Proceedings of the Standing Senate Committee on 
Foreign Affairs and International Trade

Issue 7 - Evidence, November 22, 2006


OTTAWA, Wednesday, November 22, 2006

The Standing Senate Committee on Foreign Affairs and International Trade met this day at 4:08 p.m. to examine the Canada-United States agreement on softwood lumber.

Senator Hugh Segal (Chairman) in the chair.

[English]

The Chairman: I will represent the other side pending the arrival of my distinguished Tory co-religionists. Professor Helliwell and Professor Harris, thank you for being there.

[Translation]

Welcome to this meeting of the Senate Committee on Foreign Affairs and International Trade. Today, we continue our study on the Softwood Lumber Agreement and on the dispute resolution mechanism.

[English]

Today we are fortunate to have with us two professors from British Columbia appearing together via video conference: Professor Helliwell, Professor Emeritus of Economics at the University of British Columbia; and Professor Harris, Professor of Economics at Simon Fraser University. Both appeared before the committee when this committee was under the chairmanship of Senator Stollery.

Professor Helliwell's research has covered many aspects of economics and public policy. He is currently research fellow and program coordinator of the Canadian Institute of Advanced Research's program Social Interactions, Identity and Well-Being. He is a research associate of the National Bureau of Economic Research and a member of the board of the Institute for Research on Public Policy. His published books include How Much Do National Borders Matter? and Globalization and Well-Being.

Professor Harris specializes in international economics and, in particular, the economics of integration. From 1985 to 1988 he was a special advisor to the Canadian government on the negotiations leading to the Canada-U.S. Free Trade Agreement. He has published books and articles on Canada-U.S. free trade, international macroeconomics, economic growth and Canadian public policy.

[Translation]

I would ask Professor Helliwell to please go ahead; he will be followed by Professor Harris. After that we will have an opportunity to ask them questions.

[English]

John Helliwell, Professor Emeritus of Economics, University of British Columbia: Mr. Chairman, I have been asked to discuss the effects of the softwood lumber agreement, SLA, on the operation of the dispute resolution mechanisms of NAFTA as they apply to trade between Canada and the United States. My view on this question is straightforward and based on fundamental principles.

The SLA, and especially that part permitting the U.S. lumber producers to keep 20 per cent of the duties paid during the dispute period, will inevitably cause serious damage to the credibility and hence the effectiveness of the NAFTA dispute resolution procedures. The reason for that is simple.

The NAFTA dispute resolution panels have continued to support the Canadian case that the softwood lumber duties charged were not justified. This was also the case during previous softwood lumber disputes. In the preceding instances, however, cessation of the duties was generally accompanied by full return of the duties paid, plus interest accrued during the periods those funds were held by the United States. I understand the only exception was in 1996 when the dispute resolution process was politically overridden by an agreement that involved less than complete refund of the duties paid.

The Chairman: Mr. Helliwell, I wonder if I could impose upon you to speak a little slower to facilitate our interpreters catching up and being at speed with you.

Mr. Helliwell: To help them, I am in fact reading the document that was sent to them this morning.

When the process was allowed to run its course, the injured parties were repaid in full. This time that basic principle has been abandoned, hence increasing the expected reward to those U.S. producers contemplating similar actions in this or any other industry in the future.

More fundamentally, the purpose of trade agreements accompanied by their dispute resolution procedures is to de- politicize trade and hence to make more predictable the rules under which trade is undertaken. If the findings of trade dispute panels are overridden by the political process, then the trade dispute panels lose credibility and hence their value to the trading system.

What is the point of establishing an extensive dispute resolution process if the government of the injured party abandons the system when the going gets tough? Canada has invested heavily in the trade disputes resolution system in the past, patiently fighting and winning case after case in a series of softwood lumber disputes, each time having the patience to see the process to a just termination.

All of this past investment is put at risk, and arguably lost forever, by the current SLA under which the dispute resolution process was abandoned. The sine qua non for maintaining the credibility of the dispute resolutions process, given the series of decisions favouring the Canadian position, would have been the full return of duties paid, plus interest, just as happened generally in previous cases. The overall losses to the credibility of the dispute resolution process are in my view likely to be even larger than the very substantial sums directly involved.

The foregoing paragraphs were drafted to reflect general principles. I have since had time to go over the unheralded decisions of the United States Court of International Trade on July 21 and October 13, 2006. Together, these two decisions show that complete vindication of the Canadian position and complete refund of all duties paid was already in the cards, requiring only a few months of patience. The July 21 judgment, based on the court's interpretation of the NAFTA dispute resolution process, held that the duties were invalid, deferring until later the determination of an appropriate remedy.

On October 13, 2006, one day after the rushed implementation of the SLA, the United States Court of International Trade announced the remedy that all of the duties collected, plus interest, were to be returned to Canada. This will apparently now not happen because the agreement simply gives to the United States $1 billion, plus interest, of the duties that their own United States Court of International Trade was about to order fully returned to Canada.

If the Canadian government had not let politics trump the dispute resolution mechanisms of NAFTA, the long process would have ended with the 100 per cent return of duties, plus interest. Instead, the SLA has not only given up more than $1 billion of unwarranted duties, but also accepted a number of other provisions that will constrain the ability of Canadian softwood lumber producers to trade freely into the United States. If my reading of these decisions is correct, there has been a double loss for Canada. The NAFTA dispute resolution process has lost credibility through being politically overridden and the failure to wait out the process for only a few months longer has cost more than $1 billion and the imposition of a number of unnecessary trade restraints.

