Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 3 - Evidence - June 6, 2006
OTTAWA, Tuesday, June 6, 2006
The Standing Senate Committee on Agriculture and Forestry met this day at 5:02 p.m. to study the present state and future of agriculture and forestry in Canada.
Senator Joyce Fairbairn (Chairman) in the chair.
[English]
The Chairman: Honourable senators, I call the meeting to order.
We are very pleased today to have with us the Minister of International Trade, the Honourable David Emerson. With him as well is John Gero. We have the minister with us for an hour. Mr. Gero has indicated that if we wish, and of course, if the minister wishes, he can stay longer. That is agreeable to this committee.
For our viewing audience, I would like to say a few words about what we are discussing around this table today. This committee is considering international trade issues that affect both the agriculture and forestry industries in Canada. As pretty much everyone must know from reading, watching and listening to the news recently, Canada is a trading nation. Our annual exports include $44.6 billion of forest products and $25 billion of agri-food products.
We are the fourth largest agriculture and agri-food exporter in the world, and the fifth largest importer. Our agriculture and forest sectors would not be able to contribute to our society to the degree they do without international trade. That is why the current round of negotiations at the World Trade Organization, and the recent framework agreement with the United States on softwood lumber, is so important to rural Canada.
A new WTO agreement on agriculture may result in lower farm subsidies — maybe this is wishful thinking — in the United States and the European Union, which would mean increased market access for Canadian exporters. Nevertheless, there is a risk to our supply managed commodities, like dairy and poultry products, and the future of the Canadian Wheat Board. Minister, you have quite a vigorous bag of things to do.
We also want to ask the good members of this committee to be very tight with their questions. Mr. Emerson, you can talk as quickly as you want in your answers so we can get in as much as we possibly can. With that, I would like to ask our deputy chair, Senator Gustafson, to kick off the questions, followed by Senator Peterson.
Minister, please proceed.
Hon. David Emerson, P.C., M.P., Minister of International Trade: Thank you, Madam Chair. I thought that I would forgo an opening statement because I want the committee to have as much time as possible to ask questions. My document is on the table so that it can be read into the record. In that way I can more efficiently respond to the priorities and interests of honourable senators.
Senator Gustafson: I am pleased that you are here today. I have been looking forward to meeting with someone in the area of trade. I have been involved in agriculture for 27 years, perhaps far too long, but we have heard the same thing from governments over those years. We will try to get the United States and the European Union off subsidies but, quite frankly, I do not think that will ever happen because they seem to be going the other way. The Europeans say that farmers know what starvation is and will not tolerate the abolition of subsidies. The Americans are moving very quickly in the same direction.
It is a serious global problem. How are we to deal with subsidies in Canadian agriculture?
Mr. Emerson: Thank you for the good question, senator. My colleague on my right is the man who has his hands and arms up to his shoulders in the muck on this issue. It is a difficult problem.
As you know, the Doha round is rapidly moving into its concluding phase. It is our intention to hold a ministerial meeting in late June, so the push is on to get detailed modalities, as they refer to them, for both agricultural and non- agricultural market access issues.
There has been some movement, as you have probably seen in the newspapers, with the Europeans now giving some indication of a willingness to go a little further. The ball is back in the Americans' court. We will see whether the kind of forthrightness that we saw from U.S. Trade Representative Portman carries on with his successor, Ambassador Schwab. She is a clever and capable lady and it remains to be seen whether she will have the political support to move this ahead.
We need to get the Europeans and the Americans moving. The major developing economies of Brazil and India are holding back on non-agricultural market access pending their getting what they want for their agricultural sectors. The situation is still very fragile. I would have to say that I am neither optimistic nor pessimistic. It is simply a highly fragile situation.
Canada is walking a difficult balance with supply-managed sectors we are committed to protect and a large export- oriented agricultural industry. That sector sees a major future in growth in the export market and aggressively wants a strong liberalization outcome.
The Canadian government and Parliament have expressed a position that there is not to be any substantive compromise on supply-managed sectors. We are doing our utmost to ensure that the supply-managed sectors are taken care of and their healthy future is ensured but, at the same time, we recognize that we will not walk away from the World Trade Organization.
You get to the point where you either fight for your industries and for the best offensive and defensive outcome or you let other people look after their interests and you accept the outcome at the end of the day. Our negotiators are in the room and prepared to fight.
Our trade negotiators are highly respected by other countries and are deeply involved in a variety of combinations of groups to try to get us through what is an extremely difficult situation, although I would not say that we are the determining country in terms of how this will shake out.
