UNCERTAIN
ACCESS:
THE CONSEQUENCES OF U.S. SECURITY AND
TRADE
ACTIONS FOR CANADIAN TRADE POLICY
(Volume 1)
PART 2:
SECURING CANADA-U.S TRADE
ENSURING THE FREE FLOW OF
GOODS AND SERVICES ACROSS THE BORDER
Although positive measures have been adopted to render the Canada-U.S.
border more secure and trade efficient, ensuring the free flow of goods and
services across the border remains the leading economic challenge facing
Canadians. The Committee believes
that the border situation requires constant monitoring as the U.S. become more
inward-looking and security-conscious, and as strengthened homeland security
measures are implemented. As
several witnesses reminded Committee members, the U.S. is clearly preoccupied
with national security issues, and Americans (albeit misguidedly) perceive
Canada as part of the problem and not part of the solution. However, their preoccupation with security has becomes our
problem.
Richard Harris, a former member of the Research Advisory Group on Trade
Policy (Economics) of the Macdonald Commission, which recommended free trade
with the U.S.,[1] provided the Committee
with a graphic description of the most dire effects of the problem, in what he
admittedly called his “pessimistic scenario.”
He observed that increases in border costs had to be regarded “as one
of the single most important national economic issues of this decade” in
that it could reverse the positive economic trends of the past fifteen years.
According to Harris, for the past 15 years Canada has been pursuing a
seamless border so as to have integrated North American manufacturing and
service sectors. If the Americans
implement additional security measures at the border, a substantial increase
in border costs will occur for Canadian producers. Such a cost increase will bring about several adjustments.
First, Harris argued that a 10% increase in border costs would lead to
a reduction in Canada-U.S. trade volumes of roughly 25% and a drop in Canadian
export prices of about 10%. The
long-run impact that such a loss of access to the U.S. market would have on
our living standards would be great: Canada
would have to search for other trading partners or trade with the U.S. at a
much higher cost.
Second, Harris noted that industrial restructuring will occur as the
existence of higher border costs causes a reorganization of the type of
time-sensitive delivery in intermediate goods and manufacturing (just-in-time
inventory activity) located near the border – the natural advantage that
Canadian and Mexican locations had will have been eliminated – and a
transformation of the domestic economy as Canada is pushed into final-goods
trade. Canada would then have to
resort to its original model of fully developing an indigenous manufacturing
sector. The United States could
always reorganize its production and supply its market domestically, he
argued.
Third, trade will naturally be diverted to other markets such as Asia and
Europe. While the Committee would
be supportive of such a development, the costs of a large-scale disruption of
the traditional north-south trading pattern could be quite onerous for
Canadians.
Hopefully, Harris’s “pessimistic scenario” will not materialize.
To avoid all of the potential effects described above, the Government
of Canada must constantly strive to convince U.S. decision-makers that it
deems their security challenges to be important. The
Committee hopes that in so doing, Canada would not only assist in the war
against terrorism but also be shielded from certain trade-restricting U.S.
security-related actions. The
Committee recommends:
|
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. |
A. The Effects Of
September 11
The terrorist attacks that occurred in the United States on September 11,
2001, had serious short-term effects on the Canadian economy.
Whereas prior to that date the facility of movement across the border
had been largely taken for granted and progress in improving the border had
been neglected, the situation had now changed.
With the U.S. government clearly intent on ensuring the security of its
citizens from potential terrorist threats, concerns were raised here in Canada
that our southern neighbour would erect what would amount to a fence around
its borders.
One of the first impacts to be felt was the sudden and lengthy backlog at
the Canada-U.S. border. Immediately
following the terrorist attacks, the U.S. closed its airports, seaports and
land crossings. When the border
with Canada reopened, individuals and goods were delayed while both countries
wrestled with security concerns and subjected commercial and passenger traffic
to thorough scrutiny. The
resulting inspections delayed trucks for 12-18 hours[2]
for days afterwards, and it was weeks before the situation returned to normal.
Certain companies heavily dependent on trade with the United States
ceased factory production temporarily, which affected employment.
In addition to hurting productivity and raising the cost of doing
business in both countries, border delays undermine exports and harm
employment. This is true not only
for manufacturers but also for the tourism and hospitality industries, which
are affected by reductions in border crossings by individuals concerned about
potential crossing delays. A high
percentage of Canada-U.S. trade is in intermediate products that are
transported on a “just-in-time” basis to manufacturing plants on both
sides of the border and assembled into larger products. These deliveries enable firms to maintain fewer inventories
as a cost-saving measure. The
downside is that under this system, border delays quickly result in plant
closures, financial losses for business and employee layoffs. David Adams (Vice-President, Policy, Canadian Vehicle
Manufacturers’ Association) suggested that a one-hour assembly line shutdown
would cost $1.5 million in forgone revenue, and the addition of an extra
hour’s revenue would range from US$400,000 to $800,000.
Canadian businesses were also concerned that decisions on future business
investment would be made on the basis of domestic firms’ continuing ability
to supply the American market. Without
reliable access to that prized market, foreign-based companies may be
reluctant to establish business operations in Canada.
Others, both domestic and foreign, may wish to relocate existing
facilities south of the border.
B. The 30-Point
Border
Action Plan And Its Implementation
Fortunately, concrete action was forthcoming after the events of
September 11. The Government of
Canada adopted certain measures to reduce border delays while, at the same
time, ensuring an adequate level of border security.
These actions included the employment of additional personnel at the
border, the establishment of dedicated traffic lanes for commercial traffic,
the opening of additional lanes for passenger vehicles, and the designation of
special processing lanes for trucks having already passed through expedited
pre-clearing.
In conjunction with its own independent action, the federal government
also pushed aggressively for a joint strategy (with the Americans) for the
border. In December 2001, the two
countries signed a declaration spelling out the creation of a “Smart Border
for the 21st Century.”[3]
An accompanying 30-point Action Plan, based on four pillars (the secure
flow of people, the secure flow of goods, secure infrastructure, and
coordination and information-sharing) was designed to lead to collaboration in
identifying and addressing security risks (i.e., keeping terrorists out) while
achieving an efficient and effective expediting of the flow of legitimate
people and goods across the shared border (see Appendix 4).
It leaned heavily on the principle of risk management, by concentrating
resources on individuals and products displaying higher degrees of risk.
A Canadian Border Task Force was established for its implementation.
To effectively carry out the Action Plan, both governments set aside
significant financial resources. On
this side of the border, the Canadian Federal Budget of December 10, 2001,
allocated $1.2 billion in future years to make the border more secure, open
and efficient. Roughly one half
of this funding has been directed towards the improvement of border
infrastructure (e.g., improvement of access roads, addition of new lanes,
purchase of electronic scanners for quicker inspections), with the other half
devoted to enhancing border security through enforcement,
intelligence-gathering for security purposes and equipment.
Most of the infrastructure money will be destined for Canada’s six
major border crossings, with $300 million ($150 million federal; $150 million
provincial) committed to new border infrastructure in the Windsor-Detroit
area.
While the U.S. government has also committed additional funding to
bolster border security, the funding required to upgrade technology and
infrastructure and to increase the quantity of border staff has been slow in
coming. The shortage of funding
from Washington to provide more U.S. customs officers at the northern border
has historically been blamed for creating traffic delays there.
Lewiston, N.Y., resident Jim Phillips (President and Chief Executive
Officer, The Canadian/American Border Trade Alliance) assured the Committee
that the staff shortage problem is currently being dealt with.
Witnesses addressing border issues were generally very supportive of the
progress made to date with respect to the Border Action Plan, even if
considerable implementation work remains to be done. The border is now both more secure and more
trade-facilitating than it was at the time of the terrorist attacks. Proof of this lies in the fact that when the U.S. recently
moved to the Code Orange security level[4]
and
brought in Operation Liberty Shield, there was little border disruption.
Phillips suggested that public security and economic security were
viewed in the U.S. as twin goals, both of them important.
In March 2002, the two countries began cooperating on a Port Security
Initiative to identify and screen high-risk marine cargo before it arrives in
either country. Canada has
customs officers stationed in Newark and Seattle-Tacoma for this purpose, and
the U.S. has staff in Vancouver, Montreal and Halifax to inspect containers to
be transhipped south of the border. The
two sides share intelligence information.
Fast lanes for low-risk, pre-cleared travellers (as opposed to shippers)
were opened in June 2002 at two British Columbia-Washington State border
crossings. This joint program,
known as NEXUS, uses proximity readers to obtain security-related information
from hand-held identification cards. The
program is now running at four border crossings and will be expanded to
include all other high-volume crossings by the end of 2003.
Plans are also underway to launch a new program incorporating fast lanes
for low-risk air travellers, referred to as NEXUS-Air.
Pilot projects in Ottawa and Montreal are to begin in 2003.
In September 2002, President George W. Bush and Prime Minister Jean Chrétien
formally announced the launch of a new joint program (Free and Secure Trade,
or FAST) to ensure a secure supply chain for low-risk goods (facilitate the
movement of commercial shipments across the border).
Among other things, this program establishes fast lanes for approved,
lower-risk shipments (i.e., those purchased by pre-authorized importers and
transported by pre-authorized drivers and carriers).
Subjecting truckers to a rapid electronic security check in these lanes
will, it is hoped, result in more efficient border processing.
The FAST program enables low-risk trucks and drivers to have their
manifests sent by transponders to the customs agent at the border before the
trucks arrive. FAST went into
operation in December 2002 at six border crossings (4 in Ontario, 1 in British
Columbia and 1 in Quebec).
Other signs of progress worth mentioning include strengthened cooperation
between the two countries to increase their ability to intercept high-risk
travellers before they leave for North America; the establishment of
Integrated Border Enforcement Teams to catch criminals and terrorists before
they cross the border; the coordination of intelligence-sharing, financial
surveillance, customs cooperation, immigration practice and infrastructure
protection; and the initialling of a Safe Third Country Agreement to deal with
the treatment of persons seeking refuge and asylum at our land borders.[5]
On the negative side of the ledger, progress on developing the
infrastructure required to establish a more effective border-crossing network
has been slow. David Adams
remarked that the 120% growth in two-way trade since the launch of NAFTA has
not been accompanied by any commensurate increase in border infrastructure.
While the 30-point Border Action Plan has generally received critical
acclaim, the Government of Canada has been criticized for not devoting enough
attention to injecting funds into the construction of border infrastructure.
For example, there are too few approaches to the border, with
frequently used border locations such as Windsor-Detroit still requiring
additional crossing points and/or expansion of existing ones to provide for
the separate lanes required to streamline traffic.
The three busiest border crossings all involve old bridges: the
Ambassador Bridge connecting Windsor and Detroit was constructed in 1929; the
Peace Bridge linking Fort Erie with Buffalo was erected in 1927; and the Blue
Water Bridge between Sarnia and Port Huron was built in 1938. Other bridges
span the St. Lawrence River between Canada and the State of New York.
Construction of new bridges at key border crossings must be part of any border
infrastructure solution.
Programs such as NEXUS and FAST will only be as good as the border
infrastructure that is established, for there is little point to having
special lanes for security-cleared, low-risk shippers and travellers if access
to the lane occurs only a few car lengths from the actual border.
These programs will require new investments in infrastructure before
they can be truly effective.
In addition, border security must be pushed outward by moving customs
inspection and paperwork away from the actual border. The pre-clearance system devised for airports could serve as
a model for a similar development at land border crossings.
According to the Canadian Chamber of Commerce, however, there has been
little evidence of progress in moving pre-clearance away from the land
borders.
Given the critical importance of the border to Canada’s economic
prosperity, the federal government should be investing a considerably greater
quantity of resources in infrastructure at high-volume border crossings.
It would also be helpful if quicker action could be taken on adopting a
pre-clearance system for the movement of goods across the border, under which
Canadian agents would work on U.S. soil and vice versa.
Witnesses suggested that progress in this area would require a
resolution of the guns issue (U.S. border guards carry weapons whereas
Canadian guards do not) and Charter of Rights and sovereignty issues.
The Committee recommends:
|
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. |
C.
New Border Restrictions
On The Horizon And How To Deal With Them
A brief reference to the new U.S. security-related actions looming on the
horizon has already been made. These
potential actions are fraught with problems for Canada, as Canadian producers
could be kept out of the U.S. supply chain unless these plans are modified.
David Bradley (Chief Executive Officer, Canadian Trucking Alliance)
stressed that additional border restrictions, apart from adversely affecting
transborder shipments, could undo the progress achieved under the Border
Action Plan. That said, a number
of individuals whom the Committee met in Washington, including U.S. Senator
Susan Collins (R-Maine) and William Lash III (Assistant Secretary of Commerce
for Market Access and Compliance, Department of Commerce), insisted that a key
objective in applying these security requirements was to ensure that the
movement of trade and people across the border would not be compromised.
The first of the security measures to note is the U.S. Patriot Act
(October 2001) requirement that the U.S. Attorney General precisely track the
movement of all individuals in and out of the country.
According to recent statements, U.S. Ambassador to Canada Paul Cellucci
has hinted that the U.S. Administration has agreed to exempt Canadian citizens
from the documentation requirement contained in this entry/exit control
system. However, foreign
nationals residing in Canada would have to register.
Regarding the imposition of exit controls, John Murphy (Vice-President,
U.S. Chamber of Commerce) observed that discussions are currently underway to
make the Canadian side of the border the U.S. exit point and thereby avoid the
introduction of an additional security checkpoint.
Second, the U.S. is planning to insist (by October 2003) on advance
notification of the contents of all commercial shipments into the country:
four hours for truck shipments, 12 for air shipments and 24 for rail
and marine shipments. These requirements are quite onerous for a number of key
Canadian industries; according to U.S. Representative Earl Pomeroy (D-North
Dakota), they are also of great concern to the Northern Border Caucus of the
U.S. House of Representatives, which he co-chairs.
