International Trade Committee on May 1st, 2018

[The Chair, Liberal, Mark Eyking]

Good morning, everyone, on this nice spring day in Ottawa.

This morning we're going to continue our study on the potential Canada-Mercosur free trade agreement. I think this is our fourth meeting and we have a very busy morning. We have two sessions, with three witnesses in the first hour, and three witnesses coming for the second.

Good morning, gentlemen, and thank you for coming to our committee. Some of you have been here before. It's good to see you. You know the routine. We try to keep your presentations to five minutes or less. The shorter the better, as that gives us more time for dialogue with the MPs.

Without further ado, we'll go right to Canadian Manufacturers & Exporters. Mr. Wilson, you have the floor.

[Mathew Wilson, Senior Vice-President, Policy and Government Relations, Canadian Manufacturers & Exporters]

Good morning, and thank you for inviting me to speak on behalf of Canada's 90,000 manufacturers and exporters and our association's 2,500 direct members to express our support for a free trade agreement between Canada and Mercosur.

Manufacturing is the single largest business sector in Canada. The manufacturing industry's contribution is critical for the wealth generation that sustains the standard of living of every Canadian. The industry accounts for 11% of Canada's total economic output, while employing over 1.7 million Canadians directly in high-paying jobs. Manufacturing is also an export-intensive business. It accounts for roughly two-thirds of Canada's total exports, and for $1.3 billion in exports directly to the Mercosur region.

As such, trade—both imports and exports—is vital to the Canadian economy and to the health of Canada's advanced manufacturing sector. This is why CME and our members fully support free trade and Canada's free trade agenda in general. However, we do not blindly believe in free trade agreements for the sake of free trade agreements, with Mercosur or anyone else. CME has always believed that no free trade agreement is worth signing unless the deal meets three objectives.

One, it should create a fair and level playing field for Canadian manufacturers and exporters and ensure that they have an equal opportunity to export to foreign markets as foreign competitors have to export into Canada.

Two, it should allow value-added exports from Canada, and not just the export of natural resources.

Three, it should not undermine the existing integrated manufacturing supply chains developed through previous FTAs, especially the NAFTA.

Without a doubt, with a combined market of 260 million people and a $3-trillion economy, Mercosur represents a great opportunity for Canada and for Canadian manufacturers as long as we meet these three objectives through negotiations.

However, as a first step, the negotiations must result in rapid elimination of the very significant tariffs in place across the region that directly and negatively impact major industrial and export sectors. Tariffs of up to 35% in sectors such as automotive, machinery and equipment, and pharmaceuticals are trade prohibitive compared to Canada's relatively modest tariff levels.

Secondly, we must ensure effective trade laws are established to remove structural barriers. I must echo concern noted by other groups appearing before the committee over the real concerns in some Mercosur markets of practices that are anti-trade and harmful to Canadian economic interests, including currency manipulation, direct economic subsidies, regulatory complexities, state-owned enterprises, and the dumping of certain products into Canada.

Thirdly, as with all FTAs, we must ensure effective dispute resolution and remedy solutions that quickly resolve commercial issues as they emerge once the FTA is in place.

While this is CME's advice for the FTA negotiations, there is a bigger, more structural issue that we as Canadians and you as a government cannot overlook, and that is our long-term economic performance under FTAs. As noted above, free trade agreements are only as beneficial as the amount of value-added trade they create. Too often, Canada's FTAs have not led to these outcomes, and this should be the top concern for the committee. Outside of NAFTA, Canada's export record with other FTA countries has been mixed. For example, with the EU, our most recent FTA, exports have actually been down while imports have been up. We must have a plan to reverse these trade trends if we are to grow our economy and create new jobs and grow the middle class.

CME believes this plan should consist of three elements.

One, we must improve our domestic business competitiveness, including our tax and regulatory regimes, to ensure they are focused on investment and growth at home to allow companies to produce goods competitively here for markets around the world.

Two, we must focus on leveraging existing business supply chains. Today, roughly 85% of Canada's value-added exports are production parts that feed into larger finished consumer and industrial parts. Governments must make decisions based on actual industrial capacity for global supply chain integration and expansion, not strive to create new export segments where there is no proven advantage or opportunity for Canada.

Three, we must support the global growth of SMEs by supporting their growth at home. Canada has many small businesses but not enough medium-sized and large companies. In fact, over 95% of manufacturers have fewer than 10 employees, and many do not have any internal expertise or financial ability to expand globally. Governments have excellent support programs, but they should be consolidated to ease access for smaller companies.

