fact that when you bring in a vehicle to one of the Mercosur countries, let's say, under the CET tax of 35%, and you ship that vehicle within the Mercosur to countries, it's duplicated again. You pay that again as it enters the other market. This cascading effect takes place over and over again. It's clearly all one way in terms of what we have coming into Canada, but it's very small at this point in time.

The Holy Grail, as you may know, Mr. Carrie, is to get a global product mandate for our plants here in Canada. Ford, for instance, has the Ford Edge that has that mandate. The people I work with work daily to try to keep the mandates that we have here, but also to expand them to global mandates if we possibly can. That's the key here: how can we open up these markets, get rid of these non-tariff barriers, or at least deal with them, and then put into place appropriate dispute settlement mechanisms that are efficient in that they're legally binding? The timing and the agility of those settlement dispute mechanisms are absolutely critical.

Also importantly, and this is what was so good about why we supported CETA to the extent that we did, was we struck an agreement with two mature markets. We struck an agreement that acknowledged and actually integrated the fact that we are an integrated industry with the U.S. and put in place derogations or placeholders, if you will, so that when the U.S. did get an agreement with Europe, then we could definitely use accumulated content under the NAFTA, for instance, to meet the requirements of the CETA.

That's what is so critical. We have to negotiate for autos on the basis of the integrated industry and on the basis of the integrated market in North America. We have to trade as a bloc, negotiate as a bloc, and open those markets along the lines that I've suggested.

[Colin Carrie, Conservative, Oshawa, ON]

I think that's how you opened up with NAFTA. It's so important to get that right.

[Mark Nantais]

It really is.

[Colin Carrie, Conservative, Oshawa, ON]

Do you have any numbers on how much Mercosur sends to North America?

[Mark Nantais]

It's not very many at this point in time because they don't meet the Canadian vehicle safety standards, as an example. We have plants, and there you have production capacity in some of these countries—Brazil, particularly. Most of the products that are produced meet, for those domestic markets, different safety standards, and so forth.

Keep in mind that Canada, which is aligned with the U.S., has some of the most comprehensive safety standards in the world, some of the most stringent emission standards in the world, all scientifically based, as I mentioned. Those vehicles, generally, would not be coming into this country at this point in time unless they were homologated to meet our standards, or we come up with some means of how we homologate our standards so that they can at least recognize the vehicle standards we meet, and potentially vice versa.

[The Chair, Liberal, Mark Eyking]

Thank you, sir. Those were good questions, but your time is up.

We'll now go over to the Liberals.

Mr. Dhaliwal, you have the floor for five minutes. Go ahead.

[Sukh Dhaliwal, Liberal, Surrey—Newton, BC]

Thank you to the three presenters.

The other day, witnesses came to the committee and told us that they believed this deal would not be any good for Canadian businesses, and Canadian businesses want boom. I'm hearing the same here from you, Mr. Nantais, and from the Fisheries Council. What can we do to promote this trade, if this agreement goes ahead, so that small and medium-sized Canadian businesses are able to benefit from it?

[Mark Nantais]

First off, in our industry, as I mentioned, we are so highly integrated on a North American basis that NAFTA is the absolute priority. We've said this to the Prime Minister and we've said this to this committee, as an example, as well. That's what we need to settle first.

Again, speaking for our industry, if we don't have and we can't use our integrated supply chains to produce efficiently and competitively, then we won't be here. We will do like other companies do, where, as I mentioned, they use free trade agreements to lower the tariffs into this country, bolster their domestic industries, and increase their capacities to ship abroad. Why wouldn't we do that as well, particularly when we are in one of the highest-cost jurisdictions in the world to produce?

That's why we take the position we do, but we are still also very supportive of opening up as many markets broadly across the globe as we can because of the potential opportunities that do exist, not just for industry but for all sectors, whether small or medium businesses. Again, I think for any business, if they can get a global mandate and be able to produce products that will meet the requirements of the markets that they intend to ship to, then that's a good thing. But for our industry, we have some very deep concerns about getting NAFTA right first and then dealing with these other issues.

