Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 4 - Evidence, February 17, 2003 - Afternoon
VANCOUVER, Monday, February 17, 2003
The Standing Senate Committee on Foreign Affairs met this day at 1:34 p.m. to examine and report on the Canada- United States of America trade relationship and on the Canada-Mexico trade relationship.
Senator Peter A. Stollery (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, this afternoon we have with us Mr. Les Reed, who is a forest policy consultant and Mr. Billy Garton who is a partner at Bull, Housser & Tupper. Thank you for taking the time to give us the benefit of your wisdom this afternoon.
Mr. Billy Garton, Partner, Bull, Housser & Tupper: Honourable Members of the Senate, ladies and gentlemen, my name is Billy Garton and I am a lawyer here in Vancouver with the law firm of Bull, Housser & Tupper. My practice focuses on natural resources law, primarily in the forestry and mining sectors. I am not an expert in international, NAFTA or U.S. trade law, nor do I represent any of the current litigants in the current Canada-U.S. softwood lumber dispute — at least in respect of that dispute. My remarks today are my personal observations and are not necessarily shared by my firm or any of its clients.
As a lawyer and a private citizen, I have a personal interest in legal matters that affect Canada's forest industry. About a year ago, I published in the Canadian Business Law Journal an article that I presented in October 2001 at the Faculty of Law at the University of Toronto, Ontario. I suspect that may be the reason I was asked to join you today. That article is entitled ``The Canada-U.S. Softwood Lumber Dispute: Is Canada Stumped Again?'' Copies of this article have been distributed among you.
My article does not make specific recommendations for change to the trading relationship with the U.S. or Mexico. However, it nicely illustrates both the history of this long-running dispute and the inherent weakness of the U.S. case now that they are bound by the World Trade Organization, WTO, rules. The history and the strength of Canada's case shows that trade law has proven to be a blunt and almost useless instrument to resolve this long-standing dispute concerning a $10 billion per year export to our largest trading partner.
I do not believe that B.C. lumber production benefits from a countervailable subsidy. However, if Canada is right at law — as it so plainly appears to be — and we are still litigating more than 20 years after the U.S. lumber lobby went after Canada in 1982, we know something has to change in the way these disputes are dealt with under treaties and under domestic law.
I will not attempt to recite the history of the softwood lumber dispute, however some context is necessary to see how the softwood lumber dispute is less about fair and free trade and more about limiting Canada's access to a very lucrative lumber market.
The Lumber I dispute that commenced in 1982 ended with some critical findings by the U.S. Department of Commerce. Their statements ring true today as much as they did in 1982. They concluded that:
... a comparison of Canadian stumpage prices with U.S. prices would be arbitrary and capricious in view of the wide differences between species composition; size, quality and density of timber; terrain and accessibility of the standing timber throughout the United States and Canada.
They further stated that ``Canadian prices for standing timber do not vary significantly from U.S. prices; indeed, in some cases the Canadian price may be higher.'' That is how they dismissed the U.S. lumber lobby's dispute in 1982.
The Chairman: Please cite which tribunal that was for the record.
Mr. Garton: That is the U.S. Department of Commerce in their final finding in the 1982 softwood lumber dispute and a reference to it can be found in the footnotes of the paper I distributed.
Undeterred by failure in that proceeding, the U.S. lumber lobby brought a new petition in 1986 at which time the U.S Department of Commerce determined that stumpage payable in Canadian provinces provided a benefit to lumber producers. That is still a test that is used today. In their analysis, the cost to government of producing standing timber exceeded government stumpage revenue. Therefore, they used a cost-versus-benefit kind of analysis.
A memorandum of understanding, MOU, was executed between Canada and the U.S. under which Canada collected a 15 per cent export charge on softwood lumber. The MOU provided for reductions in the export tax if provinces implemented replacement measures increasing their stumpage fees or other costs imposed on timber production. In British Columbia, these costs increased dramatically in subsequent years.
In 1987, we saw the introduction of the ``comparative value pricing system,'' which greatly increased stumpage in the province. However, other changes at that time downloaded the silviculture — the tree-planting obligations — to the forest industry and the province as well and ended the practice of being able to deduct those expenses from the silviculture bill.
The combined effect of these and other changes reduced the export tax collected under the 1986 MOU to zero in the case of British Columbia. Canada cancelled the arrangement in 1991 when about 92 per cent of all lumber sales to the U.S. came from exempt provinces or had greatly increased stumpage charges.
Following Canada's termination of the MOU in 1991, the Department of Commerce took the unusual step of self- initiating the Lumber III trade dispute. This time, the department rejected the cost-to-government approach. We had increased the cost of providing timber to forest companies and they decided they would not use that approach this time. Instead, instead they alleged that subsidies existed based on comparing selected stumpage fees for timber in Canada with timber in the United States.
What is interesting about the Lumber III dispute is that it took place after implementation of the Canada-U.S. Free Trade Agreement. Canada appealed the determination of subsidy to a binational panel and prevailed on all of the key issues regarding subsidy. We also appealed the International Trade Commission's final determination of injury and that panel also concluded that the commission's decision was not sustainable by the evidence, each time remanding it to the commission for reconsideration.
The result of this success in the Free Trade Agreement appeals was a request by the U.S. for an extraordinary challenge committee, ECC. In 1994, that committee upheld the rulings of the binational subsidy panel. The Department of Commerce then had to revoke its countervail duty order and some of the duty deposits were refunded immediately. However, the U.S. retained about $800 million of countervailed duty. In a strongly worded dissenting opinion, the lone U.S. judge on the extraordinary challenge committee questioned the constitutionality of the whole Free Trade Agreement dispute resolution process. Shortly after that the U.S. lumber coalition filed a constitutional challenge to the chapter 19 dispute resolution process, requesting a declaration that chapter 19 of the Free Trade Agreement and the U.S. laws implementing it were unconstitutional.
About three months after that, the U.S. and Canada announced that they would enter into a consultative process that resulted in the Softwood Lumber Agreement, the U.S. agreed to refund the $800 million, and the U.S. lumber coalition withdrew its constitutional challenge. I can recall those refund cheques coming from the United States Department of Commerce. They came in small amounts. Some people got stacks of cheques that high that had to be checked against each shipment to the U.S.
In the meantime, throughout the 1990s British Columbia dramatically increased stumpage again with the passage of the Forest Renewal Act in 1994, which added what we call ``super-stumpage.'' at times when lumber prices are high. That money was used to fund Forest Renewal British Columbia, a Crown corporation that ended about a year ago.
We also brought in the Forest Practices Code, which again added very significant cost to the operation of forest companies in British Columbia. Throughout the 1990s there were numerous additions to parks and protected areas in B.C. that doubled the parkland base from about 6 per cent to about 12 per cent of the land base of the province, effectively reducing the available provincial timber harvest with no change to fixed costs in the forest industry.
As honourable senators know, Lumber IV, the current dispute, started as soon as that five-year Softwood Lumber Agreement died, proving that temporary solutions will not necessarily put this dispute to bed even when significant changes are made to stumpage and the cost structure and timber harvesting rights in Canada.
What is different this time is that the U.S. is now a signatory to the WTO subsidies agreement and has modified its laws to conform to its WTO obligations. While Canada failed to get a definition of subsidy in the Free Trade Agreement and NAFTA negotiations, the WTO subsidies agreement provides a test for subsidy that constrains the U.S. preference for changing the rules of the game when the law does not suit their objective of limiting Canadian access to U.S. lumber markets.
For a finding of a countervailable subsidy under the new U.S. law and the new WTO rules it is necessary to meet a three-part test: First, the program must be provided to a specific industry or group; second, the program must provide a financial contribution; and, third, the program must confer a benefit.
Canada has strong arguments to make on all these points and has raised all of them with the WTO. Perhaps the strongest argument arises from that third requirement that the program must confer a benefit. The term ``benefit'' is not specifically defined in the WTO subsidies agreement. However, guidance is found in article 14 of that agreement that establishes a test for determining whether a benefit has been conferred by government. The test specifically provides that ``the provision of goods or services ... by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration.'' It goes on to say that the adequacy of remuneration is determined in a specific way, and I will quote from article 14(d) of the WTO subsidies agreement.
Adequacy of remuneration shall be determined in relation to prevailing market conditions for the good or service in question in the country of provision or purchase...
The U.S. Tariff Act has adopted that. Canada argues that this benefit test requires comparison of private and public timber prices in Canada and not cross-border comparisons of stumpage between Canada and the U.S., which is at the heart of the U.S. evidence that there is a countervailable subsidy provided by stumpage rates in Canada. Canada's interpretation was rejected by the Department of Commerce in their final determination. However, it was upheld by a WTO panel on September 27, 2002. In their report on the preliminary determination by the Department of Commerce they said that by using prevailing U.S. stumpage prices — which, by definition, do not constitute the prevailing market conditions in Canada — the U.S. Department of Commerce acted inconsistently with articles 14 and 14(d) of the Subsidies And Countervailing Measures Agreement in determining the benefit to the recipient. They therefore also acted inconsistently with article 1.1 of the Subsidies And Countervailing Measures Agreement in determining the existence of a subsidy. They basically said, ``You lose on your main point.''
That decision was rendered 13 months after the preliminary decision of the Department of Commerce and after about 18 months after the Lumber IV dispute commenced. Now, from a plain reading of U.S. law and the WTO rules it seems a cross-border comparison of stumpage prices cannot support a finding that Canadian softwood lumber is subsidized.
I have not dealt with the anti-dumping duties, which are based on company-specific behaviour in the marketplace, but the policies and procedures used to calculate dumping margins appear to be rife with opportunities for protectionist abuse. Unfortunately, I think that applies anywhere in the world where the WTO anti-dumping agreement is enforced.
The critical result of adding an anti-dumping allegation is the power that it gives the U.S. lumber lobby to veto arrangements that the U.S. government and Canada may wish to make to resolve the dispute. The price of Canada's success in its sawmills and in the forest has been a sustained effort by the U.S. lumber producers to use U.S. trade laws to limit Canadian access to the U.S. lumber market. Softwood lumber is not a unique commodity; it is not treated with any special care in NAFTA or the WTO. It is like the proverbial canary in the coal mine, illustrating the fate that could befall almost any commodity traded between our two countries.