Today, Canada runs a significant and growing trade deficit with Mercosur countries in large part because of the structural realities of high tariffs, barriers to entry, and other unfair trading practices. Eliminating these realities through negotiation is a must for entry into this FTA, as it is the only path to export growth and prosperity at home for Canadian manufacturers and their millions of employees.

In conclusion, CME supports Canada's free trade agreement with Mercosur because it can lead to a prosperous manufacturing industry and stronger Canadian economy, but we must ensure the negotiations eliminate structural impediments to trade, and we must implement a plan to prepare Canadian industry for the global stage.

Again, thank you. I look forward to the discussion.

[The Chair, Liberal, Mark Eyking]

Thank you, Mr. Wilson.

We're going to go to the Canadian Vintners Association, with Mr. Paszkowski, the chief executive officer. Before you start, how was your grape crop and your wine crop last year?

[Dan Paszkowski, President and Chief Executive Officer, Canadian Vintners Association]

Last year was a good crop across the country so we're hoping that the weather stands as it did last year so we get an even better one this year.

[The Chair, Liberal, Mark Eyking]

It looks like your vines overwintered all right, so far.

[Dan Paszkowski]

That's right.

Our industry is made up of more than 700 vertically integrated grape wineries located in six provinces across Canada. We have 31,000 acres of vineyards supporting 1,800 grape growers. Wine is the highest value-added agrifood product in the world, and unlike other sectors of the economy, once our vines are planted it is impossible to move our agrifood operation to another jurisdiction.

The Canadian wine industry contributes more than $9 billion to the national economy, supporting 37,000 jobs and attracting almost four million tourist visitors to the wine country each year.

We are the second-fastest growing wine market in the world, with wine consumption growing three times faster than the global average. Over the last decade, per capita wine sales in Canada have increased by 26%, compared to a drop of 10% for beer, and no growth for hard liquor.

Canada's interest in wines is both an opportunity and a challenge, as Canada is the sixth-largest wine importer in the world. Over the last decade, imports have captured 67% of wine sales' growth of 116 million litres.

Canada has been actively negotiating and modernizing trade agreements around the world. As such, it is important to understand that signatories to CETA, NAFTA, and the CPTPP represent 91% of total wine imports to Canada. These free trade agreements provide Canada with tariff-free access to some of the largest trade blocs in the world, but they also provide tariff-free entry into Canada for the largest wine-producing countries on the planet.

In 2016, these same FTAs supported import access valued at $2.2 billion, compared to $12.5 million in reciprocal trade for Canadian wine. This represents a wine trade deficit of $2.1 billion, which is far from fair trade and erodes Canada's ability to grow wine sales at home.

Annual wine consumption in Mercosur is 1.5 billion litres, of which 92% is consumed in Argentina and Brazil. Wine imports to Mercosur's four member countries total 107 million litres, representing only 7% of total consumption. There is limited opportunity for wine exports to Mercosur, which is further evidenced by the fact that Argentina already owns 100% of its wine sales market, Uruguay 96%, and Brazil 76%. By comparison, 100% Canadian wines have a 10% market sale share in Canada, with a total 32% market share for all wine produced in this country.

There is a significant wine trade imbalance between Canada and Mercosur. Canada exports zero wine to Mercosur countries; and Argentina is Canada's eighth largest wine importer by both value, of $106 million, and volume, of 21-million litres.

For the foreseeable future, free trade with Mercosur would only serve to benefit wine producers in Argentina, Brazil, and Uruguay. Free trade with Mercosur would extend tariff-free access from 91% to 97% of all wine imports entering Canada, and reduce costs to regulatory harmonization, while providing zero benefit to Canadian wine producers.

Annual per capita wine consumption is 28 litres in Uruguay and 24 litres in Argentina, yet the majority of wine consumed in Mercosur is either produced in their home market or imported from other producers in South America, or from countries like Portugal and Spain, with which it has historical ties. With wine imports representing only 7% of total wine consumption, Mercosur countries have not been, and will not be, a priority market for Canadian wine producers.

Given high production costs in Canada, even with the elimination of high import tariffs on wine, the freight costs, in addition to import, wholesale, and retail markups, as well as other taxes, would make Canadian wines uncompetitive in the Mercosur marketplace, even with proactive marketing campaigns.

The Canadian wine industry supports trade agreements that are based on free and fair trade, but this has not been our recent experience.

For example, over the last 30 years under the Canada-U.S. FTA and NAFTA, U.S. wine imports to Canada have grown by $485 million. Canadian wine sales to the U.S. have increased by a mere $8.4 million over that same time period.

