UNCERTAIN ACCESS:
THE CONSEQUENCES OF U.S. SECURITY AND
TRADE ACTIONS FOR CANADIAN TRADE POLICY
(Volume 1)

Report of the Standing Senate Committee on Foreign Affairs

Chairman : The Honourable Peter Stollery
Deputy Chair : The Honourable Consiglio Di Nino

Fourth Report

June 2003


MEMBERS 

The Honourable Peter Stollery, Chair
The Honourable Consiglio Di Nino, Deputy Chair 

and 

The Honourable Senators:

Raynell Andreychuk
Jack Austin, P.C.
Roch Bolduc
Pat Carney, P.C.
*Sharon Carstairs, P.C. (or Fernand Robichaud, P.C.)
Eymard G. Corbin
Pierre De Bané, P.C.
Jerahmiel Grafstein
Alasdair Graham, P.C.
Rose-Marie Losier-Cool
*John Lynch-Staunton (or Noël Kinsella)
Raymond Setlakwe 

* Ex officio members 

In addition to the Senators indicated above, the Honourable Senators Maria Chaput, Joseph Day, Edward M. Lawson, Frank W. Mahovlich, Pana Merchant, Gerard A. Phalen, David P. Smith and Terry Stratton were members of the Committee at different times during this study or participated therein during the Second Session of the Thirty-Seventh Parliament.

Staff from the Parliamentary Research Branch of the Library of Parliament:
Peter Berg, Analyst
Michael Holden, Analyst
Janna Jessee, Intern from the Norman Paterson School of International Affairs 

François Michaud
Clerk of the Committee


ORDER OF REFERENCE

Extract from the Journals of the Senate of Thursday, November 21, 2002:

The Honourable Senator Stollery moved, seconded by the Honourable Senator Adams:

THAT the Standing Senate Committee on Foreign Affairs be authorized to examine and report on the Canada – United States of America trade relationship and on the Canada – Mexico trade relationship, with special attention to: a) the Free Trade Agreement of 1988; b) the North American Free Trade Agreement of 1992; c) secure access for Canadian goods and services to the United States and to Mexico, and d) the development of effective dispute settlement mechanisms, all in the context of Canada’s economic links with the countries of the Americas and the Doha Round of World Trade Organisation trade negotiations;

THAT the Committee have power to engage such counsel and technical, clerical and other personnel as may be necessary for the performance of this order of reference;

THAT the Committee have power to adjourn from place to place inside and outside Canada for the purpose of this reference; and

THAT the Committee shall present its final report no later than December 19, 2003, and that the Committee shall retain all powers necessary to publicize the findings of the Committee as set forth in its final report until January 31, 2004.

After debate,

With leave of the Senate and pursuant to Rule 30, the motion was modified to read as follows:

THAT the Standing Senate Committee on Foreign Affairs be authorized to examine and report on the Canada – United States of America trade relationship and on the Canada – Mexico trade relationship, with special attention to: a) the Free Trade Agreement of 1988; b) the North American Free Trade Agreement of 1992; c) secure access for Canadian goods and services to the United States and to Mexico, and d) the development of effective dispute settlement mechanisms, all in the context of Canada’s economic links with the countries of the Americas and the Doha Round of World Trade Organisation trade negotiations; and

THAT the Committee shall present its final report no later than December 19, 2003, and that the Committee shall retain all powers necessary to publicize the findings of the Committee as set forth in its final report until January 31, 2004.

The question being put on the motion, as modified, it was adopted.

 

Paul Bélisle

Clerk of the Senate


RECOMMENDATIONS

Recommendation 1

That the Government of Canada ensure that U.S. decision-makers recognize how seriously Canada takes security concerns.  The government should immediately launch an active campaign to inform such decision-makers of the unprecedented cooperation between Canada and the U.S. on border security issues and the reality that Canada is a secure trading partner.

