International Trade Committee on Feb. 26th, 2020

[Bob Fay, Director, Global Economy Research and Policy, Centre for International Governance Innovation]

Thank you very much.

Good evening, and thank you, Madam Chair and committee members, for the opportunity to present the views of the Centre for International Governance Innovation.

By way of introduction, we go by “CIGI”. We're an independent, non-partisan global governance think tank based in Waterloo, Ontario, and we conduct policy-relevant research exploring global economics, security, politics and international law, with a focus on digital economy issues. Given this background, my comments will relate to Bill C-4 and data and intellectual property.

Canada has focused substantial resources and effort on new trade deals to reinforce the rules of the game in international trade, and rightly so. Trade is at the heart of our prosperity. New trade agreements are necessary to open up new markets and preserve old ones, and revised rules are necessary as economies change and to minimize trade frictions.

We fully understand that trade-offs were necessary in negotiations of CUSMA and that hard choices had to be made. We believe that the ratification of this agreement will remove some of the trade uncertainty that has dampened economic growth, and my remarks are not designed to hold up ratification.

Rather, my objective tonight is to highlight how commitments made in CUSMA related to data and intellectual property may inhibit Canada's ability both to innovate and to develop our own domestic policies. Then I'll offer some suggestions on the way forward.

In particular, CUSMA fails to consider the implications of how the nature of trade is changing, moving away from scale and cost efficiencies to, first, intellectual property creation; second, the rise of big data as an economic and social asset; and, third, the resulting imperative of asset protection.

What Canada agrees to in these areas has very wide-ranging repercussions for Canada in many forward-looking areas, including our ability to harness data in new technologies such as artificial intelligence, as well as fundamental domestic policies related to privacy, security, intellectual property, foreign direct investment, competition and innovation.

Yes, that list is long, and it touches upon all aspects of our economy, and indeed our daily lives, yet we are dealing with these issues currently largely through a trade lens, via a trade agreement that is dominated by U.S. interests. I would also note that the recent mandate letters charge the ministers for ISED, Heritage and Justice with the main task of coordinating new digital and data rights, which recognizes that there are substantial societal issues related to the use and monetization of personal data.

Indeed, data is an extremely valuable resource. Statistics Canada—and very good for them—has placed the value of Canadian data at over $200 billion, which is about two-thirds of the value of our oil assets. This number is extremely large, but it pales in comparison with other countries, namely, the United States. For example, the market cap of U.S.-based Facebook, Amazon, Netflix and Google is about $4 trillion U.S., and that high valuation results from their monopoly positions and huge data stores.

Further, these companies are cementing their market positions each and every minute with their continued acquisition of all varieties of data through user engagement with their platforms and fierce protection of their assets by a combination of the de facto rule-setting in the absence of national regulations; trade deals that enshrine open data flows; strong intellectual property protection of their data and AI assets; takeovers of innovative firms through their vast reserves of cash; the acquisition of top talent; and, the powerful information asymmetries that they gain with their data and their technologies.

The bottom line is that the data is their intellectual property, and their interests are behind the digital chapter in CUSMA.

We have three examples of some of the commitments in that trade agreement that favour them.

The first is the treatment of data localization. This part of the agreement is short and not so sweet. It says, “No Party shall require a covered person to use or locate computing facilities in that Party's territory as a condition for conducting business in that territory.” From a commercial perspective, that makes a lot of sense, but this is problematic for many non-economic dimensions. For example, if we took the smart city partnership in Toronto that's proceeding right now with Sidewalk Labs, which is a subsidiary of Alphabet, Canadians may well desire that their detailed data that will result from that city remain in Canada and not be transferred to the U.S., but Canada may be limited in its ability to do so.

Second, under CUSMA, localization is permitted if organizations collect, hold or process that information when those activities are undertaken for or on behalf of a government. However, for national security reasons, if the data were held by a private organization, then CUSMA would technically require the government to allow those data to be released to the other two partner countries.

Third, CUSMA contains a safe harbour provision to liberate digital platforms from responsibility for the content that they carry. On the one hand, free speech advocates see this as desirable. On the other, some see the weaponization of platforms like Facebook and YouTube during recent votes such as the 2016 U.S. presidential election as indications of the unwillingness and/or the inability of the digital platforms or governments to regulate content. This is a trade issue because the platforms' business model is supported via massive cross-border data flows.

ln summary, it is not clear how much policy flexibility CUSMA will ultimately allow the federal or provincial governments in adopting new laws and regulations to achieve objectives like those to protect people's privacy, prevent algorithmic bias, protect critical infrastructure, ensure national security or promote domestic innovation.

Let me now conclude with three recommendations on the way forward. First, trade negotiators need to be more fully briefed on the wide-ranging implications of the data-driven economy and the implications arising from existing digital measures in CUSMA and those that could arise going forward with the negotiations that are about to begin at the WTO on e-commerce. We need to be mindful that there are vested interests pervasive in the digital realm and that regional trade agreements are an entry point to manage policy space for areas that go well beyond digital trade.