How we resolve this dispute can have far-reaching implications — not just for us but also for trading relationships throughout the world. A long-term resolution through the courts or through negotiation is unlikely to result in a lasting solution if it requires privatization of Crown forest land in Canada or protection of a high-cost U.S. lumber industry, as neither result seems acceptable from either an economic or a policy perspective. What we need in the rules- based trading regime are effective dispute resolution mechanisms and remedies that will be credible, timely, and will have a prophylactic effect to discourage protectionist behaviour before it starts?
I have four recommendations in that regard. First, we should consider the imposition of tighter timelines that are responsive to the needs of all the parties for expedited treatment of these disputes. The WTO timelines are aggressive and the WTO agreement was to impose rules with aggressive timelines, but look how long it has taken us and we still do not have a decision on the Department of Commerce's final determination of countervail duty. These disputes drag on for many months and that should not be required with high-profile disputes. Canada has asked for expedited resolution of these disputes and the Americans have refused to go that route. Yet, perhaps in order to deny a party- expedited resolution of a dispute you should have to provide good reason or put up security or something.
My second recommendation is that binational panels should have representation from countries that are not a party to the dispute — under NAFTA in this case. This might help address the risk of perceived bias and improve the credibility of the decisions that are made. Currently, the chair of a NAFTA panel can be a citizen of one of the other parties but there is sort of an odd ``reverse citizenship'' model in choosing the other four members of the panel. Perhaps the credibility of the decisions might be enhanced if it was wide open to select from a non-citizen of any of the litigants.
Third, it is obvious there should be effective remedies beyond continually remanding the decision back for reconsideration. Binational panels could be given the authority to make orders if that proves to withstand constitutional scrutiny. One example would be in addition to the existing grounds for requesting an extraordinary challenge committee, perhaps a party who ``wins'' at the binational panel level might be able to request extraordinary remedies from an extraordinary challenge committee if the party who loses at the panel level resists implementing the panel's recommendations, or repeatedly resists.
Finally, in trade disputes where the ultimate remedy may simply be a refund of collected duties — and of course, that is in doubt as well — perhaps there should be scope for an award of additional damages or costs in cases where there is an abuse or obvious misapplication of the rules.
Mr. Les Reed, Forest Policy Consultant: My presentation has three separation sections. First, I will summarize the dominant issues raised by the U.S. lumber cartel. Second, I will relate these to what I call the central core of the dispute — namely, the saw timber deficits in the United States. Third, I will offer my view of an appropriate Canadian response. It is also my intention to take a longer-term view. Most of your witnesses tend to focus on what is going on today or next week or next season at the most but I will give you a kind of a long-run view of the dispute.
The first issue is market share. I first went to Washington D.C. in 1962 to appear before the U.S. Tariff Commission in the softwood lumber hearings. We won that one hands down. Canada's share of the U.S. softwood market then was 12 per cent. By 1995, it had tripled to 36 per cent. Why did the Canada share grow? The answer is really very simple: For 200 years the U.S. plundered their forest, wiping out 30 per cent of the forest area in their half of the continent. That area is equivalent to one-and-a-half times the combined area of Washington, Oregon and California, or twice the area of Texas. It no longer is.
In the 1980s, they began to shut down federal and state forests for spotted owls and wilderness preservation reasons. The new loss to their sawmills was approximately 50 million cubic metres in annual log supply, a volume equal to the B.C. Interior log production in the year 2001. That loss was a real headache for their sawmills and it had ``Made in USA'' written all over it. Canadian provincial forest policies have nothing whatever to do with the American shortfall in saw timber supply. Canadian sawmills simply moved into the market vacuum, which was created initially by American forest policy.
There are other reasons as well why we did well in the U.S. market. Carpenters in the U.S. have a decided preference for Canadian spruce, pine, or fir over southern yellow pine. Our mills are 60 per cent larger on average and much more efficient than theirs.
The second issue is the American's allegations of stumpage subsidy in Canada. Yes, Canada's stumpage charges are usually less than in the United States — not always, but usually. Why? Because our forests are more remote and they cost more to harvest. They carry expensive burdens of road building and reforestation — items not charged to companies logging federal timber in the U.S. Hence, the U.S. Department of Commerce, USDC, contrives a flimsy case against our provincial forest managers, charging that we sell our timber at less than its market value and thereby subsidize our sawmills. They base this allegation on a ridiculous cross-border stumpage comparison, insisting, for example, that a cubic metre of logs in Prince George should carry the same stumpage as a cubic metre in Pine Hill, Alabama. Their method of calculation has now been declared illegal, of course.
Given this, they still have the gall to suggest that our provinces adopt the U.S. Forest Service system of bidding on federal timber sales. However, their bidding system is broken. It is a national scandal in that country; it is rife with collusion. It is notorious for below-cost timber sales. At last count, it was costing the U.S. taxpayer an amount approaching U.S.$1 billion annually in subsidies to U.S. sawmills. They invented subsidies, not only for sawmills but also for agriculture and other things. They are masters at subsidies but that does not stop them from charging someone else with that.
Moreover, the U.S. lumber cartel has bragged that they sell 90 per cent of their timber at public auction. It is a shameless fabrication. In less polite company I would call it a barefaced lie. Only 10 per cent of American sawlogs are sold at ``auction,'' and even that is a stretch of the truth.
Here are the facts concerning sawlog supplies: Fifty per cent are owned by the forest industry; bidding is rare; they simply cut their timber and use it. Fifty per cent of their cut comes from small private woodlots; bidding is rare. In fact, International Paper, the prime supporter of the U.S. coalition, has been charged recently with monopoly practices driving down the prices of stumpage in the U.S. south. They are facing charges of monopoly control and depression of prices — a fine lot to have fronting an action against Canada. That is what they do. They put a man in a pick-up truck and he goes out into the country and he sits at a farmer's table and he says, ``I want to buy your wood and I'll give you this much today.'' Maybe he has had a visit the day before or the week before from a second, but he rarely gets a visit from more than two or three. They work in little zones of influence around a pulp mill and the small private woodlot is taken to the cleaners by these big companies.
Only 10 per cent of U.S. timber cut is from public lands, but not by sealed bids. It is an oral auction, usually with only three to four bidders. In economics, we call this ``oligopsony'' or fewness of buyers. This ``wink-and-a-nod'' system is rife with collusion. It is not perfect competition or market-based timber sales by any stretch. We threw away that system because it did not work. It was unfair.
The third issue is log export regulation. The U.S. lumber cartel demands that British Columbia remove all constraints on log exports. Maine sawmills demanded the same thing from New Brunswick back in the 1820s. Did you know that current U.S. legislation prohibits even a single log from being exported from their federal and state forests in the U.S. West? That is a line drawn through the Dakotas and Texas west of the 100th meridian. Not a single log. Here in British Columbia, you can get a permit to export your surplus timber from public lands.
The interesting thing is that their legislation carries this interesting title: Forest Resources Conservation and Shortage Relief Act. That is their problem; they are short of timber. They do not often recognize this fact in such bold language but there it is in the title of legislation. Moreover, there is an interesting substitution rule that forbids a company from buying public timber if it is exporting private timber from the same region.
The same rule applied in B.C. would force Weyerhaeuser to forfeit all their coastal timber licences. Weyerhaeuser cannot export timber from its private lands in the United States and still bid for timber in the same zone. Weyerhaeuser is quite big here on the coast; they now harvest something like 5 million cubic metres a year, a quarter of coastal lumber production. Imagine them giving up licences of that magnitude. The Congressional Research Service has told the U.S. Department of Commerce that log export controls imposed in the U.S. subsidize the U.S. sawmill industry. I think this is hypocrisy at its worst. They profit in a major way from the very same practice they condemn in British Columbia.
Should B.C. deregulate its logs, its log exports unilaterally? I say never. That is a goofy suggestion. It makes me sick, frankly, to hear this nonsense being proposed by companies and by governments in this province. Should we synchronize our regulations with theirs? Now, there is a real question. I say why not? If they want a level playing field let us give them one.
The central issue in the dispute is that the U.S. lumber cartel has a major and dominant problem — namely, a massive saw timber shortage. Their supply is deficient — not only in volume but also in quality of lumber products — especially in the U.S. south. They are deficient because, as a rule, they have to pay more for their wood than we do. The reason for that is that they simply are not competitive in saw timber costs. In a nutshell, that is what underlies their complaints about our market share, our stumpage practices and our log export controls. Their timber deficit is the central issue in the softwood dispute. Back in 1962, the U.S. Tariff Commission put their finger on the softwood problem in this perceptive finding, and I quote:
The most important cause of the increased imports is ... the rapidly rising price of timber and purchased logs. Underlying this development is the limited commercial availability of softwood timber in the United States, particularly of saw timber size, and the resulting intense competition among buyers of such timber.
In 1962, I helped persuade that commission to reach their conclusion. We got a five-to-one unanimous decision out of a U.S. Tariff Commission, which was regarded up until that time as highly protectionist. I think we made a pretty good case and I wish we were so lucky now.
What is the Canadian response? In the short run, all of the provinces must hang together — no freelancing, as British Columbia is doing now. Divide and conquer only works to the advantage of the U.S. cartel and it will backfire on British Columbia. The B.C. proposal for an export tax would cripple a large share of Canadian sawmills, given their highly unlikely assumption of price levels moving above U.S.$300 per thousand board feet. There is a sliding scale in this proposal that we impose on ourselves, an export tax. However, you do not really get much relief until the price gets up to $300 per thousand board feet. I do not know anybody in B.C. who expects the price to go up and stay at that level for any length of time in the next two, three, four years.
We must hang together. We must rely on the WTO and NAFTA appeals panels. I know it takes a long time. You have just been advised that perhaps we should change the process in some way to shorten up this long delay. However, in the longer run, Canadian sawmills only have one sensible strategy: They must reinvent their industry; they must lower their cost by 30 per cent; they have to increase the value of their final products by, say, 20 per cent to 25 per cent and they have to somehow get relief from tax and costly regulatory burdens.
