International Trade Committee on Feb. 26th, 2020

[The Chair (Hon. Judy A. Sgro (Humber River—Black Creek, Lib.)), Liberal, Judy Sgro]

I call to order the Standing Committee on International Trade.

We are meeting today, pursuant to the order of reference of Thursday, February 6, 2020, on Bill C-4, an act to implement the agreement between Canada, the United States of America and the United Mexican States.

Welcome to all the members. I appreciate your finding the time over your lunch-hour to come for this important meeting.

The witnesses today from the Department of Foreign Affairs, Trade and Development are Steve Verheul, the chief negotiator and assistant deputy minister, trade policy and negotiations; and Dr. Marie-France Paquet, chief economist at Global Affairs Canada.

Thank you both very much for finding the time to be with us today.

I will turn the floor over to both of you for your comments.

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

Thank you, Madam Chair. I'll start.

First of all, thank you for the opportunity to appear before you again to discuss the economic impact assessment of the Canada-United States-Mexico agreement.

I am joined today by Marie-France Paquet, the chief economist at Global Affairs Canada. Before turning the floor over to her to present her assessment, I would like to provide some short remarks.

With respect to the context of the negotiations, since its implementation in 1994, the NAFTA has had a positive impact on the Canadian economy and has supported a stable, integrated and competitive North American market.

NAFTA has supported the development of an integrated and competitive North American market by providing manufacturers, producers, investors and consumers with a predictable and secure commercial environment. NAFTA has helped to generate economic growth and raise the standard of living for the people of all three member countries.

As this committee is aware, the modernization of the NAFTA took place at a difficult time in Canada's bilateral commercial relationship with the United States. When U.S. President Donald Trump took office in January 2017, he sought to replace NAFTA with a new agreement, under the threat of a U.S. withdrawal from NAFTA.

The U.S. administration then took the unprecedented step of imposing tariffs on imports of Canadian steel and aluminum on the basis of purported threats to national security, but with absolutely no legitimate justification for those measures. The U.S. administration had also launched a national security investigation that could have led to section 232 tariffs on Canadian autos and auto parts exports to the United States, also under the national security provisions and also without any legitimate justification.

Given this overarching context, Canada was presented with two options: first of all, to refuse to negotiate and risk the U.S. withdrawal from NAFTA; or secondly, to enter into negotiations to defend Canadian interests and modernize the agreement.

In this context Canada chose to engage in negotiations with the United States and Mexico towards the modernization of NAFTA.

I would like to underline that it is important to remember that preserving the status quo was not an option for Canada. The negotiating process was unique. Normally free trade agreement partners are looking to liberalize trade. In this process the U.S. goal from the start of the negotiations was to rebalance the agreement in its favour. The President continued to threaten to withdraw from NAFTA if a satisfactory outcome could not be reached.

In the face of this unprecedented situation, Canada undertook broad and extensive engagement with Canadians on objectives for the NAFTA modernization process. Ultimately we were successful in defending Canadian interests against extreme and unconventional U.S. positions.

The final CUSMA outcome preserves NAFTA's virtually tariff-free market access for Canadian exports. It modernizes and updates the agreement to support Canada's access to and integration with the North American economy, and it provides important stability and predictability for Canadian businesses and workers.

Importantly, and as a condition for moving forward towards implementation of the new agreement, on May 17, 2019, Canada secured the removal of the U.S. section 232 tariffs on aluminum and steel, returning these sectors to duty-free trade and removing a significant barrier to Canada's participation in North American supply chains. In addition, Canada secured an exemption from future U.S. section 232 tariffs on automobiles and auto parts.

I would now like to turn to my colleague Marie-France Paquet, chief economist of Global Affairs Canada, who will provide you with more detailed information on her team's economic impact assessment of CUSMA.

Thank you very much.