Senator Gustafson: I am sure you are aware that the Americans have had the three best years in agriculture that they have ever had, while Canada has had possibly the three worst years that we have ever had. Only yesterday Statistics Canada published a number in the area of 7 per cent down in the farm economy. I thank you for your office.
Senator Peterson: We are getting closer to an agreement of the softwood lumber issue. There are many exclusions, such as the Atlantic provinces and the Canadian territories. From these 32 companies, I wonder who is left. It must be mainly companies in British Columbia. Perhaps we could talk about them in a moment.
My concern is the kicker clause when lumber drops below $3.55 per thousand board feet — that price being driven, I presume, by the housing market. What is the possibility of that happening soon? If it does happen, what are the implications? It would seem that there is a good chance it will happen. Should we prepare for any other punitive kick-in clauses in the agreement?
It is rather unfortunate that $5 billion went to the U.S. industry. There must be some way that we could at least control it from this end. We would not be giving them $500 million to look after legal costs because I am sure our people had legal costs for the agreement process.
There must be some way we could set up a structure whereby we could collect the money and deal with it, if it were to happen at all. It would seem that there is a good chance it will happen.
Mr. Emerson: We are looking at options to gain greater speed of delivery and control of recovered deposits. Perhaps there is a mechanism to put in place.
There is so much misinformation that I must say that in respect of softwood lumber, we have been in NAFTA- related and WTO-related litigation for many years. This last episode popularly referred to as ``lumber four,'' is four to five years old. All of the litigation is perfectly legitimate under NAFTA and under chapter 19. NAFTA provides a process or a framework for taking duties down, which has happened and been beneficial for Canada, and allows for dispute resolution primarily through chapter 19, but not exclusively, as you know, because of Chapter 11.
The dispute resolution process adjudicates trade disputes and trade actions under unfair trade laws based on the domestic laws of the country that has launched the action.
This is not an independent set of laws that we have negotiated; it is U.S. law, so we are constantly in a world where economic circumstances can change.
Therefore, different kinds of cases can be brought under U.S. law, or if you win a case, as we frequently do, regulatory definitions change and different laws can be passed. We saw the enactment of the Byrd Amendment, which nobody thought would happen. We see changes in laws that pertain to definitions of subsidies and a variety of issues that are central to these disputes.
What I am really saying is compare the proposed agreement not with perfection and pure free trade; that is not the option. Compare it with the continuation of litigation that, even if we win all of the cases that are currently outstanding and no new cases being brought, I am of the opinion that we are two years away from victory and possible recovery of duties.
This agreement gives us a framework within which we will recover roughly 80 per cent. We will get it faster. There is opportunity cost on that money. It can be redeployed in investment, in shareholder dividends, in whatever companies deem to be the most appropriate use of cash. There is opportunity cost on the money, and the agreement takes us where far too many company resources are dedicated to fighting legal battles over softwood lumber, and believe me, it is an extremely expensive battle. It takes millions and millions of dollars in costs and time just to manage the data associated, for example, with a dumping review, or data filings and administrative reviews under the countervailing duty cases.
It gets us out of a world where U.S. commerce can launch further cases. It gives us stability and security from more cases of this type being launched over the next seven to nine years.
It also means that at the bottom of the market, as you say, we could be paying export taxes. There is a mechanism that as prices fall to the lower part of the market, an export tax can go from 5 per cent to 15 per cent at random lengths price of $315 per thousand board feet.
With that mechanism, one hopes that there will be some salutary impact on the behaviour of companies, and they will manage production in such a way that we are not in export tax territory for substantial periods. Only experience will bear out how that will work.
What is more important to me is the export tax is a Canadian tax. It is somewhat similar to stumpage being increased at the bottom of the cycle. That money will stay in Canada and go back to the provinces where the lumber comes from and can be recycled for tax reductions or other infrastructure investments in that province.
We are at least keeping the money in Canada, we are creating certainty, we are creating stability, and, having experience in that industry, it needs stability. It is not just the lumber business that has been going through hard times. The pulp and paper business is experiencing hard times as oriented strand board and plywood are beginning to experience price shocks, as well.
Senator Peterson: Is it possible to work towards getting that regime under stumpage so it does comply, therefore saving aggravation? You are saying, almost indirectly, that it is the same thing.
Mr. Emerson: In a way, it is better, and let me tell you why. In theory, you could simply raise your stumpage fee at the bottom of the cycle. However, that would mean that every tree harvested in Canada would then pay that increased cost. That would mean increased cost, not just for lumber destined for the export market in the U.S., but to exports of lumber to China and third world countries. It would apply to OSB and would fuel the costs for pulp and paper. In that sense, the export tax is a targeted stumpage increase that has less collateral damage than a generalized stumpage increase.