Many of our companies are already lowering their costs and reinventing themselves. If the U.S. tariff vanished tomorrow, our sawmills would still face two major threats: offshore competition from the Swedes, the Russians, the Fins, and the Germans, from Chile and New Zealand, and substitution by non-wood products. Non-wood substitutes now have 15 per cent of the markets we enjoyed in 1970. That is a big hunk. We fell asleep at the switch. We thought things would always be good. It has not turned out that way.
Here is my final caveat: History has one paramount lesson for us in this dispute. There have been some 30-odd tariffs on Canadian lumber since 1789. That was the year in which the first Congress of the United States had sittings. The first substantive legislation was a protectionist tariff — described in those terms. I know there was a little five-liner ahead of that that says the Congress has the right and responsibility to appoint a clerk, but the first substantial legislation was a protective tariff. We have not been free of tariffs on our logs and lumber very much since that time.
Given that record of protection in Congress and in the industry, the U.S. lumber cartel will never walk away from this fight and even when we beat them before the WTO and NAFTA — in the coming months we expect to do that — they will still return later with a new set of trumped-up charges. No matter how the present episode ends, U.S. protectionism will not end. Therefore, it is essential that we proceed with NAFTA and WTO actions. We must not jeopardize our future lines of defence by some foolish agreement to abandon our appeals. To do so would be to legalize the cross-border comparison that is the only reason for the high countervail duty rate in the first place.
The WTO has already agreed that the U.S. subsidy claim is based on an illegal comparison. This was a body blow to the U.S. cartel and we cannot afford to throw away that gain. This is a battle we can win and it is no time to run up the white flag.
Senator Austin: Thanks to both of you for your presentations. I consider them to be extremely valuable to the consideration of this committee.
I would like to start with Mr. Garton. There seems to be some confusion about the role of NAFTA and the role of WTO. Does WTO supersede in its rulings, any rulings that might come under NAFTA panels? Could you take us through that as counsel and tell us what the relationship of dispute settlement and fact-finding is between those two systems?
Mr. Garton: I wish I could. I wish I understood it better than I do. For me the role of the WTO and the subsidies agreement is not so much in the dispute resolution realm, although their disputes will be naturally dealt with faster because they do have tight timelines. However, the real benefit of the WTO is giving us that definition of subsidy that does not exist in NAFTA. Therefore, it is not so much on the dispute resolution side as much as on the substantive side of law that I think Canada won a significant plus when the U.S. acceded to the WTO subsidies agreement.
The NAFTA dispute resolution and the WTO dispute resolution running parallel certainly splits our resources for litigating something like this, but the WTO remedies are particularly unattractive. The remedies you get at the end of the day through the WTO are things like political persuasion, surveillance and supervision by the WTO if the U.S. forgets to, or neglects to, do anything about it and of course that wonderful remedy of the ability to impose retaliatory tariffs. I do not think we will get very far imposing tariffs on all the softwood lumber that the Americans ship to Canada. The WTO dispute resolution mechanism is one that can quickly make decisions for us or for the parties and tell the rest of the world about it; however, they do not provide meaningful remedies. That is the defect in that system.
The Free Trade Agreement system is a slower parallel track. The same arguments will be made, but if we have credible binational panels, it will probably have greater persuasive power. It is quite interesting that, in 1991, when they went to the extraordinary challenge committee, the committee said that the binational panel was right and the Department of Commerce was wrong, that pretty much ended the matter. Certainly, it got us back some of the duties right away and resulted in as close to an order as we will be able to get.
I do not pretend to understand the two systems very well; they each have their pros and cons. It would be nice to have best of all worlds put into one system and not have to split our resources.
Senator Austin: I understand one of the significant differences is that with respect to NAFTA and the issues we are dealing with, the U.S. can change its domestic law and therefore change the criteria on which a judgment is made. We can do the same thing but that is ``symmetrical'' in its significance because of the size of the two markets. The WTO does not have that freedom.
One of the issues that troubles me in the area of sanctions is the return, after a ruling, of money collected improperly. For example, with respect to the Byrd Amendment, Congress has taken no action and the U.S. says, in effect, that they cannot deal with the matter unless Congress deals with it. With Lumber III, while some money was returned quickly, all of it should have been returned. We found ourselves having to negotiate for a very large part of it. Now we are sitting with the evidence before us that some U.S.$600 to U.S.$700 million has been collected in the current dispute and it might run to double that. There is no indication — even with findings that are adverse to the U.S. case — that those monies would be returned, which creates a huge negotiating lever for the United States.
Could you comment on the inadequacies of the remedies or adequacies? One of our objectives as a committee is to examine the trade relationship and particularly examine the way in which dispute settlement mechanisms work or do not work.
Mr. Garton: I think it is contrary to the rule of law that you could lose and be able to keep the duties. That is what I understand U.S. legislation permits. Just as the world community took on the Byrd Amendment and succeeded in the WTO, I think the world community will have to work hard on changing that approach. I do not know whether Canada takes the same approach. I do not know whether our rules would provide for the same thing.
One of the problems we have to avoid in all the finger-pointing over the softwood lumber dispute is hypocrisy. Mr. Reed has done a great job of pointing out the hypocrisy in the U.S. position. I do not know what our rules are because I have not made a study of it. However, I quite agree, it would be unheard of in a civil dispute between two parties in Canada. The court just would not permit it. Typically, the court would allow a party who was collecting duties like that to post security so that there is money there to collect. That was always our concern with the Byrd Amendment, that once the U.S. Department of Commerce fritters the money away to all the U.S. producers they will never get it back and they will fight even harder to hang on to the money after that.
The Chairman: Obviously, some of these things are not as clear as one might like. I have read the NAFTA part where the binational panels meet and decide on national law. The criticism is that if you lose, then Congress will change national law. Then we have been told that the WTO agreement overrides regional agreements. NAFTA is a regional agreement, and since the WTO agreement in 1996 that that can no longer be done. Can it be done or can it not be done? It must be straightforward. We have been told that the WTO agreements override and are the superior law of trade. Is that so?
Mr. Garton: I do not know the answer to that. I do think that the remedies the WTO have are so limited that they would have a difficult time ordering the money to come back because they do not seem to have the ability to make that kind of order.
The Chairman: A point has been made about the constitutionality of NAFTA — that that was never tested. What I find surprising is that if the Supreme Court permitted a constitutional challenge over NAFTA, does that mean that the U.S. is totally unable to have an agreement with anyone because it can be challenged at the Supreme Court?
Mr. Garton: My understanding is that shortly after that challenge was dropped, the rules regarding binational panels and how they make their decisions were amended somewhat to try to deal with the concerns. However, I also understand it is still an unanswered issue because no one has litigated it. I believe that the central question is whether or not you can have foreigners interpreting domestic law.
The Chairman: I understand.
Senator Carney: I would ask that both these witnesses ensure that we have their CVs as a matter of record. They have both had distinguished careers in this field.
I just wanted to underscore Mr. Garton's point about the limited remedies available under the WTO. When we win a case in the WTO, our remedy is that we can retaliate. On my watch we won one of the first countervails against the U.S. It had something to do with corn. In the middle of the softwood lumber debate, we decided to give it to them where they hurt; we applied a countervail against corn. The first squeals came from our hog producers because Canadian hog producers imported corn into Canada. They were not the least bit interested because they were the ones who were paying. Therefore, these remedies, when you try to enforce them, do not necessarily have the effect.
Mr. Garton, you said anti-dumping aspect of the current dispute, Lumber IV, could undermine any agreement and we must focus on that because the difference between the past disagreements and today's is the charge that we are dumping in the U.S. market below our costs of production. As we heard this morning that is why the mills are going flat out, they are trying to get their production costs down, they are increasing their volume and they are shipping it to the U.S. and lowering the prices, which is exactly what the American producers will not want.
Could you elaborate on your comment that the anti-dumping could undermine any agreement? We did not hear much on anti-dumping this morning and we have got on a route to settlement in respect of the countervail but not the anti-dumping. What is the fear?
Mr. Garton: You are right. Anti-dumping is new. Lumbers I, II and III did not involve an anti-dumping allegation. However, Lumber IV, the current dispute, does.
I am not an expert on U.S. law, but anti-dumping has been explained to me as a private matter. When individual companies bring a petition, the Department of Commerce must respond and investigate. When they find the dumping activity, they have to follow their procedures, which are laid out in their statements of administrative action and the rest of their Tariff Act. When they find dumping, they are required to impose a duty equal to the amount of the ``dump.'' Hence, you could have a situation where you had a Department of Commerce that was quite willing to turn a blind eye if there was dumping and the industry would cry foul and enforcing the law that way. Another situation could be where Commerce was anxious to find dumping and manipulated the numbers in a way that they can be calculated to find dumping. In such a case, it is a complicating factor because if the U.S. lumber industry is not on side I cannot see how the president gets the authority to deal with the dumping allegations on his own.
Senator Carney: You point out that this is not something that can be controlled, that any individual company can bring this, so it is an Achilles heel that has to be addressed.
Mr. Garton: I think a significant number of companies must bring it. There must be a representative sample.
Senator Carney: Mr. Reed, has spoken to my deepest fears because he talks about the B.C. position. Some of us feel that there is a danger that the B.C. position — which really parallels the U.S. policy bulletin — is a ``sell-out'' to the Americans. The concern is that this approach is basically a grab for our forest resources. The Americans want access to our timber because they are short of theirs and that our public timber — the Crown Jewels of British Columbia —will end up in American hands in the form of jobs and so forth.
Do you feel that B.C.'s position is a sell-out to the American producers? What will flow from it in your view should British Columbia follow this run up the white flag? Is it true that the Americans basically want access to our timber?
The Chairman: Mr. Reed?
Mr. Reed: You are very accurate; it is a sell-out. Only people who have no knowledge of the history of this dispute and of how the various issues are intertwined understand that if we give away on log exports they will just move in and take all of our timber sales. Our logs are even being sold as far south as Scotia, California right now. This is really a shame. We are doing it with surplus logs.
