Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 15 - Evidence
OTTAWA, Thursday, February 15, 2007
The Standing Senate Committee on Banking, Trade and Commerce met this day at 15:50 a.m. to examine and report on issues dealing with interprovincial barriers to trade.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Welcome, colleagues and witnesses. We are delighted to continue our ongoing study of interprovincial barriers. We want to welcome the Canadian public from coast to coast to coast watching by television. I tell witnesses that not only will they be seen across Canada and North America, but also on the Internet worldwide. Their words will thunder across and around the globe.
The committee today continues its examination of the interprovincial and interterritorial trade barriers that exist in Canada and, more particularly, the extent to which these trade barriers, these regulations, limit the growth and profitability of the affected sectors. We will also look at the ability of businesses in affected provinces and territories jointly and with the United States to form economic regions that can only enhance prosperity by enhancing productivity. This committee believes that the topic of internal barriers to trade is critically important as we seek a prosperous and competitive future, not only within Canada but with our colleagues to the south and around the world. The barriers, in our view, often increase costs for businesses and perhaps, ultimately, for the consumer and may lead to inefficiencies that could reduce competitiveness and productivity. We need to focus on specific actions that will enhance productivity and competitiveness and these internal barriers to trade that are harmful in one way or another to achieve this goal. In Canada, we may have free trade with the United States and certainly other free trade agreements, but we still do not have free trade in Canada.
We believe this hearing is important in the context of the government announcements by the Minister of Finance on November 23. The commitments of this new Conservative government, like the former Liberal government, which was on the same wavelength, are intended to pay particular attention and importance to the terms of our study, and that was to foster a stronger Canadian economic union by continuing to engage with the provinces and territories to enhance internal trade and labour mobility and to work with provinces to create a common securities regulator. This latter initiative has long been advocated by this committee.
I am delighted today to welcome a new member of this committee, Senator Ringuette from New Brunswick, who replaces Senator Hervieux-Payette. It was because of Senator Hervieux-Payette's great performance in this committee that the leadership saw fit to make her the Leader of the Opposition in the Senate. We have lost her but gained Senator Ringuette. We are delighted. Great things are in store for you, Senator Ringuette. If you do a good job here, I am sure that the party will put you in a higher cast of leadership.
I want to welcome the deputy chairman, Senator Angus. I welcome him because we are at idem on these issues and the importance of the problems we face.
We are pleased to welcome Sean McPhee, President of the Vegetable Oil Industry of Canada, VOIC, and Mr. Bob Broeska, President of the Canadian Oilseed Processors Association, COPA. I understand Mr. McPhee has a brief statement.
Sean McPhee, President, Vegetable Oil Industry of Canada (VOIC): The Vegetable Oil Industry of Canada is a vertical trade association comprised of growers, principally canola growers in Western Canada; intermediate processors who crush and refine oil, which is used in a variety of consumer product applications; and our third group at the top of the supply chain, producers of products such as margarine, cooking oil, salad dressing, whipped toppings and a whole variety of principally soy-oil-based and canola-oil-based products.
We have a story to tell you today, and I want to advise you upfront that it is not a pleasant one, chronicling, as it does, a failure of political will. However, there is a positive message here of hope, and I want to ensure it is heard and understood. We at VOIC and, in my previous role as a consultant at Unilever Canada, have done work for governments in this country in terms of creating a body of internal trade law. There is a substantial amount of agreement on internal trade jurisprudence that we have generated. The issue now is that it needs to be put to work.
The inception of VOIC in 2002-03 was due in part to interprovincial trade issues, beginning with efforts to address Quebec's margarine colour regulation in the late 1990s, which I led at the time on behalf of Unilever. However, Quebec margarine colour is part of a bigger picture. These products — blended dairy and vegetable oil spreads and beverages and so-called dairy analog products — are substitutes for traditional dairy products. They meet a variety of consumer demands for healthy products, a demand among many Canadians who are lactose intolerant or dairy intolerant, which we estimate to be 20 per cent of the population.
In the material that I distributed to you yesterday, the first appendix gives you a visual indication of the different regulations from province to province that make it almost impossible for a national manufacturer to put these products on the marketplace. If you look at the chart in Appendix 1, you will note that some provinces allow the manufacture and sale of these products and some do not; some allow them only through ministerial exemption; and others specifically disallow them. Generally speaking, there is a difference in range of approaches to enforcement. Some regulations are actively enforced, and others are not. Overlaying all these provincial regulations related to these products are federal regulations, particularly those in the Food and Drugs Act administered by Health Canada.
The problem articulated in an Agriculture Canada memo at about the same time I am referring to, in the late 1990s, is that these differing provincial regulations prevent firms that process these products from being fully competitive because the economies of scale simply do not exist.
With that background, I want to focus practically on our experience in attempting to use the Agreement on Internal Trade, AIT, to address these three trade barriers. I will give you examples of three that I have been personally involved in, two of which have been done under the aegis of the Vegetable Oil Industry of Canada.