Recommendation 2

That, since a trade-efficient border is the lifeline of Canada’s economic prosperity and since the current infrastructure at key border crossings is woefully inadequate to handle the tremendous growth that has occurred in bilateral trade, the Government of Canada accelerate the implementation of the 30-point Border Action Plan by:

a)      Encouraging Canadian and U.S. authorities to accelerate the construction of new bridge and tunnel crossings into the United States;

b)     Injecting considerably greater financial resources into the construction of additional border infrastructure other than bridges and tunnels; and

c)      Accelerating efforts to establish a pre-clearance system for the shipment of goods across land border crossings, thereby “moving the border away from the border” to reduce border impediments to trade, investment and business development.

 

Recommendation 3

That the Governments of Canada and the United States intensify efforts to ensure that any implementation of Canadian and American security measures adequately take into account any effects on bilateral trade and investment.

Recommendation 4

That Canada and the United States initiate negotiations to achieve substantial trade remedy (e.g., anti-dumping, countervail, safeguards) relief in economic sectors (e.g., steel) in which producers would favour such action.

Recommendation 5

That in the Doha Round of WTO trade negotiations, the Government of Canada give top priority to obtaining a WTO agreement to:

a)     clarify and improve upon existing provisions on subsidy and dumping definitions;

b)     tighten existing WTO provisions governing the use of trade remedies (e.g., anti-dumping, countervail, safeguards) so as to restrain protectionist abuses; and

c)      avoid continental trade conflicts.

Recommendation 6

That during FTAA negotiations on the introduction of an effective hemispheric dispute resolution system, the federal government seek to retain, as a minimum, the NAFTA Chapter 19 dispute settlement process as an option for NAFTA trade.

Recommendation 7

That Canada, Mexico and the United States implement NAFTA Article 2002 calling for the establishment of a permanent NAFTA Secretariat and provide this Secretariat with the following mandate:

a)      To examine means by which trade disputes and irritants can be resolved within the NAFTA rather than at the WTO, and to help expedite the resolution of these trade conflicts;

b)     To examine medium- and long-term trade policy issues and to generate reports including recommendations for action by NAFTA partners; and

c)      To review developments within the multilateral trade system and their relationship to the NAFTA trade framework.

Recommendation 8

That the Government of Canada, in association with affected provinces, maintain as its objective a permanent arrangement with the United States that provides for an unrestricted market for softwood lumber.  In the interim, any short-term agreement to allow time to complete this permanent arrangement should not surrender Canada's right to obtain the judgements of the WTO and NAFTA panels or the processes under NAFTA Chapter 11 and should require that:

a)     anti-dumping duties against Canadian softwood lumber producers be dropped; and

b)      all countervailing and anti-dumping duties already collected be returned to Canada.

Recommendation 9

That the Government of Canada:

a)     Work with like-minded countries to remove from the WTO’s draft agriculture negotiation document any proposal to phase out state trading enterprises or such farmer-controlled enterprises as the Canadian Wheat Board; and

b)      Direct its efforts at tightening the WTO’s anti-dumping rules to give the agricultural sector special consideration, in view of the frequency of externally driven commodity price movements that cause prices to decline below costs (a trigger for anti-dumping action).

Recommendation 10

That the federal government:

a)     Substantially increase the number of consulates in the United States from its current planned level.  The new consular offices should be designated as trade and investment offices and staffed with appropriate and experienced professional personnel;

b)     Immediately initiate a focused campaign to inform U.S. decision-makers of the importance of the bilateral trade relationship;

c)      Increase its funding of efforts to promote Canadian trade and investment interests in the U.S., and make its advocacy strategies in that country more effective; and

d)      Strengthen bilateral relationships at the executive and legislative levels of government.  Strategies should be formulated to more effectively engage and regularly interact with the U.S. Senate and House of Representatives on issues and concerns of importance to both countries, and appropriate budgetary resources should be provided.  To this end, the government should establish a Parliamentary Office in Washington to assist Canadian Parliamentarians in their interaction with U.S. legislators and other key U.S. decision-makers.