Second, we need new international rules of the game for trade, for foreign direct investment and for intellectual property. As part of this, what Canada could do is push for the creation of a new global organization to set international governance in these areas. Drawing on the experience of the Financial Stability Board that was created in the aftermath of the financial crisis, we have put out a proposal to create a digital stability board. Such an organization would develop standards, regulations and policies across the many realms that digital platforms touch; advise on policy actions needed to address vulnerabilities in a timely manner; and ensure that this work feeds into other international organizations such as the WTO.

Finally, we should use the six-year review built into CUSMA to rectify some of these issues that I have outlined.

Thank you for your time and attention, and I look forward to any questions you may have.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Fay.

Now we'll go on to Mr. Kalesnikoff, chief executive officer. Please go ahead, sir.

[Ken Kalesnikoff, Chief Executive Officer, Kalesnikoff Lumber Co. Ltd.]

Thank you very much.

Wow. My presentation is going to be a little simpler, and I think my friend Andy Rielly made a good choice of staying at home in B.C., because I'm probably going to be trapped here until spring by the sounds of what's going on outside. Anyway, thank you for your time.

I was asked to present here from a common sense point of view as somebody who is on the ground and experiences the softwood lumber agreement. I will tell you now that I am not a NAFTA expert or a USMCA expert—which is apparently what we're going to be calling it.

Kalesnikoff Lumber started in 1939 with three brothers: my uncle Koozma—CUSMA, so you confused me right out of the gate—Sam and Pete.

We grew from a horse logging operation of about eight people to 150 people currently, and are heading for 200. I'm the third generation in our business. My two children are very engaged, which is very unusual—they're really keeping the old man in line—and they are our fourth generation. We're located in Thrums, B.C., between Castlegar and Nelson in the West Kootenays; and we're about an hour from the U.S. border.

Who are we? Through our innovation, we care for the environment, the communities, our employees, and that is a focus for us in everything we do. We are always looking for the next opportunity. Our experience in the forest industry and our ability to be nimble and continue to uphold our positive reputation as wood experts have allowed us not only to survive, but also thrive and grow through industry changes and to be where we are today.

Value added is a big piece for me. That's always been important. We've always been about adding as much value as we can to every log that comes into our hands. We make decisions based on maximizing the value from that log depending on its best end-use in the particular wood, our customers, our employees and even our communities. I believe that adding value also creates a diverse, much-needed forest industry.

We reinvest. In 1987, we started by spending $5 million on a small log line, and in 2000 spent $3 million on our remanufacturing facility called Kootenay Innovative Wood. In 2005, we put an end matcher in that cost us $800,000. We upgraded the sawmill in 2012 to the tune of $20 million. In 2014, we upgraded the planer for $6 million, and we have just recently announced our adventure into the mass timber industry—$35-million greenfield project is happening now in the Castlegar area.

We have been successfully growing our business from a horse logging operation and, as I said, we're now investing into that $35-million dollar world-class mass timber facility. We did this with only 15% to 20% of our timber under tenure. We buy over 80% of our logs on the open market.

A big advantage for our getting into mass timber is just our experience with value-added specialty manufacturing, our pre-existing relationships, and our understanding of what it takes to go up the value chain.

There are drawbacks to the softwood lumber agreement. Over the years, the softwood lumber agreements have unfairly penalized the value-added specialty manufacturing sector. I'll give you an example. There was an opportunity for us in 2006, I believe. It was when Mr. Emerson was negotiating the deal. We had just spent $800,000 on an end-matching system—that was the upgrade to enable us to do end-matched softwood flooring, which would then go into panelling and siding as far as end matching was concerned. There was a rule that if the product was end-matched all the way around the piece—in other words, both sides and the end—that it would be exempt. Well, that got negotiated away, and I don't even know that he realized what he had done in the stroke of a pen.

But that affected us. We didn't even turn that machine on and we lost that advantage. It affected Huscroft in Creston, Wynndel Box in Creston and Gorman Bros. in Westbank. We all had those types of machines being installed.

Earlier this year, because of the softwood lumber agreement and the 20-point-whatever per cent duty, we had to make a really difficult decision and shut the remanufacturing plant down because we couldn't afford to make products that were going into the U.S. with a 20%-plus duty on them. Now, our people, because of our moving into the mass timber side, have all been utilized. So, nobody lost a job, but it's causing us a major amount of grief. We also have had customers for 20, 30 or 50 years that we are not able to do business with because of that hurdle.

Because we're a smaller operator, we're more nimble and are able to develop niche products, especially products for customers' needs. That's what we focus on, and the softwood lumber agreement is getting in the way of that all the time.