First, going back to margarine colour, we approached Quebec in advance of the September 1, 1997 deadline for them to repeal the colour regulation. They tabled draft legislation and then simply withdrew it. We subsequently went to Ontario, requesting that they take forward a challenge under the dispute resolution proceedings of the Agreement on Internal Trade. It took five years before the sectoral and chapter 17 consultations were completed in that challenge. In those five years, changes of ministers in both Ontario and Quebec brought the process back to square one after whatever little progress was made. One minister, at the request of Ontario dairy farmers, refused to move the file forward even though the Harris provincial government had already committed to do so. On the Quebec side, there was no intent or consistency in terms of achieving the objectives of the consultation.
In April 2002, Ontario and Quebec agreed to proceed to a dispute resolution panel and jointly requested the internal trade secretariat to initiate the process. Following Ontario's panel submission in September 2002, Quebec advised the secretariat that regardless of its AIT obligation and its commitment to Ontario, it would not make a panel submission and would not appoint a panellist. That was the end of round one: five years, no result and no recourse. The vegetable oil industry's losses due to Quebec's margarine colour regulation, estimated at about $20 million annually, would continue.
At about the same time, Ontario took tentative steps to repeal the Edible Oil Products Act, EOPA, legislation that prohibits the products that I outlined at the beginning. B.C. and Alberta challenged Ontario on this matter at the request of the Vegetable Oil Industry of Canada. The outcome was that the panel, in its ruling, advised Ontario to repeal the Edible Oil Products Act, which the province did.
The panel also advised Ontario not to replicate the trade restrictions in the EOPA. The Government of Ontario, specifically the Minister of Agriculture, circulated a letter, which I included in the package before you, indicating that he would not do that. What the Ontario government did on the very day that they repealed the Edible Oil Product Act, was make amendments to the Ontario Milk Act, which simply replicated most of the restrictions under EOPA. Ontario was questioned directly at the panel hearing as to whether they intended to replicate those restrictions under the Ontario Milk Act. A representative denied it but the Ontario government went ahead and did it anyway.
The third trade barrier was round two of the Quebec margarine colour challenge. This time, Manitoba, Alberta and Saskatchewan challenged Quebec. Quebec agreed to play ball this time. We went to a panel. The panel found unambiguously in favour of the Western provinces, finding that the colour regulation has ``impaired and caused injury to margarine producers and their upstream suppliers'' and that ``Quebec repeal the measure forthwith, and in any event, no later than September 1, 2005.'' A few days before that deadline, in my capacity as President of VOIC, I received a letter from the Quebec Minister of Agriculture in which he said:
. . . the Quebec government gives importance to the panel report, and is presently reviewing it. In the meantime, the margarine colour restriction remains in force and the Quebec government is ensuring its application. We will inform the industry, when appropriate, of the government's decision concerning the expert Panel's recommendations.
That was one and a half years ago: they must still be reviewing the panel's decision because the regulation remains in place.
These three examples are of politicians, frankly, not doing what they committed to do when they signed the Agreement on Internal Trade. There are direct costs to my industry. We estimate the cost of the margarine colour regulation to growers, to processors and to consumer product companies at about $200 million to date since the date when Quebec should have repealed the regulation.
Economic cost is not the only issue. In terms of the products I outlined at the outset, we cannot sell many of them on the market. Health Canada's newly revised Canada Food Guide acknowledges the nutritional value of these products by opening up the previous Milk Product food group to the new Milk and Alternatives food group. Unfortunately, other than fortified soy beverage, we are hard-pressed to find many alternatives in the grocery store because they are not on the market as a result of the regulatory disparity outlined in the table I referred you to.
I will conclude with some observations. I will say the following as bluntly as I can. The two largest provinces in Confederation have let Canadians down in terms of our collective desire to achieve a unified internal economy, by making a mockery of the Agreement on Internal Trade. The federal government has been invisible throughout the process I have outlined in terms of all three panel reports. To our request that they intervene in the dispute on the Edible Oil Product Act, because of the finding of the Federal/Provincial/Territorial Agri-Food Inspection Committee that the federal government should be regulating and the provinces should de-regulate, we were told by the federal government that their intervention ``would not be helpful.'' It is also clear to me that Canada's electoral riding distribution favouring rural over urban constituencies appears to have given primary producer lobbies an inordinate sway over government policy at the expense of downstream processing and consumer interests.
Section 121 of the Constitution should be interpreted to include non-tariff barriers. Responsibility for the AIT within government is unclear. More than once, we were advised by the Ontario minister responsible for internal trade that the Minister of Agriculture held the file. On other occasions, we were told by the agriculture minister that the minister of internal trade held the file.
The Agreement on Internal Trade is for Canadians, whether they are individuals or private sector firms, and yet they have no recourse should governments fail in the administration of the agreement. As a result of two panel reports on margarine colour and the EOPA, a substantial amount of AIT jurisprudence has been generated that, if acted upon, would significantly help advance the cause of creating a national economy; and I know that the committee is interested in the national economy.