There is something else we have to watch. That is the simple fact that those who are most anxious to get freedom from log export controls, have a lot of private timber. Canadian Forest Products and Weyerhaeuser and TimberWest are working very hard. They formed an association of private timber owners trying to get any kind of controls off of log exports.
Therefore, when you get advice that you should dispense with log export controls, ask them how much private timber they have.
Senator Carney: Lots.
Mr. Reed: Enough to make it very attractive.
Senator Carney: You are talking about log exports. If you shut down the coastal mills, even under existing regulations if you get two refusals for the logs they become surplus. Therefore, if you shut down the coastal mills, then all your logs are surplus and they all go to Oregon and Washington.
What will flow from that? So what, they are talking about an integrated forest industry, maybe all of the logs should go to us. What do you think would be the impact?
Mr. Reed: One of the things is that we will sell the logs and not have the chips and we will shut down some more pulp mills. The sad thing is that there is already a shortage of fibre on this coast. We have got about 30 per cent to 50 per cent more capacity than we have timber licences to supply. This would simply worsen it markedly.
Senator Carney: Then this is the domino effect? If we export the logs, if we do not have the chips, then we close the mills and those towns. Does that apply to the Interior as well as the coast?
Mr. Reed: Not as much. It could very well apply in the southern belt, in pulp mill towns like Castlegar and Cranbrook.
Senator Carney: What can we do to discourage British Columbians from doing that? Have the other provinces got the clout to restrain British Columbia from doing that? I understand that the American proposal would deal with this issue on a province-by-province basis.
Mr. Reed: The U.S. cartel has been very clever. They have said that they would split off B.C. and the Canadians would become a pushover. Crucial to their strategy was that B.C. be separated from the rest.
Senator Austin: I have two questions and one of them is for both of you, if anybody has the answer. In Mr. Garton's paper, there is a reference to the U.S. Commerce Department's decision that lumber and pulp and paper industries are a single industry and yet there has been no tariff on pulp leaving British Columbia. Can you comment on why there is this asymmetrical treatment of softwood lumber and pulp when it is, as the U.S. Commerce Department said, a single industry, vertically integrated?
Mr. Garton: They were forced to take that position because the first test for a subsidy is whether it is provided to a specific industry. Our first line of defence — and one of the reasons we were successful in the 1982 Lumber I dispute — was the argument that it does not go to a specific industry or a small group of industries. Our logs are used by the furniture industry and the pulp industry for chips and plywood and other industries, it is a diverse industry.
To get around that they had to come to the conclusion that it is provided to a specific industry and they believe that a large enough segment of the log profile goes to the pulp industry and the sawmills to constitute — and because they are often vertically integrated — a single industry. I am not so sure anymore because they are not as vertically integrated as they used to be. The 1990s saw a big change in the way timber is held in British Columbia and a real disintegration between the pulp mills and the sawmills.
One of Canada's arguments in the WTO is that stumpage is not provided to a specific industry. We may succeed on that, but they were forced to take that position because of the way their law reads.
Senator Austin: Have they backed away from that in any of the rulings? As you know, they are currently applying the countervail and the dumping to one part of the industry and not to other parts of the industry. How do they explain that?
Mr. Garton: They do not. They say it is a single industry and leave it at that. Another interesting question that I posed to an economist over a year ago — and to which I still do not have a satisfactory answer — is why the duties are cumulative. If we were subsidized to the tune of 20 per cent and if a company was dumping 10 per cent, they are dumping 10 per cent because they are subsidized 20 per cent. However, why would they be cumulative? The answer was that U.S. trade law was developed in the 1930s at a time when an economic analysis was not sophisticated enough to pick up on something like that. I do not find that a very good answer.
Senator Austin: Mr. Reed, we heard from industry witnesses this morning that their pressing problem and the reason they wanted a negotiated settlement and are pressing the provincial government to negotiate a settlement is the growing capital deficiency, which is caused by these tariffs and duties and punitive cash collections.
They say we may have an excellent case in the tribunals and we may eventually win, but we may be a long time dead in industry terms. They simply cannot continue to fund as a total industry. What is your response to that?
Mr. Reed: We are certainly running down our capital in the industry now. The cash flow is not sufficient to pay the tariffs and put a lot of money back into iron, as we say. They are hoping for momentary relief. There is a new wrinkle in the U.S. memoranda that is being circulated now and will be discussed later this week in Washington. Mr. Aldonas has put into this something called the ``effect test.'' Have you heard about that?
Senator Carney: Yes, I read it in the information.
Mr. Reed: It says, in effect, that you cannot earn any credits against your countervailed duty until the effects of your actions are found in the marketplace and in stumpage and so on. These people who think they will get momentary relief may wait three or four years and be dead anyway. To split off and go for this short-term freelancing business to me is just foolhardy. They cannot win on this. The U.S. lumber cartel, will never let them off the hook as long as this effects test is in the package.
Senator Austin: What will go into effect if they agree — and I am not saying I am not with you on your thesis, I am simply discussing the parameters of evidence — that if an export tax goes into effect it goes into effect immediately and at least the rent is collected in Canada.
Mr. Reed: I would not call it rent, with respect. It is hostage payment. What that will do for our mills is absolutely zero. It will be no help to Doman Industries or anybody else.
Senator De Bané: Mr. Reed, I have read your memoir. It is very, very passionate. You explain very well in it the historical background that goes back more than 200 years and that thing has been coming on all the time. There is a lot of indignation in your document recounting the whole thing. Your solution has five or six prongs in it. As Senator Austin said, you pursue a solution quite different from the one proposed to us this morning by the three representatives of the industry.
This morning, Senator Austin raised the point that the remedy at the WTO is that we can impose penalties, tariffs, et cetera, on our imports from the United States. Who wants to put duties on the fruits and vegetables that we import in the winter? We would be shooting ourselves in the foot. This morning I sensed that our distinguished witnesses would like to reach an agreement as quickly as possible. One of them said that he represents 10 companies and in the last three years has paid $80 million in legal fees. He said they could not continue like that.
You stated that the worst policy would be to capitulate after 200 years. On the other hand, what came through very strongly this morning is that we must find a way to put an end to this thing. I am most interested in your views.
Mr. Reed: We really have no option. The difficulty is that you heard at least three points of view this morning. They never get together; nobody in the B.C. forest industry wants to work with other people. They all want to hive off in their own little thing. West Fraser says no deal. Weyerhaeuser says make a deal, the coalition thing is fine with us. Canfor says export logs. It is hard to get Slocan out of the bunker.
There is no consensus in this province. Those who do not like what the leaders are doing keep their mouths shut. That is what you do in the club here in Vancouver; I do not belong to a club. I can tell you their strategy will fail, partly because of the effects test, unless we get some strength and some muscle given to us by NAFTA and WTO tribunals. The sawmill industry in Canada and the whole industry in British Columbia will be permanently crippled. That is exactly the strategy of the U.S. cartel. They want to cripple our sawmill industry. We have no hope making a deal with them. We only have a hope that the WTO and the NAFTA will give us further strength.
We still have to go that extra business of further reducing our costs and squeezing our industry into a much more effective international productive competitive force. Even if the tariff goes away tomorrow, we still have a problem with imports from offshore and from these substitutes.
I cannot imagine why the industry has not been able to see the history of this whole dispute in its full context and realize that there is only one logical thing to do. How much of this is run by the provincial government and how much of it is run out of two or three corner offices in the city?
Senator Carney: This morning John Allan told us that the American proposals will not be intrusive into the B.C. industry. I had raised the spectre that our industry would be run on the economic policy, the forestry policy, the silviculture policy and the social policy would be run by the U.S. producers. Mr. Allan said that he did not think that was the case. Do you agree?
Second, Weyerhaeuser, our respected company, owner of M & B now, and others such as International Paper run operations on both sides of the border. International Paper is a major backer of the coalition in the U.S. and it owns Weldwood, am I correct?
Mr. Reed: No.
Senator Carney: It owns interests in British Columbia.
Mr. Reed: Oh, yes, major interests in the interior.
Senator Carney: Are these international companies, which are pushing for an integrated forest industry and own timber holdings and sawmill capacity and pulp mill capacity on both sides of the border, in a conflict of interest? Is the proposed settlement intrusive into B.C.'s sovereign right to run its own forests?
Mr. Reed: Regarding intrusiveness, the Free Trade Lumber Council people believe that the U.S. Department of Commerce settlement would be very intrusive and I agree with them.
With respect to Weyerhaeuser, they have a long tradition in the United States of belonging to no associations and running by themselves. They are always trying to do a back-room deal with the environmentalists or with the state government or something from which they will benefit. They do not work well together in a group. I am not sure I would call it a conflict of interest; they just have a very confusing agenda. Nobody knows what they are up to. Why did they adopt in effect the U.S. cartel's agenda? What is the difference between the Americans putting 27 per cent on and the Canadians putting on 25 per cent? You give away a quarter and you get back a quarter. What good is it?
Senator Carney: We are asking you.
Mr. Reed: It does not make sense to me, frankly.
Senator Carney: What about International Paper? What about the whole idea of big international integrated companies owning timber and processing on both sides of the border? Are they in a conflict of interest? Are they losing with one hand and gaining on the other vis-à-vis the Canadian-owned companies?
Mr. Reed: Many of us have tried to figure that out. I know that International Paper has a mad on about Canada that started back in New Brunswick about the late 1970s, early 1980s. They had a timber supply problem and the province said ``we are wiping all of the licences out, we will start over, we have got 12 pulp mills and we have only got wood for nine.''
Senator Setlakwe: My question is very short. This morning three witnesses told us that they want a quick agreement. You say that we should go through the NAFTA route and the WTO and that there seems to be uncertainty as to what extent WTO can render a binding decision. Do we have to wait until January 1, 2005 before we know or can we expect a WTO decision to be binding?
Mr. Reed: Some of their decisions will come along within weeks. They have given us very hopeful signs on the Byrd Amendment, on other things. I would suspect that we will get a very important set of gains through WTO. It will be great moral support; it will be great political support when we deal with Washington at a high level. It will not do any good before the U.S. coalition. They are not interested in reason or evidence or facts, they simply want to cripple our sawmill industry. There are two reasons: One is that they can drive up the prices and the second is that for large private landowning companies such as International Paper, the value of their assets will double.
