International Trade Committee on Dec. 4th, 2017

[The Vice-Chair, Conservative, Dean Allison]

I call the meeting to order.

Good afternoon, everyone. Pursuant to Standing Order 108(2), we will commence our briefing on the ongoing negotiations of the North American Free Trade Agreement.

We'll get started very shortly, but before we do I want to welcome our witnesses here today and thank them both for being here. I know that you have been very busy, so the fact that you're taking some time out of your busy schedules to be here and just give us an update is greatly appreciated.

From the Department of Foreign Affairs, Trade and Development, I have Dany Carriere, who is the director of trade negotiations for North America, and Steve Verheul, who's the assistant deputy minister of trade policy and negotiations. Welcome, and it's good to have you here.

As I think you are no strangers to how committee works, we'll start with your opening statements, and then we'll move around the room over the next couple of hours, asking questions back and forth. It is not televised live, but there is a camera from Global TV, which will share the proceedings with other networks after we're done.

I'm going to turn the floor over to you, Mr. Verheul, to start with your opening remarks, and then we'll have some questions from our members.

[Steve Verheul, Assistant Deputy Minister, Trade Policy and Negotiations, Department of Foreign Affairs, Trade and Development]

Thank you very much. Good afternoon, everyone, and thank you, Mr. Chair.

I'm Steve Verheul, Canada's chief negotiator for the NAFTA negotiations, and, as mentioned, assistant deputy minister of the trade policy and negotiations branch at Global Affairs Canada. As you also mentioned, I'm joined today by Ms. Dany Carriere, who's the NAFTA chief policy coordinator.

Thank you for the invitation to provide the committee with an update on the NAFTA negotiations. I would like to take this opportunity to acknowledge the work of the committee in their hearings on NAFTA, including cross-country and international consultations. The feedback those reports provide is quite valuable, so thank you.

This is my first appearance before this committee since the negotiations were launched in August, so I will focus my opening remarks on a quick overview of the negotiating rounds we have had so far, followed by a description of where talks currently stand.

To start with, as you all know, negotiations to modernize NAFTA were officially launched by the three NAFTA ministers on August 16, 2017, in Washington, D.C. To date, five rounds of negotiations have been held in rapid succession. Each round brings together nearly 30 negotiating tables. They cut across all of traditional trade agreement topics such as national treatment and market access for goods, investment, cross-border trade in services, and government procurement, but also include newer modern trade topics, such as digital trade, good regulatory practices, and small and medium-sized enterprises.

Nearly two months ago, Canada hosted round 3 in Ottawa. Almost 600 national delegates in addition to nearly 300 journalists, 100 stakeholders, and 75 representatives from provinces and territories were present for the Ottawa round.

Following the first three rounds, the NAFTA partners were in a position to announce the conclusion of the competition policy and small and medium-sized enterprises chapters. At the end of round 4, as they did for rounds 2 and 3, ministers met to take stock of the negotiations. They decided, given the scope and complexities of the negotiations, to extend the period of time between rounds to allow more technical work and domestic consultations. Ministers also reaffirmed the goal of reaching an agreement in a reasonable amount of time.

Most recently, Mexico hosted round 5 in Mexico City, where it was announced that the sixth round of negotiations will take place from January 23 to January 28 in 2018 in Montreal, Canada, but before that, negotiators will continue their work in Washington, D.C., from December 11 to December 15.

As you know, Canada's objectives for these negotiations have been based on extensive ongoing consultations with Canadians, including businesses, civil society, labour unions, indigenous peoples, and academics. In total, the Government of Canada has met with over 900 Canadian stakeholders, including local communities from across the country, and we've been continuing to meet stakeholders alongside the NAFTA talks themselves and between rounds. In addition, the government has received over 44,000 written submissions through the Canada Gazette process, the NAFTA consultation website, and direct emails to the NAFTA consultations team.

These extensive consultations provide valuable opportunities for Canadians representing many of the diverse regions and populations of our society to give their perspectives on Canada's negotiating priorities.

In addition, to ensure Canada's positions are well informed, we've established a wide-reaching consultation mechanism that includes a steering committee and specific sectoral groups. The sector-specific groups include agriculture, automotive and auto parts, civil society, culture, energy, infrastructure and government procurement, labour, metals, services, and transportation.

We also work very closely with our provincial and territorial colleagues, who travel to the negotiation sites, where they are provided with regular updates on the talks.

Overall, Canada's goal is to make an already good agreement more modern and more progressive. We are seeking to ensure that NAFTA can fully address the challenges of the 21st century. That means cutting red tape, harmonizing regulations where it makes sense, and making the flow of goods and services more efficient and effective for our businesses.