In short, the Vegetable Oil Industry of Canada has been through two AIT dispute resolution processes. The outcome of one has been completely ignored and the outcome of the second one has been ignored in part. The agreement needs to be significantly strengthened with appropriate remedies when parties are out of compliance.
Mr. Broeska will have a comment regarding international trade.
Bob Broeska, President, Canadian Oilseed Processors Association (COPA), Vegetable Oil Industry of Canada (VOIC): Thank you. Our industry purchases canola and soy beans from farmers directly and processes them into 5 million tonnes of vegetable oil and protein meal annually in Canada. The industry is worth $6 billion to the Canadian farm economy and to the Canadian economy in general.
Mr. McPhee has spoken to the details of the Agreement on Internal Trade. I have served as a member of the minister's trade advisory committee through the Canada-U.S Free Trade Agreement, the Uruguay round of the General Agreement on Tariffs and Trade, GATT, and now as a member on the minister's trade advisory committee on the Doha Round. In that time period, we believe that we have had some major accomplishments. We have achieved access to the U.S. marketplace for Canadian oilseed processors and Canadian farmers, and access to the growing and mighty China marketplace through trade and tariff barrier reductions during the Uruguay round of GATT. Now, we are looking to achieve greater access to Asian, Middle East and South American markets in the Doha Round.
During that time, our industry has gained major access to some marketplaces and yet during that same time frame, we have been unable to achieve free market access for our products across Canada. Despite our efforts and substantial investment in time and manpower, the political will does not seem to exist to do in the Canadian marketplace what we want to achieve internationally.
We believe there are substantial gains to be made in the domestic marketplace not only for our industry but also for those who resist change. My other job is to serve as President of the International Association of Seed Crushers. I have had the opportunity to see firsthand how market liberalization globally is embracing change. Vegetable oil products and dairy products are marketed together internationally in many circumstances. The changing nutritional measures and consumer values have enabled both to exist simultaneously and in complementary situations for the benefit of both.
We believe that kind of growth should be enabled through our Agreement on Internal Trade within Canada. We are here to urge senators to consider what might be done to the AIT to allow industry better access to its domestic commercial marketplace.
The Chairman: Could you tell us about the size of the industry? You have indicated the quantum for producers but can you break it down for producers, manufacturers and consumer products? What is the size of the industry as a whole and how many people does it employ?
Mr. McPhee: The industry is in excess of $10 billion annually to the gross domestic product. I believe that growers contribute about $2 billion to $3 billion. I need to confirm these numbers for the committee because I do not have them with me.
The Chairman: You can give us approximate numbers now and you can verify and correct them for us later. We want to understand how much this industry affects which segments of the economy, compared to those that might be prejudiced by the growth of this segment. I think it is a question of looking at the macro numbers.
Mr. Broeska: There are in excess of 200,000 canola seed growers in Western Canada and 25,000 growers of soybeans in Southern Ontario. That grassroots level of the industry produces those oilseeds that move through the crushing industry. The crushing plants that buy that seed from the farmers are located in Ontario, Manitoba, Saskatchewan and Alberta. Ten plants buy 5 million tonnes of soybeans and canola from farmers and process it into vegetable oil and protein meal. The plants sell the vegetable oil to refineries or process it through their own refineries. Those refineries are located in Quebec, Ontario, Manitoba, Saskatchewan and Alberta. The oilseed processing industry itself is worth about $6 billion per year to the Canadian economy: $3 billion worth of value added and processing value that they turn back to farmers through seed purchases, and $3 billion worth of trade, either import replacement or export earnings.
Senator Massicotte: My question is with regard to coloured margarine. Is the annual cost of that loss, $20 million?
Mr. Broeska: Yes: We have estimated, based on market share that we look at in similar market jurisdictions, that in the Quebec marketplace alone the lost market sales are worth about $20 million a year.
Mr. McPhee: To illustrate that point, the market share of margarine of the combined butter-margarine market in Canada is about 78 per cent, and in Quebec it is about 58 per cent. The only thing we can attribute that difference in market share to is the colour of margarine. The regulation is obviously designed to make butter a more appealing colour than margarine.
In addition to the lost economic opportunity due to that difference in market share, there is the cost of compliance. A national manufacturer must run separate production lines and maintain separate inventories and separate distribution systems. The largest national margarine manufacturer estimates that separation cost at $1.2 million a year. When the two are added together, the difference is about $20 million annually.
Senator Massicotte: You said that lost sales are worth $20 million. You said that in the other provinces 78 per cent of the market buys margarine while in Quebec 58 per cent buys margarine, and the difference is because of the colour of the margarine. Is that correct?
Mr. McPhee: Yes: That $20 million includes the compliance costs, which are about $3 million of that.