I am confident that we better not sell out and forego the WTO. Some of this will become law. If we give way on the countervail thing and allow their silly proposal to prevail then it becomes law and we can never fight that again.
Senator Di Nino: Mr. Reed, your response indicates that you are presuming what the terms and conditions of a negotiated settlement would be. Are you saying that the lumber coalition in the U.S. will never give us anything we can work with? I find that a little more difficult to believe. I do agree that if we had some additional support from WTO, NAFTA rulings that are in our favour it would be easier to negotiate.
However, it would seem that if we could negotiate a fair agreement with the U.S. commerce department representing the U.S. lumber industry, it would solve our problem. We could do it in a fair way that would respect both sides of the argument so that we can continue on to do business. I am questioning whether you know something we do not know or are you just presuming you already know what the outcome of any settlement of an agreement would be?
Mr. Reed: The U.S. Department of Commerce may some time soon go to the U.S. lumber cartel and suggest that 27 per cent is too much and that they should go for 15 per cent. That would cripple our industry if you put it on permanently with no chance of getting rid of the conditions for three, four, five years.
B.C. is in a strange place where they think that if they negotiate then they can make some side deals and they will have an exit ramp and they can go back to a zero position again. There is about one chance in a hundred that this will happen. The cartel has the ear of Congress, Their thirsty friends in Congress are as protectionist as they have been in 50 years.
Senator Di Nino: Surely Canadians would not sign a deal that would not be in their opinion favourable to Canada?
Mr. Reed: I listen to the people in the Free Trade Lumber Council, I listen to the people here with their cacophony of diverse views. All I can say is that I have no confidence that the B.C. government position is sound.
Senator Austin: Mr. Garton, you appear to take the opposite position from that of Mr Reed. In the last paragraph of your paper, you state, ``A failure to resolve this dispute amicably could have enormous economic implications in Canada. Goodwill, skilful negotiations and political leadership are required to find a solution.'' I take it that you believe there is no alternative to a negotiated solution?
Mr. Garton: Yes, unfortunately. That is why I came with recommendations of how I think the dispute resolution system under NAFTA or the WTO can and should be improved. Like Mr. Reed, I have great faith in our case. I do not have terrific faith in the result that we will get, being one that is lasting and will stand the test of time with a protectionist approach from the U.S.
I think that WTO decisions can be extremely helpful. They can really help our hand in the negotiations and that is why I want to see us pursue the litigation. However, I think we will have to take what we get at the WTO and through NAFTA and find ourselves a long-lasting solution. In the end, it will be some sort of settlement.
Senator Austin: Have you looked at the Aldonas draft public policy document?
Mr. Garton: I have not actually had the opportunity to go through that other than through the press and what others have told me about it.
Senator Austin: I had wanted to ask you some questions about some of the issues raised in that settlement. As you have not looked at his line by line, I had better let you go. I would simply say that it is the view of some witnesses we have seen that this is the basis on which a negotiation for at least an interim arrangement would be made.
If it is a serious proposal, I think we should have a pretty careful look at it.
Mr. Garton: I would like to note our experience with the softwood lumber agreement in 1996. Everyone dropped the litigation at that point, did a five-year agreement and — surprise — when the fifth year came up we had no agreement with the Americans and Lumber IV started right away. Regardless of whether we get an agreement, interim or otherwise, I think we have to be careful to pursue our remedies and find out what the law says and get an impartial body to tell everyone what the law says and then we know where we stand.
Senator Austin: Mr. Garton, I would tell you that the Weyerhaeuser representative suggested that in their view we should suspend all of our actions under WTO and NAFTA as a gesture of goodwill in negotiating an interim arrangement that would continue to be our leverage as we move towards a final relationship. A hold area or reserve, sort of. Just for your information.
The Chairman: Our next witnesses are Mr. Kim Pollock, the National Director of Public Policy and Environment from the Industrial, Wood and Allied Workers of Canada and, as an individual, Mr. Richard Harris, Professor of Economics at Simon Fraser University, who has been before our committee before on at least a couple of occasions.
Mr. Kim Pollock, National Director, Public Policy and Environment, Industrial, Wood and Allied Workers of Canada: On behalf of my union, the Industrial, Wood and Allied Workers of Canada and our President, Dave Haggard, I am pleased to accept your invitation to speak here today.
IWA Canada is the largest union representing wood workers in Canada and we have a vital interest in the Canada- U.S. softwood lumber dispute. We have worked actively to attempt to get a solution to the dispute. We have supported very strongly both our provincial and federal governments' efforts to litigate this matter through NAFTA and the WTO and to generate some negotiations with the Americans.
I have distributed copies of a news release and a backgrounder on a recent joint initiative involving unions on both sides of the border, the Canadian Labour Congress, CLC, the American Federation of Labor-Congress of Industrial Organizations, AFL-CIO, and various affiliates. We think that this proposal will go a long way towards laying a basis for a solution to the dispute.
Our proposal is in two parts. The first is a proposal for a sliding scale, provincially administered lumber tax that would give provinces time to make changes on their own without being overseen by the American administration or the American industry to change their forest practices or their stumpage regimes. The second part is a proposal for a joint Canada-U.S. marketing strategy for lumber and manufactured wood products. We recognize the need to stop fighting over our respective shares of the North American pie and try to expand the international pie. Otherwise, while we are bickering the Europeans, Latin Americans, and Asians are gaining an increasingly larger share of the American market, and they are doing it without any tariffs and so on.
Finally, I have provided a copy of our position on pension bridging and our proposed modifications to the aid package for impacted softwood workers .
Professor Richard Harris, Economics Department, Simon Fraser University: I would like to raise what I think will be an important argument in the deliberations of this committee at an important juncture in both the economic history of our country and, in particular, Canada-U.S. relations.
Three years ago, I argued that most of the visible economic gains from future economic integration will require some institutional change in the NAFTA structure. That change would have to be in the nature of the creation of some common-market-type arrangements to deal with the complexities of modern trade and foreign direct investment decisions and the integration of service markets.
This is not a popular policy in Canada, nor does it have much interest at this time by the U.S. administration. It has been advanced by a number of think-tanks and by Mexican officials with various proposals. However, by and large it has been off the policy agenda. Nevertheless, in thinking about Canada, U.S. and Mexico, the events of September 11, 2001 changed the situation considerably in both obvious and subtle ways. In considering these issues, it is important to understand the economic context of the current situation.
Trade barriers obviously within NAFTA are low, but they are also low between a number of our trading partners externally and becoming lower. In particular, China and India are gaining better access to North American markets as are industrial countries getting access to those countries under the WTO. This is changing dramatically the pattern of international specialization of production across the globe and furthermore the growth in world trade. While China does not account for a huge part of the world economy measured in GDP — say about 4 per cent — its rate of growth is absolutely somewhat phenomenal.
Last year, for example, the increase in Chinese-manufactured exports was equal to their total exports in 1992. This is a country which by mid-century will be the largest trading country in the world by any imagination. India also is similarly on one of these take-off trajectories with respect to trade, having opened up its markets and undertaken a number of other important policy initiatives. Therefore, this reorientation of the world trading system with respect to these very large countries will have a very big impact on the NAFTA arrangement in ways that I will try to make clear.
The unique characteristic of the NAFTA trading relationship — in particular the access of Canada and Mexico — is the precise and specific types of access that Canadian and Mexican producers have as a consequence of having a land network based on rail and truck transport. This is what makes those two trading partners completely and utterly different than any other pair of trading partners with the United States. When one thinks about the nature of economic relationships between the countries, one must think carefully about how commerce is conducted among the three countries. There are trucks and railroads and aircraft; trucks and railroads are the two big things at $2 billion a day.
Currently, for Canada, 82 per cent of our exports go to the U.S.; our export-to-GDP ratio is about 46 per cent. By some calculation between one in three and one in four jobs in Canada is directly linked to exports to the United States.
The post-9/11 initiatives to secure the U.S. land borders and sea borders almost certainly will reduce the overall dependence of the U.S. economy on foreign trade in ways that we do not yet fully understand. Scholars are now undertaking a great deal of academic work trying to estimate the impact on trade or the increase in these types of inherently non-quantifiable costs. We do not know exactly how much trade will go down but it almost certainly will go down. Furthermore, the differential impact on land-based access versus sea- and air-based access as a result of these changes will impact importantly on the NAFTA arrangements.
In respect of Asia and the NAFTA arrangement, the reduction in trade barriers against these external countries means that the ``preferential'' access that Mexico and Canada had in the first 10 years of the agreement is now being significantly eroded in a large number of manufactured goods. Therefore, we will be left basically with the natural trading advantages that accrue as a result of geographic proximity, political stability, and special types of transportation networks — most importantly the truck and rail networks between Canada and the United States as linked to the U.S. interstate system.
What is at risk? The ``vertical specialization'' or inter-industry trade — for example, the auto industry — is essentially built on a distribution and organizational model that is dependent upon time and geographically sensitive proximate distribution systems. Therefore, if you cannot get those trucks across the border to those plants you will disrupt the entire model against which that industry is organized.
How much of Canadian trade is sensitive to these kinds of considerations? I would suggest about half of Canada- U.S. trade is currently sensitive. You can take out energy and some of the basic raw materials — for example, softwood is not heavily dependent — but most of the growth of the trade subsequent to NAFTA is exposed to these kinds of considerations.
Where does all this lead? Let us consider the event that border costs go up and stay up. What will be the impact? There will be a number of impacts. First, in addition to a general reduction in trade overall, there will be some re- allocation of the types of activities that occur across borders. A lot of the advantage that Canada has had in its location in the value chain will essentially be disrupted as a consequence of these increased transport cost considerations. You will no longer be able to locate an industry in Windsor or Oshawa or Richmond that is critically dependent on a just- in-time inventory system, for example. In the short run, this will cause disruption; in the longer run, this will cause a reorganization of the type of activity that occurs across these borders.
Exactly the same thing is true with respect to Mexico. Mexico is specialized in parts and assembly on the lower part of the value-added chain but they are also exposed to the same kind of considerations.