The third action is the June 2002 passage of the U.S. Public Health
Security and Bioterrorism Preparedness and Response Act of 2002 to help
the U.S. prevent, prepare for and respond to bioterrorism and public health
emergencies. The draft
regulations accompanying the legislation would require the registration of
foreign facilities that manufacture, process, pack or hold food for animal or
human consumption, as well as the provision of advance notification to the FDA
of every shipment of food products into the U.S. market.[6]
Rory McAlpine (Acting Director General, International Trade Policy
Directorate, Agriculture and Agri-Food Canada) referred to this legislation as
his department’s most pressing concern from an agricultural trade
perspective. Industry
representatives also expressed concern about the complexity of the Act and its
regulations, and the impacts that it will cause.
In Washington, Sharon Bomer-Laurentsen (Deputy Assistant U.S. Trade
Representative for Agricultural Affairs) pointed out that considerable effort
is being expended within the USTR to ensure that trade in the products
affected by the regulations remains relatively unhindered.[7]
However, she cautioned the Committee that it is reasonable to expect
that firms will have to modify in some respects the way that business is
carried out.
Ronald Bulmer (President, Fisheries Council of Canada) informed Committee
members of the Canadian seafood industry’s concerns about proposed U.S.
regulations on plant registration requirements and prior notice, as well as
upcoming FDA employee empowerment rules at the border and required
record-keeping for products traversing the border. The Government of Canada is currently consulting with
affected industries to formulate an appropriate response. The ultimate goal is to minimize the regulations’ impact on
cross-border trade.
How should Canada deal with these and other security-related measures?
One option would be the development of “strategic bargains” that
would, it is hoped, exchange actions taken by Canada on security for U.S.
concessions on trade. As Kathleen
Macmillan (President, International Trade Policy Consultants) noted, these
actions would be designed to provide Americans with comfort about security
concerns. Both she and Peter
Clark (Partner, Grey, Clark, Shih and Associates, Ltd.) felt that the
provision of such comfort would be a positive development.
Donald Barry observed that since September 11, a number of individuals
and groups in Canada had released proposals linking security measures taken by
Canada with U.S. trade concessions. For
example, the November 2001 report of the Coalition for Secure and Trade
Efficient Borders advocated an integrated and comprehensive response to
security and border issues. In
the spring of 2002, Wendy Dobson, professor at University of Toronto, called
for a new bilateral arrangement to offset our support of U.S. objectives on
border security, immigration and defence with enhanced access through a
customs union/common market.
Thomas d’Aquino informed the Committee that in January 2003 the
Canadian Council of Chief Executives (CCCE) had unveiled the North American
Security and Prosperity Initiative (NASPI), a new bilateral partnership for
trade, immigration, energy, security and defence designed to ultimately
transform the internal border into a shared checkpoint.
This proposal does not involve a customs union, common market or
currency union since, according to d’Aquino, the likelihood of their
acceptance in Washington is not great. Altogether,
NASPI has five components:
·
The establishment of a protection zone around North America together with
elimination of regulatory, procedural and infrastructure barriers at our
internal border. Shared
approaches to commercial processing, infrastructure, intelligence and
policing, North American identity documents would be developed, and a common
institution to provide oversight would be established;
·
Regulatory cooperation, through mutual recognition or other forms of
harmonization, to remove regulatory redundancies on a sector-by-sector basis.
Included here would be trade remedies, restrictions on access and
ownership in major industries, and impediments to skilled labour mobility;
·
Achieving resource security (in the form of a resource security pact that
would end once and for all the resource pricing and subsidies issues) in oil,
natural gas, electricity, coal, uranium, primary metals, forest products and
agriculture;
·
A North American defence alliance involving greater investment in the
Canadian military and an enhanced Canadian homeland security capability; and
·
The establishment of four specialized joint commissions to deal with the
above four areas. These
commissions would have to be accountable to political authority on both sides
of the border. The Council is
examining models such as the International Joint Commission.
Witnesses appearing before the Committee were divided on the merits of
presenting broad security and trade initiatives to the Americans.
It goes without saying that D’Aquino is a strong proponent of this
approach. Richard Harris told the
Committee that the North American security problem should have been dealt with
as a North American perimeter issue instead of as a land-border issue, and now
that window of opportunity appears to have closed.
This view was supported by David Bradley, who observed that so much
investment had been made in the land border that no one was discussing
perimeter security any more.
Other witnesses felt that there was still time for Canada to respond more
vigorously to U.S. homeland security concerns and thus, it is hoped, to obtain
relief from U.S. actions. For
example, Fred McMahon (Director, Centre for Globalization Studies, Fraser
Institute) argued that Canada had risked its physical and economic security by
ignoring the development of a North American security perimeter.
McMahon was of the view that while the 30-point Border Action Plan was
a good start, it needed to be accelerated and it did not go far enough.
He thought that the key short-term issue for Canada did not involve
entering into a deeper trade agreement, but rather dealing with the
security-related threat to our current trade.
Measures to be taken include dealing with the terrorist threat better
by altering refugee immigration policies and by improving the tracking of
existing immigrants,[8]
and making the supply chain more secure.
Rolf Mirus (Director, Centre for Economic Research, School of Business,
University of Alberta) observed that our national interest dictates that we
take the initiative with the U.S. to secure and reshape our trade and security
relationship. The status quo is
not an option since border closures and slowdowns are large risks and foreign
investment may be deterred. The
issue-by-issue approach is perhaps not workable in this climate.
We should make a commitment to improve security at our borders – so
that the U.S. has confidence in us – and work together to improve security
for ships and aircraft. He envisions common procedures at a North American security
perimeter. Moreover, U.S.
confidence would increase if Canada had a stronger military.
On the negative side, Donald Barry did not hold much hope in the short
term for such a new security/trade partnership, since the Bush Administration,
fixated as it is on security concerns and domestic issues, does not have any
interest in this type of approach. He
also wondered, since Washington’s priority is security while ours is trade,
exactly how the security/trade bargain would be weighted, who would set the
terms and whether Congress would be interested? Also, deeper cooperation is likely to occur on a North
American basis, not a Canada-U.S. one. Instead,
Canada should continue to build up its security and defence capabilities,
since it makes sense for us to do so anyway, and such actions can help, albeit
in a modest way, to reverse U.S. security perceptions of Canada.
Most importantly, we need to continue the efforts under the Border
Action Plan.
In Washington, lobbyist Paul Frazer (Murphy Frazer Selfridge) stressed
the importance of performing the “grunt work” required at the border to
ease U.S. security concerns and to facilitate trade. He rejected the “strategic bargain” approach previously
described.
In his written submission to the Committee, Jim Stanford (Economist,
Canadian Auto Workers) was very critical of any proposals or measures that
would sacrifice Canada’s capacity to independently determine its
immigration, security and foreign policies in order to ensure that border
crossings operate smoothly. Unconvinced
that any such moves would “buy” Canada any special treatment from U.S.
authorities, he favoured continued emphasis on sensible, incremental measures
to enhance the efficiency of cross-border trade.
The Committee agrees. The
answer to the border problem does not lie in the development of “strategic
bargains” to remove border-related impediments to trade.
It is highly doubtful that the Bush Administration would be interested
and, as Kathleen Macmillan pointed out, it is not clear that the Americans
would ever be satisfied with sovereignty-restricting actions that we would
take to boost security. They may
continue to impose ever more stringent security-related measures at the
border. Moreover, we want Canada
to retain its decision-making ability in the important policy fields mentioned
by Stanford above.
Rather,
it would appear that the best solution is to continue to work within the
framework of the Border Action Plan to improve North American security.
Lobbying hard for an easing of the planned new border requirements also
makes sense, since their implementation in their current state would be
harmful to economic interests on both sides of the border.
The Committee recommends:
|
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. |
CURBING THE USE OF TRADE REMEDIES
Another key impediment to realizing secure access to the U.S. market is
the continued application of U.S. trade remedy (e.g., anti-dumping,
countervail) actions against Canadian producers. Even if the overwhelming majority of North American trade
runs smoothly and without adverse incident, other than border problems –
indeed, over 95% of Canadian exports to the U.S. appear to be trouble-free at
this time – there is no denying that from time to time certain trade
irritants and disputes seem to define the bilateral relationship. In a number of key industries (e.g., softwood lumber,
agricultural products), Canada faces frequent trade remedy disputes, with the
U.S. periodically attempting to alter its domestic trade remedy laws to
provide protection for its producers.
Moreover, the incidence of protectionist activity in the U.S. could
increase if the U.S. economy deteriorates.
Appearing before the Committee, Richard Harris expressed concern about
the current level of U.S. protectionism and what he described as an inward
focus in the United States as well as a possible abandonment of the
multilateral agenda by an administration that he claimed was quite willing to
accommodate protectionist interests.
The Committee shares Canadians’ frustrations with chronic trade battles
such as the eleven Canadian Wheat Board challenges and the numerous conflicts
over softwood lumber exports, and is concerned about the huge legal fees –
$800 million on the softwood case in Washington since 1986, US $200 million on
softwood at the WTO and $10 million on the current Wheat Board case – that
Canadian companies have to spend in their defence. We strongly believe that American producers, by constantly
initiating these trade actions in some sectors, are not living up to at least
the spirit of the existing free trade agreement.
A. The
FTA:
Objective Not Met
Trade disputes and irritants tend to arise from the imposition of
protectionist measures by countries attempting to insulate their own
industries from international competition.
The aim of the FTA negotiators was to prevent such protectionism and to
remove existing protectionist measures; these actions hardly seem consistent
with free trade. Ideally, there
would not currently be any such measures with respect to trade between Canada,
Mexico and the United States.
Indeed, the main reason Canada entered the FTA negotiations in the first
place was, as John Helliwell (Professor, Department of Economics, University
of British Columbia) reminded the Committee, to obtain easier access to the
U.S. market and to be exposed to less danger from U.S. trade remedy action.
Before the FTA came into effect, private and government interests in
the U.S. were increasing their efforts to impede Canadian imports through the
use of domestic trade remedy legislation.
In the decade before the FTA’s implementation, for example, the
United States had initiated some 30 investigations against Canada in the trade
field; they involved major exports such as softwood lumber, pork, potash, and
fish products. Also worth
mentioning is the fact that at the time of the FTA negotiations there was no
effective dispute settlement mechanism at the global level such as the current
WTO mechanism.
The main strategy used by Canada to achieve secure market access was to
attempt to obtain an exemption from the application of anti-dumping and
countervailing duties. Anti-dumping
actions are generally taken when it can be shown that a foreign competitor
sold products into a given market (e.g., the American market) at prices that
are below cost or below comparable prices in the home market (e.g., the
Canadian market). Alternatively,
countervailing duties are imposed by governments on exporting countries to
offset perceived production subsidies in those countries.
American FTA negotiators flatly refused the AD/CVD exemption proposal
because they believed Canadian products were being subsidized and that U.S.
producers required the protection of domestic AD/CVD law.
In response, the Canadian negotiators suggested that North American
competition legislation be introduced as a replacement for anti-dumping
duties, and that a common definition and code on subsidies be negotiated to
lower substantially the use of countervailing duties.
These proposals were unsuccessful, however, as the Americans were
unwilling to go beyond the GATT rules at that time and insisted on maintaining
their trade remedy laws. Ultimately, they showed no interest in having U.S. domestic
law supplanted by a new body of international law.
To
break the resulting deadlock in negotiations, the Americans put forward an
interim solution whereby the existing judicial review of AD/CVDs by U.S.
courts would be replaced with reviews by binational panels comprising trade
specialists from both countries. The
resulting Article 1906 of the FTA stipulated that the binational panel system
would be a temporary measure (five to seven years) pending the development of
a new, common AD/CVD regime. Furthermore,
Article 1907 called for the parties to set up a working group to develop more
effective rules and disciplines concerning the use of government subsidies and
the application of unfair transborder pricing practices.
None of these alternative approaches saw the light of day, as the
existing binational panel system became a permanent feature of NAFTA (Chapter
19). Moreover, the working group
identified in the FTA’s Article 1907 was dropped – it was agreed that
rules on dumping and subsidies would be dealt with in the Uruguay Round of
GATT negotiations[9]
– and instead the parties agreed to regular, general consultations on a new
AD/CVD regime. In some quarters,
however, continuation of the status quo was seen as a significant Canadian
victory in view of existing concerns about sovereignty in the U.S., which had
taken the form of considerable Congressional pressure to downgrade or
completely dismantle the Chapter 19 process.[10]
Ultimately, Canada (and Mexico) did not receive the exemptions from U.S.
AD and CVD laws that they were seeking, as shown by the punishing duties on
Canadian exports of softwood lumber. Nor
did they meet their objectives of crafting a set of uniform trade laws.
As a number of witnesses pointed out, free trade with the U.S. has not
provided Canadians with the assured access to the American market that they
were seeking. Both countries can use their countervailing and anti-dumping
laws as they see fit, and can change their trade remedy laws whenever
appropriate.[11]
Instead, the parties to the FTA and NAFTA had to settle for access to
dispute resolution mechanisms that assess the proper application of NAFTA
member country trade legislation. Thus,
Canada’s only recourse is to ensure that the U.S. trade remedy law is
applied correctly. These dispute
resolution mechanisms are reviewed in the next chapter.
B. Exploring Made-In-North
America Solutions
One
has to wonder whether the U.S. would ever curtail its right to use such trade
remedies as countervailing and anti-dumping duties on internal NAFTA trade.
Given the central role that these tools play in U.S. trade policy, and
how hard the Americans have fought to retain these tools in trade talks, it
seems difficult to envision the U.S. entirely giving up its right to impose
countervailing tariffs and duties. The
Honourable Roy MacLaren (former Minister of International Trade) observed that
there is currently no incentive for the U.S. to forgo its trade remedy
practices. Lawrence Herman
(counsel, Cassels, Brock & Blackwell LLP) remarked that the Americans saw
their vigorous trade remedy process, necessary to deal with what they view as
unfair foreign trade practices, as “an article of faith.”
Not all are of this view, however, as one observer of North American
integration argued that the Americans “might be receptive within an overall
goal of North American economic security.”[12]
Thomas d’Aquino noted that there was no place for trade remedies in
the bilateral relationship. He
thought that the best way to capture Americans’ attention on trade remedies
would be to come up with a “strategic bargain” that would result in the
removal of trade remedies, a goal not achieved fifteen years ago.
However, MacLaren dismissed this option outright, noting that the U.S.
