International Trade Committee on March 9th, 2017

[Dr. Ian Lee]

I see. I'm sorry.

I'm trying to pull a whole bunch of things together simultaneously. China is moving very quickly. We all know that. I mean by this that they are moving up the curve. Their wages are going up. I can tell you that. Every time I go back I use the laundry. I take my laundry to a Chinese laundry two blocks from my hotel. Five years ago it was five dollars for the bag, and then the following year it went to $10, and now it's up to $30. Wages are going up. Prices are going up.

I don't go to restaurants. I go into the grocery stores because you learn more. You talk to people. You see things. You see prices of things we recognize in Canada, juice, eggs, and those prices are going up. That's one thing I just wanted to put out there; their wages are going up. My Chinese students, who are not students but managers of multinationals and Chinese corporations, are in their thirties and they're country managers at that level. They are VP level. They are executive level. They tell me the wages are going up very significantly. I'm from Ottawa and I'll use Ottawa as my benchmark. From all I can see, a lot of the prices in Shanghai, when I convert from RMB into Canadian dollars, things that we know very well like juice or milk come out pretty similar to Ottawa, whereas five years ago it was really cheap to go to Shanghai. Your Canadian dollar went a long way.

That's one thing to note: their cost structure is going up. I realize Shanghai is not completely representative of the whole country. It's seen as the most dynamic city. It's the Toronto of China. That's the first point.

In terms of the SOEs, that's where I've been doing most of my research, and that's really what I wanted to talk about very quickly. Remember, they are in a lot of the industries like steel. The SOEs have been studied by Americans, by academics, by Europeans, by the Chinese themselves, and they have a real problem. The Chinese private sector is very dynamic, from what I can see. A lot of these people in my classes—this is executive MBAs—are in the Chinese private sector and they are very dynamic and they're very quick and they're bilingual, etc., but it's in the SOEs, in the state-owned enterprise sector, where they have a lot of problems. They have a lot of zombie corporations where they're essentially bankrupt, and the Chinese government keeps promising to reform the SOE sector and introduce market reforms, but they do not. They're claiming to, but what they're doing is consolidating a lot of the smaller and mid-sized SOEs into bigger SOEs, which makes me more pessimistic, not less pessimistic, because it's harder to privatize a big company than it is a small or a medium-sized—

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

May I just jump in with one more question?

[The Chair, Liberal, Mark Eyking]

Sorry, the time is up.

[Dr. Ian Lee]

I'm sorry. I didn't mean to—

[The Chair, Liberal, Mark Eyking]

It's okay. Maybe you can share it with another member.

We're going to move over to the Conservatives now.

Mr. Van Kesteren, you have the floor. Go ahead, sir.

[Dave Van Kesteren, Conservative, Chatham-Kent—Leamington, ON]

Thank you, Chair.

Thank you all. It's a fascinating discussion.

Mr. Neumann, I commend you on your passion for the worker. I remember a friend of mine, who was a labour leader as well, said, “Dave, don't forget the working man”, and that's who we have to remember.

Dr. Lee, this is what it's all about, isn't it? I, too, have had the opportunity to travel to China and actually I think it was the chair of the Communist Party who told me, “We have 500 million people making a dollar a day.” They have this drive to move them out.

I don't want to dump on anybody, if you'll pardon the term, but how much of this is of our own doing? I watched a program. I've seen this Swedish guy who just recently died, the professor who does all these graphs with the bubbles. You probably know who I'm talking about. He was talking about how the poor countries are moving forward, and when you see that big bubble, manifested mostly by China, and India, to some degree as well, and how they're trying to push that, how much of this is an equalization across the globe? How much of this is just going to happen?

I don't know how else to get around this, and I know that the steelworkers at this particular point are being affected, maybe more than most others. That's number one. Then I can remember in the 1960s when the buzz was pollution and didn't we, to some degree, close down Hamilton as well? People just didn't want to see that pollution. They didn't want to see all that.

How much of this has just come to a loggerhead?

I wish we had more time because I know you could probably give a lecture on this, and I'd love to attend it, so I'm going to give you a little time.