The Chairman: I will now ask Professor Harris to give us his perspective. We will then open the floor to questions.

Richard Harris, Professor of Economics, Simon Fraser University: Good afternoon. As I understand it, this afternoon we are talking about the interaction between the softwood lumber dispute and the NAFTA dispute resolution procedure, in particular chapter 19.

The softwood lumber dispute has been the most visible and probably the worst in economic terms of the various Canada-U.S. trade disputes subsequent to the signing of NAFTA that have tested the proposition that NAFTA resembles anything close to free trade. It is clear that most of the softwood lumber agreements are de facto managed trade agreements and therefore represent a substantial departure from the more general principles of free trade.

More recently, however, the ultimate resolution of this particular dispute is being cast by some observers as a nail in the coffin of the chapter 19 procedures.

The series of chapter 19 disputes under softwood lumber, and then ultimately the extraordinary challenge raised by the U.S. government and the politicization of that process, added significantly to the pessimism about the prospects for a better dispute resolution procedure and a more substantial freeing of trade between Canada and the United States. I share some of that pessimism.

It is also unfortunate from a timing perspective relative to what is happening within the United States on the broader issue of trade liberalization. I think there is a conjunction of events that are quite ominous with respect to trade relations between Canada and the United States. More generally, we have a virtual tsunami of Asian imports in the United States, which is raising Democratic and Republican interest in pursuing protectionist agendas. Twenty- seven of the Democrats who were elected in the most recent election campaigned specifically on protectionist platforms. This in conjunction with very little progress on improving living standards of average workers has led to the rapid rise in polling results that show a substantial drop in American public support for free trade.

If one puts that in conjunction with the potentially dramatic slowing of economic growth, we are faced with a situation not unlike the early 1980s where we saw a very considerable rise in U.S. pressures and protectionism. It will be a severe testing of the NAFTA arrangements one way or another. That is unfortunate, but that is how things seem to be working.

At the broader level, I am interested in Professor Helliwell's comments regarding the fact that we had to abandon the NAFTA mechanism. We did abandon the NAFTA process and pursue negotiations of managed trade in this sector. We can talk about the net effect of that, but that was the result.

This might have very serious consequences one way or the other. One consequence might be that if what I am talking about happens, we will see many other sectors potentially pursue the same political routes to secure the same agenda, which would be very unfortunate.

In the Canadian perspective, we have at this point very little alternative but to muddle through. This is one of those cases where as a small country in an asymmetric relationship, we do not have much choice.

We may be able to think seriously about the lessons learned from this particular set of events. One of the lessons I take away is that if the chapter 19 procedure could all be reformed in the sense of elevating it from disputes between private parties to raising it up a notch so we could push more disputes to Chapter 20 where there are state-to-state negotiations involving national interests, that would be a good thing. Other people have discussed that, but I do not think it is likely in the immediate future. Perhaps that is something we should think about.

On balance, I have made some pessimistic comments, but I think we should close on a more optimistic note. Realistically, trade is still relatively free with the United States. I think the chapter 19 procedure is viewed by most people as having worked, on average, relatively well and in Canada's best interests.

Anything we could do to secure and promote that dispute settlement process, which is generally regarded as one of the best still in most regional free trade agreements around the world, we should do.

The Chairman: I will take the chairman's prerogative and ask one question of both of you.

We heard from distinguished academics yesterday from Georgetown University as well as Gordon Ritchie, the former deputy trade ambassador. I think it is fair to typify their assessment that while the SLA was not the best of all possible arrangements, it made pretty substantial sense in the context of the changing economic and trade political environment we now face.

I think it is fair to say that their concern about the Canadian International Trade Tribunal, CITT, and those kinds of victories is that we have had many of them on this issue over a long period of time. A successful litigation and a case won produces for certain more litigation, which is great for lawyers but does not produce resolution. There are benefits to be gained.

I do not want necessarily to buy into their assessment. However, I think it is fair to say that that was the substantive part of the assessment they offered. Dr. Helliwell, is it your judgment that those witnesses simply misunderstood?

Mr. Helliwell: If my understanding of those cases is correct, those witnesses are absolutely incorrect to take that view. One way of describing what has gone on here is seizing capitulation from the jaws of victory.

With regard to the hearing process, as I understand it, for the next steps out of the October 13 judgment in the United States Court of International Trade, the only appeal could have been to the Supreme Court or an intermediate court. Therefore, the political process was not to come back into play.

One could simply play it straight, and the likelihood of its being overturned, in my guess, is very small. They were very close to reaching the right resolution. It is ironic, so soon after almost giving up the apparent resolution, which would have vindicated the procedures and received all the money back.

The Chairman: Assuming for a moment that the people on both sides of the referenced political agreement had the best interests of their countries at heart in the agreement they reached, would you attribute the profound misjudgement on the Canadian side to incompetence?

I want to follow the line here. If they did something that was very wrong, do you think they did so because they were incompetent?