What's next? To be successful in business, we need a predictable and supportive environment. This is an area where I really believe government can help. We also need open and free access to the markets. Companies such as ours have a track record of being committed to their people and community and don't shut down when things get tough, never mind shutting down permanently. Small, independent companies such as ours are much more nimble and we create more value, far beyond the two-by-four. We just need the right log to make the right product, and access to an open market. In our case, that means taking a high-value log and creating more jobs per cubic metre and more economic payback per cubic metre, instead of focusing on volume. However, again, the softwood lumber agreement does get in the way.

I do not know whether there's an opportunity to have the softwood lumber agreement encapsulated in the NAFTA agreement. It's probably much too late. However, it would have been very beneficial to have something such as that happen to stabilize the industry, especially for the smaller, independent manufacturers, because we are the ones that are getting hit really hard by this type of penalty.

Thank you very much.

[The Chair, Liberal, Judy Sgro]

Thank you, sir.

We'll go on to Linda Hasenfratz, from Guelph, Ontario. Welcome.

[Linda Hasenfratz, Chief Executive Officer, Linamar Corporation]

Good evening, and thank you very much for the invitation to take part in your consultations.

I'll say a few words about Linamar. Linamar is a diversified advanced manufacturing company of about 70% in auto parts, and 30% in a variety of industrial products such as access equipment, harvesting equipment, commercial vehicle parts and energy components. Our sales are around $7.5 billion. In nine of the last 10 years, we have grown the top and bottom line at Linamar in double digits. We have—

[The Chair, Liberal, Judy Sgro]

Just hold on a second. We've lost our audio. Our technicians will work it out between them.

I will go on to Mr. Rielly.

[Andy Rielly, President and Owner, Rielly Lumber Inc.]

Thank you very much for the opportunity to address this committee.

My name is Andy Rielly. I am the president and owner of Rielly Lumber. We're located in West Vancouver, B.C. Our manufacturing plant is in Chilliwack, B.C. In the interest of contributing to an informed discussion about the USMCA, I will give you a quick overview of our company and the nature of our company's business, the effects of the current trade dispute with the United States over softwood lumber, and why the USMCA is important to our company and the future of our sector.

First, Rielly Lumber was founded in 1995 as a manufacturer of western red cedar components and finished products. Our early mission was to make the products that the big sawmills did not want to make or could not make. We do not harvest logs, we do not cut logs and we do not hold Crown tenure. We buy western red cedar lumber and then manufacture finished products.

The U.S. is the biggest market, by far, for our products. In 1996 until 2001, the U.S. and Canada entered a softwood lumber agreement that was based on a quota system, which meant that Canadian companies were awarded quota to ship to the U.S. market based on their previous five-year shipping volumes. Having started just one year earlier, Rielly Lumber did not get any quota to ship into the United States, so we did not have access to our main market. Over the next five years, we figured out how to get quota so that we could ship to the U.S. We continued to grow our business, all the time dedicated to manufacturing and to employing people in British Columbia.

From 2001 to 2006, like all Canadian companies we paid punitive duties on our finished products shipping into the U.S. in the next lumber dispute, which we called “Lumber IV”. That lumber dispute was solved only after many WTO, and particularly many NAFTA, legal victories by Canada. In late 2006 the new softwood lumber agreement brought a 10-year period that was pretty much duty-free for high-value products. There was no major prohibition to shipping into the United States. As well, in that agreement every Canadian company had a return of over 90% of the duty deposits they'd made for the previous five years. At that time, Rielly Lumber decided to invest the duty deposits returned to us into manufacturing facilities, equipment and creating jobs in British Columbia.

The next 10 years were pretty good. We grew our business. Things were going along well until the current trade dispute, which we called “Lumber V”, occurred in April 2007. Again, punitive 27% duties were levied on the selling price of our products. There was the threat of retroactive duties against products that we had shipped previously to when the actual duties came in, with an increased scope of the products. We all thought to ourselves, “Here we go again.” This time, however, the lumber dispute was different, as in worse than Lumber IV. Adding 27% duty to an all-time high price of cedar products resulted in our customers substituting with other products and other species at an astounding rate. New bonding requirements, which were required by U.S. Customs, required large cash deposits by small and medium-sized companies. This was in addition to remitting, every Friday, the duties they had incurred the previous week. Most small and medium-sized companies in Canada cannot continue to post both the deposits on a regular basis and the bond cash requirement.

Another aspect of this dispute is that many major companies in Canada have made huge investments in the United States, transplanting a lot of Canadian investments and jobs to the U.S. side of the duty wall. As Ken Kalesnikoff just said, in order to get behind the duty wall, many value-added companies are relocating to the U.S. side of the border to do their manufacturing. I'll give you an idea of the effect on our company. Rielly Lumber sales in 2019 were roughly 62% of what they were in 2016. Employment in our plant went from 41 to 23. This is an alarming trend for secondary value-added companies across British Columbia and Canada.

