International Trade Committee on Feb. 16th, 2022

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

I call to order meeting number seven of the House of Commons Standing Committee on International Trade.

Welcome to all our witnesses.

We apologize for the delay. You know how these things are when you're dealing with Ottawa and the House of Commons.

Today's meeting is taking place in a hybrid format pursuant to the House order of November 24, 2021.

The Board of Internal Economy requires that committees adhere to the following health protocols. Anyone with symptoms should participate by Zoom and not attend in person. Masks must be worn by everyone in the committee room, except when members are at their place during parliamentary proceedings. However, it's strongly recommended that members wear their mask even when they are at their place during parliamentary proceedings. I remind staff to have their masks on for the two hours of this meeting, please. All those inside the committee room should follow best practices of maintaining a physical distance of at least two metres from others and maintaining proper hand hygiene.

As the chair, I will be responsible for enforcing those measures, so thank you for your co-operation.

I have to outline a few rules. You may speak in the official language of your choice. At the bottom of your screen, you have the choice of floor, English or French. If there's a problem with the interpretation, please let us know and we will halt the proceedings and correct it. The “raise hand” feature is on the main toolbar, should you wish to speak. When speaking, please speak slowly. When you are not speaking, your microphone should be on mute. I remind everyone that all comments should be addressed through the chair.

The committee clerk and I will be maintaining a speaking list.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on Monday, January 31, the committee is resuming its study of the modernization of the Canada–Ukraine Free Trade Agreement.

With us today by video conference as individuals are Roman Waschuk, business ombudsman in Ukraine; and Michel Roche, professor, Université du Québec à Chicoutimi. From the Canada-Ukraine Chamber of Commerce is Zenon Potoczny, president. From the Canadian Association of Petroleum Producers is Mr. McMillan, president and chief executive officer. Finally, from the Ukrainian Canadian Congress, we have Ihor Michalchyshyn, executive director and chief executive officer.

Welcome to all of you.

We will start with five minutes of opening remarks, after which we will proceed with a round of questions.

Mr. Waschuk, I invite you to make your opening statement, for up to five minutes. Go ahead, please.

[Roman Waschuk, Business Ombudsman in Ukraine, As an Individual]

Thank you very much.

It's an honour to be here in my current capacity as a business ombudsman, but also harkening back to my time as the Canadian ambassador to Ukraine at the time the Canada-Ukraine Free Trade Agreement was signed and implemented. It was designed primarily to give our commercial relations a boost, and, if anything, in terms of its negotiation, it was designed to help open up the Canadian market to Ukraine products, as well as promote Canadian exports.

We made a special effort, on the part of our development program at the time, to launch a project called the Canada-Ukraine trade and investment support project, with which Mr. Potoczny and the Canada-Ukraine Chamber of Commerce were associated. It was led primarily by The Conference Board of Canada to support Ukrainians who were suffering both from continuing warfare, which we now see is possibly surging again, but also from the problems of a transitional economy, which still hasn't worked out all the kinks.

We have seen growth in bilateral trade, but also bumps on the road. The pandemic was certainly inhibiting progress in 2020, and then we saw some rebound in 2021.

In looking at the opportunities that modernizing this agreement might bring, certainly in my time as ambassador, and now looking around at the Ukrainian economy and the issues I'm helping to resolve as a business ombudsman, you definitely see a thriving IT sector in Ukraine, which Canadian companies have been very actively tapping into.

You might think this would be problematic for the Canadian IT market or labour market. From what I've seen, however, it tends to be a net growing of the pie. As a former U.S. president might have put it, make the pie higher. The digitalization of companies, like Canadian Tire, was driven in part by innovations developed in Ukraine. It actually helped Canadian Tire increase the number of IT people employed both in Canada and Ukraine, just by making the company more digital. So there's considerable scope in the information technology services sector.

There's another area where Canadians have certainly made considerable progress in Ukraine, and that is in the insurance sector. Fairfax Financial of Canada now owns three insurance companies in Ukraine. It's the largest single player in the Ukrainian insurance space. Their companies write about $150 million worth of policies annually.

Having a framework more securely defined, in which both ground rules for investment and rules for the provision of services by companies based in either Canada or Ukraine, would help expand that sort of engagement on both sides of this trading, investment and services relationship.

I won't belabour these points anymore, and will leave it to you to ask some questions.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Roche, please go ahead.