Mr. Helliwell: There was a thirst to have a deal and get this behind us. That is always the difficulty in these circumstances. It may be that people thought the U.S. regime would be tougher to deal with later on.

However, if my interpretation of the role of the United States Court of International Trade in the process and the subsequent steps available for those judgments is correct, the repoliticization was not likely to happen. In that context, patience has much to be said for it.

Of course, there was a substantial group of people in the industry arguing the same thing, that it was a mistake on principle for Canada to have invested years and years and millions of dollars in building the credibility of this process to abandon it before its completion. The irony is that this particular set of court decisions appears to have made that case more right than others forecasted.

The Chairman: Professor Harris, would you like to add any reflection to this discussion?

Mr. Harris: I disagree with Professor Helliwell on this. I think the negotiators played the best hand they were dealt given the current circumstances. I would not accuse them of incompetence at this point.

Senator Austin: It is good to see both of you again. Professor Helliwell, I agree with your chronology. As Senator Segal has said, the government is justifying this decision on the basis that there is an asymmetrical relationship between Canada and the United States, whether it is economic or political. In other words, the implied premise is that when the chips are down, there is no way Canada could win no matter what the rules of the game are.

That, as you say, Professor Helliwell, does not suggest much credibility for the United States in Doha and its bilateral trade game negotiation with other countries. I will make another point and then ask you to comment on my two points.

We have also seen the concession by Canada of the freedom of the owners of resources, the provinces, to manage and govern their own forest policy. Both of you are familiar with the forest industry.

Do you see any serious constraints to our economic advantage in the way in which we have allowed the United States to audit and claim infraction if in any way we amend our forest policies in our agreement to allow virtually the unrestricted export of logs from British Columbia to U.S. mills? I put those three questions to you, Professor Helliwell.

Mr. Helliwell: I heard two questions. There was one about the credibility of the U.S. in other trading arrangements, and the other was about the restrictions on the Canadian industry. Is there a third question I missed?

Senator Austin: Yes, the economics of the Canadian forest industry of allowing relatively free log exports to the United States, which practice seems to be rebuilding U.S. mills while Canadian mills are closing down.

Mr. Helliwell: I do not have any profound comments on the links between this particular agreement and the credibility of the U.S. in international tribunals, generally. I regarded these two judgments, the second one of which I did not find any reference to in the press, to be very encouraging to that process. The U.S. courts reported back to say that these agreements have legal force in the United States. Now, that might have been something that would not have been repeated in other areas. Looking ahead, the bits about the U.S. role in the broader trade agreements depends much more on the politics of that time and probably less on the details of the particular operation of the SLA. Therefore, I do not see any implications of this particular agreement for that.

The key restrictions that matter are the ones referred to be Professor Harris. By the way, I do not want to be thought to say that I thought there was ill will or incompetence on the part of the Canadian negotiators on this. They might or might not have been able to foresee those judgments coming. I might or might not have been misinterpreting their importance. However, given their importance, there appeared to be a good return to waiting a little longer.

The agreement contains a number of restrictions. I agree with Professor Harris that the most important ones relate to the quotas and the duties. The economics of those duties essentially make the Canadian producers the ones that are shut down when times are bad and the American producers carry on. That is the nature of the way those duties operate. It is bad news for the Canadian industry. Given that trees keep growing when they are not being cut, the overall losses of that are much less than they would be if it were some other industry that was not harvesting trees and selling them. The bank is still there but, in fact, it makes it difficult for the cutting communities to keep a stable pattern of employment. Taking the long view, the overall value of the forest resource is not so badly affected.

Senator Austin: Subject to the pine beetle.

Mr. Helliwell: You are absolutely right about that. The push of that pine beetle means cut now or never and makes these much more expensive than they otherwise would be. Thank you for that qualification because it is enormously important for a large number of the producers. My long-term point is in some ways less important than the short-term one you raise about the real waste that is likely to be entailed or the high cost of getting those trees into U.S. markets.

If you constrain the normal lumber trade, then that naturally causes the alternative open channels, in this case the raw log exports into the United States and, of course, diversification of trade into other markets, to look more attractive. In the long run, the idea of gradually moving toward a more sophisticated product sold in the global market is probably a good idea. Exporting raw log is, perhaps, a way of covering some of the difficulties posed by quota plus the tariff system, but it is not the right way to run an industry over the long term.

Senator Austin: I guess the bottom line question is whether the B.C. forest industry is better off or worse off as a result of the softwood lumber agreement.

Mr. Helliwell: If my interpretation of the U.S. cases is accurate, then the B.C. industry is much worse off. If all the duties had been returned and the U.S. was constrained from levying such duties in the future, then they would have had a much better run than they will get either financially or in terms of future quotas and taxes under the SLA.

Senator Austin: Thank you. I would ask you, Professor Harris, to respond to the same series of questions.

Mr. Harris: They are great questions. I will say that when the agreement was signed, the price of lumber was around $355. It is now down to about $215 or $220, although it may have gone up a bit recently. We are already in a regime where we will have to go to these managed trade solutions. Given the way that things are going in the U.S. housing market, it is likely that this will be the case for a considerable period of time into the future.