We have been pushed into final goods trade and we now face this external competition that coming particularly from Asia front on. The playing field will have been considerably levelled. You will have eliminated the natural advantage that Canadian and Mexican locations had, and you have essentially given them a more equal access to the North American market — in this particular case the U.S. market. In this case, there will be long truck lines at the Canadian border. There will also be long delays in processing of containers at U.S. seaports, particularly the western seaports here, in Seattle, Los Angeles, and San Diego. However, the types of goods that will be sitting in those containers will be roughly the same.
If this situation persists, two significant adjustments will occur in Canada. First, there will be a substantial real exchange rate depreciation or alternatively lower supply prices at the border for Canadian-produced goods. As a rough approximation, a 10 per cent increase in border costs will lead to a reduction in the Canada-U.S. trade volumes of about 25 per cent and a fall in Canadian export prices of 10 per cent. The long-run impact of this on Canadian living standards will be substantial.
The second adjustment will be through industrial restructuring. There will be a shift in the nature of our trading patterns to the extent we raise costs dealing with the United States versus other countries. There will be an increase in trade volumes with other trading partners — most significantly probably Asia and Europe. Therefore, there will be some trade-diverting aspects of this overall process.
We are in the middle of a process that may or may not occur. However, if the U.S. government should go ahead there will be very substantial increases in border costs for Canadian producers. This will have a significant impact that we should think about for the longer term in discussing the relationships between the three countries.
The Chairman: The committee has received information that we have a truck crossing the U.S. frontier every two- and-a-half seconds. Already the lineups in a couple of places in Ontario are several kilometres long; I do not know how long it takes them to cross, but it takes a long time. At the time of the World Trade Center attack, the lineups were 20- some-odd miles long.
It is clear to anyone that the Americans are very concerned about their security problems. I am not certain that some of it is legitimate but that does not matter, it is their country and they will not become less concerned. They are becoming more concerned and that will affect the Canadian border.
Our information is that 35 per cent of the Canadian GDP is dependent basically on that border — on trade with the U.S. Whereas to the U.S. we are 2 per cent of their GDP. In other words, if the increase in GDP went up 2.5 per cent in the U.S. this year, if it lost all trade with Canada, it would still go up half a per cent — and this is not even particularly good times.
Does this not have a really terrible implication for our position in that we seem to be lacking in very many alternatives and they could, if they got really unpleasant, could cut that border. I suppose oil, gas and electricity would be a problem, but they could do it and it would have almost no effect on them. What do you think about that?
Mr. Harris: Those kinds of questions are inherently fraught with uncertainty. There is the need for qualification as to how you will resolve all what might happen after the fact.
The Chairman: It is happening now.
Mr. Harris: Yes, but we have a Free Trade Agreement with the United States and we are talking about increasing the cost of doing that trade. If you talk about eliminating trade — for example, if the Americans were to put on either prohibitive tariffs or quotas such as Canada was not allowed to sell —
The Chairman: No, I was talking about the border security.
Mr. Harris: The question is how much legitimately will that raise the cost of doing business between the two countries? It will raise the cost of doing business significantly; we do not know how much. That cost will fall largely on Canadians, being the much smaller partner in the arrangement. The fact that much of our GDP is contemporaneously exposed to the U.S. market means it will have a large effect.
However, I think in the longer run if that is the case, we have to understand that other mechanisms will come into play. Certainly, Canada will start to export to other regions and will start to buy from other regions so the share of trade volume between the two countries will shift. An extreme apocalyptic scenario would be that you eliminate 35 per cent of the jobs in Canada. I think that is crazy, but it would have a significant impact on Canadian living standards. In the long run, being unable to sell or export — which has been the principal of Canadian economic growth, to the United States — and having to find other trading partners or having to trade with the United States at a much higher cost will lead to significant reductions in Canadian living standards.
How much? I do not know. Perhaps we should look at Australia or New Zealand as examples. Those countries are currently very distant from their trading partners; they face relatively high costs of international trade; they have living standards that are anywhere between 30 per cent and 25 per cent below Canadian levels. That is not a bad benchmark to indicate what would happen to Canada in the event we lost access to the U.S. market. We would become like New Zealand: isolated by a high border cost in the northern end of the continent. We would still sell energy; we would still sell wood; we probably would not have an auto industry. Canada would look quite different. I think those are the ways to think about the issue.
The Chairman: That is pretty tough on Ontario.
Senator Di Nino: Mr. Harris, let me continue that line of discussion. Your comments are based on your understanding that there will not be a harmonization of aspects of border control that could have a different result than what you are predicting. We are being told that 38 states see Canada as their largest trading partner. We are not only talking about Canadians having problems with, or losing, a major partner. It works the other way as well.
Do you think that we should be talking to the U.S. in harmonizing some of the irritants that we may find at the border particularly in relation to transportation by train and by trucks? If so, do you feel that that would result in some loss of our sovereignty?
Mr. Harris: In regard to Canada being the largest trading partner with 38 states, I do not know exactly where that statistics comes from but I suggest it probably measures Canada against other international countries. That particular perspective ignores the fact that when you look at a regional arrangement you should think about how much does the State of Washington trade with British Columbia versus the State of Oregon. The individual significance of Canadian provinces declines a great deal relative to the statistic you quoted. Obviously, we are an important trading partner with the United States but I do not think you want to oversell the case.
With respect to your other point, I agree. There is obviously a political consequence to this, which I will address in a moment. However, the objective is to secure future economic growth for Canada. For the past 15 years, we have been pursuing a seamless border so that we can have an integrated manufacturing and service sector, particularly with the northern states but also with respect to some of the faster-growing southern states. It is very difficult to believe that in the immediate term there is much else. Look what happens in Europe. If you look at the small prosperous countries in Northern Europe, you see that they all have the same characteristics: they have virtually open borders; they have very high manufacturing-to-GDP ratios; and, of course, they export intensively to the main European countries. Examples are Belgium, Denmark, Ireland and Holland.
These countries have high productivity and high standards of living. They have done exceptionally well. They are testimony to the fact that you can be a small country within a large economic area and prosper. However, they prosper by a particular economic model. The problem with what is happening at the U.S. border is that that economic model essentially will be cut off as a model of development for Canadian production. We will be back to a model of national development of an indigenous manufacturing sector separated either by oceans from the rest of the world or by a hostile border to the U.S. I think it is absolutely critical.
Does it involve a sacrifice in sovereignty? It must. That is a political question and everybody has to make his or her own political judgment. Obviously if we go into negotiations with the Americans on this, we have to realistically believe they will want something in exchange.
Senator Di Nino: Witnesses have told us that Canada and the U.S. are trying to solve this problem by doing inspections, by placing Canadian personnel or Canadian inspectors in the U.S. and U.S. inspectors outside of the border to effectively reduce some of the problems at the crossings. I believe that will continue.
Do you see that this would be one way to eliminate potential problems and to allow easier and quicker access?
Mr. Harris: I am not an expert on terrorism security matters with respect to inspection of trucks and ships. I expect that I know no more than you do. We are now talking about procedures and technology in which most of us have little experience. In Europe, if a truck leaving Rotterdam for Munich, it just drives down the road, it never stops. Europeans have achieved a level of integration of their distribution system that is far beyond anything Canada and the U.S. had even gotten to.
Is it possible? I suppose you will have to ask other experts. I imagine that we might achieve a level of security that would allow just-in-time inventory systems to function seamlessly across the border, I do not know. If that can happen, that is great and the Americans would be happy with that.
Senator Austin: Mr. Harris, your paper indicates that you made the suggestion of a customs union three years ago. Are you still proposing that move?
Mr. Harris: No, it goes beyond a customs union. When economists use the term ``customs union,'' they usually use it to define a free trade area with the added stipulation that the members of the free trade area have a common external barrier against third countries. That is part and parcel of more common-market-like arrangements. However, I would also go beyond that to include harmonization of the number of regulatory procedures and common competition policy. The whole softwood dispute has to do with the fact that in the FTA agreement we never got an agreement on subsidies. This would be part of a common market.
In my world, the common market would mean that we would not have the softwood lumber dispute, at least in a legal sense.
Senator Austin: You have outlined a potential dilemma for us today: a further decline in Canadian competitiveness, and a further decline in our access to the U.S. market and thus in our own standard of living. You suggest that the way out of this would be to initiate political discussions to achieve virtual economic integration with the United States. Harmonization is defined as agreeing with U.S. policy. What would you say is our leverage in obtaining Canadian interests in terms of regulation and access that would make the U.S. pay attention to our requests?
Mr. Harris: That is an excellent question. I think the answer is that it may be a very tough slog with this particular administration. It may be sort of a work-in-progress. My general perspective is that someone will have to sell a vision to take NAFTA to the next step. Getting Mexico on side will be very important. For obvious reasons, Mexico has certain kinds of leverage that we do not.
However, if one were to get the administration or subsets of the U.S. apparatus — legislative or otherwise — interested in the pursuit of free-trade-type initiatives, the idea of pushing the thing to common market might attract attention. There is no guarantee of success.
Senator Austin: Do you think we are a bit cornered? I am not accepting your thesis but discussing your thesis. We find the European Union disinterested in a further trade arrangement with Canada — free trade or some version of it. We find Japan not terribly interested. Our competitiveness in the Asian market for exports is not high, particularly in China where we have seen relatively little growth in our export access. You could draw the line and say we are not successful in the world economy. We are successful in the U.S. market and our standard of living depends on continuing that success.
Yet, using the softwood lumber case as an example, we are facing a horrendous application of U.S. domestic politics to the interests that we have in that market. You talk about a common interest and all those wonderful special relationship ideas that we had a while back. They are gone from this political system in the United States. It is essentially an issues-based, politically based administration, as you yourself referred.
How do we work our way out of it? As an economist, you have defined the problem; as a citizen can you define the solution?
Mr. Harris: As a citizen, I feel that Canadian economic interests have not been vigorously defended by the conduct of foreign policy by the current government. That may be a rational calculation on the part of the current government — I do not want to accuse them of being stupid. However, they probably made that calculation and they will pay the consequences.
Senator Austin: Could you give us an example?