[Michel Roche, Professor, Université du Québec à Chicoutimi, As an Individual]

Madam Chair, members of Parliament, thank you for this invitation.

Today, I want to talk to you about the modernization of the Canada‑Ukraine Free Trade Agreement—CUFTA—and the broader issue of control in which it operates. We can't separate trade issues from the geopolitical and social situation.

My analysis rests on the premise that free trade is meant to be mutually beneficial to the parties involved and that the hoped‑for gains aren't thwarted by unfavourable policies for either party. One aspect of the current situation is the relationship between Canada and Russia, and between Ukraine and Russia.

The Government of Canada's website on the modernization of CUFTA states as follows:

It will also help reinforce the rules‑based international system by advancing fair, inclusive and transparent trade with Ukraine and will support prospects for long‑term security, stability and broad‑based economic development in Ukraine.

It's widely known that international trade contributes to stability, and that stability is one condition for open international trade. If the goal is to support Ukraine's long‑term prospects for security and stability, it's necessary to go further than just removing tariff barriers.

To date, CUFTA hasn't led to any success. In 2016, prior to the free trade agreement with Ukraine, trade between the two countries was at a higher level than since it came into effect, except in 2017. In 2017, the agreement came into effect on August 1. A major reason is the political and geopolitical challenges in Ukraine.

This country in particular is used as a mere pawn in the chess game of the great powers. Ukraine feels threatened by Russia, and Russia also feels targeted by NATO's past and future expansion. Since security can only be mutual, real negotiations should be undertaken to review the security architecture in Europe. An all‑inclusive agreement would end Moscow's exploitation of the pro‑Russian separatists in Donbass, reassure the Russian authorities and greatly enhance the sense of security in Ukraine. All this would have a positive impact on investment and trade.

However, for the time being, the Canadian position on the current conflict involving Ukraine is counterproductive. The refusal to acknowledge at least part of Russia's grievances is blocking any real progress in the negotiations. The possible introduction of additional sanctions against Russia will have a negative impact on all countries involved, starting with Ukraine, which trades about 50 times more with its powerful neighbour than it does with Canada.

It should be noted that another factor is even more dangerous for global security in the long term. Russia's growing isolation is drawing it increasingly closer to the orbit of China, a country that remains dissatisfied with the current world order and that aspires to hegemony. It's widely known that periods of transition between two hegemonies provide the greatest opportunity for tension and undermine the collaboration needed to maintain the public goods established by the most influential countries in the international system. History showed this with the decline of Great Britain in the late 19th century and during the multipolar period following the First World War.

Is it wise, in the current situation, to let Russia pull away? Could Ukraine really benefit from this type of situation?

In conclusion, I believe that the consideration of the modernization of CUFTA must take into account the broader parameters that I outlined.

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Roche.

Mr. Potoczny.

[Zenon Potoczny, President, Canada-Ukraine Chamber of Commerce]

Thank you very much.

In these very difficult days for Ukraine with the massive Russian army on the Ukrainian borders, we stand together with Ukraine and must say no to Putin.

I'm sorry, Mr. Roche, I don't quite agree with some of the things you mentioned, but we're not going to get into the politics today.

Over the past 30 years the Government of Canada has been continually providing extensive guidance and support for the Government of Ukraine and its efforts to establish a stable economic environment. One of the most mutually beneficial examples of this is the Canada-Ukraine Free Trade Agreement, CUFTA.

Since it came into force on August 1, 2017, CUFTA has laid new foundations for trade, growth and investment in both countries.

That being said, CUFTA is still a work in progress with opportunities for improvement. The Canada-Ukraine Chamber of Commerce conducted some of the consultations with our partners, members and stakeholders, and here are some of the points of our discussions and interest.

The first is cross-border trade, and consulting, financial and ICT services. Ukraine is a great destination for outsourcing of consulting, financial and IT services. The experienced and educated labour force of Ukraine has encouraged global corporations to locate their shared service centres in Kyiv, Lviv and other cities. Ukraine is now the fourth-largest supplier of tech talent to the world.

Ukraine is becoming increasingly popular among those looking for IT outsourcing partners. Since 2017, the IT sector in Ukraine has grown approximately 27% to 30% year over year, with over 285,000 IT specialists currently working in the industry with about $6.8 billion worth of services in export.