Recommendation 11

That the Government of Canada refrain from entering into any discussions on the establishment of a customs union with the United States.

Recommendation 12

That the Government of Canada carefully investigate the impact that regulatory differences with the United States have on the Canadian economy, and release its findings to the public.  The government should seriously examine the concept of mutual recognition of each country’s regulatory standards and procedures, under which standards would be tested and inspection and certification would be carried out only once within the Canada-U.S. market.  Moreover, the government should identify those sectors in which the U.S. and Canadian regulatory systems are similar and the mutual recognition approach could be applied. 

Recommendation 13

That, noting the valid objective of engaging in regulatory cooperation with the European Union within the proposed Canada-EU Trade and Investment Enhancement Initiative, the federal government retain as a goal the successful negotiation of a comprehensive Transatlantic Free Trade Agreement.

Recommendation 14

That the Government of Canada make free trade with Asia a priority and initiate trade-liberalization negotiations with China, Japan, South Korea, India and members of the Association of Southeast Asian Nations (ASEAN).  The federal government should also develop new strategies to increase the interest of Canadian businesses in Asian markets, help Canadian firms construct durable partnerships with Asian companies and establish a better image for Canadian products in Asia.

Recommendation 15

That the Government of Canada establish a Trade and Investment Council to conduct comprehensive analytical research on external trade and investment issues.  


TABLE OF CONTENTS

RECOMMENDATIONS

Foreword

PART 1: INTRODUCTION 

PART 2: SECURING CANADA-U.S. TRADE 

ENSURING THE FREE FLOW OF GOODS AND SERVICES ACROSS THE BORDER
    A. The Effects of September 11
    B. The 30-Point Border Action Plan and Its Implementation
    C. New Border Restrictions on the Horizon and How to Deal With Them 

CURBING THE USE OF TRADE REMEDIES 
    A. The FTA: Objective Not Met 
    B. Exploring Made-In-North America Solutions 
    C. Seeking Progress at the WTO

IMPROVING DISPUTE SETTLEMENT MECHANISMS 
    A. NAFTA Chapter 19 Dispute Resolution 
    B. Chapter 20 Dispute Settlement 
    C. Achieving Progress at the WTO 
    D. NAFTA's Chapter 11

ARE NEW INSTITUTIONS REQUIRED TO MANAGE NORTH AMERICAN TRADE?

RESOLVING EXISTING TRADE DISPUTES AND IRRITANTS 
    A. The Canada-U.S. Softwood Lumber Dispute 
        1. The Essential Nature of the Dispute
        2. The Federal Government's Two-Track Strategy to Resolve the Dispute
            a. Legal 
            b. Negotiated Settlement
        3. Where to Go From Here?
    B. Agricultural Issues
        1. The Dispute Over the Canadian Wheat Board
            a. Legal Challenges
            b. Evidence Heard
        2. The U.S. Farm Bill
            a. The Farm Bill and the WTO
            b. The Impact of the Farm Bill in Canada and Elsewhere
            c. Country-of-Origin Labelling
    C. U.S. Subsidies for the Proposed Alaska Natural Gas Pipeline

IMPROVING CANADIAN OFFICIAL PRESENCE, INFORMATION FLOWS AND ADVOCACY IN THE U.S.

PART 3: CANADIAN TRADE POLICY IN THE LONG TERM:
                CLOSER INTEGRATION OR TRADE DIVERSIFICATION?