[Sukh Dhaliwal, Liberal, Surrey—Newton, BC]

How about you, Mr. Lansbergen? You said the same thing, that basically we are in a trade deficit when it comes to fisheries. I'm certain we can do something to enhance trade to those nations and bring awareness so that consumption is increased. Could you say something on that, please?

[Paul Lansbergen]

Certainly. I think one important differentiation between our sector versus the automotive sector is that... I'm five months into the sector and to the council, so I may not be fully informed, but I'm not aware of similar non-tariff barrier challenges for the fisheries sector that Mr. Nantais talked about.

Really, the Mercosur bloc of countries represents a very small current export market for us, but clearly there is some opportunity to grow that. As I said, their per capita consumption is very low, so encouraging them to eat more fish and seafood, whether it comes from Canada or elsewhere, represents a growth opportunity for us. That would be the biggest component, I think, in terms of the challenge of taking advantage of a new free trade agreement with the Mercosur.

[Sukh Dhaliwal, Liberal, Surrey—Newton, BC]

Mr. Dietrich, do you see any possible environmental or social risks, moving forward? You say that you will benefit out of this trade, right?

[Robert Dietrich]

Yes. I've spent my whole career in Canadian-based, internationally oriented technology companies, and the model is the same in all of them. That is that Canada benefits from having the head offices, from having the technology development jobs, and from creating value through the application of technology. It drives the education sector or takes advantage of our excellent education sector.

Brazil, for example, is one of the largest markets in the world. From our point of view, it's a “cooling” market—in other words, it's hot, and they have a lot of air conditioning. They waste a lot of energy because they use inefficient equipment. That's a golden opportunity for a company like ours. It's the same if you go to India or to southern China or the Asia Pacific.

I am a great proponent, as is our company, of eliminating some of the non-tariff barrier areas that restrict trade. We'd love to export from our plant in Toronto, but if we need to because of distance and logistics, then we will manufacture or assemble in those markets with Canadian technology. I think that's so important to understand. Yes, manufacturing jobs in our industry could be important, but it's the technology that drives the value.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

Mr. Dhaliwal, your time is up.

We're going to go to the NDP.

Madam Ramsey, you have the floor.

[Tracey Ramsey, NDP, Essex, ON]

Thank you to our witnesses today.

My region is known as the automotive capital of Canada, so I don't think it will be any surprise that I'll direct my questions to the CVMA.

You mentioned the fact that our trade outcomes are incentivizing, essentially, companies to leave Canada or are making it difficult for them to be competitive. You also mentioned the importance of achieving provisions that provide reciprocal market access for Canadian vehicle exports. I wonder if you can expand on that a little bit, on what you think that looks like in a trade agreement to have that reciprocity.

[Mark Nantais]

To achieve that reciprocity, particularly in those countries where they don't have tariffs.... As I mentioned, they have industrial strategies that are focused on things like non-tariff barriers.

Japan and Korea have been so astute at putting in place non-tariff barriers as part of their strategies that they've essentially kept out vehicle imports from any auto-producing country around the world. The Europeans have made some small progress there on premium-type vehicles. But generally, the non-tariff barriers are so far-reaching and broadly applied—everything from taxes, to ensuring that you must use their test procedures and their test facilities, to local zoning laws that would prevent you, for instance, in our business from establishing a dealer network to service the vehicles you would bring into that country. It has the effect of keeping the import numbers so low that it no longer becomes viable, from a business perspective, to continue to try to enter that market. Japan and Korea, for instance, are the lowest of any other OECD countries in the world in terms of auto imports into their countries.

It's the combination of all these things—taxes, permitting, local zoning laws, etc. These are the things that ultimately make it extremely difficult to bring in new vehicles to that market, particularly when you're trying to break into a market where the vehicle category, the size...smaller-size vehicles really don't have the margins that some of these premium vehicles have, to be able to absorb some of the costs. That's what makes it very difficult.

Clearly, it's a constantly changing market, or environment as well, a regulatory environment. You could send a shipment of vehicles into a country only to have it change something whilst you're in transit. Those vehicles will sit on the dock until such time as you overcome the new requirements or you deal with their inspections and whatnot, which are specific to their own country. We just can't afford to do that. And it's not just us. I think any manufacturer that incurs that type of cost on such a small volume of vehicles would be in the same position.