[Marie-France Paquet, Chief Economist, Department of Foreign Affairs, Trade and Development]

Madam Chair, honourable members, thank you for your invitation to appear before the committee today. In my capacity as the chief economist and director general of the trade analysis bureau of Global Affairs Canada, I am pleased to provide a perspective on the potential economic impact of the Canada—United States—Mexico Agreement, or CUSMA, as we know it in Canada.

Our role at the Office of the Chief Economist is to assess to the best of our ability the potential impacts of a trade agreement. We report the results of our findings in a document called the “Economic Impact Assessment”.

Our internal model is a dynamic computable general equilibrium model with 57 sectors and 140 countries and regions of the world. Such models allow impacts to feed into other sectors of the economy, and for those sectors to adjust over time. We can then evaluate potential impacts on production, exports, imports, and for the first time for a final assessment, the Canadian labour market. However, regardless of the degree of sophistication of our model, it remains a simplification of reality. This means that, unfortunately, we are not in a position to include all the gains from the negotiations in the model.

We approach every assessment the same way. We discuss and consult with all relevant parties within government to understand the provisions and determine what can be included in the modelling approach. This time is no exception.

The CUSMA negotiations were conducted in a very different context from CETA, the trade agreement with the European Union, and the CPTPP, where the starting point was no agreement and the result was a new free trade agreement.

For the task at hand, we had to consider what would happen if the United States were to withdraw from NAFTA, as well as the new agreement called CUSMA. The economic impact assessment is based on the final negotiated text.

The modelling results represent the potential benefits of NAFTA preserved by CUSMA, the avoidance of section 232 tariffs on the Canadian steel and aluminum industries, as well as the incremental impact of an implementation of the CUSMA outcomes.

CUSMA modernizes the agreement, making it easier for Canadian companies to benefit from NAFTA preferences. CUSMA also preserves NAFTA's virtually tariff-free market access for Canadian exports. It strengthens the integration of the North American automotive sector. It reinforces Canada's relative position as a competitive investment destination for automobile and auto parts production, and provides new market access opportunities in the U.S. market, while at the same time preserving Canada's system of supply management. The new agreement also modernizes provisions in line with Canada's more recent FTAs to help reduce red tape and protect the government's right to regulate in the public interest, including for health and safety.

These modernizations would make it easier for Canadian exporters to claim preferential tariff treatment under the agreement. The gains would, however, be partially offset by new market access into Canada's supply-managed sectors and more restrictive rules of origin in the automotive sector.

Some provisions under CUSMA would also help reduce policy uncertainty in certain areas such as services, investment and digital trade, and result in a positive impact on businesses. However, modelling such gains is challenging and relies heavily on the assumptions made. Therefore, these types of benefits were not evaluated in this study. Furthermore, many of these obligations have already been implemented by Canada under CETA and by Canada and Mexico under the CPTPP.

The modelling of quantitative impacts of CUSMA focused on modernized provisions in customs administration, trade facilitation and origin procedures, new market access provisions, automotive rules of origin, and data localisation commitments for financial services. These elements were selected for modelling based on the expected magnitude of their economy-wide impact, data availability and analytical feasibility.

The overall effect of the implementation of CUSMA on the Canadian economy is positive when considered against the consequences of a U.S. withdrawal from NAFTA. The implementation of the CUSMA outcome would secure GDP gains of $6.8 billion or 0.249% of Canadian GDP. With respect to autos, the outcomes are expected to incentivize production in Canada and North America, while leading to the sourcing of more expensive auto parts from within the region.

From a labour perspective, CUSMA secures nearly 38,000 jobs that would otherwise be lost if the United States withdrew from NAFTA, of which 18,708 are for men and 18,853 are for women.

In conclusion, the analytical findings resulting from the economic modelling suggest that the agreement's economic impact on the Canadian economy is positive when compared with the effects of an American withdrawal from NAFTA and the imposition of section 232 tariffs on Canada's steel and aluminum sectors. Importantly, CUSMA preserves Canada's access to the U.S. and Mexican markets and protects Canadian economic gains, jobs and income that would otherwise have been lost.