THE DIMINISHING RETURNS FROM TRADE LIBERALIZATION
    A. The FTA and Trade Growth
    B. Other Factors Influencing the Canada-US Trade Relationship
    C. The Diminishing Gains From Trade Liberalization Under the NAFTA

ASSESSING THE MERITS OF CLOSER INTEGRATION
    A. The Customs Union Option
    B. A Common Market
    C. A Common Currency
    D. Lessening Regulatory Duplication

THE NEED TO DIVERSIFY CANADA'S TRADE
    A. Achieving a Comprehensive Free Trade Agreement with Europe
    B. Strengthening Trade Ties with Asia-Pacific
    C. The FTAA and Hemispheric Trade Ties

STRENGTHENING FEDERAL AND LONG-TERM ANALYTICAL CAPACITY

APPENDICES:

APPENDIX 1: RECENT HISTORY OF THE CANADA/U.S. SOFTWOOD LUMBER DISPUTE
APPENDIX 2: CANADA/U.S. SOFTWOOD LUMBER DISPUTE - CHALLENGES AT THE WTO AND NAFTA
APPENDIX 3: PREVIOUS U.S. INVESTIGATIONS INTO THE CANADIAN WHEAT BOARD:
APPENDIX 4: SMART BORDER ACTION PLAN
APPENDIX 5: LIST OF WITNESSES


FOREWORD

This report is not intended to be a rerun of the old arguments about the Canada-U.S. Free Trade Agreement.  Members of the Foreign Affairs Committee, which also deals with Foreign Trade, reviewed the Free Trade Agreement – it has been in effect for about fifteen years – and took a look at what actually happened.  What we learned certainly surprised me and I was an active member of the committee fifteen years ago when the Free Trade debate took place.

Over the course of the Committee’s hearings, we met with 95 witnesses in Canada during 25 sets of hearings in Vancouver, Calgary, Winnipeg and Ottawa. We went west partly because of the softwood lumber dispute, so important to the British Columbia economy. 

The Committee also heard from 72 individuals in Washington. We did not complete the Mexican part of what has become NAFTA because of scheduling conflicts brought about by the Mexican electoral calendar. We will complete that part of our investigations later. To put our Canada - US - Mexico trade in perspective, roughly 75% of our 2-way trade is with the U.S. and 2.6% with Mexico.

Apart from security issues, which we address in our report, three themes seem to me to have been at the centre of our conversations. The first theme to consider is tariff reduction.  When most people think of freer trade they think of lowering tariffs. That certainly was an element of the Free Trade Agreement.  In 1985, the MacDonald Royal Commission noted that because of the Auto Pact and, ‘the high level of duty-free resource imports’, average US tariffs against Canadian goods were about 1% and average tariffs on dutiable goods were in the 5 to 7 per cent range.  In contrast, Canadian average tariffs on dutiable imports were at 9 to 10 per cent. I doubt if many consumers noticed when under the agreement all tariffs ended 5 years ago in 1998.  That part of the life of the FTA ended at that point.

In the 1980s, US protectionism was thought to be on the rise.  When the MacDonald Royal Commission made its report on the Canadian economy in 1985, the Commissioners noted,  “…many Canadians are deeply concerned that because trade with Canada is quantitatively less important to Americans than is their trade with us, the United States might implement protective trade measures harmful to Canadians and be relatively unaware of, or unconcerned by, the consequences”.

They went on to say, “It is imperative that Canada reduce both the uncertainty of our access to U.S. markets and the adverse effects that might result from any trade-restrictive measures”.

The second theme of our hearings was whether or not the system for settling trade disputes adopted in the agreement between Canada and the United States has worked.  Ninety-five per cent of Canada’s exports to the US are trouble free.  5% of our trade is disputed. That 5% is quite a lot when you realize that, of our total exports to the US, 13% goes through either a pipeline or along transmission lines and 25% is accounted for by the Auto Pact. 

Anyone who has followed softwood lumber, the problems of the Canadian Wheat Board or the difficulties of the Canadian beef industry would have to say that the NAFTA dispute-settling system has not worked at all. I was certainly taken aback when we were given an estimate of $800 million dollars in legal fees on softwood lumber since the 1980s. Mike Moore, former Director General of the WTO, has said that just the case before the WTO on softwood lumber cost $US 200 million and that was before the most recent decision on stumpage which ruled in Canada’s favour.