Is the U.S. forest or lumber sector better or worse off? Well, my hypothesis is that the alternative would be something similar to what was already going on and that it would persist. Therefore, the agreement does represent an improvement for all the forest product companies and their workers in Canada relative to what was likely to happen. However, if you were to take the point of view that we were going to get free trade in lumber, then you could come to a different conclusion, and I accept that.

The export of logs issue is interesting. In general, it is extremely difficult, once you start trying to assess the economics of these managed trade agreements without the details of each of these individual components. Probably it would not be difficult to make the case, however — famous proposition of the theory of the second best — that it is not inconceivable that we are worse off from having given up control of log exports, given that we do not have genuine free trade. If we had complete free trade, then we could probably come to the opposite conclusion. In this instance, I think we are suffering what we call "terms of trade deterioration'' in this sector, with reduced access. Essentially, we are giving up another instrument with which we could effectively improve the situation of the industry. I would have to conclude, without doing a detailed analysis, that we are probably worse off with that particular provision.

Senator Corbin: Does the U.S. court ruling still create a legal precedent in terms of being useful in future litigation?

Mr. Helliwell: I regarded the July 21 decision followed by the October 13 decision — 6109 and 6152 — to refer to the long term and not only to this situation. They strengthened the arm of the dispute resolution panels. There is some possibility of learning from mistakes, of benefiting from these advantageous decisions in the United States Court of International Trade and of having a stronger hand to play in the future.

Senator Corbin: You hesitate to qualify the Canadian negotiators as incompetent. I suppose you were not party to those negotiations, but do you think that the Canadian negotiators were bullied by their American counterparts?

Mr. Helliwell: I do not know. What they came up with is not what I would have come up with, but it is hard for me to say what their reasons were or and what went on in the meetings.

Senator Corbin: Is it not strange for a common onlooker like me or the guy who works at one of my local sawmills to find, after days, weeks or a month or two of the expectation that the court would fall on the side of Canadian complainants, that suddenly we would seed the ground that leaves the impression that the Canadians somehow were bullied? You might not want to comment on that but that is what I sense.

Mr. Helliwell: It was either bad luck, bad management or forces of the sort that you describe. Those are probably the options.

Senator Corbin: We will leave it at that for now.

Senator Di Nino: Professor Helliwell, I believe you said that NAFTA represents anything but free trade. I wanted to clarify what you meant by that. Do you agree with the opinion that has been expressed by numerous witnesses from whom we have heard that, in effect, the free trade agreement between the U.S. and Canada has been a great boon to Canada and any disputes that we have had through the dispute settlement mechanism have worked predominantly in our favour? In fact, Mr. Ritchie said yesterday that chapter 19 has done just that. Could you comment on that?

Mr. Helliwell: I do not think I said that NAFTA is about anything but free trade. Perhaps that was Mr. Harris.

It is possible to make a general comment about the dispute resolutions process. My interpretation of these most recent decisions is a big vote of confidence in that process, of which I was previously rather sceptical partly because it was treated in a bit of a scofflaw way by the United States.

If you want me to discuss NAFTA in general, that is another set of questions.

Senator Di Nino: I thought the comment had been made by you, but perhaps it was Professor Harris. I was taking notes and I could have made an error. I thought I heard that NAFTA represents anything but free trade. If that was not the case, then I withdraw my question.

Mr. Helliwell: I do not think I said that, but there is a sense in which I agree with it. There is an important feature of NAFTA that has to do with the rules of origin which in fact are antithetical to free trade by cutting out third countries in a way that would not have happened without the agreement. It is a general feature of preferential trading agreements. They are made worse when the rules of origin are more subject to the control of industry groups. Unfortunately, that is what has happened both in the original FTA and in NAFTA. These rules of origin became more and more under the control of the North American industries, which has then allowed them to use the provisions of NAFTA to damage free trade at the global level, which of course is what everyone would prefer to see.

Senator Di Nino: I have three quick questions that I would like to pose to both Professor Helliwell and Professor Harris.

First, once the United States Court of International Trade decision came down, could it not be challenged?

Second, it has been quite emphatically suggested by witnesses that the dispute settlement mechanisms contained in NAFTA and the FTA are actually a better vehicle to use as opposed to the remedies available in the World Trade Organization mechanisms.

Third, are there other remedies, other things that we may or may not have done, or things we should be doing to lessen these kinds of irritants that happen in the trade relationships between our two countries?

Mr. Harris: It was I who said that NAFTA was not free trade. The reasons are simple. The first is because of the preferential aspects the rule of origin. The second is because of the fact that we do not have a commitment to free trade given the application of administrative trade rules by both Canada and the United States. We have had many disputes. When the deal was originally signed, the great failing on the part of the negotiators, particularly on the Canadian seat, was not to secure release from those types of arrangements. However, that did not work and we ended up with the dispute settlement mechanism, particularly chapter 19 instead, which covered countervail and subsidy.

The Court of International Trade decision can be appealed to the Supreme Court of Canada. I am not a lawyer. Thus I have no comment about that.

As to NAFTA versus the WTO, if you look at the functioning of the panels, the mechanisms and the disputes that are brought forward in the literature on international trading disputes, you can make the case that the NAFTA dispute mechanism has been one of the best functioning in the industrial world. The WTO procedures occasionally work. However, they are extremely cumbersome. It is never timely. Unfortunately, there are many cases in which the participants or the parties end up for extended periods in abrogation. I think there is some disenchantment with what is going on with the WTO at the moment. That may represent, in part, a broader phenomenon.