I'll turn now to why the USMCA is important to our company. As you know, most softwood lumber in the first NAFTA agreement was not covered by that. It is not covered in the new USMCA. The most important part of the new USMCA, which is vital to us, is the dispute resolution mechanism, previously known as chapter 19.

In this more challenging diplomatic environment, small independent companies need enforceable rules to protect their interests. Short of reciprocal duties on goods entering our country, which are not likely, Canada will only get negotiating leverage in Lumber V from continued [Technical difficulty--Editor] NAFTA and USMCA legal victories. We have to remember that large companies have made huge investments in the United States, and they're not in any hurry to pressure our provincial governments to solve the current dispute. Hundreds of small and medium-sized Canadian companies are in danger of failing unless we have this dispute resolution system and can manage to make it work faster.

New jobs in the forest industry are not going to come from the primary sector. They're only going to come from doing more work in it and adding more value to the resources that we have here.

I can state that my main reason for supporting the USMCA is that Rielly Lumber is a Canadian company. We want to continue to manufacture in Canada, and we have no intention of relocating to the far side of the border [Technical difficulty--Editor]. The dispute resolution system is vital to our company, but if we can get another softwood lumber agreement going forward, that would protect the independent companies.

In closing, I would say that the value-added sector is something that I've been involved in and where I've worked for the last 35 years. It's been good to me and it's been good to our family. I think it's worth fighting for and I hope you agree.

Thank you for listening.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Rielly.

We'll go back to Ms. Hasenfratz to see if we have the system working.

Okay, Ms. Hasenfratz, go ahead.

[Linda Hasenfratz]

Good evening, and thank you.

First, I'll say a few words about Linamar.

Linamar is a diverse advanced manufacturing company. We are about 70% in auto parts, and about 30% in a variety of industrial equipment, such as access equipment and harvesting equipment, as well as commercial vehicle parts and energy components. We have $7.5 billion in sales. We have 27,000 employees globally. We manufacture in 61 facilities in 11 countries. About 40% of our plants and about 11,000 of our employees are in Canada.

Turning to trade, I believe that an area that is critically important to our prosperity and global competitiveness as a country is free trade agreements. I think it is absolutely critical for us not to lose momentum in this key area, because free trade agreements allow us to have bigger markets to buy from and sell to. They create more opportunities, and more opportunities mean more chances to grow or to cut costs. Free trade agreements have been a key factor in several decisions, as an example, for automotive OEMs to locate in Mexico because of their access to world markets.

In my mind, ratifying the new NAFTA deal here in Canada is absolutely critical to Canada's continued economic success. The U.S. has long been Canada's most important trading partner, and vice versa. As I'm sure you know, trade with the U.S. represents more than 75% of our exports, which is 64% of our GDP. We really can't afford to put that at risk and create the enormous costs that added duties would add to those transactions.

NAFTA was a deal that created enormous prosperity for all three countries since its inception in 1994. The United States' GDP increased by $12 trillion, reaching 2.8 times the 1994 level. Canadian GDP was up by $1 trillion, reaching, very similarly, 2.7 times its 1994 level. Mexican GDP increased half a trillion dollars to almost twice what it was before the agreement.

Importantly, NAFTA also created deep and intricate supply chain optimizations across all three countries. It would be quite disastrous financially to try to unravel those. You can't unscramble the eggs. In the auto sector alone, there are on average seven border crossings between Canada, the U.S. and Mexico for every vehicle that is built. Adding duty to each of these border crossings would add enormous costs to North American-built vehicles, and decrease our competitiveness.

We have a great case study right here at Linamar that illustrates that deep integration. We have a program for a cylinder block that we make that is cast in Mexico, comes to Canada for premachining, goes back to the U.S. for additional processing, and comes back to us again in Canada for final machining. Then we ship it to our customer down in the U.S. to be assembled into an engine. Some of those engines come back to Canada to be assembled into vehicles, and then those vehicles are sold in both Canada and the U.S.

Why is it so complicated? We are tapping into the great strengths and technologies that have been developed and honed in each of those countries. Instead of each country having to develop the technologies and make the investments to do all that processing in each country for its individual needs, we are pooling our needs and focusing on different parts of the supply chain, and in the end we have a great, highly competitive product that we can sell in many countries, not just North America.

The new NAFTA deal has modernized important elements of our trade deal to reflect technologies and realities that didn't exist 25 years ago, but at the same time, from our perspective, will keep consistent core elements of the deal. That means we will see minimal disruption of existing supply chains, which is really key. From an automotive perspective we see only upsides, no downsides for Canadian companies to the changes that were implemented. Higher regional value content means opportunity for work, potentially, as automakers who maybe are not meeting the new standard. Maybe some of the German manufacturers, for instance, will decide to onshore some product. High labour value content may also result in some opportunities for Canadian suppliers to help increase this measure of content in the vehicle.