The reason the system has not worked is pretty straightforward.  The arrangement agreed to, known as Chapter 19 of the agreement, is well-described in a document produced by the Trade Remedies Division of DFAIT: “Bi-national panels determine whether a final determination is in accordance with anti-dumping laws of the NAFTA country in which the decision is made. If a panel finds that the determination was in accordance with domestic law, the determination is affirmed”. It is the fatal flaw. If you want to export lumber to the United States and US lumber producers want to stop you they appeal to US law, which is written by their representatives. The dispute is judged on that US law and if for some reason they lose they will change the law and bring the case forward again.

There was no WTO in 1988.  The FTA dispute-settling system, with its fatal flaw seemed an improvement over the weak GATT fifteen years ago. The WTO system, more expensive but much improved, with panels made up of members from neutral countries, came into being in 1995. It could be argued that that part of the FTA ended its useful life when the WTO dispute-settling system was put in place in 1995.

The third issue relates to the changes in the value of the Canadian dollar over the past fifteen years. About 86% of our exports go to the United States. In 1988 that figure was about 75%.  In 1988, the Canadian dollar was worth about 85 cents U.S. and in 1992 it rose to nearly 89 cents. Then the Canadian dollar declined to almost 63 cents U.S. You would expect our exports to rise. Interestingly, last year our exports to the U.S. actually declined from the year before. Certainly, almost every witness we heard from said that the value of the dollar was crucial to our exports and that the value of the dollar was responsible for our increase in exports to the U.S.

Over the same period, exports from the U.S. to Canada did not increase very much.

Just about everyone that we heard from agreed that the Canada - U.S. part of the NAFTA had run its course. It is in the past. The important question that Canadians should be asking their government is where do we go now. The Committee has provided guidance in this area, with substantial sections of our report devoted to what our long-term trade policy ought to be. Now is the time, however, for a national debate on this very important issue.

On behalf of the members of the Foreign Affairs Committee, I would like to express my appreciation to the Clerk of the Committee, Mr. François Michaud; Mr. Peter Berg, Mr. Michael Holden and Ms. Janna Jessee from the Research Branch of the Library of Parliament; Mr. Ian Parker, our communication consultant, as well as all the reporters, interpreters, translators, editors and other support staff for their important work on this study.

Peter Stollery
Chair


PART 1:  INTRODUCTION

A truck crosses the Canada-U.S. border every 2.5 seconds.  What would happen if that time interval were to double to 5 seconds?  For Canadians, this question is a highly pertinent one, as we have become highly vulnerable to any U.S. security-related actions that have the effect of blocking or restricting trade across that border.

It is unlikely that the current American preoccupation with national security will diminish.  In Washington, the Committee was informed that security is a long-term (perhaps twenty years) concern, that seemingly all issues are being viewed in the U.S. through a security prism, and that Canada cannot afford to turn a blind eye to American security needs.  In essence, U.S. security concerns have become our concerns, and we must take them seriously if we want to continue to take advantage of what is by far our most important bilateral trade relationship.

All in all, Canada sends an overwhelming 87% ($346.5 billion) of its merchandise exports south of the border, generating 35% of this country’s GDP, with the greater part of those exports (70%) transported by truck.  Our exports to the U.S. market exceed those of all 15 EU members and are three times those of Japan, giving Canada a full 19% share of the U.S. import market.  Trade between Canada and the U.S. is of critical importance, and continued access to the U.S. market is vital.  Moreover, a full 76% ($218.2 billion) of our merchandise imports are sourced in the U.S., and bilateral goods and services trade with the U.S. is approaching US$700 billion per year.  It is useful to note that although a 5,000 km border separates the two nations, by far the largest number of vehicle crossings occur on the Ontario-Michigan[1] and Ontario-New York[2] borders. The movement of goods across the Detroit/Windsor border alone exceeds total U.S. trade with Japan.  Over half a million individuals and 45,000 trucks cross the border there daily.  The British Columbia-Washington land crossing at Blaine, B.C., and the Quebec-New York crossing at Lacolle, Quebec, are two other important border points.