Mr. Harris: I was involved in a few discussions initially when the border perimeter concept came up. If Canada had vigorously supported that initiative, whereby the North American security problem would be dealt with as a North American perimeter issue rather than as a land-border issue, possibly we would be at a different point than where we are now. The truck problem may not have been a Canadian problem. Yet, that particular window of opportunity appears to have gone by.
We may get back to the same point eventually, I do not know. Perhaps the whole thing will just go away, but that was an initiative that had its costs.
Senator Austin: How important do you think we are as a consumer market to the U.S. export market? One side is that we want to export into the U.S., do they have to buy, but we are, as I understand it, 25 per cent of their export economy. The weakening of our economy would reduce our buying power for U.S. goods and services. Is that important in the U.S. context?
Mr. Harris: Yes. We are a big industrial country. As things go, we are an important market for U.S. goods and services. Look at the automobile industry. We tend to focus on Canadian exports of automobiles, but most of the models that are driven on Canadian roads are produced in U.S. plants. That is an example of where the Canadian market is quite important.
Unfortunately, of course, if things were to turn out badly they could reorganize their market and supply that demand domestically. However, given the current level of integration, Canada constitutes an important market for many, many American firms.
The Chairman: In respect of the perimeter for the Americans, I know the Mexican scene pretty well. It is like a sponge; you can walk across 800 miles of border. They have a huge illegal movement back and forth all of the time. I do not know why our perimeter is so different. I would have thought if I was going to go into the U.S. I would use the southern perimeter where it appears that there is no defence at all.
Mr. Harris: There are two aspects to the Mexican border. One is dealing with the transfer of goods through the truck system that connects with the Interstate. The other is dealing with illegal Mexican migrants, which is the sponge problem. My understanding is the treatment of trucks under the NAFTA provisions at the border is similar with respect to the two countries.
The Chairman: On the Mexican border, they simply do not allow Mexican trucks into the U.S. They just lost a case about it.
Senator Carney: I would like to address the points made by Kim Pollock of the IWA. This is a union that has played a very important role in the past in substantive contributions to softwood agreements between Canada and the U.S. and so I very appreciate you taking the time to be here today.
We have been told that the provinces cannot agree on an approach to softwood lumber and the industry cannot agree on an approach to softwood lumber, yet somehow the labour movement has come together with four unions and the major labour central bodies in a joint proposal. This is amazing because nobody else has got this to be of consensus.
Could you first identify who these agencies, apart from yours, are and then tell us how you did it. Then we will speak to your suggestion.
Mr. Pollock: The participating unions are ourselves, the Communications, Energy and Paperworkers Union of Canada and the Canadian Labour Congress here, and PACE, which is the Paper, Allied-Industrial, Chemical and Energy Workers International union, and the International Association of Machinists and Aerospace Workers, as well as the AFL-CIO.
How did we do it? I suppose it is the old story about how hanging focuses the mind admirably. As you are probably well aware, the dispute is having different, yet considerable impacts on both sides of the border. About 140 plants have closed in the United States, as recently as November. The Americans are being impacted as a result of Canada's response to the duty. The most efficient producers ramp up their production and substantially reduce their unit costs and simply use the cushion that they have in the difference between the exchange rate and the tariff to just create the ``wall of wood'' that has worried the Americans. The American producers, particularly in the U.S. pine region, simply are not efficient enough and cannot get their costs down as well as we can. They are actually being impacted at least as serious as we are so that mutual pain and anguish turned into a degree of mutuality between us all.
Senator Carney: For clarification, the unions that are signatory to this agreement would not necessarily be found among the southern pine producers, would they? Most of the unions to which you have referred would be in other more industrialized parts of the U.S. Am I wrong?
Mr. Pollock: I would hardly want to say that you are wrong, Senator Carney, but there are a lot of IAM workers and some PACE members down in the south. They are being hit quite hard.
Senator Carney: The point I want to establish is there is broad-based union support for your proposal.
Mr. Pollock: Yes.
Senator Carney: Your proposal is two parts: One is support for a sliding scale administered lumber talks, and the other one is the very sensible suggestion about diversifying North America production of forest products and winning new markets for it. Are you worried about offshore competition, offshore to North America?
Mr. Pollock: Absolutely. Since the tariff was imposed, I have seen figures indicating that third-country imports by the United States have gone up from .4 of 1 per cent to 4.4 per cent. So, in other words, they have rapidly taken advantage of the situation with respect to prices and markets in the U.S. and gone right after that market.
Senator Carney: As you point out in your brief, those foreign supplies entered duty-free.
Mr. Pollock: Yes. There is no tariff on them.
Senator Carney: I would like to turn to the issue of British Columbia log exports because the IWA has been consistent in their opposition to log exports. You pointed out that log exports have tripled in the period from 1997 to 1998. It has gone from an average of 300,000 cubic to nearly a million cubic metres. For the year 2000, estimates range up to 2.4 million, thus it has increased by 100 per cent again. You started from a low base, it tripled and then doubled again. You point out that a lot of this is from private lands. Have you any information more recent than the year 2000?
Mr. Pollock: I do not have it here with me but I would be pleased to get it to you as soon as I can.
Senator Carney: Thank you. It is my understanding that that massive increase in log exports, which is central to the proposed settlement, has increased substantially yet again.
Mr. Pollock: I know that it has increased, I just do not know the specific number.
Senator Carney: In British Columbia I hear the argument for log exports is that at least it is a job. Your own members say they do not really agree with log exports but it is the only job in town. What is your answer to that? What do your American counterparts think about the log export issues because that is a log supply to their mills and it keeps their jobs going?
Mr. Pollock: People will do all kinds of things if someone holds a gun to their head. If some says, ``you will not work, your family will not eat and your kids will not get post-secondary education if you do not harvest this timber that we will export to the States,'' that is pretty tough. Given their druthers, few of our members who would not say, ``do not export those logs, you are sending jobs to the United States.'' That is certainly the case. The statistics on the amount of value that could be added to a unit of timber by secondary and tertiary processing indicate how many more exports and jobs can be generated than if we ship the raw log.
Senator Carney: What do your American union colleagues say to that argument? Those logs are fuelling jobs in their mills. How do they react to the issue of log exports from Canada?
Mr. Pollock: I suspect that they are not all of one mind on it. Among our American brothers and sisters, there would probably be some differences in their views.
Senator Carney: The 2.4 million cubic feet that you estimate may be the export range for the year 2000 equates to how many sawmills? I have seen figures and I remember reading that it could be between six to 10?
Mr. Pollock: Yes, I was going to say probably that would be 10 good-sized mills.
Senator Carney: How many jobs? Let us say 224 jobs a mill?
Mr. Pollock: Well, 224 times 10.
Senator Carney: We are talking about a substantial job loss. Would we agree here if you used a multiplier of 1.7 that, with that level of log exports, we are talking about 5,000 jobs on the coast?
Mr. Pollock: I do not think that is beyond the realm of possibility.
Senator Carney: This may be a strange question for me to ask given my involvement in the Free Trade Agreement but some people would argue that a reversal of economic integration trends of the last decade might be a good thing. What is your response to them?
Mr. Harris: They would have to tell me what they had in mind. Broadly speaking, most of the studies of Canadian economic development in the last 20 years have been largely focused on trade integration, mostly with the United States but also globally. We do not know what reversal of trends will be, but it might be a good idea.
Senator De Bané: Professor Harris, in your paper you stress the substantial increase of trade among the U.S., India and China. You stated:
Post-NAFTA the United States has reduced its external trade barriers against a number of non-NAFTA countries, most importantly China and India. As we move into the 21st Century the growth in world trade accounted for by China and India is expected to be literally unprecedented. The orders of magnitude are hard to put in context.
The growth of China's export this year is more than their total exports barely 10 years ago. The surplus this year, I think, exceeds $80 billion with their trade with the U.S. You also stress that half of Canada's trade with the U.S. is exposed to serious risk from increases in border cost.
When I look at those two items — which may or may not be related — I see that Canada in the future might be in a very difficult situation. If United States trade with those low-cost countries increases substantially and Canada loses to a certain extent its geographic advantage, we will feel the pain a great deal. Is my analysis unfounded or do you see problems in the future?
Mr. Harris: No, I completely agree. That is my major point.
Mr. Pollock: Part of Canada's problem in maintaining its exports is that there is not only a problem in terms of external trade relations, there is also a problem in terms of investment. I was looking at investment statistics for the forest industry in British Columbia last week. It is absolutely striking that right through the 1990s and beyond, the rate of capital investments in British Columbia's forest industry has gone down. If we are concerned about international competitiveness and efficiency and unit costs, we have to be concerned about that too.
Senator Di Nino: Professor Harris, your well-presented and well-researched paper gives me some concern. I think we should take note of your conclusions.
You talk about how, through the lens of September 11, Canada will have to increase its trade with non-NAFTA partners. I think it is fair to say that Canada has been spectacularly unsuccessful in doing that over the past number of years 10 or 15 years. I do not see that that will change a lot unless a shift in the whole mindset takes place and that may be more difficult than we think. In your last paragraph, you say that 9/11 has effectively raised the border issue as the single most critical NAFTA and Canada-U.S. relations issue. As a potential solution to the problem, you suggest that we may not have embraced the perimeter security issue as positively as we should have. I agree with you on that.
Are there any other thoughts you can give us? Is there anything else that you think we should be doing? I do agree with you. I think this is a much bigger issue than we have truly recognized and the statistics that you quote are frightening to say the least. There must be some other approaches that we can and should take to try to minimize and/ or reverse this.
Mr. Harris: I think you are outside the realm of economics here so frankly, my expertise has little to play. My general sense is that the state of the political relationship between the two countries has a very important feedback on its commercial relationships.
To put a positive light on the situation, perhaps the current situation will prove to be temporary, in which case we can all breathe a great sigh of relief and go on with what is more or less the status quo set of developments. I do not have really a good answer for you.
From pessimistic perspective, assuming that the level of U.S. protectionism will remain high and that there will be an abandonment of the multilateral agenda and an inward focus in which protectionist interests will find the political leadership more willing to accommodate them more than they have to date, Canada would be in a very difficult position. It is not an unprecedented position; New Zealand lost access to the European market in the early 1970s. I used to know these numbers.