We currently see a rise in interest from Canadian ICT firms in outsourcing to Ukraine as well as looking into opening their offices in the country due to the newly adopted law on digital economy facilitation, with highly attractive tax and regulatory conditions. The GDPR law is under way to its adoption. All this will make Ukraine highly competitive on a global market, and Canadian companies will benefit from it.

On the other hand, big Ukrainian service companies are also opening their offices in Canada to benefit from being located in the same time zone as most of their customers and better provide services. Hence, there are additional jobs in the Canadian economy.

On investment, Canadian corporations and investment funds are sophisticated investors. During the last few years we witnessed quite substantial investments in the Ukrainian markets made by such companies—Mr. Waschuk mentioned Fairfax, Brookfield and others. An important role in decision-making on the implementation of international projects by Canadian investors is played by the federal corporation, Export Development Canada, EDC, which provides credit and government guarantees for the implementation of the project.

In 2014, Ukraine's EDC rating significantly deteriorated, which led to reduced interest of Canadian businesses to invest in Ukraine. In 2017, Ukraine's rating was slightly improved, but it remains undesirable and does not correspond to the realities of the business and investment climate in Ukraine.

We would ask the committee to consider the need to re-evaluate the current EDC rating on Ukraine.

On non-trade barriers, we constantly hear of Canadian exporters facing challenges while dealing with Ukrainian customs, and it is probably time to consider implementing some improvements. Beyond tariffs, there are many other chapters and provisions on such elements as non-tariff barriers that will help to ensure that the market access that we gain through lowering or eliminating tariffs is not taken away by some other means or circumstances.

CUFTA should focus on eliminating the red tape that companies face at the border by establishing customs procedures that are as standardized, as simple, as predictable and as modern as they can be. We suggest that digital transformation with a paperless environment and an ability to advance ruling for a given product, even before it reaches the border, would be very helpful.

A perfect example of such an issue is the certificate of origin, which in many cases gets questioned once the product travels from Canada through another country to Ukraine. Another example of such a non-tariff barrier is the treatment of Ukrainian alcoholic beverage exports to Canada by Canadian companies.

The export tariffs on these beverages were removed but in the case of one of our members the Ontario Ministry of Finance, through the LCBO, has levied an unfairly high cost of service differential, COSD.

[The Chair, Liberal, Judy Sgro]

I'm sorry, sir, I have to interrupt.

Could you close your remarks so that the members can ask some questions, please.

[Zenon Potoczny]

All right.

I would just like to say that much lower cost charges are being applied to EU tariffs because of the provisions of the Canada-European Union Comprehensive Economic and Trade Agreement. It's also the same with Canada-U.S.-Mexico, where they are much lower.

Therefore, we're asking to please ensure that similar provisions are included in the text of the expanded and modernized CUFTA.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

[Zenon Potoczny]

On the immigration—

[The Chair, Liberal, Judy Sgro]

I'm sorry, sir. You're over time.

I know it's difficult.

Mr. McMillan, please.

[Tim McMillan, President and Chief Executive Officer, Canadian Association of Petroleum Producers]

Thank you, Madam Chair and committee members, for including CAPP in this important discussion.

The Canadian Association of Petroleum Producers produces about 80% of Canada's oil and gas. We're proud to be one of Canada's largest employers and Canada's largest private sector investor. Pertinent to this committee, oil and gas make up Canada's largest export.

Consistent with the last couple of speakers, I will keep my comments to energy trade and to the larger dynamics that are currently making trade with the Ukraine challenging and some of the dynamics that are driving that in Europe and in the Ukraine.

As a quick background, the Ukraine lost about 80% of its oil and gas potential when Russia annexed the Crimea in 2014. According to the International Energy Agency, Ukraine has one of the most energy-intensive economies in Europe. They have worked very hard over the last decade to become more self-sufficient with gas, and today they produce about 70% of the natural gas domestically and need to import the other 30%.

Like the rest of Europe, their energy needs and their gas needs make them heavily reliant on Russia. Back in 2016, Russia, in the midst of a dispute, cut off gas supplies to the Ukraine for a day. The devastating effects of energy insecurity are something that no country should have to live with.

When we look at the primary energy demand in the Ukraine, natural gas makes up about a third of all the energy they use, coal is 30%, nuclear is 20% and petroleum, gasoline and diesel fuel about 18%.