As Thomas d’Aquino (President and Chief Executive Officer, Canadian Council of Chief Executive Officers) informed the Committee, most of the world would envy our position as the top foreign supplier of the U.S. market.  However, it was also pointed out to us by Richard Harris (Professor, Economics Department, Simon Fraser University), quite correctly, that Canada faces a key problem:  not only have emerging countries such as China and India seen their access to the U.S. market improve relative to ours, thereby eroding our free-trade advantage in a large number of manufactured goods, but any increased land border costs will hamper our access to the U.S. market significantly.

According to Harris, roughly one half of Canada’s trade, typically intra-industry trade occurring in important industries such as automobile manufacturing, is sensitive to border problems.  The integrated nature of the North American economy, together with Canada’s enormous trade dependence on the U.S., has made us extremely vulnerable to border disruptions.  The U.S. decision to close the border to Canadian beef exports, owing to “mad cow” disease in Western Canada is the most recent example of this vulnerability.

Another terrorist attack on U.S. soil will always remain a possibility.  Moreover, U.S. authorities are contemplating three specific measures with potentially adverse impacts on trade:  the imposition of entry/exit controls at the border; the creation of onerous advance notification requirements for cargo manifests; and the registration of all foreign facilities that manufacture, process, pack or hold food for human or animal consumption, with advance notification to be provided to the U.S. Food and Drug Administration for foreign food shipments into the United States.[3]  Fortunately, some relief may be forthcoming regarding the proposed entry/exit requirement, as Canadian citizens may receive an exemption from the planned controls.

Donald Barry (Professor, International Relations, University of Calgary) told us that the most important challenge for Canadian decision-makers is how to respond to the post-September 11 (2001) security environment while ensuring the free flow of goods across the border.  Fortunately, quick action by Canadian officials led to the December 2001 “Smart Border Action Plan” to create a secure and trade-efficient border, and steps are being taken to flesh out the principles contained in the Plan.  However, there are still allegations in the U.S. media and by U.S. legislators that the Canada-U.S. border is porous and that Canada is not taking American security concerns seriously enough.

Trade measures taken by the U.S. have also proven to be problematic for Canada.  Examples of actions that are, in the view of many of the Committee’s witnesses, unjustified include the continued use of U.S. trade remedies (e.g., American trade action on softwood lumber, the Canadian Wheat Board and a range of other agricultural commodities, most recently blueberries); the imposition by the U.S. of non-tariff barriers to our products; the adoption of the U.S. Farm Bill and the deleterious effects it has on our farmers; and the American position on state trading enterprises and supply management at the World Trade Organization (WTO).

There is no doubt that the original Canada-U.S. Free Trade Agreement stimulated bilateral trade and investment and had a positive effect on the Canadian economy.  However, Canadian and American negotiators of the original Canada-U.S. Free Trade Agreement (FTA) did not secure exemption from each other’s trade remedies (e.g., anti-dumping and countervailing duties).  Nor were the negotiators successful in devising a made-in-North America set of definitions and rules on subsidies to limit the use of countervailing duties as well as competition legislation designed to replace anti-dumping duties.  The reality is that without subsidy rules and anti-dumping codes in place to govern trade in North America, Canada will continue to face U.S. trade remedy action in key industries, and U.S. consumers of Canadian products (e.g., softwood lumber, wheat) will continue to pay additional costs imposed on them by a trade remedy system that is strictly geared to meet the needs of U.S. producers.