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

We will go to the members for questioning.

Mr. Hoback, you have five minutes.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Chair.

Thank you for bringing this forward. You know, I'm very disappointed; I asked for a chance to have a look at this last night so that I could at least consider it overnight. To have it dropped on us five minutes before the committee meeting is totally disrespectful of the opposition role that we have to play. I will make that protest loudly, right now. There is no reason this couldn't have been given to us last night.

When was this completed? When was this done and on your desk? I will be making an ATI request on that, just so you know.

[Marie-France Paquet]

We finished the English version yesterday at around 5 p.m. or 6 p.m.

[Randy Hoback, Conservative, Prince Albert, SK]

So there's no reason it couldn't have been given to me last night.

[Marie-France Paquet]

I have to provide it in English and French. That's what took us a bit of extra time. We had 14 translators working on it yesterday to be able to provide it today.

[Randy Hoback, Conservative, Prince Albert, SK]

I could have gotten it at two in the morning and would have read it. This is a big deal. This is $2 billion a day.

When were you empowered to take on this study? When were you told, “Okay, we have to do the study”?

[Marie-France Paquet]

I was not told to do the study. We always do a study. As you probably know, there's no legislative requirement to do so or to provide it, but we do it. We embarked on conducting the study at the conclusion of the agreement.

As I said, we do this by having discussions with the negotiating team at Global Affairs and other relevant government departments to make sure we understand the provisions.

[Randy Hoback, Conservative, Prince Albert, SK]

Okay, but the negotiations were basically done last April. In fact, if you compare it with the TPP, we had the analysis on February 16, 2018, and then we approved it on June 14, 2018. This government wants us to look at it for five minutes and go and give them a blank statement.

We are going to approve it. We are. We recognize the harm if we don't approve it. We get that. But your comparison is with something not being approved—that is, if the U.S. pulled out. I was looking for a comparison with the old agreement and the gains in the new agreement. I was looking for the industries and sectors that would be negatively impacted so that we could have a proper game plan for them. The question was never whether the U.S. pulled out. That's never been the question. So why would you do an analysis against something that will never happen? Why wouldn't you compare it with the existing agreement and where we're going with the new agreement?

[Marie-France Paquet]

Because we strongly believe the status quo with NAFTA was not an option. Therefore, it was either going to be no NAFTA—

[Randy Hoback, Conservative, Prince Albert, SK]

No, that's wrong—

[Marie-France Paquet]

—with the imposition on tariffs that were actually present at the time, to something different, which is CUSMA.

[Randy Hoback, Conservative, Prince Albert, SK]

Again, in making decisions while sitting around a board table, I would have gone back to my senior management team and said this was unacceptable. Plus, for us to make a proper decision, we have to compare it with what we know, and what we know today. You cannot guess what the U.S. may or may not do. You don't know that. You're assuming that. It's a strong assumption. Maybe it's a safe one, but it's a strong assumption.

You know what you have today. You know what you have in the new agreement. You do an analysis to compare the two. In the new agreement, we gained how many jobs? Well, you can't do that. You're comparing it with no agreement. In the new agreement, how much is added to our economic activity? I don't have that here. In the new agreement, how much is gained in the environmental chapter? Again, you're comparing it with nothing. If I look at the C.D. Howe report, it's a $10-billion hit. It has negative effect on GDP. If I compare it with the TPP, if we'd done TPP instead of NAFTA, it's a $4-billion gain for Canada with the U.S. involved in TPP. So I look at this and say, “How do I take this information and actually give it an accurate assessment?" I can't. You didn't give me the right starting point. I go to the government....

We haven't played games here. We've said that we're going to pass it. We're going to move forward. But we need the information to do that properly. You haven't provided that. You haven't provided yourself with the information. That's really scary, because it's $2 billion a day. Yes, we're going to approve it. I guess, comparing it with nothing, we know that this is still a better way, but we've done nothing for the sectors that are left out. You haven't even identified them in your report. I'm wondering how I go to the Liberals now and say, “You need to be accountable to help the forestry workers. You need to be accountable to help the dairy workers. You need to be accountable to help the aluminum workers.” I have nothing to do that on, based off this report.

