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.

D.  NAFTA’s Chapter 11

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. 

  

B.  Agricultural Issues

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.


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