I will now address other remedies to lessen irritation around trade between Canada and the U.S. Broadly speaking, 90 per cent of the trade between the countries has basically been irritant free. We have a history, in particular in agriculture and lumber. There are old, political, long-time interests in both countries, but in particular in the United States, that have made progress in these areas very difficult.

In the immediate future, I do not think there is any prospect for doing anything about lumber. However, I think there are reasons to be optimistic about what might happen in agriculture. The agricultural sectors in both Canada and the United States have gone through a long period of structural adjustment. There is some rationalization going on. World prices for agricultural products are increasing significantly. Thus we might see a sea change in attitude, particularly on the U.S. side, regarding doing something about agriculture.

In my view, that would be enormous progress. It would be enormous, first, for its demonstration effect for the rest of the world. The reality is that we were not able to make any progress on this important sector either in the FTA negotiations or NAFTA and it was a bit of a block. That is one way to proceed.

Mr. Helliwell: My understanding is that the next route would be to the Supreme Court of Canada with, perhaps, an intermediate stop. Another unfortunate feature of the SLA was that that process was not allowed to work itself out. Thus we do not have, as it were, the final definitive word yet. It will be important to take that last step in order to settle the strength or not of these NAFTA procedures once and for all. It would have been nice to have that done and locked up if it worked out as I thought. It would have then been a big extra strength in the NAFTA procedures.

If that had been done, or when it is done, if it goes through to support the current judgments of the Court of International Trade and hence the NAFTA procedures, that will be a big mark of confidence in those NAFTA procedures. In general, it will make them stronger than the WTO procedures for the reasons that Mr. Harris suggested. If not, then it is a more open situation.

As to other options or remedies, the most advantageous thing you can do, if you are dealing with a very large partner, is to ensure that you keep your options open. I have thought for many years that Canadian firms and governments alike were ignoring the fact that economic growth in the rest of the world is bound to be faster than it is in North America. If you wanted to hitch your trade patterns to people who have different comparative advantages and are faster growing than the United States, that is where the long-term advantages were likely to be. At the same time, an offshoot of that is that by giving you more options it strengthens your bargaining hand when dealing with a larger neighbour.

Senator Mahovlich: I am seeing this not as incompetence but as political. Politics trumps economics. I think when the new government took over, they said, "Let us get this settled. We will send Ambassador Wilson and Minister Emerson and get this deal done at any cost,'' and the cost was $1 billion. Is that what it was?

We had Gordon Ritchie as a witness and he thought that the NAFTA dispute settlements that we have are in order; he has confidence in NAFTA. He seems to think that it should not change, that we should keep it the way it is. How should Canada view this? Every time a problem comes up now will we solve it politically?

Mr. Helliwell: The case I was making was that to turn to politics and away from the established process is almost surely going to cost money and long-term credibility, both of the process and of the trade relations. It is a very costly thing to do. The costs are paid not just in the current agreement, which seems to have been the case, but for the long term, because it then strengthens the hand of those industry groups that have the capacity to go to congressional members and launch another action. It is enormously important for countries like Canada, the smaller partner and more dependent on the openness, to support and play out the objective, independent dispute resolution processes. There is also a long-term advantage to not making a politically inspired agreement. In this situation it rather looks like there were losses, both in the agreement itself as well as for the future. It is not just the $1.25 billion, which it is with interest, but also the accepting of a very highly regulated lumber trade at the current time, which is not only regulated but also not in the Canadian interest.

Senator Stollery: I welcome our two witnesses. We met last time in Vancouver when we were reviewing the free trade agreement a couple of years ago. I recall a question at the time and it seemed to me that most of our trade with the U.S. had historically been relatively dispute free. The whole reason for the free trade agreement was because of the fear of oncoming American protectionism. That was the raison d'être for Mr. McDonald's proposals, as I recall.

When we last met we were discussing whether the free trade agreement or the exchange rate was actually a major factor in the 10 per cent increase in our trade with the U.S. between the time of the signing of the agreement when the Canadian dollar was at roughly 80 cents or a bit more and then dropped to 63 cents. I remember those conversations with our witnesses.

I believe I am the last one here who was a member of the committee when the discussions took place about the free trade agreement and who accompanied the committee to Washington when Mr. MacEachen went after Congressman Gibbons, who was the U.S. promoter of the free trade agreement. It was a very dramatic meeting. Senator MacEachen talked very effectively about the fact that the dispute settlement mechanism would at some point break down. I am sure that anyone who was at that meeting will remember that.

In terms of the lumber business, people are asking who is responsible. Some are saying it is the bankers. The lumber companies were in such debt to their bankers that the bankers really dictated the agreement. Whether you like the agreement or not, it seems the bankers had a lot to do with it.

I am getting around to my question. It is complex. It seems to me what Professor Helliwell says is very important. We are dealing with a country that in population is nine times larger than we are. I know from conversations with experts on the WTO that one reason the dispute settlement mechanism is not tougher is because of the fear that the U.S. political system, which does not like to lose, will leave the trading system. This is really what happened with the softwood lumber agreement; is it not? They left the agreement and refused to subscribe to the agreement that they signed.