I don't mean to be hard on you, and I apologize. I know that you have your starting points and stuff like that. I'm sure there's a good political reason why you did it the way you did. I realize that you probably didn't make that decision—the gods above you did—so don't take that wrong. The reality is that if we don't have good data, how do we make good decisions? The reality is that right now we can't make a good decision based on this data. Which report do I go with? Is C.D. Howe more accurate or is the U.S. data more accurate? If you compare those with this here...wow.

[Marie-France Paquet]

I can speak with regard to the C.D. Howe and the USITC reports if time allows.

In the USITC reports, if you look carefully, there are probably three numbers, so three different scenarios. If there is no policy uncertainty reduction in the model, they have a negative for the U.S. economy of $22 billion. If there there is some reduction in policy uncertainty done in a certain way—and we can discuss that for a long time—then there would be a benefit for the U.S. economy of $68 billion. If there is a lot of reduction in policy uncertainty, you get $235 billion—I think that's the number.

C.D. Howe did not do any policy uncertainty, and we did not either. We know that it is good for business if we reduce uncertainty, but it's very hard to model.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Madame Paquet and Mr. Hoback.

Ms. Bendayan.

[Rachel Bendayan, Liberal, Outremont, QC]

Thank you very much for appearing today.

I would note that in Mr. Verheul's opening comments he mentioned that Canada was presented with, I believe he said, two options. One of those options was the withdrawal from NAFTA, and the other one was the renegotiation, which resulted in what we now know as CUSMA.

We know that the impact of a U.S. withdrawal from NAFTA would have been substantial, and we know that U.S. tariffs were a reality. I know that my colleagues have often made reference to other private-sector studies, but I would like to point to something that the RBC said: “A 4% across-the-board increase in tariffs between Canada and the U.S.—roughly equivalent [to] a reversion from NAFTA to WTO tariff rates—could reduce Canadian GDP growth by about 1% over 5 to 10 years”.

Your analysis in your report indicates a few qualitative and quantitative gaps, and that you weren't able to fully quantify investment-climate factors. That said, you do indicate the importance of this agreement, and I was wondering if you could speak a little more about how these factors would have impacted our Canadian economy.

[Marie-France Paquet]

If you look at the RBC study you're referring to and other studies by mostly banks, they would all point to an about 1% reduction in GDP should the U.S. withdraw from NAFTA. They are pretty much consistent.

The reason is simple. These are macroeconomic models, and they don't allow for what I explained at the very beginning. They don't have a lot of sectors in them. They might have two or three. They're very aggregate. They don't have the tariff changes in there. They impose a shock, and then you get a 1 percentage point reduction in GDP.

When you do it with a CGE model, the type of model we assess, you have 57 sectors, so when you make changes in tariffs, for example, then the sectors can adapt and workers that are having a harder time in that sector can move to another one. There is adaptation across sectors and over time.

Any studies by the banks that use macroeconomic models don't provide for that. They will point to very different results. So that's one thing.

In terms of the policy uncertainty and investments, there are certain things that we would have loved to take into account in the model because we do agree that a reduction in uncertainty is a good thing for business. That is partly why we took so much time; we re-did all the analysis a few weeks ago to try to do it the way the USITC has done it and see what it would provide for Canada.

That was very difficult to do. We didn't have the model or the data ex ante before putting it in the bigger model. We even tried to take USITC's coefficient. We thought, “The USITC does good work. We'll take its coefficient and put it in our model and see that we get.” We got results that did not make sense. We had an impact on Mexico that was much bigger than for Canada and the U.S.

So, there are other interventions done in the USITC report that I cannot explain just by looking at it. Even though it's 359 pages, I cannot tell you exactly what other interventions they might have made in the model.

