International Trade Committee on Aug. 3rd, 2016

[The Chair, Liberal, Mark Eyking]

Good morning and welcome, everybody, committee members, and new committee members who are sitting in.

For everybody in the audience, we're here because I got a request from four committee members last week under Standing Order 106(4). The request was to do an update on diafiltered milk and spent fowl issues. It has to be approved before this meeting can go forward.

I'm sure that all committee members here have a copy of this standing order. Does everybody have one? Then I'll move to the first order of business.

All in favour of proceeding with this standing order, raise your hands.

[Some hon. members]

Agreed.

[The Chair, Liberal, Mark Eyking]

Good. So we'll move ahead with this.

As a result of this request, I did a of couple things. Many of you had to travel all the way here to attend this meeting. For us to have a bit of a productive meeting, I took it upon myself to ask some officials from the government to be prepared. They came back here, are prepared and are with us today. We'll start our meeting, and if it's all right with everybody, we'll bring forward some officials to explain the situations on both of these issues.

I have booked the room for two hours, to 12 o'clock. It's how the committee wants to roll here, but my suggestion is that for the last 10 to 15 minutes, we go in camera to talk about future business. We have a few topics. I just want to brief you on our Atlantic trip. For anything else we want to go forward with after this meeting, we can talk about it at that time.

Is that okay with the committee, or is there any comment on our agenda today?

Mr. Hoback.

[Randy Hoback, Conservative, Prince Albert, SK]

Chair, I think you won't see any problem from our side on what you're proposing. The only thing is that we would probably like to see the ministers come forward on this issue. I'd like to reserve that right to have them called forward, as well as stakeholders. I'm not sure they've been given proper time or notice to actually present here.

If there are some stakeholders here today, I wouldn't mind listening to them if they are prepared to present.

[The Chair, Liberal, Mark Eyking]

Thank you for that comment.

I'll let Mr. Hoback and others know that before the meeting started, I had some discussion with both industry representatives. They are not prepared today, but they said they're willing to come in the fall or whatever, when they're more prepared. If we schedule a meeting, they're more than willing. Today they're not available to give an update. That's where it's at right now, because I only asked the government officials at that time to come here for this briefing.

[Randy Hoback, Conservative, Prince Albert, SK]

If we wanted to bring them in tomorrow, would they be willing to come tomorrow, or the day after, or...?

[The Chair, Liberal, Mark Eyking]

It depends how we talk about future business—when or at what meetings we do it, and how we do it. Right now they say they could come in the fall, but it's the decision of the committee.

[Randy Hoback, Conservative, Prince Albert, SK]

Yes, but you're talking about an emergency meeting and then you're deferring it to the fall. I'm just trying to look at the logic of that.

[The Chair, Liberal, Mark Eyking]

I'm talking about today's meeting, and I'm suggesting we could do future business, if we want to talk about—

[Randy Hoback, Conservative, Prince Albert, SK]

But you're talking about bringing producers in the fall. That's deferring it to the fall.

[The Chair, Liberal, Mark Eyking]

They said they're available, but not today. It's up to our committee if we want them to come sooner or whatever. It's whatever our wish is, I guess is what I'm saying.

[Randy Hoback, Conservative, Prince Albert, SK]

Okay.

[The Chair, Liberal, Mark Eyking]

I'd like to get into this and maybe do that in future business. Today we have brought forward witnesses to talk about where the whole situation is at right now. Maybe after that meeting we can discuss where we go from there. Is that okay?

[Randy Hoback, Conservative, Prince Albert, SK]

Yes. That's fair.

[The Chair, Liberal, Mark Eyking]

Is that okay with everybody? We'll go in camera for the last 15 minutes.

There's a technical situation here. We will have to suspend for a few minutes.

[The Chair, Liberal, Mark Eyking]

We have about five witnesses here. There's no set time for presentations; whoever wants to speak can do so. We have three different departments. I'll start off with Finance and then go to the Canada Border Services Agency and then to Agriculture. There's no set time, but if you can keep it to five to 10 minutes, it would be appreciated. The committee will just do our regular line of questioning. We'll follow the way we usually do it. We'll go probably to 11:40 or 11:45, and then we'll go in camera.

Without further ado, I'm going to start with the Department of Finance. Who is speaking for the Department of Finance?

Okay, go ahead.

[Dean Beyea, Director, International Trade Policy Division, Department of Finance]

Maybe I could clarify before I begin my introduction. I was asked to come to speak about the duties relief program, not the other two programs you mentioned earlier. If that's still the case, I'm happy to continue in that manner.

[The Chair, Liberal, Mark Eyking]

Does it pertain to these two topics? I think it's pretty specific, what we're talking about here. It states here “as well as other ongoing irritants”.