Our major trade agreement is with our neighbour and biggest trading partner, but where does that leave us? Long before the free trade agreement, our disputes have always been over primary products. We heard in Winnipeg of 11 different challenges against the Canadian Wheat Board. The Americans used legal fees as a way of penalizing us; if they lost a case, they would immediately start another. I believe we were told, and Senator Di Nino would remember, they brought the same case 11 times against the Canadian Wheat Board.

Where does this leave Canada, which is so dependent on trade? We have not had a discussion about trade since the MacDonald commission and that is now 20-some years ago.

This is my question: All countries have problems with their neighbours, not just Canada, but when our neighbour and our big trading partner is a country that may actually leave the trading system if they start losing too many cases at the WTO, what do we do? Where does that leave us?

The Chairman: A rich range of questions is implicit in my colleague's reflection and questions, so please feel free to share your perspective with us. We will benefit immensely from that.

Mr. Helliwell: There are two remedies available to countries like Canada in that uncertain trade environment. One is to keep investing in the process. It is always true that investments in the international institutional network always pay bigger dividends to the smaller countries than the larger ones. The problem is always to get the larger ones to play by those rules because often they have more to gain by simply waving their large stick.

If you ask how many years it will be before the United States is no longer the world's largest economy, the answer is probably within 10 years. At current growth rate differences between China and the United States, the Chinese economy, at purchasing power parody measures, which are the real ones to measure the size of the economy, will pass the United States within, I think, seven years. Because the largest part of the world's population is starting out poorer, they have the potential, once the resources within them, essentially human, are unlocked, to grow faster. What also happens is that countries' trade shares grow even faster than their GDP. As a share of world trade, the non-North American countries are growing incredibly quickly. I have been arguing for years that in this country we play too much to historical trade ratios and not enough to looking further down the pike at the possibilities for the future outside North America.

This applies elsewhere as well, not only in the policy arena. I think it is turning around in most trading countries of the world. You will find countries explicitly opening their doors to the faster growing areas and making investments that count; in other words, establishing knowledge exchanges, human capital exchanges and the relations that make trusted trade work. The international framework will always be part of that.

That is a broad picture of where we should be heading to diversify. In the bilateral case, we must continue investing in those procedures. NAFTA should be carried right through the procedures.

We must remember that these actions before the Court of International Trade were launched by Canada, by the producing provinces and by the firms. We could say the industry did not have deep enough pockets to carry on. Many did have deep pockets, but that is what governments are for, to backstop the necessary costs of building and maintaining the credibility of the international system. Just as the government is paid for negotiating the treaty in the first place in order to ensure the dispute resolution mechanisms are worth something, the government must in turn pay the major costs of taking them through the legal channels.

In my interpretation of those cases, they were very close to reaching a point where those procedures would have looked good and that money would have come back. Now we are saying it should fall back, but I would not give up. I would try to re-establish the fundamentals and invest heavily in the procedures. In the future, I would not allow Canada's interest in a fast settlement to dominate the overriding long-term interest in a better system.

Mr. Harris: This is a very big question to address. It is true that these cases arise in Canada every 30 years or so. Central Canada is in a lot of trouble.

As a result of the forces Professor Helliwell talked about, the primary resource-producing provinces are in very good shape. That future is pretty clear, and I do not see much in the way of hiccups no matter what happens by way of Canada-U.S. relations.

If you were to contemplate a very serious disruption in Canada-U.S. trade relations, I think it would put our entire manufacturing sector into crisis. We have a situation now where the automobile industry is on the edge of technological competitiveness. The industry must go through a great deal of rationalization. We do not know what the U.S. will do. Whatever the solution, it will either be a made-in-North America solution or a made-in-U.S. solution. If it is a made-in-U.S. solution and Canada is out, then our auto industry is basically gone. Those are the decisions one must face.

That does not mean that looking 10 or 15 years down the road you could not come out the other side and Central Canada might look like Finland, but that would be a very tough go, at least a decade or more, to get to that side.

We have a lot invested in this trade relation. The fact is, we will have to invest more in the medium term and hope that politics in the United States turns around. There are reasons to be optimistic in the longer run.

Senator Downe: On the topic of trade, it has always struck me that Canadians are quite rightly concerned about the large volume of trade we do with the United States, but we underestimate the large volume of trade Americans do with Canada.

With respect to your comment that Central Canada could end up looking like Finland, I am not sure whether that was a compliment or a criticism.

What is your view of the U.S. concern that their trade may be blocked at the Canadian border? According to the last figures I saw, they sell 25 per cent to 30 per cent to Canada.

The Chairman: We are the primary export market for 37 American states.

Senator Downe: Do you know the percentage?

The Chairman: The problem is that exports are not as important to the United States compared to their domestic market requirement, so that is the countervailing proposition. I will let the genuine experts reflect on your question.

Senator Downe: You are from the West Coast and may be better informed. According to the recent figures I saw, there is about $20 billion worth of trade with California alone. That seems to me a significant figure.

Mr. Harris: The United States is and remains Canada's largest trading partner, but we are also one of their slowest growers. That was Mr. Helliwell's point.

Americans face the same dynamics we do in the sense that, if you look at where trade growth is likely to occur, it is unlikely to be Canada. Given our current state, the level of trade between the two countries is very high and persistence in the trade pattern is very stable. It is unlikely to change quickly, barring a catastrophic event.