What the FTA negotiators did achieve was a system of binational panel review to deal with cases in which the two sides are unable to resolve their trade differences through consultation.[4]  However, the system in place is not a true dispute resolution system, in which offending trade actions would be measured against some common codes of conduct.  Rather, the dispute settlement process simply checks to ensure that national trade remedy laws are applied properly.  It should come as no surprise, therefore, that the Committee heard conclusive evidence that bilateral disputes are increasingly being referred to the WTO for resolution (as opposed to NAFTA), since it offers a considerably more effective dispute settlement mechanism.  The Committee seeks means whereby these trade rules and dispute settlement systems can be improved, and is disappointed that made-in-North America solutions have not materialized.

Why are the above-mentioned actions being taken against Canada or, in the case of additional security measures, being contemplated?  On the security side, Canada does not pose the risk to U.S. homeland security that so many Americans perceive.  Most importantly, the perpetrators of the events of September 11, 2001, did not enter the U.S. through Canadian checkpoints.  In addition, an April 2003 analysis of ten years’ worth of data from the U.S. Immigration and Naturalization Services by the Association for Canadian Studies reveals that Canada does not deserve its poor reputation as a gateway for illegal entry to the United States.[5]  The study showed that Canada ranked 15th in terms of the point of origin of “illegal aliens” living in the U.S. in 2000, well below Mexico and Central and South American countries.[6]  As several witnesses reminded the Committee, the Mexico-U.S. land crossing is far more porous than the Canada-U.S. border in terms of the entry of unauthorized individuals.  A third point to make is that, as several witnesses indicated to the Committee, the number of unaccounted-for Canadian refugee claimants facing removal orders – a point of contention with certain Americans – is proportionally no higher than the number of such individuals in the United States.

The problem here is that there appears to be a mismatch between reality and Americans’ continuing impression that the Canadian border is porous and that Canada represents a threat to U.S. security.  In reality, cooperation between the two countries on border security is unprecedented. and Canada is fully committed to maintaining a safe and secure border.  The misguided perceptions that linger south of the border will need to be reversed.

Regarding trade, Canada is the United States’ largest trading partner and the leading merchandise export market for 39 of the 50 states (2002).  It is unclear to the Committee how many Americans are aware of this reality; more needs to be done to promote this fact.  In the aggregate, over $1.5 billion in merchandise trade now crosses the Canada-U.S. border every single day, of which American exports to Canada total US$165 billion, roughly one quarter of the U.S. international market.  We are anxious to preserve this mutually beneficial flow of goods and services, and wish to rid ourselves of U.S. trade disputes.

Also of great importance is the fact that Canada plays a key role as a supplier of oil, natural gas and hydroelectricity to the American market.  Indeed, Canada is the United States’ largest supplier of energy, exporting more crude and refined oil products to the U.S. than Saudi Arabia does, and shipping large quantities of hydroelectricity south of the border.[7]  Pierre Alvarez reminded us that Canada’s oil and gas reserves are so vast that they cannot be consumed in any realistic time frame.  In terms of national security, those exports contribute significantly to U.S. national energy needs.  The importance of obtaining one’s largest supply of imported energy from a reliable source next door cannot be overstated.  Once again, is this reality known south of the border?

Turning to the Canada-Mexico trade relationship, it is worth noting that total bilateral trade with Mexico is greater than our bilateral trade with any European country and is exceeded only by our trade with the U.S. and with each of our top two Asian trading partners (Japan and China).  In other words, it is our fourth largest trading relationship in the world.  Moreover, Canada is Mexico’s second largest export destination and trading partner, and our investment in Mexico has more than tripled since the start of NAFTA.

Even though the bilateral relationship remains by far the least developed side of the NAFTA triangle – trade with the U.S. is 37 times greater than trade with Mexico – it  has undergone tremendous growth.  Two-way trade rose from $5.6 billion in 1994 to $15.1 billion in 2002, and there is considerable potential for trade growth and increased bilateral economic cooperation.