It is important to remember that we don't win business by being protectionist. We win business based on innovation and efficiency. That's where we should all try to focus and try to eliminate barriers to growth.

At Linamar, our Canadian plants are our most productive globally of all of our 61 plants. We have the deepest bench here, we have the best increases in productivity here, which, by the way, has increased by 34% in the last six years, and we have the strongest commitment here to continuous improvement in our facilities every single day.

We can compete with any country with our product and our process innovation and efficiency, and we do so. We've invested billions of dollars in our Canadian plants in recent years to launch billions of dollars of new business, almost all of which, by the way, ships to the U.S. We critically need the new NAFTA agreement to be ratified to bring certainty to our ability to continue to compete in this manner.

Last, I wanted to comment on timing. The U.S. and Mexico have already moved to ratify the agreement in their respective legislatures. While of course it's important to fully understand and to vet the deal—I appreciate that this has happened, and I encourage that to happen—I do caution against excessive or unnecessary delays or attempts to rewrite something that frankly I think has gone as far as we could get it to go.

Business leaders across North America are supporting swift ratification of the agreement—many I speak to—to keep North America tariff free, make the economy even more vibrant and competitive, drive investment and, of course, support the creation of jobs.

Thank you very much for the opportunity to address your committee. I look forward to your questions.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Young, please, from Woodtone Industries.

[Kevin Young, Chief Executive Officer, Woodtone Industries]

Madam Chair, committee members and staff, thank you for the opportunity to talk with you about Bill C-4, softwood lumber, and Woodtone. I think there are some commonalities in some of the presentations here this evening.

I am Kevin Young, and I serve as chief executive officer of Woodtone Industries, a family-run company with facilities in Chilliwack, B.C.; Armstrong, B.C.; and Everett, Washington. We employ over 300 people across our operations, which are built on a 40-year legacy of excellence and integrity.

At Woodtone our overarching belief is that everybody should live in a great-looking home that lasts a lifetime and doesn't sacrifice the environment to achieve this goal. Our teams design, manufacture and market Woodtone's finished building products for home interiors and exteriors. Our family at Woodtone is proud to offer some of the finest finished building products available anywhere in the world.

We don't cut down trees, and we don't make commodity two-by-fours, but we respect and appreciate the primary producers that do. Our specialty at Woodtone is high-value finished wood products. Our products are unique in that they have no grade stamps and are not intended for structural construction purposes. All of our products are prefinished—either pre-stained or pre-painted—and are ready for installation in new home construction.

Although our products can be found around the world, the United States and Canada remain our key markets. We welcome and embrace future efforts by governments to address the softwood lumber dispute in earnest after CUSMA is concluded.

The asymmetrical impact of the softwood dispute has been uniquely devastating for Canada's value-added sector and workers. At Woodtone we've had to make tough choices, like many others, including relocating technology, processing knowledge, and moving jobs south. In January 2018, we announced the move of 20 direct jobs and over $1 million in technology from our Canadian operation to our facility in Everett, Washington.

While primary producers have enjoyed sustained demand and record prices during the dispute, processors down the value chain have not. We've lost exports and we've lost jobs. This dynamic still exists. We believe that, when you consider spinoffs including transportation and other suppliers, up to 120 direct and indirect jobs are in play in our operations. We want to recalibrate before it is too late. That is why we are here today.

We don't want to lose the opportunity to repatriate some of this work for finished products not at the core of the softwood dispute. Our products fall outside the intended scope of the softwood lumber dispute. They can be readily differentiated at the border at the time of export. At the border we need a solution that works for authorities; a solution that is feasible, administrable and enforceable well into the future.

This brings us to Bill C-4. We support members of the committee amending Bill C-4 to provide for an independent study mechanism on finished exports outside the dispute. Specifically, we seek a review by a panel of experts for finished wood products that is consistent with past Canada-U.S. trade precedents. This, we believe, could be done by amending the reference to softwood in Bill C-4. This will provide reassurance to U.S. authorities that the scope language is enforceable, administrable, and will reduce circumvention.

Possible positive outcomes here include hyphenating the product codes 4407 and 4409, which can be done to assist local border agents in processing our exports with confidence. This is similar to efforts to accommodate U.S. plywood manufacturers back in the Canada-U.S. Free Trade Agreement.

With a simple majority vote at clause-by-clause, committee members can make an independent review happen by amendment. I'm not here to ask members of the committee to renegotiate NAFTA or the new CUSMA. It would not be wise to reopen negotiations with either Mexico or the United States. Enhancing Bill C-4 as it relates to softwood lumber is not changing the trade deal. You can take or leave the deal, but the legislation can be improved in this one area.