Since 2004, under the Canada-EU wine and spirits agreement, EU wine exports to Canada increased by $478 million, compared to $800,000 for Canadian wine export sales to the EU market.

Under the Canadian Free Trade Agreement, winery-to-consumer delivery remains unavailable to 80% of the Canadian population. Today, Canada stands as one of the countries, if not the only country, in the world that does not permit winery-to-consumer delivery. We have freer wine trade with Europe and the U.S. than we have between Ontario and Quebec.

In closing, the Canadian wine industry has much higher import penetration and competition than almost any other wine-producing country in the world. While Mercosur supports Canada's goals of greater trade diversification by providing new and expanded opportunities for Canadian businesses and industries, it will create competitive challenges for the Canadian wine industry. To ensure that existing and future FTAs do not come at the expense of Canadian wine and grape growers' businesses and workers, it is vital for government to help us adjust to the realities and opportunities created by ratifying any trade deal.

To date, Canadian wine and grape businesses have been placed at an unfair disadvantage. To succeed, we would require transitional assistance to ensure our interests are represented and that we can take advantage of what these free trade agreements have to offer.

Thank you.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

We're going to move over to Redline Communications. Mr. Williams, you have the floor.

[Robert Williams, Chief Executive Officer, Redline Communications]

Thank you, Mr. Chairman; and good morning, everyone.

I'm Rob Williams. I'm CEO of Redline Communications. We manufacture wireless technology for customers wishing to build private networks and our markets are really focused on natural resources, service providers, and government agencies. Our technology is designed and developed in Markham, Canada, where we employ a team of about 120 engineers and technicians. We manufacture in Mexico and distribute globally using our 3PL partner based in Mississauga.

Our technology is quite advanced. It's a software-defined broadband radio that can operate in a wide array of frequencies. This enables us to sell our products quite easily into countries where the regulatory authorities have specific requirements for those different regions. We incorporate advanced security, and as such, we're subject to strict export controls, something that I think we need to be very mindful of as we move forward.

The nature of our customer engagements require us to have a local presence in the geography with our prospective customers, and we often send experts from our head office to assist customers with those engagements. Thus, it's critically important for us to have free and easy movement of people as we conduct our projects.

Once a project has been initiated, we ship into the country with the hope that prolonged delays are minimized, which is often not the case. Often our ability to adhere to customer timelines is challenged by unpredictable customs clearance regulations, and we often therefore avoid undertaking projects in some of the countries where those challenges exist. Once a project has been implemented, it's occasionally necessary to return defective components, and this simple process is often mired in high double duties, making the simple repair of products a challenge for our customers.

Amongst the Mercosur partner countries, Redline conducts a significant amount of business in Argentina. However, we're limited to the oil and gas market due to the excessive tariffs imposed on incoming goods. These tariffs make our technologies too expensive for other markets in that country.

Although we see a significant opportunity in Brazil, particularly in mining and transportation, it's difficult to enter that market due to the high tariffs imposed on software and technology. For a smaller company such as Redline, the costs to support local content requirements for electronic equipment create an economic barrier for working in that country.

In addition to the import-export challenges I've noted, we struggle with timely payment from customers at the conclusion of sales transactions, due to country-specific taxation rules that tend to challenge a very small company such as ours.

Some of our recommendations as you move forward with this trade agreement, which we very strongly support, include elimination or reduction of the tariffs on the import of electronic and telecommunications equipment; elimination of local content requirements for that equipment; recognition of Canada's rigorous safety standards, eliminating repetitive homologation requirements in each of those countries; elimination of the SIMI process, or certainly simplifying it, for goods that are being returned for repair; replacement of the visa requirements with reciprocal electronic travel authorizations such as we've implemented here in Canada; and simplification of the type approval process for telecommunications equipment and elimination of the need for local applicants.

Again, Redline strongly supports the trade agreement, and I thank you for listening to me this morning.

[The Chair, Liberal, Mark Eyking]

Thank you, Mr. Williams; and thanks to the witnesses for the presentations.

We're going to start the dialogue with MPs. First we have Mr. Allison, for the Conservatives, for five minutes.

[Dean Allison, Conservative, Niagara West, ON]

Gentlemen, thanks for being here today. I had an opportunity to do a round table with the Canadian Chamber of Commerce a couple of weeks ago. There were about 20 large companies, which you'd all recognize, and we were talking about trade and competitiveness.

Mr. Wilson, you talked about that during your comments. There was an interesting article by Mr. Iveson on the front page yesterday of the National Post talking about our direct foreign investment in Canada slowing down and about to fall off a cliff.