Senator Massicotte: Have you conducted consumer studies in Quebec that indicate that people there find the fact that margarine is not coloured yellow to be a negative?
Mr. McPhee: Yes: We did public opinion polling when this issue first arose. We used a professional pollster who took a large sample and found that 70 per cent of Quebec consumers wanted the government to repeal the regulation and wanted yellow margarine available on the grocery store shelf.
Senator Massicotte: I agree with that observation. Everyone wants more consumer choice. However, I was trying to determine whether it is factual to say that the 12 per cent differential relates to the colour of margarine. Is there any support for the argument that more yellow margarine would increase sales by 12 per cent?
Mr. McPhee: It is not impossible to prove a direct cause-and-effect relationship, but we have looked at the different market share status in Quebec and the factors available in that kind of analysis compared to the rest of the country. The main factor is the appearance of the product.
Senator Angus: Are the Vegetable Oil Industry of Canada and the Canadian Oilseed Processors Association two separate industries?
Mr. Broeska: The Canadian Oilseed Processors Association, which I represent, is an association of companies that purchase canola seed and soybeans directly from farmers and crush that seed to manufacture vegetable oil and protein meal. These companies have plants located all across Canadian and ship that oil and meal both to the domestic marketplace and the export marketplace. The Canadian Oilseed Processors Association is a member of this ad hoc advocacy group called the Vegetable Oil Industry of Canada.
Senator Angus: They are interrelated. The members of your association are also members of VOIC, which is an advocacy group for the industry?
Mr. Broeska: That is right.
Senator Angus: Who are the members of your group?
Mr. McPhee: Our members are the Canadian Canola Growers Association, which represents canola growers principally in Western Canada; the Canadian Oilseed Processors Association, whose member companies are Archer Daniels Midland Company, Bunge Canada, Cargill and Canbra Foods. Other members are Loders Croklaan, Unilever Canada and Rich Products Corporation.
Senator Angus: Mr. McPhee, I was interested in your remarks about the work you have done in developing a body of jurisprudence supporting free internal trade. Have any of the decided cases involved section 121?
Mr. McPhee: No, they have not. The observation has been made, and comment has been made on numerous occasions, that section 121 has not been effectively utilized and overseen by the federal government since 1867, and that we are left with the result of that, which is that the provinces regulate without national consistency. In the three experiences that I outlined, the federal government has been a non-player.
Senator Angus: Have there been a significant number of internal tariff barriers that should be banned by section 121?
Mr. McPhee: There have been in my view, yes.
The Chairman: For our viewing audience, Senator Angus is referring to section 121 of the Constitution Act, 1867, which reads:
All Articles of the Growth, Produce, or Manufacture of any one of the Provinces shall, from and after the Union, be admitted free into each of the other Provinces.
The section is essentially a free trade provision that mandates that products produced in one province can be bought and sold in another province without additional cost.
Mr. McPhee: That is my understanding, yes.
Senator Angus: Most members of the committee have a legal background, and the wording looks clear to us. It has not been invoked. In your view, should it prohibit these tariffs?
Mr. McPhee: I am not a lawyer, although I have had much exposure to lawyers.
I also was involved in Unilever Canada's court challenge, which went to the Supreme Court of Canada. We triggered that challenge by importing yellow-coloured margarine into Quebec, in direct violation of the law.
While the justice of the superior court agreed with our arguments, he did not find that our argument regarding the Agreement on Internal Trade was sufficiently embedded in Quebec law.
The Quebec Court of Appeal upheld that view and the Supreme Court of Canada upheld the view, noting that provinces, under the Constitution, have the scope to regulate, in the manner that Quebec regulates margarine colour in Quebec, and that is the legal answer given by the Supreme Court of Canada.
Senator Angus: Was it unanimous?
Mr. McPhee: It was a bench decision.
The Chairman: What year was that decision?
Mr. McPhee: It was last year.
Senator Angus: That was the Supreme Court decision?
Mr. McPhee: Yes.
Senator Angus: It was a bench decision; no reasoning was given?
Senator Goldstein: Yes, there were reasons.
Mr. McPhee: I want to make an important point here: I do not think it was terribly surprising in many ways that the decision was reached. As I understand the debate on section 121, from my reading of commentators on it, the decision was hardly surprising. The point is, the provinces and the federal government have signed the Agreement on Internal Trade and they have explicitly said they will legislate and regulate in a manner that is consistent with their undertakings in the Agreement on Internal Trade. They have not done that. That was the whole point. They were to restrain themselves through their commitment to the agreement analogous to international trade. They signed the agreement and said they will regulate in a manner consistent with the convictions and obligations they have committed themselves to.
Senator Angus: Was the litigation an interpretation of the Agreement on Internal Trade rather than of the Constitution? It sounds like it. It sounds like they skirted that issue.
We have already made a little note here to bring in constitutional experts to advise the committee on section 121. You alluded to other principles of internal trade jurisprudence that evolved over the years. Can you give us a couple of those principles, please?