We want to work with committee members on appropriate language for an amendment. We encourage the members of the committee to act with confidence, supported by past precedent and sound public policy in the public interest. Our approach is collaborative and is achievable. Not only will it benefit Woodtone, but other operations in B.C., Quebec and the Maritimes will also benefit.

The Woodtone approach is not a cure or a solution to the softwood lumber dispute, but it is an effort to help a volume of exports that should not otherwise be in the dispute. We want to take the steps necessary to address the concerns. What we are talking about does not impact Mexico. It is specific to local border entry points to help local officials process our finished products.

We commend the co-operation of members on the committee and the positive initiatives to use Bill C-4 to improve Canada's future trade deals and arrangements.

We thank our local MPs and all members of the committee for this chance to be heard. By working together now, we can improve Bill C-4 moving forward and improve cross-border trade in finished wood products not in dispute.

Thank you, and I welcome questions and comments and wish the committee good luck and wisdom in your continued work.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Young.

We'll go on to Michael Beck, operational manager from the Capacity Forest Management.

[Mike Beck, Operations Manager, Capacity Forest Management]

Thank you.

I'm Mike Beck with Capacity Forest Management. I'm their operational planner. We have managed over 20 first nation clients in B.C. We help gather tenure through government to government as well as licencee negotiations. We've also been instrumental in two foundation agreements that have taken place in B.C. with the shíshálh Indian band as well as Lake Babine Nation.

I've been invited to discuss the impacts of the softwood lumber dispute and how it is creating issues with first nations businesses and collaborations with forestry licensees, businesses and lumber mills in B.C.

As you know, a few people have already noted that the softwood lumber agreement has basically been a long outstanding issue between Canada and the United States. Basically, this agreement that we've been sitting on has been expired since 2015. The current government hasn't seemed to place the softwood lumber agreement as a top priority to settle during the negotiation processes and ratification of NAFTA between Canada, the U.S. and Mexico. The softwood lumber issues around the competition between Canada and the United States lumber companies are a major problem resulting from differences in their respective forest management principles.

The dispute is based on the U.S. lumber industry opposing the low Canadian stumpage rates and transportation costs, perceived by the U.S. as an unfair advantage that subsidizes our lumber industry. The U.S. has been imposing duties and tariffs on Canada since the early 1900s, and the softwood lumber dispute is not going away any time soon.

Canadian forest management principles are vastly different, and to compare one against the other is very onerous and well documented. A healthy Canadian log and lumber business requires certainty and fair market pricing. In order to achieve this, the Canadian government needs to bring the softwood lumber agreement to the forefront and finalize a long-term deal that avoids protectionist measures on both sides of the border.

Canadian logs and lumber require unencumbered access to world markets in order to return the highest possible pricing. Protectionist measures in this case create an unnecessary cost to Canadian sawmillers, and these costs are passed on to the log sellers, which pushes log prices down domestically. Recent court decisions and reconciliation agreements for first nations are providing control of their timber resources within their unceded territory. The federal government needs to create forestry policies that will ensure success, sustainability and create long-term, meaningful jobs in the industry as well as first nations businesses and ventures.

Imposed U.S. countervailing duties and tariffs have denied the maximum price on logs, which has impacted profit margins for first nations businesses that sell to Canadian mills. There's a requirement for major reforms and policy to remove restrictions on log exports in order to eliminate uncertainty in the Canadian forest industry and allow the highest return and highest prices for our renewable resource.

Duties and tariffs need to be eliminated and a long-term softwood lumber agreement needs to be ratified to ensure a healthy, sustainable and stable forest industry in Canada. The impacts for first nations forestry businesses are, again, another vital component. It's impacting negatively with our first nations businesses, agreements and collaborations with Canadian forest industry partners.

Canada is required to challenge and amend the Export and Import Permits Act that would ratify the softwood lumber agreement, as there are significant impacts. The current U.S. countervailing duties and tariffs are affecting the economic success of the Canadian forest industry, including first nations businesses that are selling their logs to local Canadian lumber mills.

Some Canadian first nations bands, as part of the ongoing reconciliation process such as foundation agreements, are receiving timber rights to harvest Crown timber within their unceded territories. These first nations forestry opportunities, timber tenures and licences provide economic benefit and stability, long-term employment and training opportunities for first nations communities and future first nations business investment opportunities. The impacts of the current softwood duties and tariffs on the Canadian first nations forestry business is that Canadian local sawmills are basing their log purchase pricing on current log markets but factor in the percentage of the tariffs and duties so that the mills pay to reduce the log prices, which impacts first nations businesses and projects negatively.

As well, the U.S. countervailing duties and tariffs impact the bottom line for first nations businesses and ventures. They're looking for the highest economic benefit for their timber resources within their unceded territory.

Currently, with the economies of scale of first nation forestry businesses being upstream log sellers, they are additionally impacted financially as their businesses will not see any reimbursement of duty deposits from the United States once a dispute is settled, as these costs are typically factored into the local mill log purchase pricing agreements at the beginning of the projects.