One of the things that a lot of these companies said.... I think one company in particular said that they have six manufacturing plants in Canada and they will absolutely never build another facility in Canada. I'm talking about manufacturing now. A lot of these companies are not able to either track money from the mother ship or from head office as they compete around the world.

As we look at these trade deals and where we're at, my question to you is this. You did make reference to our competitiveness at home. Would you just share with us a little more about the challenges you see as we move forward in this country in terms of our own competitiveness, which gives us the ability to trade elsewhere?

[Mathew Wilson]

The bottom line is you can't export abroad if you can't make it here. It's a fundamental aspect, and we have struggled in Canada for years with investment. Probably going back to the great recession, maybe even a bit before that, we've had investment problems. That certainly has accelerated over the last three or four years, in that time range, and we're not seeing it. Over the last year, as President Trump has moved into the U.S., it has created a lot of trade uncertainty in the United States, and then add on top of that trade uncertainty, massive tax reform and regulatory reform changes in the U.S. We've seen pretty significant outflows of capital from Canada into the United States. I don't think it's necessarily unique for Canada, but it is something we need to pay attention to. On our FDI numbers, the Iveson article is just one of many articles. I thinkThe Globe and Mail had similar numbers a few months ago. I know that even Minister Morneau has mentioned this post-budget.

The FDI numbers coming into Canada are a significant concern across the board, and for two reasons.

One, just for long-term competitiveness you need that FDI.

Two, in the manufacturing sector, whether it's wine, telecommunications, auto, or anything else, the sector is pretty much tapped out at capacity. We're sitting at somewhere around 85% overall capacity, whereas 82% was seen as maximum capacity. You can sign all the free trade deals you want in the world, but if you don't start increasing the capacity levels of Canadian facilities, you're not going to be able to export anymore. They're pretty much at full capacity, whether it's Europe, whether it's CPTPP, Mercosur. Even with the U.S., our ability to export more is really limited by our ability to draw that investment in the first place. We're not drawing the investment in, not creating jobs, not creating innovation, and we're not able to export because of that. We need to see that bump in investment in order to see the growth in exports sorted out.

[Dean Allison, Conservative, Niagara West, ON]

Thank you. I'd like to ask you more questions but I'd be in trouble if I didn't ask questions of the wine industry.

Mr. Paszkowski, thanks for being here. I know that one of the challenges our industry has had has been in exporting. You just laid out the numbers in terms $2 billion in versus $12 million out, etc. Talk to us about some of the challenges that Canadians face. You did talk about high production, but what are some of the other challenges we face as we try to export into other markets? As you mentioned, most markets own their own market, and we are the exact opposite. We have a lot fewer Canadian wines being sold in our own market. You talked about so many things, but what are some of the other issues you face as you try to export? Are they non-tariff barriers? Is it export dollars to trade promotion? What are some of the things that you think would be helpful to try to increase that market, and what are our challenges?

[Dan Paszkowski]

The trade agreements open up those markets to us, which is important. However, if you look at the agreements themselves, these are superpowers in wine production, so their interest in importing wine from Canada is limited. Our largest exports will typically be our icewines, but we do have growth in sparkling and table wines because we're becoming better and better every year and winning global competitions. There is that opportunity, but it's slow and it's small. It's case by case, rather than pallet by pallet.

What we're up against is a significant amount of investment by foreign governments into their industry. I've looked at some numbers recently. Whereas the Canadian industry gets support to the tune of around $38 million, I compare that to Italy, which gets support to the tune of $440 million. These are things such as a 40% grant on every dollar of investment made. These guys are getting the best technology, the best innovation, which they're investing into their wineries with the support of their government, to be able to own their own market and export abroad.

The other challenge we have is not being able to ship our wine across interprovincial borders and the fact that the growth in wine sales in Canada is typically going to imports. Over the past 10 years, 67% of all wine sales growth went to imports. That means we have to keep our eye on the domestic marketplace. There is no country in the world that exports that doesn't own their own market. We're in the awkward position that, in terms of our exportable wines, we have only a 10% market share. If we put our eye too much on exports, which is difficult for us to do because we don't have that much volume, we'll start to lose more market share because countries are investing more and more.

Portugal just announced that they're putting another $21 million into marketing in the Canadian marketplace, to be able to capture more market share.

Just this week, there was a report in a drink magazine that told us that six CEOs from liquor boards across Canada were in Italy last week and they provided a presentation to Italian producers, trying to get them to sell more wine in Canada. That's what we're up against. Italy sells more wine in Canada than we do, yet the liquor boards are there trying to get them to sell more here. That's the challenge we face.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

Mr. Allison, it was a good question, but it brought you way over the time. I don't think you'll be able to ask a question for three weeks.