Yes, you go ahead. Tell us what you know.

[Voices]

Oh, oh!

[Dean Beyea]

Thanks very much.

My name is Dean Beyea. I'm the director of the international trade policy division at the Department of Finance. The duties relief program is legislated under the customs tariff, which is the responsibility of the Minister of Finance. My division is responsible for providing analysis and advice to the minister on customs tariff matters, including this program. Day-to-day administration of the customs tariff, however, falls under the purview of the Canada Border Services Agency. The DRP relieves customs duties on imported inputs used in the production of goods that are ultimately exported. This long-standing program is similar in nature to the supply-management focused import for re-export program administered by Global Affairs Canada.

Given the general nature of the DRP, it has certain program features that are more flexible than the import for re-export program; for example, it has longer time frames for re-export. Supply-managed farmers and farm groups have expressed concern that some of these features are negatively impacting the domestic market. On the other hand, certain food processors argue that the DRP features provide them with additional flexibility that improves their competitiveness in export markets.

While DRP imports have grown in recent years, this largely represents a diversion from imports previously under the import for re-export program. Total combined imports across the two programs continue to represent a stable proportion of the domestic market. The government recognizes the importance of effective import controls to the integrity of the supply management system and is committed to their enforcement. In that context, officials are actively reviewing previously announced anti-circumvention measures, including potential changes to the duties relief program. It's also important to note that U.S. milk producers and members of the U.S. Congress have expressed concern that changes to the duties relief program could undermine negotiated market access under the Trans-Pacific Partnership. As a result of the supply management industry concerns, I understand that the CBSA has recently heightened enforcement activities to ensure that the DRP continues to be used as intended under the law.

I think I can stop there and listen to my colleagues. I am happy to receive any questions.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

We'll go over to the Canada Border Services Agency. Who do we have? Is it Mr. Lawton?

Go ahead, sir.

[Alexander Lawton, Director, Trade Compliance, Canada Border Services Agency]

Thank you, Mr. Chair.

My name is Alexander Lawton, and I am the director of trade compliance with the Canada Border Services Agency. I welcome the opportunity to address the committee today.

The Canada Border Services Agency, or CBSA, is responsible for the secure importation of food, plants, animals, and other goods into Canada, and we enforce legislation and regulations on behalf of numerous government departments and agencies to this end.

Since its creation in 1996, the duties relief program, or DRP, and associated drawback program have enabled qualified companies to import goods without paying duties, on the condition that the imported goods are subsequently exported. The products must be subsequently exported within four years.

The CBSA administers these programs on behalf of Finance Canada, primarily for the benefit of our manufacturing sector. The DRP gives Canadian companies the ability to compete internationally by allowing them to purchase and use raw materials for goods subsequently exported at world market prices and without including customs duties in the price of the exported goods.

Since 2012, a portion of the supply-managed agricultural goods industry has transitioned from the import to re-export program or IREP—a similar program managed by Global Affairs Canada—to the duties relief program. However, the DRP was not specifically designed to provide relief for agricultural goods. It was initially designed to support Canada's manufacturing industry. As a result, issues have been identified around the potential diversion or substitution of imported non-duty-paid goods under the program being sold in the Canadian market at prices substantially lower than the prices established by Canada's supply management system. The customs tariff, in conjunction with the duties relief regulations, allows participants to use domestic or imported goods of the same class interchangeably in the processing of goods in Canada. This is often referred to as substitution.

From a DRP perspective, substitution is only permissible according to the legislative definition of “same class” if the goods being used in the production are so similar that they can be used interchangeably in the final product, and that these goods, in the same quantity as the goods originally imported, are exported.

Under the customs tariff, DRP participants must report any goods diverted into the Canadian economy as well as pay all applicable duties within 90 days of the date of diversion. If, during a compliance verification, a participant is found to have diverted goods into the Canadian economy or has failed to comply with any condition of a DRP, the applicable duties are assessed, including any interest and penalties that may apply, and the company's licence to participate in the DRP may be suspended or revoked.

The CBSA maintains a robust post-release verification regime and regularly verifies participants in the DRP to ensure compliance with all program requirements. Since April 2016 alone, a significant number of compliance verifications of DRP participants have been completed, and where non-compliance was found, the applicable duties, interests, and penalties were assessed, and participants suspended from the DRP. The CBSA will continue to ensure program compliance through regular and rigorous post-release compliance verifications. However, Finance Canada is the policy lead and is responsible for any changes to the program. The CBSA is working with government partners to review anti-circumvention measures, including potential changes to the DRP. The Canada Border Services Agency will continue to support the Government of Canada's direction in any border controls initiative and will further engage other government departments as required.

Thank you.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

We're going to move to the Department of Agriculture and Agri-Food now.