Mr. McPhee: One that comes to mind is an important one, and I think it is consistent with what I said in that the agreement implies a voluntary commitment to restrain one's regulatory reach in a manner consistent with the principles of the agreement.
The panellist who wrote the panel report in the challenge by British Columbia and Alberta of Ontario, under the Edible Oil Products Act, made a strong argument for the need for parties to the agreement to honour their consultation commitments. Sectoral chapters, such as agriculture, energy and so forth, each outline detailed consultation obligations that a party must undertake. Also, chapter 17, the dispute resolution chapter, which specifies the panel process, is explicit about consultation, pre-notification of any intent to regulate and so on, giving all parties to the agreement an opportunity to comment. The panellists felt that in the case of the Edible Oil Products Act, Ontario behaved badly in not observing those consultation obligations. The panellists went further, stating that all parties did not take the consultation commitments seriously enough. That is one example.
Senator Angus: Mr. Broeska, you made references to the Doha Round and trading products of your industry internationally. Is it fair for the committee to infer from your comments that the degree of harmonization in your products is higher in international trade than it is within our own borders and between our own provinces?
Mr. Broeska: I cannot say that disharmony or tariff and non-tariff barriers do not exist globally or even in our continental marketplace, to some extent. My point, in outlining the parallel track that we took in international trade negotiations, was to indicate how far we had moved globally, continentally that is, and internationally through the Canada-U.S. Free Trade Agreement and the GATT — now World Trade Organization, WTO — round while we continue to run into the same barriers domestically.
Prior to the Canada-U.S. Free Trade Agreement, our vegetable oils had zero access to the market in the U.S.A., so until the mid-1980s there was never a pound of oil from our industry shipped into the U.S. Through the negotiations of the Canada-U.S. Free Trade Agreement, we now ship significant volumes, much more than a billion dollars worth of product, into the U.S.A. on an annual basis.
Subsequently, we negotiated access terms under the GATT Uruguay Round on to the China market, which we did not have previously except through some grey market, illegal access. We now have access to the China marketplace and our products are embraced there and used in the same kind of products that we are trying to gain access to in Canada.
The Chairman: What about the experience in Europe?
Mr. Broeska: That experience has been volatile. We currently face limits on accessing the European market primarily over technical barriers to trade and those barriers relate to genetic modification more than to the quality of the product. We sell vegetable oils in Europe, but they are primarily for use only in biofuels. They are not allowed in the food products because of genetic modification resistance. We are close and we have apparently won a patent dispute panel at Geneva in the WTO. We believe we are about to gain access for our commodity for food use as well in the European market.
The Chairman: In a nutshell, if you have a dispute under the international trade agreement, you can fight the battle. In Canada, you are not blocked but there is non-performance of allowing you to even assert your rights under the four squares of these various agreements. My opening comment was correct. We do not have free trade in your product, but we do in the United States.
Mr. Broeska: That is right. There tends to be no alternative. Our dispute resolution mechanism in the internal trade agreement seems to be flawed. We are not without problems under the WTO or the Canada-U.S. Free Trade Agreement, we all know that, but there seems to be a route to resolution, at least for our commodities.
Senator Angus: The key words that came through in both your presentations were ``political will.'' You attribute the problem and also the way forward to political will. There needs to be a strong political will to make some things happen. Can you be more specific? At what level does the political will need to happen, and in what form?
Mr. McPhee: There are a number of interrelated problems. The Council of the Federation is currently trying to address one that they call the whole-of-government approach to the Agreement on Internal Trade. Our experience has been dealing mainly with agriculture ministers. Frankly, agriculture ministers in this country are responsive mainly to primary producer lobbies, yet the Agreement on Internal Trade binds the government, not only one minister or another. We have not found, in the case of Ontario and Quebec in particular, that they approach and respond to the agreement and their obligations in a whole-of-government approach. We have been dealing with agriculture ministers who are captured by their particular grassroots lobby. That is one major problem.
The Chairman: On the question of producer versus producer, I assume that the lobby to sustain these protectionist mechanisms is the dairy lobby. Am I correct?
Mr. McPhee: That is correct.
The Chairman: On the other side are people in the agricultural industry — the canola and the seed-growing industry. What is the size of those two agricultural communities?
Mr. McPhee: The dairy industry is about $4.5 billion.
The Chairman: That is quantum. What is the size in terms of people?
Mr. McPhee: That is 20,000.
The Chairman: That is 20,000 people in an industry of $5 billion?
Mr. McPhee: It is $4.5 billion, yes.
The Chairman: On the growers' side, also in the agriculture community, what is the number of growers?
Mr. Broeska: There are about 200,000 canola growers in Western Canada, and about 25,000 soybean growers, primarily in Ontario.
The Chairman: Why has your lobby not been as successful as the dairy lobby to breach these barriers, because that is a question of political will?