Congress had never shown any willingness to remove the trade remedy arsenal at
its disposal. His desired
alternative was for Canada to continue to concentrate on the current
multilateral negotiations.
For his part, the Honourable Pierre Pettigrew (Minister of International
Trade) told the Committee that there needed to be a firm commitment to
bringing trade remedy practice in line with the growing integration of the
shared North American economic space. He
cited the steel industry as a case in which the use of trade remedies was
counterproductive.
The Committee believes, however, that little can be done on an
economy-wide basis within the NAFTA to correct this problem.
Establishing a common North American anti-dumping and countervailing
duty regime is a non-starter in the short term.
Moreover, the “strategic bargain” approach referred to above holds
little promise, as the U.S. is not likely to dispense with its domestic trade
remedy laws. The proposal of the
Canadian Council of Chief Executives to exchange Canadian action for
trade-remedy relief and negotiate a comprehensive resource security pact with
the Americans, designed to settle the thorny issues of resource pricing and
subsidies once and for all, is unlikely to be feasible and would involve too
great a loss of Canadian sovereignty. As
John Helliwell told the Committee in Vancouver, it is dangerous to move
further along the integration path, simply because Canada did not obtain what
it was seeking in previous attempts to integrate.
One option worth exploring, as several witnesses suggested, is the use of
bilateral sectoral tariff agreements (e.g., in the steel sector) to
“disarm” the use of trade remedies within the economic sectors under
consideration. Lawrence Herman
informed the Committee that the three NAFTA governments had agreed to open
preliminary discussions on a possible set of trade rules to govern the steel
industry. He felt that this
development should be encouraged, since it could lead to the removal of trade
irritants and private law remedies in that industry.
In meetings in early February with U.S. Secretary of Commerce Don
Evans, Minister Pettigrew broached the possibility of limiting each
country’s ability to impose anti-dumping or countervailing duties in trade
disputes within such a highly integrated industry such as steel.
Kathleen Macmillan saw potential in applying a possible steel agreement
to other sectors of the economy, most notably agriculture.
The Committee, swayed by all of these arguments, recommends:
|
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. |
C. Seeking
Progress At The WTO
Canada should also aggressively seek progress on the trade remedy file at
the WTO. As Jon Johnson (Partner,
Goodmans LLP) told the Committee, the advantage that the WTO has is that it
has a definition of “subsidy” and stringent rules regarding the conduct of
anti-dumping and countervailing actions.
Therefore, he felt that the WTO represented our best chance of dealing
with U.S. trade remedy laws.
According to Gilbert Gagné (Professor, Department of Political Studies,
Bishop’s University), the answer lies in (a) clarifying existing WTO
provisions on the definitions of subsidy and dumping, and (b) tightening the
WTO conditions under which dumping and countervail action can be taken.
He argued that U.S. trade remedy investigations are often launched in
the absence of strong evidence of subsidization, dumping or injury, resulting
in forced “compromises” to avoid costly litigation and maintain trade
access. Canada should continue to
insist that the WTO provisions require sufficient and stronger evidence for
the launching of trade remedy investigations.
In Washington, William Lash III (Assistant Secretary of Commerce for
Market Access and Compliance, Department of Commerce) also urged Canada to
obtain subsidies reform at the WTO. He
argued that continually retrying the same cases, as is being done in softwood
lumber, is counterproductive and that reforming the WTO could “get to the
heart of the issue.”
The Committee heard additional testimony that anti-dumping abuses have
become an increasingly serious problem for the international trading system,
as more and more countries have implemented their own anti-dumping
legislation. The problem is that
not all of these countries (largely developing countries) have interpreted WTO
rules (i.e., the 1995 WTO Anti-Dumping Agreement) in the same manner, and
disputes have occurred. Bringing
greater clarity and openness to anti-dumping rules is now seen as an urgent
priority.
These issues are on the agenda of the current round of negotiations at
the WTO and are being actively explored at the FTAA talks.
In November 2001, WTO Members agreed to initiate negotiations aimed at
clarifying and improving disciplines under the Anti-Dumping Agreement and the
Agreement on Subsidies and Countervailing Measures, while preserving the basic
concepts, principles and effectiveness of these instruments.
Claude Carrière (Director General, Trade Policy Bureau, Department of
Foreign Affairs and International Trade) informed the Committee that the
WTO’s Rules Negotiation Group was considering ways to reduce abuse in the
application of trade remedy laws and to impose stricter requirements before
anti-dumping and countervailing cases can be launched.
According to Carrière, Canada’s objective is to constrain the
abusive use of anti-dumping and countervailing measures against us by the U.S.
and other countries. To that end,
it is seeking to raise the current 25% threshold for industry participation in
a petition for AD or CVD action.
Some witnesses pointed to the uncertain prospects for success of the WTO
Doha Round, in which the above changes would have to be made.
Rolf Mirus and Donald Barry noted that the prospects for the Doha Round
were not good at this point since substantive progress on agricultural issues
had not yet occurred. Achievement of such progress would require European
concessions on agriculture; as Barry mentioned, those concessions might be
obtained as the process of EU expansion causes the Europeans to come to grips
with their own agricultural support policies.
Minister Pettigrew cautioned the Committee not to have too high
expectations regarding WTO progress on the question of trade remedies.
Notwithstanding this negotiating uncertainty, the Committee is acutely
aware of the need to overhaul existing WTO trade remedy provisions to curtail
the incidence of protectionist abuse. Along
with agricultural reform, curbing the use of trade remedies must be viewed as
the most critical objective for Canada in the current WTO negotiating Round.
The Committee recommends:
|
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. |
IMPROVING DISPUTE SETTLEMENT MECHANISMS
Since it has proven impossible thus far to eliminate the threat of U.S.
protectionism, it is important for a country as widely exposed to the large
American market as Canada to have access to a comprehensive and effective
dispute settlement system through which the most problematic and damaging
cases of unilateral protectionism can be dealt with directly, fairly and
quickly. Indeed, Canada entered
the FTA negotiations intending to emerge with a mandatory, rules-based dispute
settlement system that would govern the implementation of the agreement and
serve as a secure route for Canada to challenge U.S. protectionist actions
without having to endure the influence of powerful U.S. interests in the
process.
Regrettably, the dispute settlement system that Canada obtained through
the North American free trade agreements is only partly rules-based.
Some of the rules leave room for political intervention, and as a
result, Canada (and now Mexico under NAFTA) is still susceptible to the
adverse effects of U.S. political decisions and power.
While the Chapter 19 binational panel system (discussed below) is in many
ways a rules-based dispute settlement system, it is based on a hybrid set of
substantive law: the domestic
anti-dumping and countervail law of the three NAFTA member countries.
Although the rules tend to work most of the time, highly politicized
disputes involving major economic interests (e.g., the softwood lumber
dispute) continue to demonstrate the shortcomings of the Chapter 19 system and
its inevitable susceptibility to political pressures.
Key dispute settlement provisions under NAFTA include the Chapter 19
state-to-state binational panel process for the review of anti-dumping and
countervailing measures; the Chapter 20 state-to-state dispute settlement
procedures covering all NAFTA issues other than those contained in Chapters 19
and 11; and the Chapter 11 investor-state mechanism that enables foreign
investors to bring a claim against the country in which it has invested.
All three of these dispute resolution mechanisms will be described in
greater detail below.
Where rights and obligations under the WTO are at issue, NAFTA parties
also have the option of employing WTO dispute settlement procedures as an
alternative to those found in NAFTA. As
was already mentioned, the WTO has now become “the forum of choice” for
the settlement of disputes. For
example, His Excellency Paul Cellucci (U.S. Ambassador to Canada) noted that
the U.S. tends to resolve its trade issues through multilateral treaties
contained within the WTO-led international trading framework and that these
treaties trump U.S. trade laws.
The Committee has already registered its unhappiness with the current
NAFTA dispute settlement system. Increasingly,
disputes that are North American in nature are being resolved in Switzerland. Surely
there are benefits to both Canada and the U.S. in improving the existing
dispute resolution arrangement and making it more timely and effective.
A. NAFTA
Chapter 19
Dispute Resolution
Prior to the FTA, AD/CVD disputes originating in the United States were
decided by U.S. agencies, and the only internal avenue of appeal was resort to
judicial review of governmental decisions by domestic courts.
The FTA and subsequently NAFTA’s Chapter 19 provided a system of
binational panel review as an alternative to judicial review for decisions
made on anti-dumping and countervailing duty matters.
These agreements set out procedures for the establishment of panels,
time limits for the panel to come to a resolution and certain consequences in
case of non-compliance with panel decisions.
Donald McRae (Professor, Business and Trade Law, University of Ottawa)
described the Chapter 19 panel review process as an important improvement over
what was in place prior to the FTA.
According to both Jon Johnson and Michael Kergin (Canada’s Ambassador
to the United States), the FTA dispute resolution system was also a
substantial step forward compared with the General Agreement on Tariffs and
Trade. There was no dispute
settlement procedure in the GATT, and the losing party could block adoption of
reports. In contrast, that could
not happen under the FTA.
A
fundamental feature of the Chapter 19 dispute settlement system is that
binational panels do not create or apply new law, nor do they apply
substantive legal rules on AD/CVD;[13]
they simply review the application of the domestic law of the importing
country to ensure that it was correctly applied.
Thus, in the case of U.S. action against Canadian policy, a dispute
settlement panel would review the U.S. government agencies’ actions only to
ensure their consistency with U.S. domestic trade law.
NAFTA’s Chapter 19 binational panel review process is, therefore,
quite limited in that it only ensures that each country’s domestic trade law
is properly applied rather than setting standards of its own.
This binational panel system has generated substantial commentary and has
been a key element of several major disputes, including the softwood lumber
and steel disputes. Over eighty
percent of the disputes under NAFTA have related to AD and CVD and have thus
come under Chapter 19.
How successful has the binational panel review process under Chapter 19
been? According to Gilbert Gagné,
who has written extensively on these matters, even though benefits have
accrued from the Chapter 19 provisions, “fundamental problems have remained,
which all have proved highly detrimental to Canadian trade interests.
These relate to the limited nature of FTA/NAFTA provisions, the
problems and delays encountered in the panel review process, the maintenance
of the most troublesome aspects of US trade laws and practices, including the
ability to modify these in a restrictive way, the persistence of harassment
tactics leading to the need for “compromises” to avoid further litigation,
and, finally, US attitude seeking national interest with a disregard for
international trade rules.”[14]
Lawrence Herman argued that the key deficiency with the NAFTA dispute
settlement system is that the panels were ad hoc in nature and that there was
no true permanent NAFTA arbitration or panel institution.
He suggested that a permanent NAFTA court be established that would not
alter the jurisdiction of the panels, but would provide for a permanent set of
judges. Such a court could deal
with all of the cases under Chapters 19, 20 and 11.
However, the Committee is of the view that the establishment of a
permanent North American Court on Trade and Investment to resolve disputes is
a second-best alternative to progress at the WTO level (see below).
Sharon Bomer-Laurentsen (Deputy Assistant U.S. Trade Representative for
Agricultural Affairs) agreed with the need to invigorate the Chapter 19
process. Dispute resolution
panels needed to come to decisions in a more timely and effective fashion.
Other
reviews of the dispute settlement system have been more favourable, especially
when it comes to lower-profile cases. Indeed,
a recent study makes the case that Chapter 19 “has been quite effective in
curbing what Canadians believe to be the overzealous enforcement of AD and CVD
laws by U.S. authorities.”[15]
The study’s author, Patrick Macrory, notes that “only six Canadian
products other than softwood lumber are currently subject to AD and/or CVD
orders, and in most cases the volume of trade involved is small and the
current duty level low.”[16]
He also emphasizes that following the implementation of NAFTA,
“imports from Canada and Mexico have been subject to far fewer
investigations and orders than imports from other parts of the world, perhaps
as a result of the increased integration of their economies with that of the
United States.”[17]
A previous study also concluded that the binational panel process for
reviewing appeals of US and Canadian trade remedy cases had worked
“reasonably well” and that final decisions had been issued much faster
than those of the US Court of International Trade.[18]
Fred McMahon told the Committee much the same story:
the free trade agreements that Canada has entered into have lowered the
incidence of trade irritation; Europe and Japan have been the targets of more
U.S. trade actions than Canada has; and Canada has done well at trade panels
under the FTA and NAFTA. Jon
Johnson observed that the binational panel process had been quite useful, as
panels had been objective in their work.
Peter Clark pointed out that Canada had fared rather well in the early
days of Chapter 19 dispute settlement, but that there was little in the way of
current activity. Claude Carrière
also thought that the Canadian record in Chapter 19 cases was positive.
Even with its flaws, a number of witnesses commented on the importance of
retaining, at the minimum, the Chapter 19 process for NAFTA trade within the
ongoing FTAA negotiations. For
example, Gagné noted that although the Americans might resist such a
development in view of the enforceable nature of NAFTA panel decisions,
including a mechanism similar to the one in Chapter 19 should be considered a
minimum requirement for Canada. The
Committee recommends:
|
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. |
B. Chapter 20 Dispute
Settlement
Chapter 20 is the dispute resolution system used for the general
interpretation of NAFTA. Regrettably,
NAFTA Chapter 20 procedures do not represent an effective dispute settlement
mechanism and have been used only three times since NAFTA’s inception.
A number of witnesses saw Chapter 20 as only useful in rare cases when
disputes could not be taken to the WTO because they involve NAFTA-only rights
and obligations.
Improvements to be considered include speeding up panel selection;
providing the NAFTA process with greater institutional support; implementing
an effective appeal process; and making Chapter 20 decisions binding.
However, as Donald McRae pointed out, implementing changes to the
Chapter 20 process would not likely make it more attractive to the parties.
In particular, Chapter 20 suffers from a major flaw in that its dispute
settlement mechanisms are not binding on the parties to the dispute.
Dispute settlement mechanisms can play a major role in preventing new
disputes, but for this to happen, the mechanisms must be seen as enforceable.
When a dispute arises, the first step in the process involves
consultations between the parties. If
the consultations do not resolve the dispute, a meeting of the NAFTA
Commission, a political body composed of ministerial-level representatives
from each party or their delegates, is held.
