International Trade Committee on Oct. 23rd, 2018

[The Chair, Liberal, Mark Eyking]

Good morning, everyone.

Sorry for the delay. We had some votes in the House, and that always changes the order around.

We're continuing our study on the impacts of tariffs on Canadian businesses, companies and workers in steel and aluminum.

We've had quite a few meetings so far, with various witnesses and ministers in.

Colleagues, we're going to shorten it up a bit today to try to get this all done so we can hear from everybody and have a good dialogue.

We have three groups with us today. I always like to start off with the video conference first, in case we have any technical problems.

Mr. Wharin, can you hear me?

[Chris Wharin, Director of Administration, Bohne Spring Industries Ltd.]

Yes, good morning.

[The Chair, Liberal, Mark Eyking]

If you don't mind, you can start off first, and we can get on with the program.

Go ahead, sir.

[Chris Wharin]

I can, by all means. Good morning.

I'd like to introduce myself. I am Chris Wharin. My company is Bohne Spring Industries. We're manufacturers of precision mechanical springs and wire forms in Toronto. Our business has been in continuous operation since about 1891. We employ approximately 42 people and are responsible for the livelihoods of basically 40 families.

When we first learned about the tariffs and in particular the countermeasure tariffs, we certainly felt as though we had been thrown under the bus somewhat, with respect to our own business plus our entire industry. These tariffs have put us under tremendous stress personally as we try to mitigate the damage caused by them.

The questions that were asked when we were first invited to make this presentation seem a bit redundant now. They seem like questions that were asked back in June, when the consultation process first began. I had written a submission back at that time stating that ultimately I think the countermeasure tariffs will have a greater negative impact on businesses and consumers in Canada with the prices of everything rising.

Unfortunately, I don't feel as though our voices were necessarily heard then, and the result is that the government did impose huge tariffs on a wide range of products as countermeasure tariffs, in retaliation for the section 232 tariffs that the Americans implemented.

I was and still am adamantly opposed to these countermeasure tariffs, as I don't believe they're doing anything to help Canadian manufacturers or citizens. The only companies that may have benefited from these countermeasure tariffs are the steel and aluminum producers, who may be receiving government assistance to help them cope with the loss of sales to the U.S. market.

The countermeasure tariffs have had a very serious negative impact on our business. As I detailed in my initial submission, much of the material we use to make our products comes from the United States and is subject to the 25% tariff.

Since July 1, when these tariffs came into effect, we've paid over $50,000 in surtaxes. That, on an annualized basis, would be about $150,000. This is having a crippling effect on our cash flow and profits because we are not able to pass along all of these substantial increases to our customers. Not only are we paying the 25% surtax but we're also experiencing upwards of 25% increases in the base price of materials from suppliers due to shortages in the industry. This means that our costs have risen 50% to 60% in some cases.

We are all very concerned about the additional tariffs coming into effect on October 25 for materials coming from outside of North America and the impact this will have on the price of materials. I've been told that all stainless steel spring wire coming from Korea, for instance, will have a 25% surtax. Stainless steel wire is not available in Canada in the quality or grades that we require for our products. Most of the materials we use are not available in Canada, and yet they are subject to the surtaxes.

We were relieved to see, on October 11, duty remission order 18-16. This will certainly help between now and the end of the year, although I don't think the schedule was complete, as it omitted some particular items that we use on a regular basis, which we cannot obtain locally—specifically, music wire and hard drawn spring wire.

Some of these materials are available in Canada from Sivaco and Mittal, but not in the finer sizes that we require, i.e., 1.14 millimetres and under. The other issue is that Sivaco and Mittal have 8,000 to 12,000 pound minimum order quantities and 12-week lead times. In our business, we don't use sufficiently large quantities of material to warrant buying directly from a mill. We must rely on local warehouses to provide smaller quantities, and then we're at their mercy in terms of whatever material they have in stock.

We have had a particularly difficult time passing these surcharges onto our customers, particularly in the automotive sector. We cannot afford to absorb these surtaxes. As I said, the stress associated with trying to pass them along to customers has been inordinate.

It doesn't make any sense to us to penalize Canadian manufacturers for purchasing raw materials that we can't buy locally. If anything, tariffs should have been placed on the finished products, to help protect Canadian parts manufacturers and jobs. Canadian companies, primarily Canadian auto parts manufacturers that purchase finished springs, wire forms and stampings from the United States, do not pay a tariff, so they can buy these items more cheaply in the United States or from overseas than they can in Canada, even though the Canadian industry is fully capable of supplying all the products they require. Ultimately, this will significantly harm our industry in Canada.