Go ahead, Mr. Seppey.

[Frédéric Seppey, Chief Agriculture Negotiator, Trade Agreements and Negotiations, Market and Industry Services Branch, Department of Agriculture and Agri-Food]

Good morning and thank you, Mr. Chair and honourable members of the committee.

My name is Frédéric Seppey. I'm Canada's chief agriculture negotiator and assistant deputy minister for trade negotiations and agreements at Agriculture and Agri-Food Canada. I appreciate the opportunity to be here today in order to speak to you about issues of concern to Canadian dairy and poultry producers. My remarks this morning will focus on issues surrounding the imports of spent fowl and diafiltered milk. My colleagues from Finance Canada and the Canada Border Services Agency have already spoken to the duties deferral program.

Canada's dairy and poultry industries operate under supply management. The goal of supply management is to match production with anticipated Canadian demand. Supply management relies on three key pillars: production control, producer price control, and import control. These pillars are essential to preserving the integrity of the system. Import control and predictability are essential to the effectiveness of supply management, and necessary to accurately determine the national supply requirements and avoid disruptive shortages or surpluses on the Canadian market. The national production quotas set by dairy and poultry marketing boards take into account imports when trying to match the Canadian demand.

Regarding spent fowl, Canadian chicken producers have expressed concerns that import controls for chicken are being circumvented by a number of importers who declare broiler chicken meat as spent fowl in order to avoid import controls and corresponding tariffs. Industry believes this to be a key explanation for the significant increase in spent fowl imports in recent years. Imports of spent fowl increased 55% from 2009 to 2015, while Canadian chicken production increased only by 9% over the same period. In 2015 imports of spent fowl corresponded to approximately 10% of total chicken production in Canada.

Chicken farmers have indicated that import predictability has diminished due to the rapidly increasing imports of spent fowl and the doubts surrounding the validity of these imports. The Canadian chicken industry is concerned that this trend will continue to lead to more broiler chicken meat being imported duty-free and thus displacing Canadian domestic chicken production.

Agriculture and Agri-Food Canada is leading an interdepartmental working group to examine ways to ensure the effectiveness of border controls for poultry products. The working group is considering issues related to the imports of spent fowl and looking at potential options to enhance border controls, such as potentially requiring certification by exporting countries or conducting additional testing, including on DNA of birds. That would ensure that products declared as spent fowl are adequately treated at the border. Government officials from various departments have been working diligently to address this issue, and continue to be in close contact with various stakeholders along the value chain.

Now I will turn to the dairy issues.

With respect to diafiltered milk, the government acknowledges that the use of this product beyond what is authorized in cheesemaking under the cheese compositional standards is a source of concern for dairy producers. It is important to distinguish the use of products such as diafiltered milk in cheesemaking from the way these products are treated at the border.

Milk protein substances, such as diafiltered milk, can be imported into Canada duty-free and quota-free from the United States under the North American Free Trade Agreement, as long as they contain 85% or more milk protein on a dry matter basis. In addition to cheesemaking, these products can be used in a variety of manufacturing processes in Canada. Therefore, imports of milk protein substances as defined in the Customs Tariff Schedule are absolutely legitimate.

With respect to the cheese compositional standards, they allow for the use of ingredients other than milk in cheesemaking within specific limits. It has therefore never been the intention to completely prohibit the use of dairy ingredients such as diafiltered milk in cheesemaking.

This issue should also be looked at in a broader context.

The dairy sector faces a number of ongoing challenges, stemming from both domestic and international market pressures. It is in this context that, over the past few months, the Minister of Agriculture and Agri-Food, the Honourable Lawrence MacAulay, and government officials met with the Dairy Farmers of Canada, the Dairy Processors Association of Canada, and provincial dairy associations across the country to discuss ways to address the impacts of new market access negotiated under the Canada–European Union Comprehensive Economic and Trade Agreement, or CETA.

At these meetings, the government heard the thoughts and views of dairy stakeholders from coast to coast on a number of key challenges and opportunities facing the industry. Discussions mainly focused on how to strengthen the sector in the face of domestic and international challenges, including regarding diafiltered milk.

The government will continue to work on addressing stakeholders' interests and concerns on this issue, looking for sustainable solutions for the whole sector. Continued close collaboration between the government and the industry is necessary to help the sector meet its current challenges and seize growth opportunities.

In closing, thank you again for the opportunity to appear before you today, and it will be a pleasure to answer any questions you may have.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

I'd like to thank all of the departmental officials for their briefs.

Before we start questioning, I would like to welcome two MPs who are sitting in as substitutes.

Ruth Ellen Brosseau, it's good to see you, and Francis Drouin, welcome to our committee. We meet all the time in the summer.