The Chairman: When the U.K. joined the European Union, New Zealand lost its access to the U.K. market for butter.
Mr. Harris: They had a very asymmetric trading relationship. A lot of other things happened as well but they have essentially reoriented their trading relationship. Now Australia is their largest trading partner and they also export large amounts to Asia. It is not impossible. Another example is Finland. Finland had preferential access to the former Soviet Union and as a result of the end of the Cold War, they had to reorganize their entire trading system. They became spectacularly successful as a telecommunications export globally.
If we end up with a situation there will have to be some re-thinking about some sort of fundamental economic strategies. Frankly, if we enter the pessimistic scenario, it will be a very painful process that probably will take the better part of a decade to work through.
Senator Di Nino: As a private citizen, do you think that the position Canada may take on Iraq could be one of those irritants?
Mr. Harris: Yes, I believe it is an irritant. I have not decided where I should sit on the Iraq issue, though.
Senator Austin: Mr. Pollock, one of the factors in your industry is the cost of labour and one of the most important issues for which the IWA is responsible is the wage and benefits package for your workers. I wonder whether the IWA has looked at concerns relating to harmonization with the wood industry and with the labour costs that are generic in the U.S. mills. These are costs that, to my understanding, are lower than Canadian costs of labour. I may not have the social benefits that are added in as a factor, but all added in somebody pays them but not necessarily the employer in their system. I am wondering whether a further integration of the industry is a threat to your current collective agreement — its structure and its wage package and its benefits. How do you see that?
Mr. Pollock: I think once you calculate in the difference in the dollar and the whole wage benefit package, you will find there is not a lot of difference between the rate of remuneration for, for instance, IAM sawmill workers and IWA sawmill workers. You have to put that in a certain degree of perspective in that when you look at the overall sawmilling industry, wages are about 17 per cent of the total costs. They are important, but they are not exclusively important. There are all sorts of other costs. For instance, the cost of timber is the main problem they face in the south. This is because they buy their timber mainly from small holding private owners who have the double possibility of either selling it piecemeal to a sawmiller or liquidating it and building a subdivision or a shopping mall. In parts of the south proximate to large urban areas, that is happening at a rapid rate. I think you will find that that is the case in British Columbia as well; that the main cost driver is the cost of wood.
We are cognizant of the role of costs in our ability to be competitive. That is why Dave Haggard last fall initiated a process with the industry on the coast, where our industry currently has the biggest problem with costs. Mr. Haggard initiated discussion with the industry to see if there is something we can do to bring some relief. We know that if the industry shuts down our members go home. We do not want to see that happen.
Senator Austin: I appreciate that. I wanted to put a comment of that kind on our record so we can consider it as part of our overall consideration of the softwood lumber issue.
Mr. Harris, we have talked about a number of factors that may influence U.S. political and economic behaviour. I wonder if I could add a question that would evoke your comment on one additional factor — namely, the deficit policy which the U.S. budgeting and this Bush administration seem to be following. Mr. Daniels, head of the budget office, has tabled a budget with a very large deficit: $304 billion for the coming fiscal year; $307 billion for next year; and right down through to the end of the decade. What do you think a major series of deficits in the U.S. will do to the currency relationship — the U.S. dollar to other currencies, but particularly to ours, and to our competitive position in our trade relationship with the United States?
Mr. Harris: The macroeconomic impact of deficits on exchange rates is completely ambiguous in the formal econometric literature on the subject. Nevertheless, one has to look at the fiscal deficits in the United States in the context of an economy that has been chronically saving short for a very long time. I am in the camp that argues that there will have to be a significant adjustment mechanism put in place. Part of that adjustment mechanism will inevitably be either U.S. inflation, or a combination of that and a depreciation of their currency against the euro, the yen, but the big question is what happens to the Asian currencies.
The situation in respect of China is particularly complicated because they have a current policy of fixing against the U.S. dollar. Therefore, it really means the adjustment mechanism has to come about through changes in Chinese prices. However, I would predict that even if they have a fixed exchange rate regime, there will be an effective real exchange rate appreciation of the Chinese currency against the dollar through rising prices.
What will happen to Canada? I think it is impossible to predict. Canada is a very small country among these big currency blocs and you think about how global investors will view the Canadian dollar. Even if we are viewed as a relatively stable political and fiscal regime against a large neighbour that is engaging in some highly speculative or imprudent fiscal policy, there is no guarantee that these global investors will start to allocate a significant portion of their assets towards Canadian paper assets. My worry is that we will get the opposite — there will be the flypaper effect. Canada is viewed by many portfolio managers as effectively in a North American currency bloc, despite the fact that we float, and that a distaste for American assets will constitute into a distaste for relatively high-grade Canadian paper assets. That is my concern.
Senator Setlakwe: You have painted a rather pessimistic picture of our economic future with the Americans. What are your views in regard to our economic future with regard to the Europeans? This spring, there will be a meeting in Greece about trade enhancement between Canada and the European community. There will be another one in December. The focus will be on regulations, investment, movement of people and professionals. It will not include trade. Are you optimistic with regard to that and with the chances of our increasing our trade with the European Union, considering that at one point we were at 28 per cent and are now down to 5 per cent?
Mr. Harris: It is very difficult to know. Many of the things they are talking about doing — securing better movement of professionals, reducing some of the irritants to investment, improving access on services — are worthwhile things to do. However, we have to be realistic about what can be accomplished.
First, formal trade barriers between Canada and Europe are not very high. If we talk about eliminating barriers to trade, we are not talking about eliminating a great deal. Second, the kind of trade I described earlier — which is trade based on time-sensitive delivery in intermediate goods and manufacturing — will not happen between Canada and Europe. It is simply not possible. We are really talking about trade in other things: energy, natural resources, finished products, agriculture.
Some things can be accomplished and I am certainly optimistic that there could be some improvements. However, it certainly will not be an engine of economic growth for Canada.
Senator Setlakwe: When we say this to Europeans reply that their foreign direct investment in Canada — despite the little trade between us — represents 25 per cent of the total investment in Canada. The same percentage applies to Canadian investments in Europe. Is that a positive factor?
Mr. Harris: Yes, it is absolutely a positive factor. A lot of that inward FDI is in services — financial services, for example. One of the trends of modern economic integration has been the integration of service markets, which is facilitated by large investment flows within service-related sectors in which we would otherwise not typically think of trade as occurring. Those are all positive things and they continue to go on.
However, to reiterate my basic point, even if Canada were to sign a Free Trade Agreement with Europe tomorrow, it will not turn into an engine of economic growth. That is a reality.
The Chairman: We had evidence last week that, until 1992, 40 per cent of our softwood lumber exports went to the European Union. That is a very high percentage of softwood lumber exports. This information came from the head of the Maritime Lumber Bureau.
The Chairman: We were told, was by the use of a non-tariff barrier restriction — precisely the pine nematode — we dropped from a billion dollars a year in 1992 to about $10 million. That is an amazing drop. Do you know about that and could you tell us a little bit about it?
Mr. Pollock: That is fundamentally true. The pine nematode was an alleged pest and it did impact lumber particularly from Maritimes, Quebec, and Northern Ontario. However, we really do not have a lot of western Canadian lumber trade with the Europeans. They were very successful in using what was fundamentally a non-tariff barrier to trade to stop lumber and some pulp and paper exports to the European Union.
Senator Carney: I have a question for Mr. Harris that should help clarify any thoughts on this issue.
You point out— correctly I think — that in the past you have advocated that future economic integration benefits among the three countries of NAFTA were best secured by moving toward a common-market institution such as common competition policy, labour, mobility, and a common currency. In your paper, you stated that these proposals are not politically popular either here or in the U.S. I think that is still true because competition policy involves anti- dumping and countervail. Not only since the FTA but also through NAFTA and the WTO everybody has had trouble agreeing on a common competition policy. Labour mobility is still a problem despite advances, and the common currency or the so-called dollarization is a non-flyer in Canada. I accept that.
You say that some of these problems could have been avoided had we had a common North American security perimeter and some future Canadian government may revisit the merits of such an approach. You have correctly pointed out that sometimes, possible solutions or new trends are not within the horizon of the government or the population of the day.
In my experience one problem we have in Canada is that neither the Department of Finance nor DFAIT has much capacity or interest in forecasting in terms of shifts and trends. That used to be done by the Economic Council of Canada and that capacity was lost when the council was disbanded. Do you think that there is a need for a new kind of national institution like the Economic Council that could do some of this work in these future areas or is it safely left to academics such as yourself? With the Economic Council of Canada there was, at least, a focus. We no longer have such a focus.
Mr. Harris: I am very glad you ask the question. I am also very surprised.
Senator Carney: I was a member of the Economic Council before it was disbanded.
Mr. Harris: I was president of the Canadian Economics Association the year they killed the Economic Council of Canada. I was involved in trying to resurrect the whole thing.
Senator Austin: What year was that?
Mr. Harris: That would be early nineties. It was the Mulroney government.
The Chairman: About 1988, if I recall correctly.
Mr. Harris: It was at the behest of the Department of Finance, which was upset with the council.
Senator Carney: Have we lost the capacity to do some of this off-the-wall futuristic kind of thinking that lays the ground for changes in policy ahead of economic adverse effects?
Mr. Harris: Absolutely. There is no question about it. When they killed the Economic Council of Canada, research capacity on long-term economic issues was seriously hampered in the country. We are left with the think-tanks, which are okay, but think-tanks have their own political agenda. You are left with the academic community, which is limited. Basically, that is it in the country at the moment.
Senator Carney: Maybe we can take note of that.
Senator Austin: If Senator Carney is proposing that we consider a recommendation to put back in place a form of deep analytical capacity, I join with her absolutely.
The Chairman: As do I. This is not a political question; it is a question of common sense. From the testimony we have been hearing, it is quite clear that we are missing quite a few things that we should have in terms of Canada's long-term planning capacity, otherwise we would not have wound up in the current situation.
I want to thank our witnesses to appearing this afternoon.
The committee adjourned.