[The Chair, Liberal, Mark Eyking]

Excuse me, sir. Could you wrap up, so we can have time for the other witnesses.

[Chris Wharin]

Yes.

The price increases, which of course, are passed along to our customers, only encourage them to shop offshore.

No small business owner in Canada should have to be subjected to this type of pressure. Business is stressful enough, without having to deal with government intervention of this scope and magnitude. How much time and effort should I have to devote to fighting these tariffs and trying to pass the price increases along to increasingly hostile customers? Does our government care if small businesses such as ours survive? How can I grow and run my business effectively when I have to deal with the consequences of these tariffs and material increases? Shouldn't small businesses be focused on growth instead of fighting the government and fighting with customers on price increases?

The high-quality materials that we require for production of our parts are not available from Canadian manufacturers. I fully agree with members of the international trade committee that Ottawa's remission request processes are far too onerous for many companies, particularly smaller ones like us, that are already consumed by the day-to-day activities of running their businesses.

Thank you.

[The Chair, Liberal, Mark Eyking]

These are challenging times for big and small corporations and their employees for sure.

Now, we're going to move over to Mr. Wilson and Mr. Gates, from Ocean Steel and Construction Ltd.

You have the floor.

[Harrison Wilson, Vice-President, Ocean Steel and Construction Ltd.]

Thank you for the invitation to speak to this committee.

Ocean Steel and Construction Ltd. is a structural steel fabricator with its head office in Saint John, New Brunswick. We have fabrication plants in Saint John and Fredericton, New Brunswick. We employ a total of about 200 employees: 70 staff composed of engineers, detailers, estimators and project managers, and 130 hourly tradespeople, such as machine operators, welders, fitters, painters and maintenance personnel.

Ocean Steel started in 1955 and is the oldest member of the Canadian Institute of Steel Construction. We have provided structural steel for projects from Newfoundland to Alberta, and as far south as Texas. We have done projects in the U.S. since the 1960s. The percentage of U.S. work we do in a year can range from zero to 100%.

Fabrication of structural steel involves designing connections for individual components and creating manufacturing drawings using 3-D software to create a virtual building model. This model is then used to generate digital files to operate our CNC equipment—saws, drills, anglemasters, plate burning machines, etc., in our shop. Substantial investment is required for the latest computer-driven equipment available in our industry. For example, the latest plate processor machine we recently installed cost close to $1 million.

Historically, we have sourced the raw material from mills in the United States and Canada. Because of our concerns about quality and delivery of long and flat-rolled steel shapes, we have avoided buying steel from low-cost suppliers such as China, Russia and India.

The Canadian surtaxes on material from the United States are causing us difficulties in a couple of areas.

One area is hollow structural shapes. Some of the larger sections are not available from Canadian mills. Any sizes that have two adjacent sides adding up to 24 inches or more, for example, HSS 14 x 14 or HSS 18 x 6, are not produced by Canadian mills. We need to buy these sizes from the U.S. and therefore pay the Canadian surtax. Paying this surtax is raising the price for our customers and making us less competitive against offshore fabricators.

Another area is plate. There is only one plate mill in Canada: Algoma steel. Because of limitations on plate thickness, grade of steel, weight and size that they have been able to produce, we have sourced the thicker, heavier and longer plate from U.S. mills such as SSAB, Nucor and ArcelorMittal. In the past, Algoma had restrictions of no greater than two and three-quarter inches in thickness and 26,000 pounds in weight for A572 grade 50 plate, and 50W, which is the most popular grade of plate used in our industry.

We often require thicker and heavier plate of this grade for the fabrication of plate girders used for heavy industrial and bridge projects. We understand that Algoma is trying to increase their capacity to produce thicker sizes, more grades and generally higher volumes of production, but to date we do not believe they have achieved this goal.

Before implementation of the 25% tariff, about 60% of the needs of Canadian structural steel fabricators were supplied by rolling mills from the United States. Presently, it is our experience that Algoma is getting more requests for steel plate than they can deliver. As an example, in June of this year, we placed an order with Algoma for delivery in mid-August or sooner. As late as October 2018, our order is still not yet fulfilled. In fact, to meet our committed job schedules, we have been forced to buy replacement plates from other sources as a substitute for our Algoma order, at a considerable price premium considering the surtaxes or surcharges.