Senator Tkachuk: There has been some discussion in the newspapers and the Senate chamber about the softwood lumber agreement. It has not been met with unanimous support by a number of businesses. We hear about some in Alberta, and I know of some concern expressed in the Maritimes, even though I thought the Maritimes were exempt.
Will you clarify why some companies are opposed to the agreement? What are we doing to mitigate their uncertainty or concerns?
Mr. Emerson: Whenever you get into this kind of a negotiation, you start with framework heads of agreement that we have made available to the public. Within that, there are micro issues that affect different companies and private interests in different ways. It is quite normal to experience a lot of positioning as you go from the framework agreement to the final document. It is simply a part of the process.
I have met with Alberta interests a number of times, and we have retained consultant advisers who are presently in Washington working on the negotiations. The consultants are charged with ensuring that Alberta's issues and concerns are considered in the final cleanup of this negotiation.
In Alberta and elsewhere, there are also a number of issues relating to value-added producers and remanners. This is a messy issue, because it is not too difficult if you have remanners who do not have timber tenure and are taking low- grade lumber from the main integrated producers and upgrading it to a higher-value product. We have a good method of treating them; they will only pay tax on the first mill price, so they are not paying tax on their value added in the remanning process.
There are some problems, though, because some remanners and value added producers also have tenure, and that is creating a problem for some. We are attempting to work our way through that problem, although I am unsure whether we will be able to solve it.
Atlantic Canada should be very happy; they are out. There may be a few remanners in Atlantic Canada who have similar issues to those I have just addressed. There is also a current issue about the product of origin system that Atlantic Canada has put in place, which is fairly technical. I will give you the short version.
Back in the 1990s, when we had the softwood lumber agreement, the country was subject to hard quotas on how much could be shipped to the U.S. market. Atlantic Canada received an exemption at that time, as a lot of their timber comes off private land, and some even comes from the United States.
As a result, it was deemed that Atlantic Canada was not one of the bad guys in terms of the alleged subsidy, so they got the exemption. However, over the years of the softwood lumber agreement, there was a lot of concern that there was more lumber coming out of Atlantic Canada into the U.S. market than they had the capacity to produce.
That led to demands for a system to verify that they were, in fact, only shipping in the lumber they were producing, and there was no conduit from Quebec, through Atlantic Canada, into the U.S. They have some concerns under the new agreement that we would not be respectful of the certificate of origin system that they have developed. We will be respectful, but we will have to tie it in with a national system because we will have to have that kind of a system across the country.
Senator Tkachuk: There have been a number of articles in the paper of the WTO negotiations and our supposed isolation due to our support of supply management. We have discussed this issue in committee. We have the supply management people and our free traders in the West. There is a constant tug between the two parties.
Have the Americans and Europeans made a commitment to reduce subsidies that would make our position more difficult in the supportive supply management? If so, what kind of proposals are they making that would be of interest to us?
Mr. Emerson: I am going to ask John Gero to be more precise as to those changes.
In Europe, some of it is concessions of market access with the Americans, and primarily concessions relating to their farm bills and subsidies referred to by Senator Gustafson. The short answer is yes, they are making concessions that are worth quite a lot. Are they where we want them to be? Not yet.
John Gero, Assistant Deputy Minister, Trade Policy and Negotiations Branch, International Trade Canada: There are three elements to the agricultural negotiations and the market access discussions about lowering tariffs. The real issue is, can the Europeans make a better offer on lowering tariffs? During negotiations on export subsidies, in Hong Kong at the ministerial meeting, the Europeans committed to eliminating export subsidies by 2013.
Domestic support is focused on the United States and the amount of money the U.S. will make available in the farm bill. The U.S. has indicated an overall cut in domestic support of 53 per cent. We are looking for a much larger number and that issue is part of the negotiations.
Senator Callbeck: I come from an agricultural province, Prince Edward Island, where we grow many potatoes and process them into french fries.
Last year the United States made a bilateral agreement with countries in Central America. My understanding is that the United States can ship into countries in Central America without any tariff, whereas Prince Edward Island and other parts of Canada pay at least a 15 per cent tariff. This is a big issue in my province. I understand one of the plants ships as much as $75 million dollars worth of french fries to Central America.
Is the government talking to these countries and trying to come up with a bilateral agreement?