It is at this point that diplomacy and power-based negotiations can
derail the rules-based focus of the system.
If the NAFTA Commission is unable to resolve the dispute, the parties
can request that an arbitral panel be established. The panel, composed of independent trade specialists from
each country, hears from each party and then releases a report with
recommendations that are not automatically binding on the parties. By the very nature of the process, the final decision on the
dispute remains in the hands of the parties and is susceptible to diplomacy
and power politics. There is no
appellate body.
It
is important to point out that these shortcomings do not exist in the dispute
settlement procedures under the WTO. There,
panellists have to be citizens of third parties and panel selection is
improved; there is no equivalent to the politically oriented NAFTA Commission
and the WTO has institutional support; the appeal process is better than
NAFTA’s ad hoc arbitration; the dispute settlement system is more
transparent; and reports by review panels are binding.
It is difficult to characterize the Chapter 20 dispute resolution
system as effective since it does not possess the capacity to actually settle
disputes.
C. Achieving Progress at
the WTO
The WTO Dispute Settlement Understanding (DSU) is a multilateral,
rules-based process that is, according to Lawrence Herman, the best we have
had in international law in centuries. It
is generally viewed as a fair and effective process for settling disputes
between WTO Members. The DSU
provides for consultations as a first step towards resolution of a dispute; if
the dispute cannot be resolved, then a panel is formed to rule on whether a
WTO Member has violated its WTO obligations.
The decision of these panels can be appealed to the standing WTO
Appellate Body.
A product of the Uruguay Round of trade negotiations in the mid-1990s,
the WTO system of resolving trade disputes contains a number of features that
make it superior to the NAFTA dispute settlement process.
Witnesses made the point that the WTO provided a much more level
playing field for the settling of disputes than any bilateral or regional
trade agreement, and that it currently represents Canada’s best hope for
dealing with the application of U.S. trade remedy laws.
Already, there is evidence that NAFTA member countries are increasingly
resorting to WTO procedures rather than the Chapter 19 process.
Donald McRae remarked that the use of Chapter 19 was less frequent
under NAFTA than it had been under the FTA.
Jon Johnson provided the Committee with valuable information on the key
features of the WTO system. Of
primary importance is the fact that the WTO dispute settlement process tests
countries’ trade remedy actions against its own rules on the use of dumping
and countervail actions. The WTO
agreement on anti-dumping contains an improved anti-dumping code, and there is
a definition of “subsidy” within the WTO Agreement on Subsidies and
Countervailing Measures. Moreover,
the losing party cannot block the adoption of a report, and panel selection
proceeds expeditiously. Unlike
the NAFTA panels, the ones constituted at the WTO have a secretariat to draw
on and obtain considerable institutional support.
A standing appellate body is also in place; according to Johnson, this
has brought much consistency to WTO law.
It stands to reason, then, that the best way of making progress in the
area of dispute settlement lies in improving the WTO dispute settlement
system. Johnson informed the
Committee that there is no real dispute with the fundamental structure of the
system, in that most of the suggestions for reform deal with the technical
operation of the dispute settlement system.
However, one key issue does exist: non-compliance
with panel or Appellate Body decisions at the end of the WTO process.
When a WTO Member is found to be in violation of its WTO obligations,
it is given a “reasonable period of time” to bring itself into conformity.
If no conformity is achieved, the Member may face retaliatory action
from the complaining party or, alternatively, the offending Member may wish to
provide compensation (e.g., trade liberalization in another sector or
industry) as a temporary response pending compliance.
Claude Carrière made the point that retaliation was a rather blunt
instrument and one whose effectiveness has not been demonstrated.
The Government of Canada has not yet come up with a practical
alternative, he noted.
Richard Ouellet (Assistant Professor, Faculty of Law, Laval University)
and Armand De Mestral (Professor, Faculty of Law, McGill University) both
argued that the implementation of dispute-settlement decisions is becoming
more and more problematic. A
number of stages are now required before the parties to a dispute can agree on
implementation. Referring to the
Canada-U.S. dispute over periodicals, Gilbert Gagné noted that the reports of
the WTO panels and the appellate body give very little indication as to the
amount of leeway a country has to pursue the goals of invalidated programs.
In such cases, political pressure has become more important than first
anticipated. Both Ouellet and De
Mestral[19]
thought it would be far better to have a quasi-judicial institution determine
how to settle disputes than to have political and economic pressure exerted in
the situation in question.
Canada should be at the forefront of changing existing dispute settlement
mechanisms (both WTO and NAFTA Chapter 19) to ensure smoother resolution of
disputes with a minimum amount of political friction.
Indeed, Canada has submitted proposals in this area.
Other shortcomings of the WTO dispute settlement mechanism indicated to
the Committee include the need for greater transparency, the need for tighter
timelines for expedited resolution of disputes, the need for movement to a
fixed semi-permanent roster of panellists, resolution of the sequencing issue
in implementing decisions, the need to reform the third party process, and the
need to abolish the interim review stage.
However, the Committee heard evidence that implementing these changes
was not critical for the success of the Doha Round and that, at any rate,
progress in changing the dispute settlement regime was not likely.
In March 2003, Claude Carrière told the Committee that there was
absolutely no chance that the review of the WTO dispute settlement system
would be completed by the May 2003 deadline.
The principal objective of NAFTA’s controversial Chapter 11 is to
facilitate the flow of investment among its member countries through the
creation of rules designed to shelter foreign investors from discriminatory
measures (i.e., measures that discriminate between domestic and foreign
investors) and market-distorting measures taken by host country governments.
The chapter is not original in its design, but rather draws heavily
from the provisions of existing bilateral investment treaties such as the
foreign investment protection agreements (FIPA) between Canada and a number of
other countries. With respect to
these bilateral agreements, participating foreign investors can already submit
claims to the International Centre for Settlement of Investment Disputes
(ICSID). The Chapter 11 provisions, however, go further than the
investment provisions in the original FTA.
The most controversial component of Chapter 11 is the investor-state
dispute settlement process, which enables private foreign investors to bring
an arbitral claim against one of the NAFTA member governments if they are of
the view that a host government has breached its investment obligations under
Chapter 11. Article 1110 of
Chapter 11 states that a NAFTA government may not take measures “tantamount
to nationalization or expropriation” of an investment, unless it does so for
a public purpose, on a non-discriminatory basis, in accordance with due
process of law, and only if it pays compensation to the foreign investor.
If a foreign investor is of the view that government decisions have
damaged the firm’s business interests (i.e., profits or expected profits) in
an unfair and discriminatory manner, they can access a process of legal review
and possible compensation.
The arbitral process is governed by international commercial arbitration
rules. The investor and the
government each choose one arbitrator and the third is selected together or by
a neutral third party. The
results of the arbitration are binding on each party, and there are limited
provisions for review or appeal of such awards.
NAFTA tribunals are not permitted to recommend that a government change
its offending laws, regulations or policies.
The investor-state provisions under Chapter 11 were originally drafted to
protect corporations and investors from arbitrary regulation and back-door
trade protectionism, particularly as they would affect their investments in
Mexico. As such, these provisions
were essentially designed to preclude foreign investors from being made to
comply with more stringent rules than apply to domestic companies.
Investment promotion and protection remain their overarching purpose.
Set against this need to promote and protect investment and the rights of
private investors, however, is the expressed need for public control over
governmental policy-making. In
this context, some have argued that the investor-state provisions have imposed
a “regulatory chill” on government. In
other words, they have restricted the ability to regulate.
Is this a valid criticism?
NAFTA critics maintain that what started out as a defence mechanism for
investors against foreign governments seems to have become an aggressive tool
in the hands of certain corporations to challenge the right of government to
introduce regulations. They argue
that corporations are now dictating public policy.
Dennis Deveau (Government Liaison, Legislative Department, United
Steelworkers of America) questioned whether foreign owners of capital should
enjoy greater rights than corresponding Canadian interests.
Steven Shrybman (Lawyer, Sack Goldblatt Mitchell) told the Committee
that providing foreign firms with the right to take Canada to international
tribunals that can award damages against us is an extraordinary development in
international law. Investor-state disputes should be dealt with in domestic
(i.e., Canadian) courts, not in international tribunals. He also expressed concern about access to Chapter 11
proceedings and the lack of transparency.
On the flip side of the argument, it bears noting that the first eight
years under the NAFTA produced a mere 23 Chapter 11 complaints overall (and
only five cases decided), at a time when investment in North America was
growing rapidly. With relatively
infrequent exceptions, North American governments have generally been
successful in adopting regulations genuinely designed to protect health and
the environment and not aimed at disallowing the business operations of an
individual foreign company. There
is no doubt that Chapter 11 makes it more difficult for governments to freely
pass protectionist regulations intended to destroy legitimate businesses.
However, it has not stopped governments from doing what they want –
with the proviso that they have to compensate the business interest in
question if a panel decides that the action they have taken was not carried
out in a non-discriminating manner. As
Donald McRae argued before the Committee, it is not unreasonable to require a
government not to act arbitrarily or discriminatorily.
Whatever one’s views on the merits of including investor-state
provisions within the NAFTA, it is clear that the Chapter 11 investor-state
dispute resolution mechanism could be improved by tightening the scope of the
existing expropriation provision (this has been a focus of the federal
government for some time now and was also recommended by Robert Friesen,
President, Canadian Federation of Agriculture); by making the dispute
settlement system more transparent; and, as McRae suggested, by providing the
Chapter 11 process with an institutional base together with the incorporation
of a WTO-based appellate process that would correct tribunal errors and
provide the process with consistency and predictability.
On the issue of transparency, the actual arbitration proceedings are
closed to the public unless the parties agree that they be open.
However, each NAFTA country has now agreed to make publicly available
all documents submitted to or issued by a Chapter 11 tribunal, with a number
of limited exceptions. McRae told
the Committee that to improve transparency of Chapter 11 cases even more, the
NAFTA parties just had to agree that the proceedings would be open to the
public in the same way that claims launched by domestic investors are.
He noted, however, that whereas Canada and the U.S. appear to be in
favour of this suggestion, the Mexicans are less inclined to make this change.
ARE NEW INSTITUTIONS REQUIRED TO MANAGE NORTH
AMERICAN TRADE?
Within NAFTA, there is no evidence of common institutions governing
economic relations, apart from the labour and environment commissions that
have been created. The trade
agreement itself has no associated supranational institutions. NAFTA was supposed to evolve but never did. There is no real
NAFTA institution to effect changes, and the U.S. is reluctant to commit to
supranational institutions. Are
improved, or even new, institutions required or desirable to manage the
existing level of trade and investment in North America?
Alternatively, is the existing system of fixed rules combined with a
dispute settlement system within the NAFTA framework adequate?
For his part, Minister Pettigrew has indicated his preference for making
changes in the bilateral relationship (e.g., making progress on border issues)
using the existing institutional framework.
Two of his senior officials, Claude Carrière and Marc Lortie
(Assistant Deputy Minister (Americas), Department of Foreign Affairs and
International Trade), felt that there was a noticeable absence of interest,
especially within the U.S., in creating common institutions governing trade.
Lortie made the point that of the three NAFTA parties, Mexico was the
most active and innovative in proposing institutional change.
Steven Shrybman noted that as far as supranational institutions were
concerned, the European situation is different since balance exists there
(e.g., UK, France, Germany are somewhat similar in economic size), whereas in
North America, a lopsided situation exists because the U.S. is so powerful.
On the more positive side, Armand De Mestral argued that while
supranational institutions would never be acceptable, existing institutions
such as the NAFTA Commission could be strengthened. Other witnesses also urged the federal government to explore
the possibility of strengthening bilateral institutions or creating new ones
to effectively manage the Canada-U.S. trade relationship.
Lawrence Herman favoured the establishment of a permanent NAFTA
Commission with a permanent NAFTA free trade secretariat, as opposed to the
current situation, where officials meet in the three capitals but have no
permanent or juridical status (i.e., it is not a true trilateral body).
This group could be given the task of issuing reports, collecting data
and providing service to the three governments on key trade issues.
Herman also advocated the establishment of a permanent NAFTA court,
with a permanent set of judges, to replace the current ad hoc system. The jurisdiction of the panels would not change under the new
arrangement.
Richard Ouellet also expressed a desire for change in North American
institutions, either through a review of NAFTA or the negotiation of an FTAA.
He noted that the NAFTA institutions were under-utilized in many
respects. For example, the NAFTA Commission should be put to better
use, even though its mandate is currently not very broad. Moreover, the labour and environmental Commissions are also
under-utilized, and the various NAFTA Committees, while doing good work, are
not visible, transparent and active enough.
Public access to all of these institutions could be made easier.
Laura Macdonald recommended that a serious examination of trilateral
institutions, including existing institutions such as the labour and
environment commissions and the North American Development Bank (NADB), be
initiated. The NADB, of which
Canada is not a member, could be used to help finance economic development of
disadvantaged regions of Mexico. Regrettably,
the Bank has been neither effective nor efficient, a factor which has dampened
Canadian enthusiasm regarding participation in the institution.
For his part, William Dymond proposed that the Government of Canada
examine the International Joint Commission (IJC) to see if it could be adapted
to serve a larger relationship between Canada and the United States.
After carefully deliberating on all of these suggestions, the Committee
has concluded that a problem-solving and trade policy entity is required
within the NAFTA framework. Ten
years ago, the NAFTA provided for a Secretariat to serve the Free Trade
Commission and, while the agreement’s provisions are sufficiently flexible
to establish this body, it was not created.
Ideally, the institution would consist of senior trade officials from
all three countries, who could work together on an ongoing basis to reduce the
number of items on the NAFTA trade dispute/irritant list and provide critical
advice to the three governments on medium- and long-term trade policy issues
and on developments within the WTO. We
recommend:
|
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. |
RESOLVING EXISTING
TRADE DISPUTES AND IRRITANTS
The bilateral trading relationship between Canada and the United States
is the largest in the world. Each
day, the two countries exchange goods valued at over $1.5 billion, and over
95% of Canada-U.S. trade takes place incident-free.
However, from time to time certain trade irritants and disputes arise.