The fact is that Canada is not on a world scale one of the fast growers and is not likely to become a fast grower. Therefore, the U.S., as most other industrial countries, will be looking to China, India, Brazil and such places to increase their export market share. Over time, at the margin that will become more important.

Mr. Helliwell: On the question of the car industry, there is another way of thinking that one out, which may involve reinventing the North American industry.

Behind the scenes, there has essentially been a rebuilding of the North American industry, which are the Toyotas and Hondas, which are more or less at the world level being more at the technological front. They have a deep and abiding presence in both Canada and the United States. Even if relations between Canada and the U.S. did become worse, Toyota and Honda are not likely to decamp. There may be difficulties posed with respect to supply management if it becomes tougher across the border. However, I think that kind of relationship of plants owned by other countries in North America in general and in Canada is a big offset to what we have in terms of reliance on the old big three.

There was a question about U.S. dependence on our trade. One point Mr. Harris did not make with respect to this topic is one that I make frequently. Borders still matter an enormous amount. Countries trade about ten times as intensely within their borders as across borders. When you combine that with the fact that there are a great many big, separate economies within the United States — the states themselves — the actual share of GDP or total shipments by a firm in the United States that actually go to Canada is pretty small. There are obviously some exceptions to that.

It means that countries like the U.S. on one hand and China or India on the other hand have huge domestic markets that permit them to be more strategic in their use of foreign trade than is either desirable or politically possible for the more open and smaller countries like Canada. Possibilities in structure will always make us hostage to the fortunes of politics in the big powers.

Senator Eyton: I have had quite an intense involvement with the softwood industry, including in British Columbia, going back to the 1980s. I recall vividly that even at that time softwood lumber was an issue. Over the 20 intervening years, it has continued to be an issue with constant debate, some interim agreements, adjustments and provisions but always on one side the Canadian industry and Canadian government and on the other side the U.S. government funded and propelled by very rich and determined American competition. Based on my experience, I consider softwood lumber to be special or different from many of the other issues simply because it has been around so long and seems so difficult to deal with.

Finally, we have come to a softwood lumber agreement between the two governments. It has been accepted by the rich and determined American competition for good and bad reasons. However, that agreement is also supported by a great majority of the Canadian industry players.

Given all of that history and the continuous difficulty we have had in dealing with softwood lumber, I wonder, in particular, at Professor Helliwell's faith that the legal process to which he refers was in fact going to work. That seems a touching faith that things will work out as they should. I cannot imagine that other actions will not have been taken by the American industry in particular so as to pre-empt the effect of the resolutions you referred to.

Professor Helliwell, can you comment?

Mr. Helliwell: The longer the dispute goes on the more that kind of pessimism becomes rational. People say, "How long can we carry on?''

It rather appears we were closer to a longer-term resolution that would have been rules-based rather than politics- based than we had been in the past. The actual nature of the solution, as Professor Harris said, was not good for the industry in terms of the managed trade we are in now to the disadvantage of the Canadian industry. In fact, half of that $1 billion is going right back to the industry group that was responsible for proposing the duties in the first place. Thus their hand is strengthened doubly. They get an agreement that is good for them and full payment for all their past expenses. Thus the likelihood of their trying again is greater.

The only thing that can make me at all optimistic about the future not being too badly damaged is that at least some of these cases seem to have been establishing a precedent that would mean that it is possible in the future to have more confidence in the system and to push it through. That would be good, not just for softwood lumber but, of course, for all the other industries that rely on these NAFTA dispute resolution procedures.

Senator Eyton: It seems to me the alternative is to fight on forever with no cash down, as opposed to something in the order of $4 billion being paid to Canadians now, with continued harassment and ongoing litigation and with adverse affects to a variety of our relationships with the U.S., trade and otherwise. Under the circumstance, the agreement, although not perfect — and we all recognize it is not perfect — represented the best alternative.

To that, I would add that the Canadian industry does not need to sell to the U.S. There is a great big world out there. If in fact you choose not to play the American game, there are vast markets, particularly in Asia, available for producers in the West. I think a scenario with the cash and some settlement with the U.S. and some ongoing resolution of that difficulty is managed, and they still have an option to go.

Can you comment on that, please?

Mr. Helliwell: I am an optimist, so I think you start from where you are and make the best of it. One helpful consequence is that it probably will force or encourage the industry to be more global and less tied to the U.S. market than it was before. That will impose some adjustment costs and new thinking for them. In the long run, that will help their strength and stability.

If the agreement itself had been better, not just in the distribution of who got the duties that had been lodged, but in terms of the efficiency of the trade that will come about under the agreement, I would have rested easier than I am. In other words, was it worthwhile giving up on the credibility of the process in order to get this rather specially good agreement? I do not think so.

Hindsight is easier than foresight, but the point is the agreement is there now. You do the best you can under the circumstances we are in.

Senator Eyton: Would you agree that softwood lumber was an unusual and unique challenge?

Mr. Helliwell: Absolutely. A couple of years ago I would not have thought that the softwood lumber rulings of NAFTA panels in Canada's favour would have found full and authoritative support within the U.S. court system, which is what is required to make it best. You have to have something whereby the government has to override its own Supreme Court in order to reimpose something or to let the industry come back and start again.