[Dr. Ian Lee]

I'll be very succinct, though. I'm really tying your question into the previous question. The Chinese do have a competitive advantage in some industries, but I do not think it's in the advanced sector. I don't believe we have to worry in the services sector or advanced manufacturing, with Bombardier or the Americans worrying about Boeing, at least not for the present.

Where the threat is coming from is in traditional industries, natural resource industries, steelmaking, because the state-owned enterprises can cheat. They can cheat because they're owned by the state, so they're paying wages below market, they're getting subsidies, they're getting around red tape, and they're getting permits much more easily. The end result is that the whole structure of China is distorted by these very large numbers of very powerful state-owned enterprises, which is about a quarter to a third of GDP.

More important, they're not little companies. It's not like the small business sector in Canada, which doesn't have a lot of power. These are big companies that have a tremendous amount of power, and they can use that power to give themselves what I would call an unfair competitive advantage that has not been earned. They're doing it for the reason I said, because they have these millions of people coming in from the countryside and the Chinese Communist Party is terrified of losing its claim on power. The only way it can keep its claim on power is to keep delivering jobs. That's why I said I don't think we, in Canada, or the Europeans, or the Americans, can count on the Chinese correcting the problem in the steel sector.

[Dave Van Kesteren, Conservative, Chatham-Kent—Leamington, ON]

I've recounted this story I think in this committee, too, about the first time I went to China and was seeing the pollution. I visited the steel mills the second time and just saw the pollution. When I came back home the Chinese came to visit and they said, we want to talk to you about your trip. I was one of the first ones in our party to go at that time, and I said, that's great. What do you want to talk about? They said, we want to talk about the environment. I thought that's wonderful. They said, no, we don't want to talk about our environment; we want to talk about your environment.

They talked about us reducing our carbon footprint. When I mentioned to them that they had a little bit of an issue there themselves, they said, that's just really recent. You guys have been doing this for 100 years, and we're just.... Then he told me the story, and reiterated those things about moving the society forward and how important that was.

How much of that is accepted by some of our national leaders?

[The Chair, Liberal, Mark Eyking]

It will have to be a short answer.

[Dave Van Kesteren, Conservative, Chatham-Kent—Leamington, ON]

I'm wondering about that. I wonder if we're allowing that to happen.

[Dr. Ian Lee]

I won't address that part, but I just want to pick up on your point very quickly on the pollution side and put a metric out there that I'm not sure people are aware of. China today, 2017, still sources 65% of the total energy of China from coal. You're absolutely right, of course, you're going to have a competitive advantage in Canada making steel if you're not using coal. Just take coal out of the picture and you already have a competitive advantage over the Chinese because they're using the dirtiest of the dirtiest of the dirty.

[Dave Van Kesteren, Conservative, Chatham-Kent—Leamington, ON]

Yes, that's true.

[The Chair, Liberal, Mark Eyking]

We're going to move over to the Liberals.

Mr. Fonseca, you have the floor. Go ahead, sir.

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

Thank you, Mr. Chair.

I want to thank our panellists for all the information they've been able to share, and their experiences through an industry that has gone through so much change.

Mr. Lee, I know our focus here has been on China and their unfair competitive advantage. Is that the same now? I think I heard you mention currency manipulation. We've talked about subsidies. How about Japan and South Korea? They are different markets, but big exporters to us here. Can you do a compare and contrast with China and now Japan and South Korea? How are they able to stay competitive?

[Dr. Ian Lee]

I have not studied them, other than that I have the stats with China and South Korea and Japan and India. I was thinking about this just today actually, for a completely different reason. They seem to gravitate towards this industry specifically because it tends to be well-paying for the people in these countries, and it hires a lot of people. From the policy-maker's perspective—

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

That's China, but I'd like to—

[Dr. Ian Lee]

No. I'm talking about South Korea, India, and Japan.

To answer your question about whether they are cheating too, I haven't looked at that because I'm so focused on China. I haven't looked at the policies that are being adopted in Japan or India or South Korea. I can tell you that Asia is dominating steel production. Europe has 10%. It has 500 million people and it's the largest regional economy in the world, and they only have 10%. Asia has something like 80% of the world's steel, so they're doing something.