Mr. Emerson: That is an excellent point and my view is simple. I have been in this job for three and a half months, and one thing I have concluded is that as one of the most trade-dependent countries in the world, we have not been as strategic and aggressive as we need to be in forging new trade agreements. We have sensitive sectors that seem to pop up and create public disfavour as soon as we start to talk about new trade arrangements. That seems to be inevitable.
You have put your finger on a problem afflicting potatoes, but it is going to get worse. We have countries like the United States, Mexico, Australia and others who have entered into free trade agreements with at least a dozen countries.
You have hit on one particular case where the Americans have entered into a free trade agreement with the Central American Four, CA4, plus the Dominican Republic. I do not think they are there yet. Mr. Gero can correct me if I am wrong.
The schedule of tariff reductions would call for an advantageous tariff for American exporters of potatoes that would result in trade diversion; it would suddenly go from a higher cost country and taking trade away from Canada, a lower cost producer, simply because of the tariff distortion in place.
One of my major priorities in my role as Minister of International Trade is to fix NAFTA, drive the WTO process for maximum advantage for Canada for reasons I can explain later if you wish, and let us counter the competitive negotiation of bilateral free trade agreements. We are falling way behind, and if we do not get caught up we are going to find ourselves being discriminated, even though we are one of the most trade-dependant countries in the world.
Yes, we are looking at a variety of bilateral or regional free trade arrangements. We are ranking them in terms of the discounted, expected present value of a deal. In other words, how beneficial for Canada is a deal? How likely is it able to be negotiated? How long will it take? We are trying to take a systemic approach and we are looking at the one you referred to as a promising one.
Senator Callbeck: When you say that you are ranking them, you have not got them ranked yet? Is this one you think will be near the top?
Mr. Emerson: Yes. I cannot tell you exactly where we are going to come out.
I will tell you this: If a country shows willingness, and we can see from early reconnaissance that there does not seem to be impediments to making a deal, we will move hard and fast. We want to ensure we get deals done and counter some of the negatives we see emerging.
We are also working as part of the NAFTA commissions work; we are looking at how Canada, Mexico and the United States can work more collaboratively. We are looking at collaboration to try to bring the free trade agreements that NAFTA partners have with other countries into a NAFTA context so that we start to broaden NAFTA by pulling in some of the other free trade arrangements that other countries have.
Senator Callbeck: Have there been any discussion at all between Canada and the other countries in South America?
Mr. Emerson: Yes, there have been discussions.
Mr. Gero: We already have a bilateral free trade agreement with Costa Rica and we are in the midst of negotiating with the remaining Central American Four. It is a matter of when we can conclude with them.
Senator Oliver: Minister, I have appreciated your comments. A number of writers have said that the drop dead date for the go-around negotiations is December 2006, six months from now. What happens if that round fails and what is going to be the effect on Canadian farmers? Do you, as minister, have a strategy for dealing with the failure?
Mr. Emerson: I will ask Mr. Gero to put a finer point on it. You know why December 2006 is a drop dead date. You are working back from the expiration of the President's fast track authority.
To not do a deal would be very damaging for Canada, in my view. There are so many opportunities out there in services and non-agricultural products, not to mention the sacrifices that will be made in the agricultural sector. It will be very problematic, which is another reason why we will pay so much attention to bilateral and regional free trade arrangements.
If we are left out in the cold with a failed Doha development round, we are exposed. We have to move hard and fast to try to minimize the damage that could do to our growth opportunities in the future.
Senator Oliver: What can you reasonably do in terms of these bilateral agreements? You talked to Senator Callbeck about the next six months.
Mr. Emerson: In six months, you can cover a lot of ground in substance and detail. Can you get a deal signed in six months? Probably not, but you can certainly get to the point where you are within striking distance and you will know that you are going to get a deal. I think that is important to know.
We need to know where we have a realistic prospect of getting a deal and driving it to a conclusion. That, in turn, starts to give us a good perspective as to where the gaps are in terms of the go-forward position.
Senator Oliver: Apart from your desire to have a few bilateral agreements, what is the other part of your strategy to protect Canadian farmers in the event of a Doha failure?
Mr. Emerson: I am not the Minister of Agriculture, so you really ought to put that question to him. I do have a belief, though, that we need to continue to support the transformation of the Canadian agriculture industry. I am a great believer that protection is a second best solution, and transformation and identification of market niches and value-added opportunities are critical. When you do that in combination with opening up the market opportunities, that is what needs to be done.
The Chairman: Honourable senators, we are delighted to have the minister with us, but we are going to lose him because the bells are ringing. I think you have five minutes.