Ultimately, I'm drawn back to the current government mandate, in which one of their top priorities is reconciliation with Canadian indigenous people, as well as wanting to implement the United Nations Declaration on the Rights of Indigenous Peoples to allow government to bring federal laws and policies for Canadian first nations to pursue economic, social and cultural development needs. Based on the government non-action to settle the long-standing softwood lumber agreement, it is not placed in value for Canadian first nation forestry businesses and the Canadian forest industry. Again, there is a requirement to ratify in NAFTA, Bill C-4, regarding the long-standing softwood lumber agreement, to remove the tariffs and duties. If that is not in place and there's no agreement, this will create considerable adverse effects and restrictions for the first nation forestry businesses.

As for some of the impacts that we're currently seeing with the softwood lumber agreement, some first nations forestry businesses are having a hard time being successful and sustainable. As well, first nation business-to-business agreements and collaborations with other Canadian forest industry partners, ultimately impacting forest economic earnings to the nations and bands, are also creating some issues. Lower lumber market pricing and duties and tariffs, creating mill closures or curtailments, are creating some issues as well around the nations and territories. We're also seeing major licensees establish more mills in the United States than Canada due to the additional duties and taxes, to ensure market competitiveness and balance their dependence on local Canadian log supply. These moves create fewer good-paying jobs for Canadians, as well as first nation band members, and limit log-pricing competition to sell logs at lower market pricing, or better, with these mill closures.

In closing, I want to ensure that the softwood lumber agreement stays at the Canadian government's top priority for settlement and is ratified in some way that will make first nation businesses stay competitive and not be penalized any longer by the unfair and unjust United States' lumber tariffs and duties.

We need our Canadian government to defend our forest management systems and challenge the subsidy, to remove the tariffs and countervailing duties, since wood is used in a wide range of industries and doesn't qualify as a subsidy under U.S. law. As well, the actions of the U.S. are driven by protectionism rather than unfair management practices and stumpage rate determination.

Again, it will be vital to have collaborative discussions and engagement between government, first nation forestry businesses, and the Canadian forest industry to ensure a fair ratification of the softwood lumber agreement to make certain first nation businesses and ventures, and the Canadian forestry industry, economically successful and sustainable in Canada.

That is all I have to say. If you have any questions, I'll look forward to responding.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Beck.

We'll go on to Mr. Waugh.

[William Waugh, President, WWW Timber Products Ltd.]

We're together.

[The Chair, Liberal, Judy Sgro]

Are you okay, then?

Mr. Leblond is here as an individual.

Do you have some opening comments you'd like to make, sir?

[Patrick Leblond, As an Individual]

Yes. Thank you, Madam Chair.

I'll make my remarks in French, but I'm happy to take questions in English.

Madam Chair, members of the committee, thank you for inviting me to appear here this evening. I would like to note that I'm here as an individual, so my comments and answers are in no way binding on the organizations I'm associated with.

I believe the agreement must come into force as soon as possible, as other witnesses have stated, not because it's better than NAFTA—it's not, and for more on that, see the analysis by Dan Ciuriak for the C.D. Howe Institute—but because we must avoid the uncertainty that plagued the negotiations. If Canada were to refuse to implement the Canada-U.S.-Mexico Agreement, the U.S. President would most likely carry out his threat to withdraw the United States from NAFTA.

If the White House did that and it ended up in court, that would have a very negative effect on the entire North American economy, especially the Canadian economy, because investments would be delayed or simply shifted to the United States. Companies would focus on the United States because they would see it as the biggest market. In addition, the costs of many business transactions between Canada and the United States could increase to offset the risk associated with the possible end of NAFTA. This scenario must therefore be avoided at all costs.

CUSMA is certainly not perfect. I'm sure you've heard plenty of criticism. In the time I have left, I would like to focus on two elements. Bob Fay already mentioned one, but I'd like to go into that in a little more detail.

In the future, the Canadian government's commitments under Chapter 19, which covers digital trade, may constrain domestic regulations that federal and provincial governments may wish to put in place to govern data flows between Canada and the United States and the digital space in Canada. I discussed this topic in detail in an October 2019 paper published by the Centre for International Governance Innovation, where I am a senior fellow.

For example, U.S. or Mexican companies, especially U.S. companies, could lobby the U.S. government to initiate a dispute over regulations requiring data localization in the private sector for privacy or national security reasons. That is the issue. The agreement contains a “legitimate public policy objective” exception. No one knows what that means. Ultimately, if there were a dispute between Canada and the United States over data localization, for example, a panel of arbitrators would be called upon to settle the dispute. The panel would have to determine what constitutes a legitimate objective in Canadian public policy.