This chapter addresses the key disputes and irritants that Canada faces
over softwood lumber and agricultural goods.[20]
A. The Canada-U.S. Softwood Lumber Dispute
Softwood lumber exports from Canada to the United States, valued at
roughly $10 billion
annually, have caused the most trade friction over the past two decades.
The U.S. has initiated trade action against Canada over softwood lumber
four times in the past twenty years, and any resolution of the dispute
during that period has proven to be temporary (refer to Appendix 1 for
details on these disputes).
Softwood lumber typically comes to the attention of the U.S. Department
of Commerce when Canada’s share of the U.S. market exceeds thirty percent
and when the U.S. industry is suffering.
The lumber industry exhibits a cyclical nature driven by market demand,
and in recent years, mill closures have occurred on both sides of the border
because of decreased lumber prices. U.S.
lumber manufacturers are a relatively small but high-profile group whose
interests are aggressively advanced by the Coalition for Fair Lumber Imports
in Washington.
Regarding the current dispute, in April 2001 the U.S. initiated trade
action that resulted in an average combined antidumping and countervailing
duty rate of 27.22% applied to Canadian softwood lumber sold to the United
States. This action represents
yet another blatant attempt by the U.S. industry to protect its domestic
market from the Canadian product.
The dispute has varying regional impacts. The majority of softwood lumber exports originate from
British Columbia (54% of exports) and Quebec (20%), with smaller quantities
from Ontario and Alberta (9% and 7% respectively).
B.C.’s economy is the most reliant on softwood lumber exports, as
lumber exports to the U.S. in 2001 made up 16% of B.C.’s total exports.
In her report to the Committee on the prestigious
PriceWaterhouseCoopers 16th Annual Global Forest Industry Conference,
Committee member and the Minister responsible for the FTA negotiations in the
mid-1980s the Honourable Pat Carney revealed the havoc that the softwood
war and a global oversupply of wood have wrought on the province during the
past five years: permanent
closure of 27 mills, job losses of the order of 13,000 forest company
employees, a one-third drop in provincial forestry revenues, and the loss of
the industry’s leading position in the B.C. economy.
In contrast, lumber sales to the U.S. made up less than 3% of Quebec’s
exports and less than 0.5% of Ontario’s exports worldwide.
Producers in the Atlantic provinces (Newfoundland, Nova Scotia, Prince
Edward Island and New Brunswick) were exempted from the countervailing duty
investigation, but face an anti-dumping duty of 8.43%.
1.
The Essential Nature of the Dispute
The softwood lumber dispute revolves around differences in the structure
of the forestry sector in the U.S. and Canada.
In this country, 90% of forested land is provincial Crown land, and
most provinces lease Crown land to forest companies and charge “stumpage
fees” for the right to harvest timber from that land.
The provinces use a variety of administrative tools to determine
appropriate stumpage fees, with these varying within each province by tenure
type. In contrast, 70% of the
forested land in the U.S. is privately owned and accounts for the majority
(90%) of the timber harvest. On
U.S. forested land that is regulated by the government, harvesting rights are
auctioned off to logging companies.
The complex, very different nature of forest management in Canada makes
Canadian softwood lumber an easy target for subsidy charges.
From the U.S. perspective, provincial timber pricing policies have
given Canadian lumber producers access to subsidized timber that gives them an
advantage over U.S. lumber producers. The
U.S. believes that auction-based sales of timber reflect fair market value,
whereas the Canada’s system of administratively determined prices with
limited auctioning results in timber prices that are far below market-value
rates. The U.S. contends that
these below-market prices enable Canadian producers to undercut U.S. producers
in the American market.
The Coalition for Fair Lumber Imports has also alleged that lumber
producers have dumped lumber into the U.S. market for less than market value.
Unfortunately for the Coalition, a number of witnesses told us that the
anti-dumping duties have had unintended consequences:
they have forced the most efficient producers to simply ramp up their
output and lower significantly their unit costs, the cause of U.S. complaints
in the first place. As Senator
Carney outlined in her report to the Committee, these actions have caused
lumber exports to remain constant or grow while prices and profits have seen
steep declines.
British
Columbia is the principal target of U.S. investigations. In that province, obligations associated with some forest
tenures include the expectation that timber should be milled near the logging
site and that a minimum harvest rate must be maintained regardless of economic
conditions. U.S. producers argue
that these policies distort the market and that the long-term tenures typical
in B.C. restrict fair access to the resource.
Furthermore, the province restricts raw log exports from Crown land to
promote economic growth through increased local manufacturing and job
creation. Even though the U.S.
imposes export restrictions on logs from its own public land, American
producers argue that this practice in Canada depresses the price of logs
remaining in the domestic market, thus conferring a subsidy on the industry.
What is perhaps less well known is that the trade action on softwood
lumber imposes a sizeable cost burden on U.S. lumber consumers.
U.S. companies such as Home Depot and associations representing
lumber-consuming interests[21]
have expressed opposition to the trade action because of the associated
increase in lumber prices and its effect on home-building costs.[22]
Further, it is estimated that the number of employees in
lumber-dependent industries exceeds the number in the lumber-producing
industries by a factor of 18 to 1. However, these consumer pressures have clearly not been as
effective as those of the powerful U.S. lumber producers lobby.
Canada, in turn, defends its forest management regime and denies that it
subsidizes the lumber industry. The
stumpage fees charged more than pay for the costs associated with the forest
industry. For example, the B.C.
government showed that in 2001, revenues from stumpage fees and other fees
exceeded the government’s costs related to the management, development,
maintenance, and selling of timber by over $500 million.
Furthermore, public forests in Canada are managed for multiple uses,
not just timber production, and stumpage fees in Canada take into account the
many obligations undertaken by forest companies that win the right to harvest
Crown timber. These obligations
include road-building, reforestation, and measures to protect biodiversity and
ecosystems. In the U.S., these
forest management concerns are the responsibility of the U.S. Forest Service.
From
Canada’s perspective, the basis for U.S. trade action lies in protectionism,
not in unfair practices on the Canadian side.
As Les Reed (Forest Policy Consultant) told the Committee, the United
States’ key motivation for doing battle with Canada is its sizeable
deficiency in timber, both in volume and in the quality of the products
derived from it. Moreover, the
fact that U.S. mills have closed in recent years has less to do with Canadian
stumpage practices than with the general economic malaise facing the industry.
Of the 73 mills that closed permanently in North America between
1995 and 2000, approximately 38% were in British Columbia.
It is clear that the entire North American lumber market has suffered.
2.
The Federal Government’s Two-Track Strategy to Resolve the Dispute
a. Legal
The Government of Canada has adopted a two-track strategy to end the
softwood lumber dispute. The
first track is legal. U.S.
authorities have now produced final determinations of dumping, subsidy and
injury, and all three decisions have been challenged by Canada under both the
NAFTA binational panel review and WTO dispute resolution processes.
Panels are currently examining the proper application of U.S. trade
remedy law and will decide the cases between now and the fall.
Gary Horlick (American Consumers for Affordable Homes) provided the
Committee with the following expected outcomes of the NAFTA and WTO panels: a
positive result for Canada on the countervail challenges; a mixed scorecard on
the dumping challenge: and considerable uncertainty regarding the injury
cases. Indeed, on Canada’s
countervail challenge the WTO has issued an interim ruling stating that the
U.S. erred in imposing duties on softwood lumber exports in that it had not
adequately proven the existence of a subsidy.
A final ruling on the U.S. subsidy determination is expected in July.
Horlick also observed that NAFTA law requires the duties to be
refunded, whereas at the WTO there are no guarantees that one would get the
money back. For details on the
timelines and panel findings for the various NAFTA and WTO proceedings, please
refer to Appendix 2.
On
the subsidy question, Canada’s contention that the findings of the
Department of Commerce in the CVD and AD cases are inconsistent with U.S.
obligations at the WTO has been upheld. Notably,
the use of “cross-border” (U.S.) prices rather than Canadian prices as a
benchmark for determining whether stumpage rates confer a benefit was
inappropriate. In the past, the
U.S. Department of Commerce had rejected the use of cross-border comparisons
because of the significant differences in species composition, size, quality,
density and accessibility of the timber resource.
Stumpage rates vary significantly both within and between regions, and
the correct economic price for timber in Canada is not necessarily the same as
in the United States. The use of
U.S. prices by the Department of Commerce to establish the alleged subsidy
rate for Canada was a significant departure from past practice.
Canada also objected to numerous other aspects of the findings of the
Department of Commerce and the International Trade Commission.
Jon Johnson informed the Committee that in an earlier challenge on the
preliminary determination of subsidy, a WTO panel had ruled that stumpage was
a financial contribution but that, indeed, the U.S. had used an improper
cross-border methodology to determine if the use of stumpage fees in Canada
had benefited lumber producers. Since
the existence of a benefit could not be verified, the panel decided that the
U.S. had no basis for determining that stumpage was a countervailable subsidy.
There are concerns, however, that even if Canada successfully pursues the
legal track, the U.S. will change its investigation methods and trade laws,
and subsequently initiate new investigations.
Furthermore, pursuing dispute resolution through legal avenues is very
time-consuming. For example,
NAFTA panel rulings can take as long as 315 days from the request for
review, and those rulings can then be appealed; as a result, a lifting or
lowering of the duties on the basis of the legal process alone should not
realistically be expected before 2005 at the earliest.
Meanwhile, the imposition of duties decreases the competitiveness of
Canadian lumber in the U.S. market, and the resulting strain on lumber
producers affects employment levels and company profits.
Furthermore, Canadian lumber producers risk losing market share as
foreign competitors and substitute products become attractive alternatives to
duty-ridden Canadian lumber. As a
result, the legal track becomes politically more difficult over time,
particularly in more forestry-dependent regions of Canada, and pressure for a
negotiated solution to the dispute mounts.
b. Negotiated Settlement
While pursuing the legal track, Canadian governments and the industry
that they represent have also been involved in periodic discussions to arrive
at a durable, long-term negotiated settlement.
In the past, Canada and the U.S. have typically resolved softwood
lumber disputes (albeit temporarily) through such negotiation.
However, as John Melle (Deputy Assistant U.S. Trade Representative for
North America) pointed out, past disputes have disregarded the underlying
problems between the two sides, and litigation alone cannot solve the softwood
problem since the WTO does not force sovereign states to change policy.
Regarding the current dispute, Canada has been intermittently negotiating
with the U.S. since mid-2001.
The U.S. Coalition for Fair Lumber Imports has clearly had a role
behind the scenes in the negotiations, submitting in January 2002 (at the
request of the U.S. Trade Representative) a proposal for potential forest
reforms that could result in a more acceptable, market-based system for timber
sales in Canada. The proposal
included significant revisions to tenure policies, timber pricing systems and
laws mandating minimum cuts or requiring that mills remain open.
Canada considered U.S. industry demands excessive, and the U.S.
government was unwilling to lean on its industry to develop a reasonable basis
for negotiations. Talks ceased
shortly after the submission was presented.
In the summer of 2002, the Under Secretary for International Trade at the
U.S. Department of Commerce, Grant Aldonas, indicated a willingness to review
and revoke the countervailing duty orders, province by province, on the basis
of changed circumstances determinations.
He undertook to issue a policy bulletin that would form the
underpinnings of such determinations.
More recently, the Province of British Columbia raised the possibility of
a bridging agreement, proposing that the duties be replaced by a
lumber-price-sensitive interim border tax while forest-practices-based
negotiations take place. It was
planning to undertake a number of market-based policy changes unilaterally in
any event, and saw these changes as the basis of an “exit strategy” from
the costly duties.[23]
The draft Policy Bulletin entitled “Proposed Analytical Framework,
Softwood Lumber from Canada” (January 2003) of the U.S. Department of
Commerce suggests that reform of Canadian forest practices to ensure
market-based pricing of timber would resolve the long-standing dispute.
To achieve appropriate market-based prices for timber, the U.S.
Department of Commerce made the following main recommendations:
·
The current system for determining the prices charged for timber
(stumpage) should be replaced by an auction-based system;
·
Requirements for minimum annual harvests and timber processing should be
eliminated; and
·
Restrictions on log exports should be removed.
With
respect to the first recommendation, while the U.S. would prefer that all
timber be sold through auctions, it has indicated that it would accept a
system in which a portion of the harvest would be sold at auction and the
resulting prices would be used to administratively establish rates for the
remainder of the harvest. Similarly,
if the amount of forest land available to private owners or First Nations were
to increase, sales from those lands could also provide a basis for pricing
timber on Crown land.
Each of the three proposed policy changes is significant.
The first – to auction off timber – is problematic because it would
require changes in the timber tenure system that would leave provincial
governments liable to pay compensation to tenure holders.
The second recommendation addresses issues arising from measures to
promote economic stability in timber-producing communities.
Removal of those requirements would likely cause economic hardship for
some communities due to the relocation of processing activity and reduced
employment when lumber markets are low. The
third main recommendation, relating to log export restrictions, is contentious
because of the widely-held belief that timber resources should be processed in
Canada. Log exports are popularly
associated with “exporting Canadian jobs.”
There is also an underlying concern that the conditions of any
negotiated settlement would be an unwelcome imposition on Canada’s ability
to determine its own forest resource management.
During its fact-finding mission to Washington, the Committee was informed
that Aldonas, the senior
Department of Commerce official responsible for the softwood lumber file,
would be releasing the final Policy Bulletin shortly. Sage Chandler (Director for Canadian Affairs, U.S. Trade
Representative’s Office) mentioned that he was pleased with the proposed
reforms announced by B.C. and Ontario, and that he was waiting for Quebec’s
response before publishing the Bulletin.
The publication of the Bulletin would then trigger a thirty-day period of
public review, after which the Department of Commerce would likely undertake
“changed circumstances” investigations as the provinces demonstrate that
they have met the agreed conditions. The
investigation, which could be initiated at a province’s request at any time
and only covers countervail, would determine if the original basis for the
subsidy charge remains. If not,
the CVD duties would be revoked on a province-by-province basis. This process would be similar to that of the CVD
investigation and could be quite time-consuming and resource-intensive.
As Gary Horlick told the Committee, it could also end up in court.