Mr. Emerson: It says I have two minutes. What is your pleasure? I need to vote. Mr. Gero can stay, if that will be helpful, and I could return after the vote.
The Chairman: That would be very helpful. If you could do that, we would be very grateful.
Mr. Emerson: I should be back in 15 or 20 minutes. Mr. Gero will be better than me, in any case. By the time you get used to him, you will not want me back.
Senator Oliver: In the minister's paper, he said he is going to take some time to get it right but he is aiming to complete the agreement in the coming weeks. Earlier, I heard him refer to two years before the money comes back. When will this deal be finalized and when will Canadians have the money that was wrongfully seized?
Mr. Gero: I think the idea is to finalize it within the coming weeks, and then work in such a way that the money goes back to Canadians as quickly as possible.
Senator Oliver: Will Canadians get the money in 2006?
Mr. Gero: I cannot give you the answer to that, but I hope some of it will be returned in 2006.
Senator Campbell: I come from a province that lives and dies by softwood lumber. In my province, it is big daily news. First, I want to say I think the agreement was reasonable and fair, considering where we were.
What is the ratio of the exports comparing British Columbia to Ontario and Quebec?
Mr. Gero: My understanding is that British Columbia exports about 53 per cent of our total exports to the United States. I think Quebec is at the 16 per cent level and Ontario is at 8 per cent or 9 per cent.
Senator Campbell: My sense is that the industry in British Columbia is satisfied with the agreement. Yet I continually hear, now that I am reading Ontario and Quebec papers, that these provinces are not as satisfied. Can you explain why?
Mr. Gero: All the provincial governments have supported the agreement, and I think the large majority of the industry has as well. As the minister explained earlier, different companies have different perspectives. Some of them have more difficulty with the agreement than others, based on their export performance — the kind of products they export.
What you are finding are disagreements in the context of some of the details of the agreement. In general, all the provinces fully support the agreement and most of the industry across Canada supports the framework.
Senator Campbell: Am I just reading into the story one company who is in disagreement — perhaps a company that is still in litigation with the United States?
Mr. Gero: That is correct.
Senator Mitchell: I was in Hong Kong in December for the WTO round, and it was very interesting. You and the ministers did an unbelievable job in negotiation. It was really intense.
It was clear that there are two clear positions on supply management and the Canadian Wheat Board — those who would rather not have it and those who desperately want to keep it. Certainly, those positions are evident on the two sides of the House and the two sides of the Senate, to some extent. Those who would rather not have the Canadian Wheat Board and supply management argue that it is an impediment to an international agricultural deal that the WTO is trying to get to.
I am glad to hear the government is taking the position that they are not going to relinquish that. It seems to me that on the scale of trade with the U.S. and Europe in the world as a whole, these two elements are so insignificant as to be hardly a deal breaker.
If it comes down to a relationship with the U.S. or Europe, we have reduced our support so far compared to what they have reduced, why should we have to give it up to get them to give up more anyway? Can you make sense of that? Is there any sense to the idea that we have to sacrifice supply management and the Canadian Wheat Board in order to precipitate this international deal?
Mr. Gero: Virtually every country has different interests in the agricultural sector. Every country has agricultural sectors that are export oriented and looking for global markets, and they have some sectors that are more domestically oriented. Canada is not unique in that situation. It applies to the U.S. and the Europeans, among the larger countries, as well as some of the emerging developing countries.
The issue is not a question of it must be one or the other. The real question in these negotiations is how to deal with providing more market access, substantial reductions in domestic support and the elimination of export subsidies in that regard. At the same time, there will not be a deal unless countries' sensitivities are adequately dealt with. As you know, there is a category in agriculture on the market access side called ``sensitive products.'' Virtually every country has them, and there must be a means to ensure that one does far less in that regard vis-à-vis sensitive products than one does in general.
In these negotiations, if you are going to have 150 countries around the table agreeing with it, you must find a compromise that attaches to both countries' export interests and, at the same time, look at your domestic sensitivities.
Senator Mitchell: Would you conclude that there is not a serious assault on those two elements of our agricultural policy so that we can protect those as sensitive issues?
Mr. Gero: The government is on record that it will defend the supply management system.
Senator Mitchell: In the end, the argument that we need to give that up in order to get it does not wash, necessarily. It is simply more grist for the mill and a political argument. Thanks very much.
The Chairman: For all senators and our viewers, Mr. Gero is the Assistant Deputy Minister of Trade Policy and Negotiations. The man is in deep and dangerous water all the time. We admire his efforts in these international discussions which are so difficult.