Mr. McPhee: Our farmers are in Western Canada; their farmers are in Eastern Canada.
The Chairman: You indicated that some of your farmers are in Ontario and Quebec.
Mr. McPhee: The largest numbers are in Western Canada. Looking at it from another point of view, provinces with a heavy concentration of supply-managed sectors are the ones we have had difficulty with — and, of course, that is principally Ontario and Quebec.
The tendency, in my experience in looking at what happens with supply management, is for Ontario and Quebec in particular to overreach, from a regulatory standpoint, beyond the stated objectives or the principles of supply management — that is, the marketing and distribution of primary products. There is a tendency to overreach and protect those products on the grocery store shelf.
The Edible Oil Product Act did precisely that. The amendments made under the Milk Act in Ontario specified, from a compositional standpoint, what sort of products can be sold in the marketplace. It does not seem to me that is, or should be, the scope of supply management. The act is used as a competitive and protectionist tool to keep the products I represent out of the marketplace in Eastern Canada.
Senator Goldstein: Thank you both for your excellent presentations. They are appreciated.
We have been struggling with the macroeconomic consequences of trade barriers. When Alberta has an insufficient labour market and Quebec has significant unemployment, and workers from Quebec cannot migrate into Alberta to fill the gap, there are macroeconomic consequences. Labour cost goes up and productivity goes down — there are a host of other consequences of which you are certainly aware.
Explain to me the macroeconomic consequences if the Ontario and Quebec markets were opened by the elimination, effectively, of colouring and the other regulatory issues that they have created. I have heard both of you frequently use the words ``access,'' and less frequently, the words ``market share.'' Are we talking about a zero sum gain? The extent you are able to increase your market share would decrease the butter industry's market share and that would be the macroeconomic consequences.
Mr. McPhee: In terms of costs, one practical illustration I can give you is the cost of complying with the Quebec margarine colour.
Senator Goldstein: That is $1.2 million.
Mr. McPhee: Right, but it is a cost — it is a dead loss. In terms of market share, is it a zero sum gain? We do not think so. We believe consumers increasingly look for value-added, innovative products.
For example, some products I am talking about blend a vegetable oil ingredient and a dairy ingredient to produce a product that has a better fat profile that is lower in saturated fat and richer in polyunsaturated fats, which are a factor in reducing heart disease. We think that both the dairy and vegetable oil sectors would benefit in growing the market for the benefit of consumers. I do not think it is a zero sum game. I think there are absolute market-growth possibilities.
The Chairman: What is the size of the market in the United States? Is it 10 times the size of Canada?
Mr. McPhee: I guess that is a good rule of thumb.
The Chairman: We are talking about a tremendous marketplace for your products in United States.
Mr. McPhee: Yes.
Senator Goldstein: However, changes in the Quebec and Ontario laws would not help you market in the United States.
Mr. McPhee: They have an effect. If a national manufacturer in Canada cannot enter Ontario and Quebec markets, they will not manufacture here: they will manufacture in Pennsylvania.
Large multinationals in the food industry frequently assign, in North America, a given plant to provide a North American scope in terms of supply and service. That scope will not come to a Canadian plant if the plant cannot serve the largest market in Canada. That plant will go to the United States.
The Chairman: I have a supplementary question regarding the per-unit cost; we have been through this situation with beer. I know the beer story. All of Canada could be served by one beer plant anywhere in Canada, but we have multiple beers. Then there is a question of not just choice, but also service of the major beers.
I assume you are saying that if the national marketplace were open freely to you, you could bring down your per- unit cost, and therefore compete more effectively with similar products in the United States. Is that the argument?
Mr. McPhee: I quoted the Agriculture Canada report; I think that is what that report is saying.
Senator Ringuette: I do not have the ambitions that you stated in your opening comments, but my ambition at this committee is to provide, as much as I can, productive comments and suggestions.
My first question is that you have told us about the state of the Canadian market share in regard to margarine and butter, and you stressed particularly the one in Quebec. How many of your membership provide that market?
Mr. McPhee: Principally, the largest margarine manufacturer in Canada is Unilever, with about 65 to 70 per cent of the margarine market — so it is dominated by one player. Another margarine maker, who is not a member of VOIC, is Parmalat; they are the other major national player.
Mr. Broeska reminds me that another member of VOIC is a margarine maker, and that is Cambra Foods from Lethbridge. Cambra produces products like Canola Harvest. Unilever's products, of course, are Becel, I Can't Believe It's Not Butter, Blue Bonnet and Fleishmann's.
Senator Ringuette: What would the U.S. import in regard to dairy substitutes — primary and any kind of additives to these final products?
Mr. McPhee: Margarine is the historical example of a dairy substitute. There are no imports from the United States because of the high tariff rate quota. We can bring in small amounts at duties that are in the order of 300 per cent.
Senator Ringuette: I am trying to put this information together with what you stated earlier, that for manufacturing to increase in Canada, the Ontario and Quebec markets need to open up.