The problem with the “changed circumstances” review process is that
it would only dispense with the countervail duties once the forest policy
changes are implemented; this process could take up to three years, according
to Doug Waddell (Assistant Deputy Minister, Trade, Economic and Environmental
Policy, Department of Foreign Affairs and International Trade).
Furthermore, the anti-dumping component of the dispute would remain.
It is for these reasons that British Columbia stakeholders initiated
negotiations on a “bridging agreement” to be used as a transitional
measure while a long-term solution to the dispute was worked out.
This interim agreement would essentially restrict the amount of trade
until changes could be made in provincial forest management to reform what the
U.S. perceives as subsidy-causing policies.
The possibility of a sliding-scale border tax was discussed as a
temporary measure to replace the countervailing and antidumping duties while
these forest policy reforms were implemented in each province.[24]
Other issues up for discussion included the disposition of the over $1
billion in duties already collected and the possible repeal of the Byrd
Amendment[25]
(see below); the future of the anti-dumping duties; and the potential
withdrawal of Canada’s WTO and NAFTA litigation.
The negotiations broke down in February of this year.
At the PriceWaterhouseCoopers conference held shortly thereafter,
Aldonas presented three reasons for the ending of bilateral negotiations on
the interim arrangement: the lack of agreement on the forest policy changes required
to settle the dispute, the future of the NAFTA and WTO litigation, and the
sizeable gap between the two sides over the substance of a potential interim
border tax arrangement.[26]
On the first point, the B.C. government introduced the Forest
Revitalization Act the day after the end of the conference.
The legislation, now passed, addresses many of the U.S. Department of
Commerce’s concerns, including the call for a meaningful volume of lumber
(20%) to be made available for auction and the removal of a number of
government requirements of the industries.
No actions appear to be forthcoming on the remaining two significant
stumbling blocks, however. The
level and design of the interim border tax is viewed as probably the most
significant obstacle to an agreement, as there is a wide gap between the
positions of the U.S. industries and the Canadian stakeholders.
During the February-May period, both sides in the dispute continued to
examine alternatives on how to structure the tax. In mid-May, the Americans presented a new interim export tax
proposal for negotiation, designed by the Coalition for Fair Lumber Imports,
that linked the levels of the proposed tax to market share and not to prices,
as was the case earlier. At a
market share of 29%, an export tax of 18% would be applied on softwood
shipments to the U.S. The tax
would rise by 3 percentage points for each percentage point above 29%, and it
would fall by 4 percentage points for each percentage point below 29%.
The tax would disappear entirely if Canada’s market share was below
24%. The proposal would also have
the U.S. industry retain two thirds of the duties already collected, and it
would impose a tax on all provinces, including those in Atlantic Canada
currently exempt from the application of CVD.
International Trade Minister Pierre Pettigrew was quick to publicly
reject this latest proposal. Since
then, other proposals for attaining an interim agreement have surfaced as
well.
3. Where Do We Go From
Here?
Given the unsuccessful conclusion of the recent negotiations, Canada is
continuing with the legal track. The
NAFTA dispute settlement system is binding on the parties, and the panels will
either uphold U.S. decisions or send them back to the U.S. agencies for action
consistent with the panels’ decision. The
only avenue for appeal, the Extraordinary Challenge Committees, comes into
play in the event of gross misconduct, conflict of interest, procedural error,
bias, or abuse of power on the part of the panel.
However, as stated above, past experience suggests that even the
successful pursuit of legal options would be unlikely to resolve the dispute
in the long term.
At the WTO, once the panels make their rulings the U.S. has an
opportunity to appeal, extending an already lengthy litigation process.
Assuming Canada’s position prevails at the WTO, ultimately the U.S.
would have to correct its actions or, if a satisfactory resolution of the
dispute were not reached, Canada would be given the opportunity to retaliate.
Most of the witnesses who commented on the softwood dispute felt that
Canada should continue the legal fight, even if some of them also advocated
that we not abandon the negotiated settlement route. Among those who stridently opposed a negotiated resolution of
the dispute was Les Reed, who argued that nationwide support of existing legal
challenges was critical to avoid a “divide and conquer” scenario and that
Canada was in a strong position regarding the legal challenges that have been
made. He also remarked that any
settlement along the lines of the Proposed Analytical Framework put forward by
the Department of Commerce would be very intrusive in terms of the B.C.
government’s sovereignty over forest decision-making.
Frank Dottori (Co-President, Free Trade Lumber Council) is confident of
legal victory and is concerned that the negotiation of a settlement would not
be in the industry’s best interests. In
line with Reed’s thinking, he also expressed resentment at the U.S.
intrusion into Canadian forestry policy.
Since then, other proposals for attaining an interim agreement have
surfaced as well, including the Minister's proposal for a quota system
covering over 90% of Canadian softwood exports and an export tax applied to
any above-quota exports.
Susan Petnunias (American Consumers for Affordable Homes), the official
spokesperson for a diverse group of lumber-consuming organizations in the U.S.
urged Canada to continue with its promising WTO and NAFTA legal cases to
increase the chances of a favourable outcome to the dispute and “to take
some of the steam” out of the efforts of the Coalition for Fair Lumber
Imports. The other consumer
groups appearing with her before the Committee had similar messages.
A number of the groups bemoaned the application of an export tax in any
interim arrangement that would be negotiated, arguing that from their
perspective this was no solution.
Taking
a more moderate position, Richard Ouellet noted that if there were reasonable
grounds for a settlement, Canada should go that route, but at the present time
the U.S. position is not fair and reasonable.
Therefore, we should keep up the battle at the WTO.
Steven Shrybman and Donald Barry also supported the use of
international rules to obtain a resolution of this issue, as did Billy Garton
(Partner, Bull, Housser & Tupper), who saw the upcoming WTO decisions as
strengthening the Canadian position in the negotiations.
The Committee also heard discussion about the appropriate choice of legal
forum (i.e., NAFTA versus the WTO). Armand
de Mestral pointed out that the WTO dispute settlement process was stronger
and the preferred choice. John
Helliwell claimed that the WTO is the arena to deal with the softwood issue,
but that it is probably unrealistic to expect WTO action to resolve our trade
problems with the Americans in the near future. Donald McRae suggested that Chapter 19 should not be held
responsible for not resolving the softwood lumber dispute. The
dispute is over what the rules ought to be, not whether U.S. law was applied
properly.
The call for a negotiated end to this dispute was loudest from the B.C.
forest product industry witnesses directly hurt by the dispute and from
Atlantic Canada producers, who have not escaped anti-dumping charges.
Ken Higginbotham (Vice-President, Forestry and Environment, Canfor
Corporation) supported the federal government’s two-track strategy but would
welcome a negotiated settlement that would ultimately provide free access to
the U.S. market. He expressed
support for the market-based forest policy changes proposed by British
Columbia. He was in favour of an
interim agreement containing a border tax, but only if there was a clear
“off-ramp” leading to the revocation of the CVD orders and if there was
agreement to drop the AD case.
Bob Flitton (Manager, Real Estate and Governmental Affairs, Doman
Industries Limited) outlined Doman’s support for an interim Canadian border
tax, prompted by the lengthy (270 days) maximum period surrounding DOC’s
changed circumstances review. He
did, however, point to several “problematic” elements of a possible
settlement: the structure of the tax, the fate of the duties already
collected, the nature of the forestry reforms to be undertaken, the future of
the anti-dumping duties, and the ultimate status of Canadian legal action. Flitton cautioned the Committee that even if our legal
challenges were successful, nothing would stop the U.S. industry from filing
another petition the very next day.
David Larsen (Vice President, Government and Public Affairs,
Weyerhaeuser) and John Allan (President, British Columbia Lumber Trade
Council) were also strong supporters of a negotiated resolution of the
dispute. Allan argued that if
Canada were to stay the legal course, it would be involved in this litigation
until at least 2007. Another
point in favour of the negotiated approach is that the Province of British
Columbia has proceeded to a market-based forest policy, which is in keeping
with DOC’s Policy Bulletin.
Kim Pollock (National Director, Public Policy and Environment,
Industrial, Wood and Allied Workers of Canada) outlined that union’s
two-part proposal to resolve the dispute:
the introduction of a sliding-scale, provincially administered lumber
tax to allow the industry on both sides of the border to change their forest
practices, and the development of a joint bilateral strategy to market lumber
and wood products throughout the world.
Diana Blenkhorn (President and Chief Executive Officer, Maritime Lumber
Bureau) noted that in this round of negotiations there appeared to be more
emphasis on achieving a long-term, durable solution to the dispute.
Both sides in the dispute, she observed, had suffered from the ongoing
trade battle: her estimate of the Canadian side’s contribution to the
Washington legal community since 1986 was a staggering US$800 million!
The Committee also heard from the lumber remanufacturers component of the
industry, which is anxious to see a settlement in the dispute.
Russ Cameron (Independent Lumber Remanufacturers Association) argued
that his members could not afford to wait for the litigation process to end
and called for an exclusion or zero-rating of remanufactured products of
independent remanufacturers not possessing any forest tenures.
Their position was clear: since they do not own tenure, there can be no
link with any possible subsidies.
Several other areas of concern need to be highlighted.
The issue of whether or not to link one sector with another when
considering trade disputes (e.g., energy and softwood lumber) was discussed by
a number of Committee witnesses. In
Calgary, we received evidence from energy-sector experts and participants that
the option of linking trade issues or sectors (e.g., energy with softwood
lumber) should be rejected outright. Pierre
Alvarez (President, Canadian Association of Petroleum Producers) remarked that
such a strategy would be ineffective and could cause an upward spiral in trade
problems. Donald Barry and
Ambassador Kergin were also opposed to linkage.
Philip Prince (President, Canadian Energy Research Institute) noted
that it would be very difficult to link one sector with another in that each
is very complex and unique. Given
the inherent risk associated with a linkage strategy, the Committee finds
these arguments compelling and would like to see Canada exercise caution when
contemplating linking different economic sectors in any consideration of how
to resolve certain trade disputes or irritants.
Another issue brought to the attention of Committee members was the
Continued Dumping and Subsidy Offset Act of 2000 (the Byrd Amendment), which
entitles domestic producers supporting petitions for anti-dumping and
countervailing duty investigations to receive duties collected as a result of
these investigations.
Canada,
along with many other WTO Members, challenged this legislation at the WTO and
received a favourable Appellate Body finding in January 2003. Claude Carrière mentioned that the U.S. had stated that it
would implement the WTO ruling by dealing with the legislation.
The U.S. will be given a “reasonable period of time” to comply with
the Appellate Body’s findings. The
problem, though, is that there is stiff opposition in the U.S. Senate to
repealing the Amendment, and Congressional approval is required for the U.S.
to comply with its international trade obligations.[27]
After carefully reviewing the evidence that it received on softwood
lumber, the Committee has concluded that Canada should continue its legal
battle at the WTO and under the NAFTA dispute settlement regime.
If advantageous to Canadian interests, it should work to achieve a
long-term solution and provide unfettered access for Canadian forest products
in the U.S. marketplace. However, we should not cave in to pressure from the Americans
to quickly settle this dispute on their terms, thereby totally altering
traditional Canadian forest policy and practices. The litigation should be stayed only if Canada is certain of
a negotiated result that provides free access to the U.S. market.
We recommend:
|
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. |
On
the question of federal government assistance, the aid provided by the
government has gone to addressing the industry disruption affecting the
approximately 250 Canadian communities dependent on the softwood lumber
industry. This assistance has
included such measures as funding for displaced workers, community adjustment
and economic development, softwood lumber research and development, market
expansion initiatives and advocacy efforts.
The Committee heard testimony that additional assistance should be
provided, specifically that the federal government should direct the Export
Development Corporation (or the Business Development Bank of Canada) to
provide loan guarantees to help those companies requiring them to continue the
legal battle against U.S. trade harassment.
We do not support this option, as we are quite sensitive to the fact
that any direct government support to the industry would be perceived by the
U.S. forest products lobby as simply an additional subsidy conferred on the
industry.
Finally, the Committee heard evidence of the difficulties encountered in
both government and industry in forging a common approach to the softwood
lumber issue. One answer was
suggested by Dottori: a more formal system of federal-provincial cooperation,
incorporating private-sector input, should be developed to deal with future
major bilateral disputes, such as the softwood lumber case, that involve a
blend of provincial and federal interests.
Canada’s agricultural industries, apart from having been victims of
U.S. trade remedy action (e.g., countervail and dumping investigation into
live cattle exports to the U.S. beginning in 1998; the initiation of a new
countervail and dumping challenge on wheat exports in addition to a host of
previous U.S. trade challenges on the Canadian Wheat Board), also stand to be
adversely affected by provisions of the U.S. Farm Bill (e.g.,
country-of-origin meat labelling, increase in domestic support).
Key current issues of concern to these industries will be described
here, in addition to the potential threat from U.S. bioterrorism legislation
already described (see the chapter on border issues).
1. The Dispute Over the
Canadian Wheat Board
Founded in 1935, the Canadian Wheat Board (CWB) is a central marketing
agency responsible for selling all wheat and barley produced in Western
Canada. The Wheat Board
represents a form of collective action taken by grain producers – and
legislated by the federal government – to help farmers maximize returns on
their crops and at the same time enable them to compete with large,
multinational grain trading companies operating in the Unites States and other
countries. Essentially a
marketing cooperative, the CWB is among the world’s largest sellers of wheat
and barley, selling over 20 million tonnes of those grains annually to more
than 70 countries. CWB sales
revenues average between $4 billion and $6 billion annually, accounting for
about 20% of the world market.
In the U.S., grain producers sell their harvest directly to multinational
grain trading companies which, acting as intermediaries, sell that grain to
consumers. Since Canadian grain
is sold by the Wheat Board on behalf of farmers, there is no such “middle
man” in Canada. The U.S.
alleges that this lack of market-based intermediary, combined with the CWB’s
use of its international market power to extract higher prices for Canadian
farmers, provides those farmers with an implicit subsidy and thus an unfair
advantage over U.S. farmers. According
to the Honourable Ralph Goodale (Minister Responsible for the Canadian Wheat
Board), Americans also falsely claim that Canada is dumping vast quantities of
wheat into the U.S. market and that we offer no reciprocal market access.