Senator Cowan: I have a couple of quick questions with respect to softwood lumber. I will follow up on Senator Oliver's point about the return of the money. Once the deal is concluded, why would there be a delay? Why not simply cut a cheque?
Mr. Gero: In the American system, in order to return the monies, the U.S. Department of the Treasury and the U.S. Customs and Border Protection would have to liquidate each entry, which means every single crossing of every box of lumber, literally. In that system for the refunding of duties, the Department of the Treasury would have to go through, for the last five years, more than one million entries, and liquidate them one by one before it could write another cheque.
As part of the framework agreement with the Americans, we are trying to work out a system that would allow a better way of handling that return. From the American perspective, that is the way they return money. We are trying to develop a system through the framework agreement that would allow the funds to be returned in a more efficient manner to the exporters of record.
Senator Cowan: As I understand it, some of the money retained by the U.S. will be used to reimburse American companies for legal costs in fighting unsuccessful litigation. What plans does the Canadian government have with respect to Canadian companies that had to pay these duties and participate in litigation? Are they to be reimbursed either by the American or Canadian authorities?
Mr. Gero: It is correct that part of the money will be retained by the American coalition to cover their litigation costs. Over the last two years or so, assistance from the Government of Canada has been provided to the various lumber associations to help mitigate their legal costs.
Senator Cowan: There was some speculation or comment that in future there would be a requirement for provincial governments to have their forest management or lumber production plans vetted by some U.S. authority. Could you clarify that comment?
Mr. Gero: I believe that is an incorrect interpretation of the agreement. A provision in the agreement, as in most trade agreements, states that governments do not circumvent the provisions of the agreement to give assurances to one party or the other and that having reached the agreement, governments do not do things that negate the agreement. In essence, that is what people are referring to.
Senator Cowan: Will the Canadian government vet provincial plans and then assure the U.S. authorities?
Mr. Gero: I do not think there is a plan of vetting changes in policy. Like all trade agreements, this one will have a dispute settlement provision. It will have a provision that says, ``Governments shall not circumvent the conditions of this agreement.'' I guess we will have a dispute settlement provision within the agreement such that if one party or the other feels the other party is circumventing the agreement there will be a question of dispute. Consultation and discussion will take place and then a dispute.
Senator Gustafson: My favourite subject is the topic of getting Americans and Europeans off subsidies. I do not think that will ever happen. For example, peas are selling for U.S. $5 per bushel and Canadian farmers are receiving Can. $2 per bushel because of a subsidy in the U.S. France doubled the subsidy on wheat last year, and it seems as though the situation is getting worse.
In the U.S, it seems to be more a political decision than an economic decision. How do we survive under this scenario? Unless we deal with the global situation there is no answer. Grain prices would have to skyrocket. The little bit of increase that we might have in hard wheat right now would be eaten up by the energy and input costs. It poses a picture that is not very bright.
If Canada is to maintain an agricultural strength in grains and oil seeds, we will have to make some move in the global economy. When you put dollars into agriculture, it multiplies many times in the economy in building machinery, cars and trucks, et cetera. It seems that Canada has not taken a good look at that fact. If we do not do that, we will be in big trouble, unless there is a world drought.
Mr. Gero: Senator, it is absolutely true that Canadian farmers are the most efficient in the world and can compete with any other farmers in the world. However, the trouble is they cannot compete with treasuries and that is why the WTO negotiation is so important.
If there is a successful set of negotiations, then not only will it eliminate all European export subsidies but also, according to the present offer which we hope will be enhanced in the context of a final agreement, it would require very substantial changes to the American farm bill which, as you know, is currently under consideration.
Without such a WTO deal, you are right: the framework of the farm bill can be more expansive. That issue is of primary interest to us in these negotiations.
Senator Gustafson: The Americans always throw up that trade is a two-way street. If we do not allow them to sell in our market, why should they allow us to sell in their market? That sentiment is raised every time we visit them.
Mr. Gero: That is why we need an ambitious WTO deal that not only looks at the question of domestic support in the United States or export subsidies in Europe, but also at the whole question of market access so that a producer has the ability to sell it anywhere in the world. That is part of the overall balance in any eventual deal.
Senator Gustafson: Another positive thing has happened. In the cattle industry, the Americans have sold our beef to the world for 100 years. Then, BSE came along, they close the border and the market plummeted.
Mr. Gero: Our ability to export cattle is vital to our economy.
Senator Gustafson: Can they sell our wheat?
The Chairman: We do not want to relive the BSE issue. This committee spent many weeks studying that difficult issue.