[Rachel Bendayan, Liberal, Outremont, QC]

I'll turn for a moment to the impact on job numbers and GDP, which were described as being protected by the agreement. I refer to the Bank of Canada governor, Stephen Poloz, who said that the threat of a U.S. withdrawal could lead to a chill in investment that would then be compounded, obviously, by additional tariffs possibly levelled against Canada by the United States.

Given that a U.S. withdrawal from the agreement was a real possibility at the outset of the negotiations, my question is for both Madame Paquet and Mr. Verheul.

How would you characterize the potential spillover effects of U.S. withdrawal on Canadian investment and Canadian jobs in particular?

[Marie-France Paquet]

In terms of investment, that's a very interesting question because if you look at the foreign direct investment flows into Canada and you go back to, say, 2017 and 2018—we'll have the data for 2019 shortly—we had minimal flows into Canada in 2017. It looked as if we might have said that we knew what was going on: the climate was not that great, but we had two major divestitures in the oil sector. Two Canadian companies were buying back U.S. companies, so it looked like an outflow of funds, when in fact it was a good-news story. So 2017 was a slower year on the whole for attracting FDI for that particular reason. Then 2018 was pretty good.

As a proportion of GDP, we attract a lot of FDI. From that perspective we're doing quite well. There might have been less investment during the negotiations and whatnot by businesses located in Canada, but on the whole we still saw good flows of FDI.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

We'll move on to Mr. Savard-Tremblay.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

Thank you for joining us to answer our questions.

I agree with my colleague in saying that it would have been good to receive these studies a bit earlier. We could have asked our questions based on more than a reading we just did. We understand that you have constraints when it comes to that. You could not have given yourself that mandate; it should have been given to you.

As you probably know, my political party, the Bloc Québécois, has raised a lot of concerns about the aluminum sector. Our initial concern was that this carbon-neutral aluminum, which is on the verge of making us proud and is at the centre of our innovation, would be threatened by Chinese dumping, through Mexico, of pollutant aluminum that is produced using coal most of the time, thereby threatening the expansion of several aluminum plants. Studies have also been done on this issue.

Unions shared our concerns. The industry did not share them as much, but it recognized that protection was not the same for aluminum as for steel. The government swore to us that there was no reason for concern.

However, this morning, an agreement was reached between the Bloc Québécois and the Government of Canada. I assume your study did not take that into account, as you conducted it before this morning's announcement. It was agreed that, without needing to reopen the agreement, monitoring of aluminum imports from Asia must be increased and that, if it was concluded that dumping was being done, the same protection given to steel would be given to the aluminum sector, with the same time frames the steel sector is benefiting from—seven years.

That solution was welcomed by unions. The fact that the government brought attention to our proposal indicates that our concerns were not completely crazy. Moreover, the fact that Mexico is now so angry indicates that there was probably an issue there.

I know that you have not had an in-depth look at that, but given this change, how do you view the impacts?

[Marie-France Paquet]

Thank you for the question.

Yes, receiving such an important document at the last minute is not ideal.

Concerning your question, it is unfortunate, but for steel and aluminum, we used as a benchmark no NAFTA, with tariffs from section 232. Tariffs existed, and that is why we have put them into the benchmark.

Before this morning's agreement, the negotiated and final text talked about a seven-year implementation. On the one hand, for various reasons, we were lacking specific data to put it in the model as built. On the other hand, we modelled the agreement in 2020—it was starting in 2020—and the impacts for 2025.

Normally, we go much further in projections. As there are many tariff changes, we want to give the sector an opportunity to adapt. Here, there are not many tariff changes, and we have decided to model the agreement up to five years. The agreement that was in the negotiated text goes beyond that. Even if I had that data, in this case, it would not have been taken into consideration. Data is lacking anyway.

As for this morning's agreement, I will let Mr. Verheul add something. As you said, we were not able to take that into consideration either.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

Do you want to add something to this, Mr. Verheul ?