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

To any of the other panellists, I know we've focused on China, but now for Japan and South Korea, how do they keep their competitive advantage? Is it the same? Is it through what we've said about currency manipulation? Is it that they have subsidies? What are they doing, because they have much higher wages for their workers, and probably higher environmental standards, especially Japan, so how do they do it?

[Joseph Galimberti]

We do have orders. I'll be happy to provide for the committee afterwards the list of orders that are in place under the CITT where dumping and subsidy behaviour have been found. There are orders in place against both Japan and South Korea. It's demonstrable dumping and subsidy behaviour in those markets, and predominantly in the South Korean case, I think, it's subsidy.

This is also, though, I want to emphasize, a part of the China effect, because China is selling its steel into Korea. That is motivating Korean producers to then dump onto the global market whatever they can't sell in their now tainted or undervalued domestic market. That's why you see that sort of infiltrative behaviour. We now see dumping coming out of Europe. It's the same problem. Chinese steel is pushing Turkish steel out of Turkey, and Turkish steel is ending up in North America.

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

I'll go back to you, Mr. Lee, and what you were talking about. I don't know if we have a steel strategy here in Canada. I guess we don't own our steel now; it's foreign owned. You talked about consolidation. Is that consolidation here now within North America? Are you talking about U.S. Steel consolidating or others getting together? How do you see the strategy for us to up our game?

[Dr. Ian Lee]

I'm drawing partly on the research on industries in decline or industries facing very difficult challenges. A common strategic response that's been studied by economists and business schools is that industries in decline consolidate.

We're seeing this going on in the airlines, too, where you have a bunch of unprofitable companies and you.... Let's be blunt. I'll say what I've said in my class to my students. You consolidate to do what? To reduce competition so you can put prices up. If there are eight companies in the business and you consolidate to four divvying up the same market, it's not going to be as competitive as when you have eight firms. It's going to become more oligopolistic.

Secondly, in the study that was just done by Ernst & Young—and they have a very nice study out on the world steel industry—they're also advocating going down that road. They're saying that firms are either going to have to get bigger and scale up to achieve greater economies of scale or to “go niche”, into very focused markets.

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

My last question is for you, Mr. Neumann. How would that affect your members? Would U.S. Steel move production to the U.S. or here, wherever they're most competitive? How would that affect the consolidation or the path forward for the industry here in North America?

[Ken Neumann]

First of all, for the steel industry, if you look at the submission we've done, you'll see that currently we have 22,000 steelworkers working directly in the industry, and the industry affects in excess of 100,000. You can go back to the late seventies and the early eighties when they talked about the steel market across the country. Canada has stepped up to the plate. We've stepped up to the plate environmentally. We've modernized. We've done the skills training. It's now one of the top efficient lines.

U.S. Steel is not one of my favourite topics because of the facts on the way they were brought into Canada. There was not a net benefit to Canada. There have been some accusations over the shifting, and probably there's some truth to that fact, but we can't get ahold of that private agreement. There's that security agreement that the government won't let us access. That's still tied up in the courts.

Look at the companies that we deal with today. We have relationships throughout them. Look at Essar. Look at some of these others. We have a tremendous amount of them. We have great mills. We have great workforces. We're state of the art. There's no reason why we can't.... These laws have been outdated for years. I always look at this very simply, as a working person. If you look at the steel industry in regard to dumping, you'll see that it didn't happen yesterday. We've had this time and time again. That's why we had the bankruptcies. Why still today in this country are we building a bridge in Montreal with foreign steel? Why are we building a bridge in British Columbia with foreign steel?

On softwood lumber, I shake my head. We've lost 54 mills since the last agreement. Why are we still cutting the logs, shipping them and floating them down to the U.S., putting them on a ship, sending them over to China, and then bringing them back as a desk, or a chair, or whatever the case may be?

It's simple to me.

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

Thank you.

[The Chair, Liberal, Mark Eyking]

We have just a few minutes left. The NDP is going to take those last few minutes.

Go ahead.