Minister Goodale argued that instead of dumping product at the low end
of the market, the CWB actually markets wheat and barley at the top end of the
market as a differentiated, high-quality product.
For its part, Canada argues that low international grain prices, and not
Canadian marketing policies, are creating hardship for U.S. farmers.
It maintains that these low prices are caused in part by heavy
agricultural subsidies in the U.S., the European Union (EU) and Japan.
The Government of Canada’s position is that the CWB’s practices are
entirely consistent with its international trade obligations; indeed, both
Minister Goodale and Ian McCreary (Canadian Wheat Board) informed the
Committee that the CWB neither provides nor obtains government subsidies.
Instead, the net returns that the CWB attempts to maximize from its
sales are passed through to farmers, after all costs have been deducted, and
farmers determine cropping decisions based on strictly market signals derived
from U.S. commodity markets. Moreover,
the CWB does not attempt to underprice in the U.S. market.
U.S. International Trade Commission investigators found in 2001 that
the price of Canadian durum wheat sold in the U.S. was higher than the price
of American durum in all but one of sixty months examined.
Finally, STEs are currently permitted under international trade law,
provided they operate according to commercial business practices.
However, the issue of STEs is on the agenda at the current round of
World Trade Organization (WTO) agriculture negotiations.
The U.S. position is that STEs should be outlawed.
a. Legal Challenges
On ten separate occasions since the introduction of the FTA, the U.S. has
investigated Canada’s wheat trade policies and practices.
Charges against the Wheat Board have included subsidization, dumping
and price discrimination (charging higher prices in some markets – in
Canada, for example – and using the proceeds to offset lower prices in other
markets, such as the U.S.). In
all cases, no evidence of these activities was found.
The list of previous U.S. investigations into the CWB is contained in
Appendix 3.
The
most recent trade challenge was initiated in September 2002 by the North
Dakota Wheat Commission (NDWC). This
challenge was based on a February 2002 report published by U.S. Trade
Representative (USTR) Robert Zoellick which alleged that special monopoly
rights and privileges granted to the CWB gave it competitive advantages over
U.S. wheat farmers. At the time,
the USTR indicated that it would explore a variety of actions against Canadian
wheat policies and the CWB’s
practices, including the possibility of a WTO challenge.
McCreary noted that the USTR decided to pursue additional trade action
even after the release of a report by the U.S. ITC contradicting allegations
of CWB underpricing and dumping in global markets. His conclusion was that the facts in the case once again were
pushed aside by political interests and that new trade rules were required to
lower the incidence of trade harassment based on sheer protectionism.
In September 2002, the NDWC, along with the U.S. Durum Growers
Association and the Durum Growers Trade Action Committee, used the
above-mentioned USTR report as the basis to file a complaint with the U.S.
Department of Commerce (DOC) charging that the CWB was dumping wheat at
unreasonably low prices into the U.S. market.
Petitions were filed seeking the imposition of both anti-dumping and
countervailing duties against hard red spring wheat and durum wheat imports
from Canada. In October 2002, the
U.S. International Trade Commission initiated the requested investigations and
in March 2003, the DOC found evidence of two countervailable subsidies (the
CWB’s financial guarantees, and rail transportation programs) out of a
number of government programs examined. Provisional
duties of 3.94% were announced for imports of Canadian durum and hard red
spring wheat. The Government of
Canada has rejected the DOC’s preliminary findings.
On May 2, 2003, the DOC announced its affirmative preliminary
determinations in the anti-dumping duty investigations.
The Department has preliminarily found that imports of certain durum
wheat and hard red spring wheat were sold at less than fair value, with
dumping margins of 8.15% and 6.12% respectively.
The Government of Canada contests these findings, arguing that wheat
prices in North America are determined by North American supplies, not by
alleged Canadian dumping. The final countervail and anti-dumping determinations are
scheduled for mid-July, and the consideration of injury for August.
Ted Menzies (President, Canadian Agri-Food Trade Alliance) and Kenton
Ziegler both mentioned that legal defence costs associated with this latest
trade challenge are estimated at $10 million.
The U.S. has also challenged Canadian wheat sector policies at the WTO.
In March 2003, a panel was formed to examine (a) the CWB’s operations
in relation to Canada’s obligations under GATT Article 17 – State Trading
Enterprises, and (b) Canada’s treatment of imported grain.
The federal government is frustrated by these latest legal challenges
and intends to defend its wheat sector policies, yet again, against what it
considers to be unsubstantiated allegations against the CWB.
b. Evidence Heard
The Committee heard a number of suggestions regarding the CWB and state
trading enterprises. Robert
Friesen and Ian McCreary both called on the federal government to aggressively
promote WTO rules that clearly confirm the right of countries to employ the
services of the Canadian Wheat Board in marketing Western Canadian wheat and
barley, to operate a single-desk selling agency and to pool returns in a
non-trade-distorting manner. A
draft released recently by chief WTO negotiator Stuart Harbinson would see
STEs such as the Wheat Board phased out.
It generally adopts the U.S. position that STEs have no place within a
free trade environment. According
to McCreary, the federal government should work aggressively to ensure that
the current sections in the Harbinson draft dealing with these issues are
rejected.
Other viewpoints were also heard. U.S.
Representative Earl Pomeroy expressed the concerns of North Dakota farmers
that the fact that wheat pricing does not occur in the open market and that
the provision of subsidies by the Board is resulting in an unfair competitive
advantage for Canadian wheat farmers in third-country markets.
David Usherwood called on the Committee to recommend that the Government
of Canada eliminate the monopoly position that the CWB currently holds with
respect to wheat and barley sales. He
thought that defusing the monopoly issue would eliminate the ongoing trade
battles with the Americans over the Board’s operations.
Both he and Douglas McBain (President, Western Barley Growers
Association) favour the introduction of competition to the CWB.
According to the Canadian Wheat Board, however, either there is a single
selling desk or there is not. One
cannot have a voluntary system since one would then encounter a free-rider
problem. To deal with certain
farmers’ unhappiness with the Board’s monopoly status, the CWB has
developed a number of options to provide price flexibility as well as other
measures.
Another issue to consider is the impression remaining in certain U.S.
quarters that the Canadian Wheat Board is an arm of the federal government.
However, as Minister Goodale reminded the Committee, the CWB is very
different from what it was four years ago.
It is no longer a Crown corporation, and it is run by a modern
corporate-style board of directors, the majority of whom are farmers elected
directly by other farmers. Currently,
only five of the CWB’s fifteen directors are appointed by the federal
government, including the head of the CWB. The CWB’s power and authority lie
in the hands of farmers, therefore, and not with the federal government.
Furthermore, McCreary remarked that additional legislative changes
designed to reduce any formal linkages that are still fuelling this perception
are being considered.
Finally,
McCreary and Dennis Laycraft (Executive Vice-President, Canadian Cattlemen’s
Association) advocated the amendment of WTO rules on anti-dumping to narrow
the definition of dumping to deal specifically with predatory price
discrimination. Because of the
cyclical nature of agricultural commodity prices, there are many periods where
prices are below the cost of production through no fault of the producer, and
producers can subsequently fall victim to anti-dumping action.
The current anti-dumping rules are thus inappropriate for agricultural
trade. Kenton Ziegler (Chair,
Alberta Canola Producers Commission) also supported action in this area.
The Committee is convinced of the CWB’s usefulness as a subsidy-free
marketer of high-quality wheat and barley.
Every effort should be made at the WTO to retain the Board as a
legitimate trading enterprise and to modify the WTO’s anti-dumping rules
regarding agriculture. We
recommend:
|
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). |
2. The U.S. Farm Bill
The 2002 Farm Security and Rural Investment Act, commonly known as
the Farm Bill, was signed into law by U.S. President Bush on May 13, 2002.
The Farm Bill is an omnibus, multi-year piece of legislation that
covers a wide range of laws related to U.S. federal agricultural and food
policies. It serves as a
replacement for the 1996 Farm Bill, the provisions of which were to have
expired in September 2002. As
with the 1996 Bill, the current legislation has a six‑year lifespan.
It will expire in 2007.
All
things considered, the Farm Bill is an extraordinarily complex piece of
legislation, the long-run implications of which are as yet unclear.
Although the Bill is commonly associated with subsidy payments to U.S.
farmers, the legislation in fact covers a wide range of agricultural issues
and concerns, including provisions on trade, foreign aid, conservation and the
environment. However, the
controversy generated by the Bill has centred on the substantial increase in
agricultural support payments. The
2002 Farm Bill will add an estimated US$51.7 billion to farm support
programs in the U.S. during the 2002-2007 period, over and above existing
measures contained in the 1996 Farm Bill.
Total projected spending measures in the latest Bill, including for
initiatives outside the traditional farm program areas, are estimated at
US$273.9 billion. Rory McAlpine
and Ted Menzies told the Committee that U.S. farm subsidies that had
previously been provided in an ad hoc way would now be locked in for a
six-year time period.
The Farm Bill was motivated at least in part by the desire to protect
U.S. farming interests from heavily subsidized farming operations in Europe
and Japan. Preliminary estimates
for 2001, before the Farm Bill was passed, indicate that transfers from
consumers and taxpayers were equivalent to 21% of gross farm receipts in the
U.S. By contrast, transfers were
equivalent to 35% of farm receipts in the European Union (E.U.) and 59% in
Japan. In Canada, producer
support was a comparatively low 17% of gross farm receipts.
a. The Farm Bill and the
WTO
The U.S. insists that it remains committed to the eventual elimination of
agricultural subsidies. However,
it maintains that in the face of significant market-distorting crop production
subsidies in other countries, it must protect its own agricultural interests
by “levelling the playing field” and not sacrifice the U.S. farmer to
subsidized production overseas. In
Washington, a number of witnesses essentially told the Committee the same
story: that the U.S. Farm Bill was designed to put pressure on the EU, Japan
and other countries to lessen the provision of agricultural subsidies.
Representative Pomeroy even went so far as to call the Farm Bill
approach the trade equivalent of an arms race designed to prompt subsidy
relief in the enemy camp.
This past fall, the U.S. tabled its proposal for agricultural subsidy
reduction at the WTO. According
to the proposal, the U.S. agrees to eliminate its subsidies, but would only
begin doing so once European and Japanese subsidies have been lowered to the
current levels in the U.S. Testimony
received by the Committee suggests that the Europeans have so far been
reluctant to act.
Despite increasing production support for domestic farmers, the U.S.
insists that the Farm Bill is compatible with its WTO commitments.
Under current WTO regulations, the U.S. is limited to providing US$19.1
billion in price-linked or production-linked agricultural subsidies per annum.
According to analysts in the European Community (E.C.), it is very
likely that the Farm Bill’s subsidy provisions will cause the U.S. to exceed
this commitment.
Although the long-run impacts of the U.S. Farm Bill are at this stage far
from clear, increased agricultural subsidies in the U.S. are, in general, of
significant concern to Canada and other countries. Among the specific worries is the fact that the Farm Bill
could jeopardize progress towards agricultural reform during the current round
of WTO negotiations. Canada and
many other countries have been pressing for the elimination of agricultural
subsidies. Although the U.S.
maintains that it is committed to the same goal, the Farm Bill’s
contribution to domestic farm support is widely believed to represent a step
in the opposite direction. Furthermore,
many countries view the Farm Bill as compromising U.S. credibility in future
agriculture negotiations.
b. The Farm Bill’s
Impact in Canada and Elsewhere
Critics of the Farm Bill are concerned that the increase in
production-based subsidies to U.S. farmers, by keeping production artificially
high, will exert further downward pressure on international crop prices.
Subsidies are considered damaging because they create a vicious cycle
of hardship and dependence. They
encourage farmers to continue to produce crops which would, in the absence of
the financial support, not be profitable.
The introduction of guaranteed counter-cyclical payments in particular
is expected to have a distorting effect on world grain prices.
As a result, the Farm Bill may exacerbate the difficulties facing
farmers worldwide.
Canada is concerned that these developments will damage Canadian farmers,
particularly those in the Prairie provinces. Canadian crop farmers are among the least subsidized in the
industrialized world. An increase
in subsidies to the U.S. widens the income support gap between farmers in the
two countries and makes it all the more difficult for Canadian farmers to
remain competitive.
In addition, subsidized production in the industrialized world is
believed to be a significant impediment to economic growth in developing
countries. Poor countries without
the economic resources to be significant agricultural producers are unable to
export their products because of high tariffs and low international prices,
driven down by subsidized production in wealthy countries.
c. Country-of-Origin
Labelling
Although subsidies have garnered much of the international attention
surrounding the Farm Bill, other aspects of the legislation are causing
concern as well. In particular,
the Bill includes country-of-origin labelling (COOL) provisions that could
have serious implications for Canadian producers and exporters, particularly
in the livestock sector. Overturning
this legislation is a top priority of both the federal government and the
Canadian agri-food industry.
Beginning
in September 2002, a voluntary system of labelling was introduced for the
retail sale of meat, fish, fruits and vegetables, and peanuts.
Food service establishments such as restaurants are exempt.
Labelling will become mandatory in September 2004 unless the
legislation is altered. The
guidelines for voluntary labelling, which will likely form the basis for the
mandatory labelling requirements in 2004, are very specific.
In the case of meat products, for example, only animals born, raised
and slaughtered in the United States may be labelled “Product of the U.S.” Labels on other products must include all countries involved
in the production process. Countries
must be listed in descending order according to their contribution to the
final product by weight.
Country-of-origin labelling requirements were intended to allow U.S.
consumers to differentiate between domestically-grown agricultural products
and those produced – in whole or in part – outside the country.
Some Canadian farmers and ranchers are concerned that this will require
complicated labels and expensive tracking systems – particularly since many
animals spend time in both the U.S. and Canada between birth and processing
– and thus constitute a significant barrier to trade for Canadian producers.
For the Canadian red meat industry alone, the cost of segregation and
other COOL regulations is an estimated $1 billion to $2 billion.
COOL would also likely impose considerable costs on the U.S. market.
According to a U.S. Department of Agriculture report, the cost to U.S.
consumers of identifying domestic beef alone will be around $2 billion.