Until sufficient capacity is available from Algoma in Canada, as a temporary measure, we would suggest that a quota be established for plate that could be imported from the U.S. without application of any surtaxes. This quota could be adjusted as Algoma increases their production, size and grade capabilities.

For larger commercial and industrial projects in Canada, we sometimes compete against offshore fabricators. Some of these fabricators are dumping fabricated steel into Canada, putting Canadian fabricators such as ourselves at a disadvantage. Now, with the surtaxes, we need to pay on material that we cannot source in Canada, and we are being made even less competitive than we were before.

We were involved in the trade action launched in 2017 and coordinated through the CISC against fabricated steel for industrial projects that were being dumped into Canada. The Canada Border Services Agency and the Canadian International Trade Tribunal found that fabricators from China, South Korea and Spain were dumping fabricated steel, and that the Chinese fabricators were also being subsidized. Anti-dumping and countervailing duties were applied to certain fabricators from those countries.

We agree with and support Canadian countermeasures in principle to protect jobs at Canadian steel mills; however, protecting jobs from unfair trade practices for employees of structural steel fabricators is equally important. For this reason, we were disappointed to learn that the Canadian government has decided to waive the anti-dumping and countervailing duties for China, South Korea and Spain on fabricated steel for the LNG project in B.C. This decision will likely mean the loss of a substantial amount of work for Canadian steel fabricators.

From our industry's perspective, it appears that the government is concerned about protecting the workers at steel mills but not the employees of Canadian fabricators who transform Canadian steel mill products into fabricated components. Without a strong steel-fabricating industry based in Canada, there will be no domestic customers for the Canadian steel mills.

Thank you for this opportunity to raise our concerns at your committee.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

We're going to move to the Aluminium Association of Canada.

Mr. Simard, you have the floor.

[Jean Simard, President and Chief Executive Officer, Aluminium Association of Canada]

Good morning, and thank you for this invitation to appear before the committee regarding tariff impacts arising from the application of section 232 on the aluminum sector.

The position of our industry is very clear. We're calling for a total and permanent return to free trade for all aluminum products, without exception, between Canada, the U.S. and Mexico, as was the case before June 1, 2018. This means the removal of all section 232 tariffs, without quotas.

The Aluminium Association of Canada believes, as do our counterparts in the U.S. and Mexico, that there is momentum. With the principles agreed to in the USMCA, the conditions are now in place for the U.S. administration to put an end to these measures on a permanent basis. All parties can now get back to growing the North American economy in order to compete with the rest of the world.

The USMCA brings together three countries within a mutually agreed sandbox, a continental market with pre-set rules for the three players. From now on we must all protect the integrity of this hard arrived-at value proposition by monitoring and managing incoming metal from non-party countries, and by adhering to the rules of origin, all of this in a harmonized way.

Tariffs and quotas go against the ideas negotiated among the parties under the new free trade agreement. What Canada can do, and is doing, is protect the integrity of the agreement by monitoring and managing metal from non-party countries to ensure no transshipment or circumvention of rules.

As we have stated many times, the issue in the aluminum industry is overcapacity, primarily from China, and that's where the attention of free-trading countries should be focused.

The aluminum industry in North America has a highly integrated value chain. The 8,000 workers in our Canadian factories, producing 3.2 million tonnes of primary metal, supply an American downstream industry where more than 160,000 workers create value in the automotive and aerospace industries.

According to figures from the American Aluminum Association, the U.S. aluminum industry generates more than $175 billion of economic output in the U.S. economy, while our annual exports generate about $7 billion U.S. We're very far from a U.S. deficit.

The continuation of a tariff on aluminum only hurts the industry on both sides of the border and makes it difficult to meet the growing demand for aluminum. Canada exports 70% of its metal to the U.S., and the downstream companies in the U.S. need that metal to meet demand. The U.S. produces 700,000 tonnes, has capacity for two million tonnes and demand for 5.5 million tonnes.

Aluminum is a commodity, and the price is the same all over the world. By artificially increasing input costs and constraining metal supply, the impacts of the tariffs are making the cost of aluminum in North America the highest in the world. The downstream industry both here in Canada and in the U.S. becomes less competitive. This benefits foreign suppliers and hurts our domestic downstream companies that are pushed out of the market. As this occurs, Canadian primary producers tend to lose market share as well. What pulls out doesn't come back.