The Ukraine has worked to get what they call a flowback mechanism to get some gas coming back out of Europe into the Ukraine so they aren't solely dependent on imports from Russia.

A quick reflection on the realities of energy in Europe shows that over the last several years Europe has become increasingly dependent on Russia and on imports that globally.... Maybe I'll start globally.

The last several decades has seen dramatic increases in the demand for oil and gas. This has been a very positive impact on the world's poorest nations, meaning better diets, warm houses in winter and more freedom of movement. The International Energy Agency predicts an increase in global demand by about 30% out to the end of their forecast in 2040.

Europe has made some energy policy choices that I think have made them very vulnerable, and I'll go over them right now. I think those vulnerabilities have a direct impact on their ability to play a relevant role in the current conflict that seems to be amassing in the Ukraine. Europe has taken policy decisions. They have seen production of their domestic natural gas fall off dramatically. The North Sea and Norway have both seen substantial declines in the last several decades, and though the onshore resource is substantial in many parts of Europe and the United Kingdom, they have put policies in place that have made it very difficult for them to develop it.

As I mentioned earlier, it is life changing when the world's poorest nations get access to energy, oil, gas, coal, nuclear, wind and solar for the first time. It is truly phenomenally beneficial. It is also devastating, expensive and dangerous when the world's wealthiest nations lose access to reliable energy. The policy decisions that Europe has made in recent years have left them extremely vulnerable. They have shut down their nuclear facilities in several countries or are in the process of doing so. They have shut down several coal-fired power plants. They have limited their ability to develop their resources for oil and gas, and they have become more reliant on imports from the Middle East, Russia and Africa. They have also built out some infrastructure for LNG, and that is a bit of a lifeline today, as they are facing some very high prices and insecurity coming out of Russia.

This insecurity has left Europe in a very vulnerable position, where they seem to be unwilling to take a strong stand. Being more secure in their energy supplies would enable them to take more principled stances.

Europe has gone from—

[The Chair, Liberal, Judy Sgro]

Mr. McMillan, I'm sorry. Your time is almost up. If you want a closing statement, make it now.

[Tim McMillan]

I would thank the committee for including energy in this discussion. It is fundamental to the dynamics that we're currently seeing play out in Europe and around the world. Canada has an opportunity to build LNG facilities to be a reliable partner for our allies and friends around the world, including in Europe and in Ukraine, but it's going to take policy change here in Canada for us to play that very important role.

Thank you, Madam Chair.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

It's on to Mr. Michalchyshyn for five minutes, please.

[Ihor Michalchyshyn, Executive Director and Chief Executive Officer, Ukrainian Canadian Congress]

Thank you for the opportunity to speak to this committee.

This is a reminder for everyone that when referring to Ukraine, we don't need to use the article “the”, which would imply a region. Ukraine is a sovereign state, as we're learning in these times of conflict and Russian escalation of aggression.

I'm here on behalf of the Ukrainian Canadian Congress, which is the voice of Canada's Ukrainian community. We bring together under one umbrella the national, provincial and local Ukrainian community organizations, and represent the interests of the community in Canada which, at the last census, was at 1.4 million Canadians. Our organization has worked since 1940 and we work in the spheres of social, economic and political affairs.

Before I speak to our recommendations on this important topic of CUFTA modernization, I want to touch upon the fact that Ukraine is a country at war. It is a country that has been a target of foreign aggression for the past eight years, and it has defended itself against Russia's attempts to once again subjugate the Ukrainian people through the use of force.

Today, Russia is threatening a further invasion of Ukraine. It is a serious escalation, which is having deleterious effects on Ukraine's economy. The instability caused by Russia's escalation in recent weeks is causing private investors to flee and making it far more expensive for Ukraine to raise capital on lending markets. We welcome the announcement by Canada in recent days of loan commitments to Ukraine totalling $620 million and the intention of the G7 to support economic stabilization. However, its also important to remember that we need to raise the costs on Russia of further escalation of aggression.

UCC calls on this committee and its members to support the implementation of further sanctions against Russia as a proactive deterrent, rather than following a potential Russian invasion. Sectoral sanctions on the energy and financial sectors of Russia need to be strengthened immediately. These should be sanctions against Russian officials, particularly wealthy businessmen, or oligarchs, close to the Russian regime, and they should be sent now as a deterrent.