We also believe that NAFTA needs to be more progressive and inclusive. Canada's is seeking to integrate into NAFTA strong labour and environment chapters, reinforce the right of governments to regulate in the public interest, strengthen collaboration on activities to promote gender equality through a trade and gender chapter, and increase participation of our indigenous peoples in North American trade.

To that end, in round 5 in Mexico, Canada tabled its proposed trade and indigenous peoples chapter. The chapter aims to provide greater opportunities for indigenous peoples to take advantage of the economic opportunities of a modernized NAFTA.

At this juncture, the NAFTA negotiations are unfolding on two tracks. The first is a traditional track where it will be possible to see real improvements to NAFTA in a number of areas, including telecommunications, good regulatory practices, customs and trade facilitation, sanitary and phytosanitary measures, sectoral annexes, financial services, anti-corruption, technical barriers to trade, and many others. These are the kinds of issues to which our stakeholders have attached the greatest importance. It is a message we keep hearing regularly during our consultations.

As in all negotiations, there are difficult areas where Canada will have different objectives and approaches from its trading partner. This is true for the NAFTA as well. This includes the value of binational panels for anti-dumping and countervailing duties, or chapter 19: the U.S. is seeking its elimination, while Canada is seeking to improve upon it. That said, difficult areas were anticipated.

Where things get really difficult is on the extreme proposals tabled by the U.S. at rounds 3 and 4. These proposals fall in the second track. They include a rules-of-origin package for the automotive sector, a government procurement dollar-for-dollar proposal, an unconventional approach to dispute settlement, and a sunset clause.

On rules of origin for autos, the U.S. is proposing a regional value content requirement of 85%, a 50% U.S. content requirement, and tracing of all inputs. This proposal is wholly unworkable and would not only be damaging to the Canadian and Mexican auto sectors but to the U.S. auto sector as well. Both Canada and Mexico have highlighted the negative impacts of the U.S. proposal for the U.S. and for North America more broadly.

In regard to government procurement, the U.S. has tabled a dollar-for-dollar proposal that would virtually eliminate Canadian access to the U.S. procurement market under NAFTA. Canada has rejected the dollar-for-dollar proposal as completely unworkable, and we will not engage on the basis of that kind of approach.

On dispute settlement, the U.S. proposal is an attempt by the U.S. to return to a pre-WTO era in which the biggest economies win over smaller economies. Enforceable trade commitments are essential and represent a critical part of any trade agreement, including NAFTA. Canada will not accept an outcome that does not respect this fundamental concept of effective enforcement of legal obligations.

Regarding the sunset clause, the U.S. is proposing that the agreement expire every five years unless the parties agree to extend it. Canada's position is that this would create an unstable business environment and hamper foreign investment in North America. We continue to oppose this proposal, as well as the other extreme proposals.

The U.S. has also proposed the complete elimination of Canadian tariffs on dairy, poultry, and eggs, without suggesting the elimination of their own. In some cases they have even greater protections on products such as dairy, sugar, sugar cane products, and others. This proposal is also unacceptable.

Even in the face of these extreme proposals, Canada remains committed to modernizing and improving NAFTA, and we will continue to engage constructively with Mexico and with the U.S. with the aim of reaching mutually beneficial outcomes for a modern NAFTA that will continue to serve our exporters for decades to come.

Let me be clear: while we will continue to engage constructively and bring suggestions and new ideas to the table, we will not accept U.S. proposals that would fundamentally weaken the benefits of NAFTA for Canada and undermine the competitiveness of the North American market in relation to the rest of the world. Canadian negotiators are working hard to continue putting together high-quality proposals in advance of the Washington intersessional period, and we are looking forward to hosting our Mexican and U.S. colleagues in Montreal for round 6.

Thank you, and I look forward to taking your questions.

[The Vice-Chair, Conservative, Dean Allison]

Thank you very much, Mr. Verheul.

We're going to start with the opposition and Mr. Colin Carrie.

Go ahead, sir. You have five minutes.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much, Mr. Chair, and I thank the witnesses for being here.

First of all, I'd like to say I had a great week last week with some of my colleagues around the table. We had a chance to meet with some congressmen and senators. I have to tell you that the view about Canada was very positive overall, but there is this uncertainty.

Could you help clarify something that wasn't able to be clarified down there?

If the U.S. were to withdraw from NAFTA, would the Canada-U.S. trade agreement, which was suspended but not terminated, take effect? What exactly would occur?