This disruption of our integrated value chain is a net loss to both the U.S. and Canada. Many of these businesses are part of the North American value chain, but find themselves cash-strapped when they have to pay the 10% tariff to ship to the U.S., and face growing competition from other sources elsewhere in the world.

We appreciate the efforts of the Canadian government to help offset these situations, but it only highlights the reason that tariffs should be removed altogether. Market volatility and supply chain disruption take us toward the undesired path of metal substitution as well.

The end customers of aluminum, whether they are automotive or beverage companies, will evaluate the cost and availability of supply for future investments. They can replace aluminum with other types of materials, and once the business goes away, it doesn't come back.

More importantly, the uncertainty as to whether these tariffs will remain in place, and the disruption they cause in the market, make it difficult to effectively plan investments, jeopardizing Canada's expansion projects in the aluminum industry.

As part of the world's top-producing areas, we have to sustain our competitiveness by growing our capacity, and keep investing in plant modernization. The required investments are in the billions of dollars. The Canadian industry has invested over $13 billion since 2008 to remain a world-class competitive industry.

Finally, Canada is not a threat to U.S. national security, but in fact, it's an asset. Since the Second World War, our two countries have developed and implemented mutual assistance agreements both in times of conflict and in peace. We've always been a close strategic ally, both in production and manpower, to the U.S. national defence base. All along, we've had America's back.

Without a total and permanent exemption from long-term measures under section 232, there will be such a climate of uncertainty that any potential U.S. restart predicated on contextual and domestic pricing will not be sustainable. The plants are simply too old. At the same time, such a policy will make any expansion project in Canada hardly justifiable, thereby putting at risk all of North America's aluminum production capacity.

We will be brought to realize after a few years that the unintended consequences of this policy will have been to the overall advantage of foreign producers such as China, Russia and the Middle East.

Thank you.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

As we conduct this study, we are hearing of the impact all across the country.

I welcome the MPs who are here today from Richmond Hill, Mount Royal, Kenora, and Mississauga—Streetsville.

Without further ado, we're going to get right into a dialogue with MPs, and we're going start off with the Conservatives.

Mr. Carrie, you have the floor.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much, Mr. Chair.

I want to thank the witnesses for being here. We've been studying this since the beginning of the summer.

I have to tell you, Mr. Wharin, that it's a little disconcerting to me, and I think to all committee members, what you said about how you feel you've been thrown under the bus and your voices are not being heard. Unfortunately, we've heard that from a number of stakeholders.

The minister was here last week, and he seemed to be oblivious to the state of emergency that this is causing. What you said about not being able to pass on costs and the onerous process in place to get some relief, we're hearing over and over again. I come from Oshawa where we manufacture, and I am really becoming concerned. As Mr. Simard was saying, once these jobs go, they don't come back.

Under this renegotiated NAFTA, the U.S. can still use section 232 to adopt new tariffs as long as the measures don't apply to Canada for a period of 60 days. Do you find that the level of uncertainty has decreased or rather remains as strong as it was before this new NAFTA? Some people are calling it “shafta” because it hasn't really done anything to help. Are you finding that the uncertainty has remained strong, given the continued imposition of section 232 and the threat of these future 232s? Did this agreement help at all?

Maybe, Mr. Wharin, you could start.

[Chris Wharin]

Thank you.

No, until its countermeasure tariffs are dropped in their entirety, I don't see what benefit the new agreement will have on industry, using metals and so forth. There's none whatsoever from our perspective.

It's nice that the remissions are put in place. There are certain materials now that will not be subject to a surtax when they come across the border, which is good, and that's overdue, but until they completely disappear.... As you stated, there's a tremendous amount of uncertainty in the marketplace. Our suppliers don't really know how to price their products, because they don't know from one week or month to the next how much the material they're buying is going to cost them. They don't know how much to pass on to us. It's really a continual process of trying to set pricing, what you can pass on to your customers and so forth.

[Colin Carrie, Conservative, Oshawa, ON]

We're hearing that over and over again.

Mr. Simard, I want to ask you a question.

You talked about quotas. Interestingly, with this new agreement, I think it's the first agreement in Canadian history where we were trying to get more free trade and we ended up with an agreement where there were more restrictions and less ability for free trade.

We've had different opinions come to the committee about quotas. It seems some of the bigger players are saying to let's just do that. Let's do quotas because several countries have completed deals with the United States that include quotas. We're getting other opinions on how quotas really restrict the ability to grow and restrict the ability to attract new investment, because you're now limiting growth. It's capped.