Turning to the issue at hand, to the longer-term modernization of the Canada-Ukraine Free Trade Agreement, the Government of Ukraine has made the attraction of foreign direct investment in Ukraine a policy priority. The increase of trade and economic activity between Canada and Ukraine will serve to further facilitate Ukraine's transition to a market economy [Technical difficulty—Editor] supremacy of the rule of law and democratic governance.

Ukraine is a key international partner for Canada and an emerging market for Canadian investments in the heart of Europe. Increased prosperity resulting from Canadian investments in Ukraine will create a virtuous circle of increased investment of the Ukrainian business community in Canada, creating jobs and prosperity here.

We have five recommendations for the committee on the modernization of CUFTA. First, focus on increasing trade collaboration and investment between Canada and Ukraine in the IT, green energy, defence and aerospace sectors, which have the strongest potential for growth. Second, establish reform benchmarks in law enforcement, judicial and taxation systems and clear criteria for measuring reform progress. Third, focus on demonopolization of Ukraine's economy, including market competition reform benchmarks with Ukraine's anti-monopoly committee. Fourth, work to revise Export Development Canada's risk rating criteria of Ukraine and ensure that EDC makes all of its products and services available to Canadian businesses investing in Ukraine. Finally, focus on enhancing the people-to-people ties by developing a comprehensive road map for the liberalization of travel for Ukrainian citizens to Canada, including the establishment of visa-free travel for short-term visits.

The relationship between Canada and Ukraine is a strong one not only because of the people-to-people ties; it's strong because our countries share the same values and commitment to democracy, equality and liberty. We believe that the modernization of the Canadian-Ukraine Free Trade Agreement will strengthen these ties to the benefit of both countries and both peoples.

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much, sir.

Mr. Patzer, please. You have five minutes.

[Jeremy Patzer, Conservative, Cypress Hills—Grasslands, SK]

Thank you very much, Madam Chair.

I'm going to start with Mr. McMillan. How important is energy security to a country like Ukraine?

[Tim McMillan]

For Ukraine, like any country, it's fundamental. It is the basis of modern life. It heats our homes, it provides the food that we eat, it's the fertilizer for our crops.

Ukraine has worked very hard over the last decade to become more self-sufficient, but the insecurity of the current political situation leaves them very vulnerable and it leaves their allies very vulnerable at the same time.

[Jeremy Patzer, Conservative, Cypress Hills—Grasslands, SK]

Can Canada help? Do we have resources or things that could help out Ukraine?

[Tim McMillan]

Absolutely. We have world-class energy resources. What we lack is infrastructure. I am sad to say that over the last decade, we have had several large infrastructure projects on our east coast—some that were directly linked to European utilities—that needed federal and provincial approvals. None of those projects have gotten their approvals. None of them got final investment decisions.

Some of our competitors and friends around the world have developed substantial LNG infrastructure. The U.S. has surpassed us and I believe they have 15 that are currently operating or in construction. Canada has zero that, today, could send natural gas to Europe.

[Jeremy Patzer, Conservative, Cypress Hills—Grasslands, SK]

What was the biggest hurdle preventing them from reaching final approval?

[Tim McMillan]

It's not the resource, because ours is world class and cost effective. It is the Canadian regulatory process that is not as transparent as we would expect a democracy like Canada to have.

It changed a few years ago with Bill C-69, which made that more difficult, and I think large global investors look at Canada today as a place where it is very difficult to get major infrastructure built, energy infrastructure or otherwise.

[Jeremy Patzer, Conservative, Cypress Hills—Grasslands, SK]

Thank you.

Mr. Potoczny, where are we at right now for trading agricultural products to Ukraine under the current agreement?

[Zenon Potoczny]

Ukraine is one of the major producers of agricultural products in the world, and if you look at the different products, they're top three in the world in many cases. Ukraine is a major exporter to the world.

Between Canada and Ukraine, I don't think there's a huge agricultural trade, but there is quite a bit of fruit traded. If you drink any apple juice in Canada, you are most likely drinking juice made from apples from Ukraine, because Ukraine is the number one exporter of apples to Canada.

Definitely EDC is key in this area. I know there are companies from Manitoba and Alberta trying to export not the product itself, but the equipment to Ukraine. They have done it before with assistance from EDC. However, EDC has cut off quite a bit of business and will look at Ukraine only on very much a case-by-case basis. EDC is a very important player in here.