Senator Peterson: Recently, we had a breakfast meeting with the dairy producers, and they brought up the issue of milk protein concentrates that are flooding onto the market. We were not aware of these derivatives when the tariffs were first put in place to protect those imports, so they are doing indirectly what they could not do directly.
Are there any moves currently being made by our trades people to close that door?
Mr. Gero: At the moment, senator, that is an issue that has arisen over a recent court case ruling that was made under Canadian regulations. One thing we are looking at, which is largely a domestic issue between Agriculture Canada and the Canada Border Services Agency, is how to adapt the regulations in such a way as to ensure some protection for Canadian farmers.
Senator Tkachuk: The big difference between Canadian and the American lumber prices is that the Americans have private woodlots and we have stumpage fees. Senator Campbell may have better knowledge of this, but I believe British Columbia has been discussing the concept of perhaps having private woodlots rather than stumpage fees.
The framework agreement states,
Canada, with full participation of the providences, and the U.S. will make best efforts to define ``policy exits'' from the export measure for each province within 18 months of entry into force of this agreement.
Some people have interpreted that to mean that Canada will be either forced to adopt or voluntarily adopt the same policy for private woodlots rather than stumpage fees.
Does ``policy exit'' mean that we should move closer to the way they price their lumber, or does it have another meaning?
Mr. Gero: I think it has another meaning, senator. What it really talks about is to ensure that one has an understanding of the definition of countervailable subsidies are to ensure that Canadian policies going forward will not be deemed a countervailable subsidy.
The idea is to ensure that we can have an agreement between the two of us on the Canadian policies that would maintain a permanent exit from any kind of countervailable duty actions by the United States. It does not mean that the only way you can achieve that is by mirroring U.S. forest practices.
Senator Callbeck: I want to follow up on the question that Senator Peterson asked about the milk protein concentrates. I have read where dairy farmers are anxious to use article 28 of GATT. Do you agree with that? Is that an area you are pursuing?
Mr. Gero: To date, the government has not chosen to use article 28 of what is now the WTO, the old GATT, for a number of reasons. It is under consideration, but no decision has been made to utilize that article.
Senator Callbeck: What are the pros and cons of the article?
Mr. Gero: There are a number of questions using article 28. First, of course, are the provisions of the WTO that you would have to compensate them for raising their own tariff. The question is how would Canada be able to compensate for the raising of the tariff?
Second, we are in the midst of negotiations in the WTO on tariff issues and market access. The question is does this complicate our activities in those negotiations?
Third, there is a question as to whether such an increase in tariff would be possible in the context of our North American Free Trade Agreement. All of those are complicating factors, both pro and con.
Senator Callbeck: What time frame are we looking at as far as getting anything done for the dairy farmers?
Mr. Gero: Our domestic departments are making attempts to alleviate this concern about MPCs. Unfortunately, I am not fully informed as to what is being done on the domestic front, so I cannot give you an exact time frame. I do know there have been discussions with the dairy farmers in that regard.
Senator Mitchell: On the softwood lumber agreement, an export charge has been negotiated which we get to keep as opposed to a tariff that they kept?
Mr. Gero: That is right.
Senator Mitchell: What sort of restrictions are there on what we can do with that export charge? For example, can we just give it back to the companies?
Mr. Gero: No, to give it back to the companies would create one of the anti-circumvention issues we had talked about earlier.
Senator Mitchell: Is that explicitly excluded?
Mr. Gero: That means that if we give it back to them, they would not be paying an export charge. That would be a clear contravention.
Senator Mitchell: How close can you get to that solution?
Mr. Gero: The idea is that these funds would be returned to the provinces, and the provinces would utilize them in whatever context they wish, so as not to act in a way that creates, in essence, a circumvention of the agreement.
Senator Mitchell: The fact now is that the tariff is at 10 per cent across the board, so at some point, if it gets below U.S. $355, this becomes more expensive than what they are paying now?
Mr. Gero: On the current point, it would be. Of course, currently, under the agreement, given the prices, they would not be paying anything.
Do not forget that under the American system, that amount is under an annual review, so while that would be what they are currently paying under the current regime, it could increase.
Senator Mitchell: I was interested in a comment in the minister's opening statement that for the next seven to nine years, when lumber prices are high, no border measure will be imposed.
Is that a projection of the length of this agreement, or is that a statement of future lumber prices? Can he predict them like that?
Mr. Gero: No, he was predicting the length of the agreement, and whenever during that period, the lumber price is above U.S $355, of course, there is no regulation.