We had a witness last week who basically said we could have a deal tomorrow if we accepted these quotas, and I'm worried that there's been some type of understanding with the current government and the American administration that eventually we're going that way. It seems the longer we wait, there's going to be less and less market for us to access.

Would you be able to give us your opinion whether you see any advantage to having a quota system in place on steel and aluminum to get rid of 232s? What advice would you give to the committee on that topic?

[Jean Simard]

Thank you for the question.

I'll speak for aluminum, because our markets are totally different. They're structured differently. The pricing is different. The cross-border DNA of the industry is very different. When I said at the outset that we are totally against quota, quota is one of the worst things that can happen to Canada, in terms of aluminum production. It hinders growth. It maintains a very strong layer of uncertainty. You know when it starts. You don't know when it ends. You don't know what's waiting for you after. It increases the price for everybody in North America, which is very bad, because it creates inflation in a metal industry, and it plays into the hands of foreign suppliers.

Some people say that other countries have accepted quotas. I'm not sure they accepted them, and when they accepted them, I'm not sure they were very conscious of what is happening. You can ask South Korea how they feel about the quotas that they—quote, unquote—“accepted”. It's like the morning after for them right now.

[The Chair, Liberal, Mark Eyking]

Thank you, Mr. Simard. That wraps up the time.

We're going to the Liberals now.

Ms. Ludwig, you have the floor.

[Karen Ludwig, Liberal, New Brunswick Southwest, NB]

Thank you.

Thank you, all, for your presentations this morning.

Mr. Simard, thank you for mentioning that Canada is not a national security threat. I think all of us around this table agree that the tariff should never have been placed on it, and the ultimate goal is to get rid of the tariff.

Ocean Steel representatives, thank you for being here this morning. Two hundred-plus jobs in Saint John are certainly significant. I've spoken with your company on a number of occasions and I know the situation with fabricators is a little different from other parts of the industry. To what extent are you importing steel from the United States, fabricating it and exporting it back?

[Harrison Wilson]

Right now, about 60% of our work is in the U.S.

As I mentioned before, because some of the sizes are not available in Canada, we have to bring that in from the U.S., fabricate it, and then export it back out again. For the moment, we can get a clawback on that, but there are some uncertainties on how much we can claw back. The waste, are we not able to get it on that? There is still an additional cost for us that our American competitors don't have to pay.

It is a fair amount of work that we do in the United States.

[Karen Ludwig, Liberal, New Brunswick Southwest, NB]

Okay, thank you.

Did you submit any requests for the remission orders, or submit anything under the safeguards?

[Harrison Wilson]

Not yet. We had hoped that the tariffs would disappear with the signing of the new trade agreement. Unfortunately, they did not. We will probably have to proceed with that now.

[Karen Ludwig, Liberal, New Brunswick Southwest, NB]

Okay. We could certainly connect you, even today, with people here in Ottawa to help you move along in that process.

[Harrison Wilson]

That would be great. We would appreciate that.

[Karen Ludwig, Liberal, New Brunswick Southwest, NB]

Okay. Thank you.

In terms of the shapes and sizes, I think that's another unique aspect of having to import. We've heard from other witnesses, Mr. Wilson and Mr. Gates, that if the product is available in Canada.... That has been a bit of a hiccup at some point. What you mentioned today about Algoma.... So, yes, there may be a similar product available in Canada, but the availability date is an issue. How has that affected you?

[Harrison Wilson]

It affects us quite badly on plate items.

As I mentioned before, in some of our projects, we're competing against offshore fabricators, and offshore fabricators do not have to worry about, for example, the tariffs on fabricated steel coming into Canada. At least some countries are not affected by the countervailing duties. Vietnam, for example, is exporting steel into Canada for the Baffinland project. We bid on structural steel there, and we were not successful. It went to Vietnam.

We're bidding on another bridge project for Baffinland. Again, the plate size is 20 metres long. It would be greater than two and three-quarters inches in thickness. There's bridge plate A709 that Algoma has difficulty producing because of the hydrogen embrittlement, so we will have to buy those plates in the United States. It means we will have to pay 25% more on a third of our costs on that project, and we will probably be competing against fabricated steel coming in from offshore fabricators. It makes it very difficult for us to compete.

[Karen Ludwig, Liberal, New Brunswick Southwest, NB]

This is a very direct question. Do you support the measures the government put in place for the countervailing duties or do you think we should have left it with section 232 on the table, and not had any countervailing duties?