Indeed, witnesses informed the Committee that Mexico was an emerging economic force within NAFTA and that the Canada-Mexico trade and investment relationship was generally an important and positive one.  Opportunities for expanding the relationship remain untapped.  Luis Ernesto Derbez (Mexico’s Secretary of Foreign Affairs) told the Committee that one of the key issues in Mexican foreign policy was how best to strengthen bilateral ties, given that the trade relationship could still be improved.  In addition, the two countries face similar challenges in dealing with the U.S., and can thus learn from each other’s experiences and develop joint positions in discussions with U.S. authorities.

To learn more about the state of the two bilateral relationships that Canada has in North America, the Committee undertook an extensive set of hearings in Ottawa, with focused panels on the key issues affecting our trade ties with these countries.  We travelled to Western Canada to gauge the views of individuals and groups directly affected by Canada-U.S. trade disputes and irritants, especially in the softwood lumber and agricultural products areas, and to obtain testimony on the general state of Canada-U.S. economic relations.  The Committee also went to Washington to obtain further information on key bilateral issues and to initiate an important dialogue with important decision-makers there. 

Regrettably, the onset of Congressional elections in Mexico kept us from continuing our southern visit to that country and obtaining the important Mexican perspective on the North American trade situation, although the Committee did participate in an important panel session on Canada-Mexico relations in Ottawa and received valuable testimony from Luis Ernesto Derbez, Mexico’s Secretary of Foreign Affairs.  We intend to supplement the testimony on Mexico that we have already received with information to be obtained during a planned fact-finding mission to that country in the fall, and subsequently issue a stand-alone report on the state of this vital bilateral relationship.  Mexico is becoming a vital economic partner of Canada, and the Committee would be remiss if it did not devote additional attention to the relationship.

The Committee’s report consists of three parts, beginning with this introduction (Part 1).  In Part 2 of the report, the various challenges to securing trade between Canada and the U.S. are described.  They include ensuring a free-flowing border; limiting the use of American trade remedy action; enhancing the dispute settlement mechanisms that we have available to us; assessing the need for stronger North American institutions to manage trade; resolving current trade disputes; examining ways to spend our official resources in the U.S. more wisely; and promoting Canada’s reliability as a secure trading partner.

The report also focuses on the longer-term issue of how close the relationship between Canada and the U.S. ought to be (Part 3).  In essence, is closer formal economic integration warranted, or should a strategy of aggressive trade diversification be entertained in concert with safeguarding existing bilateral trade?  Drawing on important testimony received by the Committee, the argument will be made that past steps to formally integrate the two economies have faced diminishing returns, and that the benefits of even closer formal integration do not appear to be substantial.  Since Canada’s vulnerability is now being exposed on both the security and trade side, a prudent policy choice is to lessen our dependence on the U.S. market and to diversify our trade.  That does not mean that we should neglect trade relations with our most important economic partner; it just implies that we should not continue to “put all our eggs in one basket.”

 

[1]       The two Ontario-Michigan border crossings are Windsor-Detroit and Sarnia-Port Huron.

[2]       The Fort Erie-Buffalo connection is by far the most active of the Ontario-New York border points, although the Lansdowne-Alexandria Bay crossing also attracts significant vehicular movement. 

[3]       There are also indications that the quantity of U.S. border inspections would increase should the Government of Canada proceed with the decriminalization of marijuana.

[4]       Softwood lumber (see Appendix 2) and steel are two examples of bilateral trade disputes that have been dealt with through the FTA/NAFTA dispute settlement mechanism.

[5]       Jack Jedwab, “Canadian Aliens:  The Numbers and Status of Our “Illegals” South of the Border,” Paper prepared for the Canadian-American Research Symposium on Immigration, Association for Canadian Studies, 26 April 2003.

[6]       Ibid., p. 1.

[7]        Indeed, Canada supplies the U.S. with 94% of its natural gas imports, close to 100% of its electricity imports, 35% of its uranium imports used to generate nuclear power, and 17% of its crude and refined oil imports.


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