[Steve Verheul]

If the U.S. did withdraw from NAFTA, then the Canada-U.S. free trade agreement—which, as you mentioned, is currently under suspension—would come into effect. It may take a presidential proclamation to initiate that process on the U.S. side. We would probably both have to make regulatory changes to comply with that agreement, as things have changed over the years, but it is true that if the U.S. withdrew, the currently suspended bilateral agreement between us and the U.S. would come back into force.

[Colin Carrie, Conservative, Oshawa, ON]

I have another question I'd like to get your input on.

I come from Oshawa, and the automotive sector is hugely important there. You mentioned in your opening statements about the rules of origin for automotive and the requirement of 85% and 50% U.S. content. If that were brought into effect, how would that affect Canadian and U.S. producers for automobiles and auto parts? Would this encourage automotive manufacturers to maybe buy these products offshore? Would we be losing jobs here? Can you comment on that?

[Steve Verheul]

There are certainly two elements to that aspect.

The current regional value content is 62.5%, which is the highest in any free trade agreement around the world already. If it were to be moved to 85%, our view is that auto manufacturers would not be able to access enough of their products and inputs from North America to meet that level of regional value content. We think that many manufacturers would be motivated to then move their operations offshore and sell into the U.S. market, which has only a 2.5% tariff on cars going into the U.S. market. That would likely be far cheaper than having to make the adjustments necessary to try to meet a regional value content of 85%. I think that would certainly cause significant damage to the industry in North America overall, including in the U.S.

The U.S. domestic content provision that they've proposed, which is a minimum of 50% U.S. content, would tend to attract production in the U.S. at the expense of Canada and Mexico because that would represent the largest share of content. Many suppliers would move to the U.S. to ensure they could make that minimum 50%. Meeting that 50% would be the first priority of any manufacturer or any parts manufacturer.

We have said that this part of the proposal is entirely unacceptable. Any U.S.-specific content requirement is unacceptable. We don't see these kinds of things in any trade agreements, and we would certainly continue to hold that position.

[Colin Carrie, Conservative, Oshawa, ON]

Speaking to the auto sector, over the last few years it seems our supply chains have been very well integrated and are very efficient. If the United States continued on this road, what would it do to the overall competitiveness, not only here in Canada but in North America?

[Steve Verheul]

I think that's probably one of our biggest concerns. That type of U.S. proposal, even if modified somewhat, would render the North American market significantly less competitive in relation to the rest of the world. North America obviously competes with the European Union and production from Asia, and we would be at a significant disadvantage if we were to lower the competitiveness of the North American region.

We do feel that some of the U.S. proposals go exactly in the direction of worsening our competitiveness, which is why it is a priority for us to ensure that we do advance our competitiveness, not reduce it. That's why we're opposing some of these U.S. proposals.

[The Vice-Chair, Conservative, Dean Allison]

Thank you.

Thank you, Mr. Carrie.

We're going to move over to Ms. Ludwig for five minutes.

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

Thank you very much.

I want to continue with my colleague's line of questioning.

Some of us on this committee were in Washington last week doing outreach through the Canada-United States Inter-Parliamentary Group, the friendship group. I'm wondering if we could get your perspective on how important the outreach work is and if you're hearing in Washington and Mexico the significance of... the extent that we are making a difference on the ground.

[Steve Verheul]

It's absolutely essential. That kind of outreach work is what will make the difference between whether we can advance in the right direction in this negotiation or not, because we are getting these kinds of proposals from the U.S. administration and we're seeing a lot of opposition to many of them from U.S. industry, from U.S. states, from others. I think we need to make sure that other U.S. interlocutors are aware of the kinds of proposals the U.S. has put on the table and their implications.

The only way we can do that is by as much outreach as we can manage, so that people are aware of what is happening at the negotiating table. It's entirely invaluable.

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

Thank you.

Continuing with that, Mr. Verheul, looking at the year ahead, how often do you think members of Parliament and senators should be down there?

[Steve Verheul]

From my perspective, the most important element is timing. It's about when to go. The U.S. Congress has been preoccupied with tax reform of late, which is quite a distraction from the trade issues, and I think that at least in the minds of many in Congress, there has been a sense that the trade issues are being set aside while tax reform is being sorted out. Once there is some resolution to that one way or the other, that will be a key time to have a lot of that advocacy work taking place in the U.S.

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

Great. Thank you.

Some of the discussions we had last week in Washington included concerns and values that we share, such as national security and energy security. We certainly share a common border. I would agree with you one hundred per cent. Certainly the message we got from the meetings was.... It was an “aha” moment for some. Some members and senators didn't realize the extent of the dependence on trade with Canada and the potential implications for some disruption to their individual states and jobs.