We currently manufacture almost all the Canadian dairy substitute product.
Mr. Broeska: That is right. Cross-border trade is extremely limited because of the provincial regulations. There is little interest to access the marketplace with such technical barriers and tariff barriers. The supply-managed side of the industry protects itself with large import tariffs, as we are all aware, from other countries. We are saying that economies of scale will be achieved for our industry and the domestic marketplace, but there are also gains for the dairy side of the industry.
When we look globally, we ship vegetable oil from Canada into the U.S.A. Much of that oil goes into blended, analog and margarine products in conjunction with dairy products. That sector of the marketplace is a growth one. Consumers demand different types of products, not only conventional whole milk and whole butters. Consumers are looking at blends and analogs to give them the nutritional preferences and better eating habits they want. The dairy vegetable oil blends provide that to them. To this point, we are limited in that choice in Canada and we say that the growth we achieve outside of Canada for our vegetable oil products should be available to our consumers within Canada.
The Chairman: I take it you are arguing, and we are looking at this, in a macro and micro way. Because of the restrictions in Canada, you are able to ship the commodities to the United States, as opposed to developing value- added products and jobs in Canada, because of the limitation to marketplace in Canada.
Mr. Broeska: Yes: When we ship to the U.S. we do not ship final processed product. In most cases, we ship in bulk by railcar and in truck lots semi-refined or even crude oils that, if they went through a value-added plant to produce a blended product, a filled product, an analog or a margarine, would be fully processed for the consumer shelf.
Until we develop the scale to access the domestic marketplace, investors in these kinds of plants are reluctant to invest solely for the offshore market.
We think it makes more sense and better economic returns to have the best commercial market base located in the domestic marketplace, and then offshore markets as an adjunct. Because of these limitations internally, we seem to ship value-added products outside of the country for other investors in value-added processing plants to create value-added products on the backs of our export of crude and raw product.
Senator Ringuette: The flip side to the question that Senator Grafstein asked and you have answered is that there are no cross-border imports because of the provincial regulations. If we manage to remove the provincial regulation, we will open the door to U.S. imports, which is another phenomenon that we must consider.
The Chairman: Senator Ringuette has raised an important question. We have argued that reducing or harmonizing regulation in Canada would allow Canadians to manufacture across the country, but by the same token harmonizing regulation opens the door to American products and increases competition. How do you respond to that?
Mr. McPhee: That is free trade and we support it. We believe that products manufactured here by Canadians with Canadian raw materials that fit that kind of value-added description Mr. Broeska gave you would compete well, both for part of the Canadian market and potentially on an export basis as well.
The Chairman: Again, you are ready to compete if you are given better market share in Canada for your own products?
Mr. Broeska: Absolutely.
Senator Ringuette: I hate to be the devil's advocate again. You also mentioned that if the scope of the Canadian market included Ontario and Quebec, it would justify having one plant in Pennsylvania to supply all the Canadian market.
Mr. McPhee: What I was getting at is that typically the food industry is going to, on the North American basis, a North American supply chain. If you take away two thirds of the Canadian market, then the Canadian part of that company will not receive the mandate to serve the North American market with a plant in Canada.
Senator Ringuette: In the membership list you gave us, the Canadian Canola Growers Association and the Canadian Oilseed Processors Association are, I assume, purely Canadian groups. However, I do not know the other names here: Archer Daniels Midland, Bunge Canada, Canbra Foods, et cetera.
How many of those companies have their head office in the U.S.?
Mr. McPhee: Let us start with members.
Mr. Broeska: Yes: Bunge Canada, Cargill and ADM have U.S, head offices, but they have substantial investment in Canada. They operate crushing plants and vegetable oil refineries in Ontario, Quebec, Manitoba, Saskatchewan and Alberta.
Mr. McPhee: Unilever's head offices are in London and Rotterdam. The Canadian office is here in Toronto. The head office of Rich Products Corporation is in Buffalo, New York. Aarhus Karlshamn is in New Jersey. Loders Croklaan is in Illinois.
The Chairman: Essentially, they are all foreign majors. Is there a major Canadian company or two in this area?
Mr. McPhee: Loders and Croklaan's principal business is in the area of palm oil. The Canadian plants and Mr. Broeska's members are principally canola and soy. Unilever is located here, as I mentioned. Canbra's head office is in Alberta.
Senator Meighen: My colleagues have asked most of the questions. Let me ask one, though. I hear, particularly from you, Mr. McPhee, understandably perhaps, a fair degree of skepticism and resignation in your voice. You have been around these questions 101 times. It always is the same answer in the end and it must be discouraging.
You say that political will seems to be the only way out of this vicious circle. Are you satisfied — and I have no information to the contrary — that your industry or others have proposed alternative ways and means of solving this problem of transitory provisions, of sunset clauses, of whatever else that would give the dairy industry, in particular, something to latch on to in perhaps becoming more interested in changing their stance? Is there anything you can think of along those lines or will the problem require politicians at the provincial and federal level to say they will do it?