Finally, critics have observed that the new labelling requirements are
curious in that the U.S. has been adamant in its opposition to the E.U.
proposal to require the labelling of Genetically Modified Organisms (GMOs).
The U.S. position regarding GMO labelling has been that such labels,
and their associated regulation, may constitute a barrier to trade.
In Washington, the Committee was apprised of the complexity of the COOL
regulations and the resulting unwillingness of the U.S. meat packing industry
to label. Sharon Bomer-Laurentsen
(Deputy Assistant U.S.T.R. for Agricultural Affairs) mentioned that the U.S.
Department of Agriculture wanted the regulations to have the least possible
restrictive effect on trade. U.S.
Senator Craig Thomas (R-Wyoming) expressed surprise at existing worries about
COOL and stated that any difficulty in administering the program should be
viewed as a U.S. concern.
On the Canadian side of the border, the Committee heard that the
Government of Canada should not hesitate to initiate WTO and NAFTA challenges
to Country of Origin Labelling requirements should those requirements not
remain voluntary, if that is in the best interests of Canada.
The government will continue its advocacy efforts in the U.S., to urge
that the provision be repealed.
C. U.S.
Subsidies for the Proposed Alaska Natural Gas Pipeline
Canadian officials have two primary concerns regarding the development of
a pipeline carrying Alaska North Slope natural gas through Canada to U.S.
markets in the “lower 48 states.” The
fact that the bulk of the pipeline will be situated within Canada provides
Canadians with a certain degree of leverage when discussing energy policy
matters.
First, proposed U.S. legislation would inject subsidies into the project.
The U.S. Senate Energy and Natural Resources Committee has debated an
energy bill providing for accelerated depreciation, loan guarantees (for up to
US$18 billion), and tax credits when wellhead gas prices in Alaska fall below
US$1.35 per thousand BTUs.
Both the Canadian and U.S. governments wish to see pipeline decisions
based strictly on market forces. In
other words, the private sector should ultimately decide on the nature and
timing of the pipeline. From the
Canadian perspective, any assistance provided would distort energy markets and
adversely affect Canadian projects in the Mackenzie Delta.
Ambassador Kergin told the Committee that the pipeline bill would
indeed harm the Mackenzie Delta Project.
Paul Frazer bemoaned the lack of an effective dialogue on the pipeline
issue and urged Canadians to seriously examine the proposed legislation.
The Government of Canada appears to be principally opposed to the tax
credits in the U.S. legislation. For
its part, the Bush Administration is attempting to resist any Congressional
effort to include subsidies in the final version of the legislation.
The second concern is that the Alaskan pipeline could strand gas reserves
in the Mackenzie Delta. However,
both the Canadian and U.S. Ambassadors told the Committee that if the
Mackenzie project proceeds first – and there are positive signs that this
will happen – then the stranded gas issue is no longer a concern.
IMPROVING CANADIAN OFFICIAL
PRESENCE, INFORMATION FLOWS AND ADVOCACY IN THE U.S.
Three other key issues discussed before the Committee were (a) the
adequacy of Canada’s official presence in the U.S., particularly at the
local and regional levels; (b) the provision of information to U.S.
decision-makers on the state of the bilateral trade relationship and Canadian
security actions that have been taken; and (c) the amount of advocacy work
being undertaken in the U.S. with respect to Canadian trade interests (e.g.,
softwood lumber, agriculture) and border issues.
On the first point, the Committee heard from a number of witnesses that
a greater presence is required in the U.S., especially in regional centres
outside Washington. In the 1990s,
resource cutbacks had reduced manpower in these locations, hampering efforts
to gather market intelligence, develop commercial policies and engage
Americans at the local, regional and state levels.
The February 2003 budget attempted to alleviate this problem, allocating
$11 million to enhance Canada’s representation in the regions.
It is anticipated that the increased funding will be used by DFAIT to
open between five and seven new consular offices, in addition to the fourteen
diplomatic and trade offices that it currently has in the U.S., to promote
trade, especially in strategic regions such as the U.S. Southwest.
Even with the proposed addition, the total number of regional offices
would still only add up to just over one half of Mexico’s 38, a level which
the Committee finds unacceptable.
Ambassador Kergin suggested that while a higher budget would always be
welcome, the Canadian Embassy in Washington was reasonably well endowed
financially and that the real need was to develop greater regional
representation.
Paul Frazer concurred, pointing to the different demographic and regional
composition now in place in the U.S. and the need for new consulates in
high-growth regions of the country. However,
he called for appropriate staffing of these consulates in addition to the
injection of new funding for the regional offices.
William Lash III was of the view that Canada required a higher profile in
the U.S. and additional regional offices.
Injecting greater provincial representation in the U.S. would also be
helpful.
Not all of the witnesses shared the view that more resources were needed
in the United States. Roy
McLaren, for one, made two key points against such action.
First, the private sector in Canada is more than capable of servicing
the U.S. market; it does not require additional government assistance.
Second, investing additional resources in the U.S. will increase our
trade dependence on that single market even further.
He argued that government resources should, alternatively, be invested
outside the U.S., in order to help Canada diversify its trade relationships.
While the Committee wholeheartedly accepts the need for trade
diversification – this topic will, in fact, be addressed in greater detail
below – it also accepts the fact that Canada is not adequately represented
in key regions of the United States, such as the South and Southwest.
New offices need to be established in those locations, and their
principal mandate should be to boost sales of Canadian products and services
in the important economic regions of the U.S and, as Laura Macdonald
(Professor, Carleton University) told the Committee, to make Canadian
interests and concerns well known outside Washington.
Less emphasis should be placed on the traditional diplomatic services
typically offered in consular offices, and use should be made of honorary
consuls in the event of budgetary restrictions.
Another
issue involves the transmission of adequate information to Americans on the
current security and trade situation between the two countries.
According to Donald Barry, Canada is receiving unfavourable reviews in
the U.S. media and the American legislative community, and those negative
public and legislative perceptions need to be rectified.
He suggested that Canada should be spreading the message throughout the
U.S. that it is a reliable security partner (i.e., we are not a security
threat), that it is a vital economic partner – indeed, Canada is the leading
merchandise export market for 39 of the 50 states – and that it is the
largest foreign supplier of oil, natural gas and hydroelectricity to the
American market. The Committee has already recommended (see Recommendation 1)
that an information campaign covering security issues be launched.
Barry observed that the task of altering perceptions of Canada will be a
difficult one because Americans feel so vulnerable on security issues and
because security is such a vital current priority. He felt that we should be working together with U.S.
officials to help destroy these perceptions.
Several other witnesses remarked that negative security incidents
involving Canada seem to be magnified by the media while positive progress
(e.g., the Border Action Plan) receives no coverage.
In Washington, Theresa Cardinal Brown (Co-Chair, Americans for Better
Borders Coalition) urged Canadians to educate the U.S. Congress on our
immigration policies to reverse the current perception that they are weaker
than those of our neighbours to the south.
William Lash III called on Canadian politicians to “wake up” their
U.S. counterparts to the Canada-U.S. trade reality.
Finally, improving the advocacy of Canadian interests in the U.S. was
also on the minds of some of the Committee’s witnesses.
In May 2002, the Government of Canada decided to devote $20 million to
an advocacy campaign, with the majority of that funding ($17 million) provided
in the form of a grant to the Forest Products Association of Canada to help
advocacy efforts in the area of softwood lumber.
During his appearance before the Committee, Minister Pettigrew stressed
the need for an expansion of Canada’s advocacy program in the United States. With additional funding, the federal government could
intensify efforts to inform U.S. legislators about the Canadian position on
the softwood lumber dispute and the price that American consumers are paying
as a result of the duties imposed on Canadian forest products.
Barry also noted that Canada’s impact on the U.S. is mostly felt at the
sectoral and regional levels. Perceptions
are rarely aggregated at the national level, except for a general view that is
not well informed. Sectoral and
regional voices often hold sway, and Canada has to find allies to counter the
pressures coming from those sources. Holding
regular meetings between Canadian premiers and U.S. governors would be a
useful development in that regard, according to Frazer.
Laura Macdonald commented that Canada had to learn how to aggressively
and effectively lobby the U.S. Congress on key issues and concerns, and it
needed to devote greater financial resources to the lobbying effort in the
U.S. as a whole.
Another Committee witness, Rolf Mirus, pointed out that marketing Canada
in the U.S. is not an easy job. Personal
relations at the regional political level are starting to evolve, and Thomas
Ridge and John Manley enjoy a good working relationship.
To raise Canada’s profile in the U.S., we need to change our policies
(e.g., strengthen our military) instead of spending money on advertising in
newspapers.
Finally, Richard Harris mentioned that a key area to work on is the
political relationship between the two countries. Solidifying this bilateral relationship can have a very
important feedback effect on the two countries’ commercial relationships.
In Washington, the Committee heard from a number of witnesses about the
importance of engaging legislators on both sides of the border in a meaningful
dialogue on the bilateral relationship. The
existing Canada-U.S. Parliamentary Group has been active in this area for many
years, and greater interaction between the various legislative committees in
Washington and in Ottawa should also be encouraged.
The Committee concurs with Minister Pettigrew that advocacy efforts need
to be intensified, and is cognizant of the need to foster excellent
relationships with both the executive and legislative branches of government
in the United States. To
make progress in each of the three areas covered in this chapter of the report
(Canadian official presence, information flows and advocacy in the U.S), the
Committee recommends:
|
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. |
[1]
He
was also a special adviser to the Government of Canada during the
negotiations leading to the Canada-U.S. FTA.
[2]
These
delays can be contrasted with designated standard wait times: 10 minutes for
the Monday-Thursday period, and 20 minutes for the Friday-Sunday and holiday
periods.
[3]
Canada And The United States Sign Smart Border Declaration,
Department of Foreign Affairs and International
Trade News Release No. 162, December 12, 2001.
[4]
Under
Code Orange, U.S. border staff perform a trunk inspection on 75% of all
vehicles. The highest level of security alert (Code Red) requires even
more stringent coverage, with all vehicles being inspected, but it is only
issued for specific, targeted threats.
Unlike orange and yellow, red is not a general state of security.
[5]
Under this agreement, the
claim for asylum has to be heard in the first country of arrival.
As Bertin Coté (Deputy Head of the Canadian Mission in Washington)
told the Committee, a full 70% of refugees arriving in Canada do so across
the land border, and they will now have to be processed in the U.S.
[6]
For FDA-regulated products,
the draft regulation requires that notice be given by noon the day before
the truck in question reaches the border crossing.
The advance notification requirement is thus different for food than
for other products. Without
adequate notice, the product will be refused entry into the U.S.
[7]
In
this regard, it would be helpful if U.S. customs officers were to apply the
regulations governing trade more consistently across the border.
[8]
The U.S. is concerned about
the administration of Canada’s refugee policy and the resulting
possibility that terrorists could slip across the border.
[9]
In the end, the Uruguay Round did not result in the hoped-for changes
to existing AD and CVD regimes.
[10]
Gilbert R. Winham, “Dispute Settlement in NAFTA and the FTA,” in
Steven Globerman & Michael Walker, eds., Assessing NAFTA:
A Trinational Analysis, The Fraser Institute, Vancouver, 1993, p.
270.
[11]
In fact, the
U.S. did so shortly after it lost a NAFTA challenge to Canadian softwood
lumber pricing and allocation policies.
The amendments to its trade remedy legislation were designed to
reverse the most controversial aspects of the binational panel’s decision
in favour of Canada.
[12]
Wendy Dobson, Shaping the Future of the North American Economic
Space: A Framework for Action,
The Border Papers, C.D. Howe Institute Commentary, Number 162, April
2002, p. 21.
[13]
As was previously mentioned, these do not exist.
[14]
Gilbert Gagné, “North American Free Trade, Canada, And US Trade
Remedies: An Assessment After
Ten Years,” The World Economy, January 2000, p. 90.
[15]
Patrick Macrory, “NAFTA Chapter 19:
A Successful Experiment in International Trade Dispute Resolution,”
C.D. Howe Institute Commentary, Toronto, 2002.
[16]
Ibid., p. 2.
[17]
Ibid.
[18]
William J. Davey, Pine & Swine:
Canada-United States Trade Dispute Settlement – The FTA Experience
And Nafta Prospects, The Centre for Trade Policy And Law, 1996, pp.
286-287.
[19]
According
to De Mestral, the International Joint Commission (IJC) was not the answer.
Although the IJC is very good at providing reports, facts and
recommendations, it does not provide final decisions.
He felt that citizens and firms should be able to raise these issues
before the domestic courts.
[20]
In Washington, two concerns about U.S. access to the Canadian market
were also brought to the Committee’s attention:
the issue of insufficient patent protection as it applies to
pharmaceuticals, and the perceived low level of personal duty exemptions for
U.S. travellers.
[21]
In Washington,
the Committee heard the concerns of the following groups and businesses on
the softwood issue: American Consumers for Affordable Homes, National
Association of Home Builders, American Homeowners Grassroots Alliance,
Consumers for World Trade, International Mass Retail Association, and Home
Depot.
[22]
The duties have added US$1,000 to $1,500 to the price of a home.
[23]
On March 26,
2003, the Province of British Columbia announced sweeping changes in its
forest management practices, including a new requirement that would force
major licensees to give up 20% of their long-term forest tenures to an
auction process. After adding existing log sales and sales to private lumber,
a full one quarter of the total provincial harvest would be priced by market
forces. Ontario has since
followed suit with its own policy reforms, and Quebec is considering changes
as well.
[24]
The Committee received evidence in Washington that during the
discussions on an interim agreement earlier this year, a Canadian industry
representative had even proposed a return to the quota system.
Officials on both sides of the dispute are, however, wary of this
suggestion.
[25]
On this point, the U.S. Administration is of the view that the Byrd
Amendment should be the final issue to be resolved, once a comprehensive
interim agreement is realized.
[26] There is also the critical issue of the return of the duties already collected.
[27]
A U.S. Senate
bill co-sponsored by Senator Olympia Snowe (R-Maine) aims to repeal the Byrd
Amendment and divert duties collected in AD and CVD cases to a new program
providing federal grants to communities negatively affected by trade.