Senator Peterson: The figure is U.S. $355.
Mr. Gero: Right.
Senator Peterson: Is the export tax supposed to hold it at U.S. $355?
Mr. Gero: No, it is not meant to hold it at U.S. $355.
Senator Peterson: What does it do, then? If the price drops to U.S. $325 and the difference is U.S. $30 a thousand board feet less, how much is the export tax.
Mr. Gero: I think, at $325, it is 10 per cent in one context. Do not forget, there are two different aspects to it, because the various regions of Canada can choose two different ways of dealing with the price drop. Either you could pay the 10 per cent at that price range or you can go into having restrictions on the amount that you export and pay a far lower level of export tax.
Senator Peterson: What do the Americans want? Obviously, they are dictating this. Do they want the U.S. $355?
Mr. Gero: No, that is the agreement. What you see in front of you are the details of the agreement and the choice will be up to the various regions of Canada, not the United States.
Senator Peterson: You have import and export tax to bring it up to a number. I feel that they are protecting their market price.
Mr. Gero: The number of what price you end up with over the period would depend on the price, because there are step ranges and each of the prices would have that 10 per cent or 15 per cent within those ranges.
Senator Peterson: In some way, they are obviously trying to maintain a certain price. What they would be charging down there, if the price dropped down to U.S. $325, the export tax would take it back up again, so I presume, if are you Georgia Pacific, you would be charging that amount? Why would you not?
Mr. Gero: You charge what the market will bear.
Senator Peterson: We are not allowed to sell it cheaper.
Mr. Gero: You may be in a region where you do not charge the 10 per cent tax and you decide to restrict your level of export.
Senator Peterson: That is the same thing.
Senator Gustafson: On the Prairies, there are several house builders who are building homes and moving them into the United States. Apparently, there is a major tax saving in doing it that way.
Mr. Gero: I do not believe that prefabricated housing is covered by the agreement. The scope of the agreement covers only the details of the lumber items that covered in the previous countervailing duty. Prefabricated housing was not covered and it is not covered in the agreement.
Senator Cowan: Atlantic Canada is exempt from the agreement.
Mr. Gero: That is right.
Senator Cowan: Assuming its proper origin is Atlantic Canada, is there a limit on the amount of lumber that can be exported from Atlantic Canada into the U.S. market?
Mr. Gero: It is totally exempt as long as the amount of exports is no more than what they actually produce and what is in their inventory. If they exceed that, which would be difficult to see if it is more than your production and your inventory, that would be an indication that it is not originally from there and then there is an additional charge. As long as you are not in excess of what you produce and what is in your inventory, then there is no quota.
Senator Cowan: I had understood that there might be some percentage based on historical export to the U.S.
Mr. Gero: No, it is actual production inventory.
Senator Cowan: So it is whatever the actual production is, as long as it originates in Atlantic Canada?
Mr. Gero: Yes, as long as it originates from Newfoundland, Nova Scotia, Prince Edward Island, and New Brunswick.
The Chairman: We have toiled over the last few years repeatedly on the BSE situation. So many of our trading partners shut their doors and borders after the Americans closed down their border. How are we doing now? Are we all back or do we still have a number of them that are not sure about wanting to trade with us?
Mr. Gero: Unfortunately, we are not all back, but it is a priority for us and on a daily basis we have some successes. This week we have a decision by Thailand that they are now again open for Canadian beef. It is an ongoing process to convince people with our regulatory agencies about the safety of Canadian beef. We have not managed to open a hundred per cent of all the other markets yet, but that is an ongoing effort by Agriculture and Agri-Food Canada, CFIA and our department.
The Chairman: Which ones are we working on? I am thinking of the Asia market.
Mr. Gero: I think the two largest markets are China and Korea, which we are still working on.
The Chairman: Is anything moving in Korea?
Mr. Gero: No, not for the moment, but talks continue with both of those countries and their regulatory agencies.
The Chairman: I have a message from the front, colleagues, that there were two votes, not one vote, and I am wondering, would you like to take a short break and wait for the minister to come back or are you all talked out for tonight?
Senator Gustafson: I think he presented an answer to most of our questions, if not all of them.
The Chairman: He did, indeed.
On that note, I would like to thank his staff for having that door open for him to come back, and I hope, while you extend our gratitude to him, I know that we will want to see both of you again.
I am sure I speak on behalf of all of the senators as I wish you very good luck in the very tough days ahead. We are sure you will be doing what you do best and that is negotiating. Thank you very much for being here today.
Mr. Gero: Thank you, senators.
The committee adjourned.