We'll move over to the Liberals now. Mr. Fonseca, you have the floor.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

Thank you, Chair. I hope you didn't take any time away from my questions.

[The Chair, Liberal, Mark Eyking]

No.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

It's great to see you all here today.

We were talking about capacity. Mr. Wilson talked about it, and Mr. Paszkowski talked about it.

Mr. Paszkowski, you brought up CETA and Mercosur; they're very mature wine markets. Ours is a growing market domestically. Then looking at exports, you brought up icewine. I know icewine is selling well in Asian countries. China is a big market for us. What do we need to do? Is it the marketing side or the capacity side that would help in terms of our exports of wine?

[Dan Paszkowski]

It would be a bit of both. Right now, the federal government provides us with roughly $600,000 per year to support export development around the world. We don't export a lot of wine, but to be able to do more of that, the funding we get supports both domestic and international development, so that's very important in terms of the domestic market as well.

Where we're lagging is in the ability to compete on price and the ability to continue to compete on quality. You have the Europeans, the Americans, and the Argentinians; these guys get the best technology in the world. As I mentioned, if Europe gives you 40¢ on a dollar to invest in a tractor or a piece of high-tech equipment, that's a 40% advantage they have over Canada.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

Thank you.

Mr. Wilson, talking about proprietary or great technology, we had a company in here the other day that does HVAC and they are in the Brazilian market. The reason they've had to go there to manufacture is that they have proprietary technology and the tariffs are too high and too restrictive for them to be able to get into that market, and also non-tariff barriers. Do you feel that a company such as that, which would fall under your manufacturer and exporter umbrella, would see a benefit to being able to do an agreement with the Mercosur countries?

[Mathew Wilson]

Sure. That's why we're supporting the agreement, as long as you get the right structure in place around it. When you're talking 35% tariffs, I don't know what it specifically is in HVAC, but let's assume it's up around that level, you're not going to get into that market, exporting from Canada, or frankly, anywhere else in the world. It is a closed market for all intents and purposes.

Brazil, in particular, is a huge market. You need to eliminate those tariffs, along with the other regulatory barriers. Some of the safety regulatory barriers were mentioned, and regulatory approvals more generally. That all needs to come with it. It's not just the tariffs themselves. The tariffs are just the tip of the iceberg. If you can create that environment and eliminate those barriers, absolutely it could benefit Canadian exporters, if they have the capacity to export into those markets.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

Mr. Wilson, you brought up CETA. CETA has very high standards: labour standards, environmental standards, a regulatory regime in place, high wages, etc. You did say our exports were down and imports were up from Europe. It's not because.... Their costs are just as high or higher in many cases than ours.

You said that most of our manufacturers are small businesses. How do you move our manufacturers from small business to medium-sized business and make them competitive so that they can export to CETA and in turn also to Mercosur and other countries?

What are we missing there? What's the gap?

[Mathew Wilson]

I think we've had this conversation here before as well and I'm not sure there's one easy answer. I would say it starts at home to allow companies to grow. We have a lot of tax and regulatory measures in place that really punish companies for growing.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

That would be with CETA also, right. They would have the same.

[Mathew Wilson]

No.

I'm just talking about specific domestic tax policies that actually limit the growth of a company. I know of companies, for example, that once they hit a certain threshold of revenue they're told not to grow anymore by their accountants because actually it's tax-punitive to grow.

We have things like that; I don't understand why we would ever do that. We want to grow companies. There are things like that in Canada that prevent growth.

Then, also, there are not the support programs around the smaller companies in the scale that we need them. When you're talking about the numbers of companies we have that are that small, what European companies have that we don't have is they.... Let's use Germany as an example, which tends to be the classic example of high-tech advanced manufacturing. They have that middle stock of companies, which is really their middle-sized companies. We've got 10 of them in Canada. They've got hundreds of them in Germany. They've got massive global-scale companies like Siemens and BMW and Mercedes. We have Bombardier. We just don't have the number and scale of companies.

When you're looking at exports from Europe into Canada or Europe to anywhere versus Canada to anywhere, they have the scale of companies that can pull a whole supply chain along with them. We don't have that. We need different tools in place. In particular, there's a wide variety of things that could help. Education of our SMEs, for example, on what market opportunities are—which is something I know that we've spoken about before—is a huge component. Small companies with 10 employees don't have the internal capacity to understand markets let alone actually develop foreign market opportunities.

Those are some of the structural differences that exist between Canada and, say, Europe or other countries, which we struggle with in Canada.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

I have a really quick question for Robert at Redline.