My next question is about what NAFTA has meant to our economy and middle-class Canadians in terms of jobs over the past 23 years. What might some of the implications be if it had to be renegotiated every five years?

[Steve Verheul]

We've certainly seen trade expand considerably over the course of the years since NAFTA has come into effect. I think it has quadrupled with the U.S., and certainly it has increased by significant margins with Mexico as well, particularly in the agriculture and agrifood sector. It has certainly allowed our economies to expand and jobs to be created to a significant degree. If we move to a less efficient North American market with barriers between us and the U.S. and barriers between Mexico and the U.S., we will become a less efficient region. We will become less productive, and our economic interests will certainly suffer as a result.

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

Thank you.

I represent New Brunswick Southwest, where we have five international border crossings, and certainly with any disruption in timing and efficiency across that border we see the outcomes fairly quickly, even just with long lineups.

In your negotiations, how important have the changes in technology been to looking forward to clearance and pre-clearance opportunities?

[Steve Verheul]

One of the messages we have received probably more than any other from stakeholders is about smoothing the process for getting goods and services and people back and forth across the border. NAFTA was originally negotiated 23 years ago, and the world has changed quite a bit. There are opportunities to simplify those processes, make a lot of them automatic, make a lot of them electronic. The current NAFTA approaches in some cases still rely on exchanges of paper documents.

There's a lot of scope, we feel, for making progress on that front that will make a real difference to our stakeholders—our business community and others involved in issues across the border. From our perspective, that's the real value we can get out of this negotiation.

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

Thanks very much.

[The Vice-Chair, Conservative, Dean Allison]

Thank you. That's all the time we have.

We're going to move to Ms. Ramsey for five minutes.

[Tracey Ramsey, NDP, Essex, ON]

Thank you.

Thank you to the witnesses for being here today and for all the hard work that I know you're doing in trying to negotiate on our behalf.

If there's one word that sums up the dominating theme both here and in the U.S. around NAFTA, it's “uncertainty”. I'm wondering if there have been any impact assessments or analysis done by the government, should the U.S. indeed try to leave NAFTA.

[Steve Verheul]

We certainly have been doing our due diligence in thinking about what would happen if the U.S. were to withdraw from NAFTA, and certainly we're not looking to that kind of result. We are hoping to convince the U.S. to stay within NAFTA, but clearly, if they do choose to withdraw, we would have to evaluate domestic policy reactions on our side. We would certainly have a sense of the basis of tariffs that could be put back in place and which sectors would be affected more than others.

We have been looking primarily at a sector-by-sector approach on where the impact would be.

[Tracey Ramsey, NDP, Essex, ON]

Okay.

I don't think it will come as a surprise to you, Mr. Verheul, that I'll ask you about labour. I'll ask about where we are on labour and if we have been able to reach any common ground either with Mexico or with the U.S. in terms of right-to-work states in the U.S., ILO conventions, and wages. We saw the minimum wage go up by 10% in Mexico.

I'm wondering if you can give us an update on where we're at in terms of labour, because I believe it's one of the largest hurdles that we have to overcome with our partners.

[Steve Verheul]

Yes, I would fully agree with that assessment.

In the negotiations, we did put forward a very ambitious proposal on labour. We worked closely with the labour unions on that proposal as we developed it. We are coming to the table with an approach that does rely heavily on the International Labour Organization core conventions, of which Canada has ratified all eight. Mexico has ratified seven and is working on the eighth. The U.S. has ratified two, so they are well behind. Probably not surprisingly, the U.S. is resisting that proposal.

On the right-to-work elements that are in our proposal, the U.S. is also resisting that proposal, but we have been working quite closely with Mexico. Mexico is sympathetic to many of the proposals in our draft chapter, although certainly not all. Even the U.S. has been supportive of some elements on the more traditional parts of our proposal.

At this point, we certainly have the firm intention to continue to push our proposal. We see no reason to back down from it. We think these issues are essential and we will continue to push forward at the negotiating table.

[Tracey Ramsey, NDP, Essex, ON]

Thank you.

On ISDS, chapter 11 specifically has been a huge issue, as I think it is across the globe, really, in terms of trade agreements. On chapter 11 of NAFTA, globally we have been sued the greatest number of times around any ISDS proposal, I believe, so it's quite a serious issue to us here at home in terms of our sovereignty. There's this opt-in provision that the U.S. has put on the table. Can you speak to our position on the opt-in or on chapter 11?