So the question is, even if the panel is established jointly, do we want to let unelected, technocratic arbitrators decide what Canada can or cannot do? The same issue arises with article 19.7, which states that computer service suppliers cannot be held responsible for content on their platform. This mirrors the immunity laid out in section 230 of the U.S. Communications Decency Act of 1996.

The general WTO exception applies in this case, for example to defend public morality. The Canadian government could therefore decide, for reasons of public morality, to institute measures making companies that transmit content, such as Facebook, responsible for the content they transmit. That said, Facebook could appeal to the U.S. government on the grounds of article 19.7, alleging discrimination. Under CUSMA, Canada would therefore not be able to apply such a measure. This would result in a more constrained environment for Canadian companies and a less constrained one for American companies.

Here is my recommendation to this committee: The government and its partners should define in detail what constitutes a legitimate public policy objective in the context of the agreement so that business has greater regulatory and future certainty, especially with respect to data flows.

Lastly, we mustn't forget that CUSMA is set to expire 16 years after coming into force. After six years, the parties may review the agreement. The problem is that, for companies with an investment horizon longer than 15 years, uncertainty about whether the agreement will cease to exist partway through the lifespan of their investments could prompt them to invest in the United States rather than in Canada.

Not knowing which agreement will apply in 10 or 15 years, anyone looking to invest tens or hundreds of millions of dollars over the next 20 or 25 years in either Canada or the United States could decide to invest in the latter. That means investment and job losses in Canada.

Therefore, the sooner the parties can give CUSMA some permanence, the better for Canada.

Thank you. I'm happy to answer your questions in French or English.

[The Chair, Liberal, Judy Sgro]

Thank you very much. We'll go to our members.

Mr. Lewis.

[Chris Lewis, Conservative, Essex, ON]

Thank you, Madam Chair.

Thank you very much, witnesses, for coming out this evening. It's really good to see the softwood lumber witnesses tonight. It's better late than never, not unlike the Canada-United States-Mexico Agreement itself—better late than never.

I'm talking about how we got this report shortly after noon today. I've been going through it, and I see in the very first paragraph on page 2 six words that say “reduces red tape at the border”. Great.

I'll continue on to page 5—and I only got to page 5 because I only got this shortly after 12 today—where it goes on to say:

However, the gains will be partially offset by new market access to Canada's supply-managed sectors and more restrictive rules of origin for automobiles and auto parts that will likely increase auto-part production in North America but also lead to higher production costs. In particular, implementing the CUSMA outcome:....

My first question is for Ms. Hasenfratz. I heard you talk about shipping parts back and forth across the border, right? This would suggest that it's supposed to be much smoother. The C.D. Howe report suggests that there's going to be “border thickening”, as they call it.

We do know that the government has not put any extra time, effort or money into the CBSA, who will be the ones implementing this and the tariffs.

My question is twofold. Number one, are you concerned from the auto parts sector that there's going to be a potential issue at the border? Number two, the auto industry would very much like this CUSMA deferred for them to January 2021. Do you share the same ambition?

[Linda Hasenfratz]

I personally don't have concerns that there's going to be a holdup at the border. I think that when anything new comes in there's potentially some uncertainty, and it takes some time to kind of get your arms around that. There may be some potential issue, but I personally don't see that—and our team doesn't—as a major risk.

I think some of the discussion around implementation timing is really to just get better clarity on exactly how some of these rules are going to work. There's a bit of a question about the detail around it, which is why there's been some discussion around delaying the implementation, just to make sure that everybody has very good clarity on how the calculations work and that type of thing.

[Chris Lewis, Conservative, Essex, ON]

Thank you very much, Ms. Hasenfratz.

[Linda Hasenfratz]

That's my understanding of it.

[Chris Lewis, Conservative, Essex, ON]

That's perfect. Thank you.

My next question is for you, Mr. Young. I listened keenly to your opening speech, which was very interesting.

How has the dispute impacted your operations? You refer to “tough choices”. Can you share a bit more about these tough choices and the asymmetrical impact of the dispute on your operations and your people?

[Kevin Young]

Thank you for the question.

It's obviously very difficult to make choices when you have 300 families who work with you and you have to let some of those families go in one location and hire them in another. We're a Canada-based business, and ideally in our world we'd like to see more Canadian wood processed in Canada. The challenge we've found is that as a smaller independent producer the impact of the duties is quite asymmetrical relative to what the primary producers face.

Just as an example, the primary producers are producing two-by-fours and shipping them down to the U.S. They're going to pay a duty on that. The asymmetry is that the higher price of that wood becomes the higher price of my input. That becomes my cost. Therefore, the more value I add in Canada, again, the more duty that we pay in Canada. We did some quick numbers. It's about three times the amount of duty we pay for every board foot of finished product that goes across the line.

[Chris Lewis, Conservative, Essex, ON]

Thank you.

Do you have a suggested wording for an amendment—I think that's what you were speaking about—and why will an amendment help again?