Mr. McPhee: The one thing I think about a lot, again when looking at the international marketplace as a clue to how to operate trade agreements, is trade retaliation. If Quebec will not let canola-based yellow margarine into Quebec, then why should Alberta and B.C. take butter from Quebec?
Why not make the requirement in Western Canada for butter to be white? That is how disputes are sometimes resolved in the international forum. The Agreement on Internal Trade provides for retaliatory trade action.
I think you have heard other ideas before this committee. In the case of the two AIT panel hearings I have been through, if the party does not cooperate with the panel finding, why should that individual or private firm not be able to sue for damages?
Mr. Broeska: Perhaps I could add to Mr. McPhee's response. Many times our group has been challenged with the criticism that we appear to be supply management bashing and, in particular, bashing the dairy side of the industry.
It is not our intention to challenge the dairy industry's rights, structure or ability to market their products. In terms of market access, we are looking for a level playing field. We are looking for a fair and equitable chance to sell products based on vegetable oil — blends, analogs or supplements — on the same basis that the dairy industry sells products. We wish that there was some mechanism. The one we constantly try to put forward is that in most other market jurisdictions of the world, blends, analogs and supplements are a way of gaining access to the consumer marketplace on a fair and level basis.
Yes, there is dairy support globally. The nature of that level of the agriculture industry requires that dairy farmers are supported. However, we find that in most of those jurisdictions, there is also an appeal to changing consumer preferences by allowing regulations or encouraging regulations that allow the dairy and oilseed side of the industry to live together and share that market growth. There is growth internationally in these kinds of foods, these dairy- vegetable oil blends. We are not challenging the rights of the dairy people. We are trying to build a partnership with them but we have not found the avenue to do that.
The Chairman: If there are no other questions, I will adjourn the hearing. I want to thank the witnesses. They have given us tremendous insight problems we face as we continue our study of this subject matter. We intend to travel across Canada in the not-too-distant future: to go to all areas of the country to address these issues from a regional as well as a national perspective. We are hell-bent to bring this issue out as a political debate so we can see what is in the best interests of Canada and all Canadians, and to ensure that we increase the productivity of our economy, which we know is flagging behind our neighbour to the south.
Thank you so much. If you would like to tell us anything more, in writing, either through statistics or on the legal side, we are certainly interested. Please address them to our clerk and we will ensure that the committee is kept apprised of the movements. We are focussed on this issue and we want to study it carefully and ensure that our recommendations are in the best interests of all Canadians.
Senator Angus: Can I ask another question before you leave? Senator Grafstein and I, as well as other senators and MPs, were in Washington last week to meet with the new players there, including the chairman of the agriculture committee. We heard a lot about corn prices, ethanol and biodiesel, and we heard about Canada having an advantage in biodiesel because of canola. I gather it is not cool enough down there to grow canola. Is that correct?
Mr. Broeska: That is definitely right, yes.
The Deputy Chairman: Apparently, these ethanol plants are growing like Topsy, one per day, and adding a new income stream to an industry that is hard up at the moment, I gather.
Mr. Broeska: Yes.
The Deputy Chairman: Is there anything you want to say relevant to this internal trade barrier problem concerning ethanol or biodiesel?
Mr. Broeska: The biofuel experience now, not only in U.S.A. or Canada but globally, is the basis of a quantum change, we believe, for all of agriculture. This change extends from growing corn for ethanol to growing soybeans, canola, sun seed and palm oil for biodiesel. Biofuels will impact and revolutionize global agriculture, and we believe we are only at the beginning. There will be a massive competition for acreage between crops to produce ethanol and crops to produce biodiesel, as well as competition for using those products for food versus fuel.
We believe that challenge will be huge and will have trade implications. Argentina and Brazil, who grow both sugar and soybeans, are looking at ethanol and biofuel exports to Europe and Asia. Malaysia is already producing biodiesel based on palm oil and they are exporting that product to Europe in massive quantities. Indonesia is only beginning to enter the palm oil business and other exotic crops for biofuels. This change will radically alter the trade pattern of commodities. Countries will move away from exporting raw, unprocessed grain and oilseed commodities and will move into shipping primary products, vegetable oil and biofuels internationally. The pattern will change dramatically in the next couple of years.
You are right: Many plants are proposed not only in the U.S.A., but also in Europe, Canada, South America and parts of Asia, such as Malaysia and Indonesia. A revolution of quantum proportions is under way at this point.
The Chairman: Thank you again. We intend to take a look at the impact of these products as they relate to internal trade as well, because they are part and parcel of where Canada will go in the future. As Senator Angus said, we spent some time in Washington. The issues were well received by our congressional colleagues, both in the Senate and in the House of Representatives. They are interested in the same topics and issues, and we want to ensure they do not get a jump on us.
The committee adjourned.