This is all hypothetical. However, my guess is that had this been allowed to go through to the Supreme Court and these duties been returned and hence obviously dropped, I do not think the industry could simply have rolled out the same tools and tried them again, because they had been so explicitly and so recently ruled out of court. There may well have been other harassments available to them, which is something you have to guess about, and I am not able to do so.

The Chairman: Professor Harris, did you want to reflect on either of the senator's questions?

Mr. Harris: As to the question of the uniqueness of the situation, I think it is unique in a historical context in the sense that it represents a series of decisions and political circumstances that led to this particular outcome. However, it is certainly not unique in terms of the economics. We can imagine many of our industries being potentially put at the same risk. Prior to the FTA, the steel industry in Canada was in similar circumstances.

The other thing about the managed trade business is that this may be the thin-edge-of-the-wedge problem that I referred to in my opening remarks. Historically, we have had many managed trade relationships. The automobile industry was initially a managed trade relationship. It could be that the response to these forces will be a backing off from what we call free trade. In fact, the industries may start to seek managed trade solutions on a sector-by-sector basis. That is not inconceivable. There is a long history of such arrangements.

In many ways, the history of those arrangements is much longer than the political history of free trade. The lumber case is a very important object lesson in many ways, one being that it could repeat itself. Therefore, you must be cautious on that front.

The Chairman: The question I want to ask both our guests is with respect to the diversification of our trade patterns. I am thinking in particular of the work done by Professor Helliwell on the effect of borders and the prospect of our diminishing our reliance on the U.S. marketplace by increasing our focus on places like China and India and accepting the principle of path dependency, which works in politics and economics where it is tough to get out of an existing furrow that is quite comfortable to begin a new furrow simply because the transition costs are quite substantive.

I am interested in both your reflections on this point. If there were to be a consummate decision by a Canadian government to focus intensely on China and India, what would you recommend as some of the instruments to facilitate that kind of constructive transition? What would you see as some of the transition costs, given the proximity of the American market, the relative ease of access, with all the difficulties we have reflected upon, as opposed to other markets which, while growing rapidly and tantalizing in many ways, do have some of their own barriers to entry that are not without cost to Canadian exporters, manufacturers and the like?

That is a large question but take any part that you feel comfortable with because it would help the committee in its deliberations and recommendations.

Mr. Helliwell: I have done some modelling of the trade densities among countries to determine whether they are uniquely high between Canada and the United States compared to Canada and other countries after adjusting for size and distance. The answer is that they are not dramatically so. By and large, trade decisions are made by individual firms the way they ought to be made. Trade decisions are not a direct response to government policy. Governments are framework builders and should remain as such.

In talking about the increased concentration that I advocate to form markets, I say to policy-makers: Do not focus preferentially on the Canada-U.S. link but treat all of your links to frame and build the system so that the doors are as open to the rest of the world as they are to the United States. That does not mean building preferential trading agreements with any country. I am not a fan of such a system. I want an open system where individual firms will move on their own opportunities and contacts.

I understand from my work on borders on the one hand and migration, off-shoring and other similar things on the other hand, that productive, low-risk trading relationships take a long time to build successfully. You cannot expect things to happen immediately. Should they be pushed by government? No. Will they or should they be managed by government? No. Should the government be open to listening to industries and individual firms about blockages they might be facing or about contacts that might help, because sometimes government-to-government arrangements can help business and industry to move forward? Yes. The whole idea behind many trade offices is to provide better knowledge and understanding than the industries might have obtained on their own.

The migration and education patterns in the world are such that most of these linkages are being generated industry- by-industry and by the connected individuals and firms. They quickly develop links of identity and quality that could not be dreamed of at the government level. It pays for the government to have a baseline set of services that they will offer and join a team at times. However, the private sector ought to direct this and the government ought not to emphasize preferentially the North-South linkages in the way they have been doing. Government should be more symmetric.

Canadian trade will become more global and less North-South because of the difference in growth rates, which is what will drive it. The rest of the world is opening up and growing faster. Both of those will take our trade where it was. Should that then be treated as a bad or good thing? With respect to management of Canada-U.S. trade, it is a good thing because your eggs are not in one basket. Do I recommend countervailing agreements with other countries? No. Let us make the whole system as open as possible.

Mr. Harris: To be honest, you are asking a difficult question. If you let market forces dictate where things go, you would pick up on two trends. In primary commodities it is clear that our trade will become more diversified in any event because of the growth phenomena that Professor Helliwell referred to. Even if we sell natural gas into the Chicago hub of the U.S., the reality is that it will be at a globally determined price. Therefore, the particular geographic composition of the trade is not important.

With respect to manufactured processes and services, I have a different view than that of Professor Helliwell. The primary drivers are large global corporations and Canadians will be employed in those industries. The value-added generated in those industries will be based on decisions that are based on those large corporations. It is unfortunate, but the fact is that the linkages held by Canadian firms to the broader networks will determine whether we succeed or fail. Much more will matter than whether the government has trading issues. Unfortunately, that likely means that in the technology sector and high value-added industries, the linkages with the United States will become deeper.

Back to the absence of government intervention. The chances of that happening are slim to none. For example, energy could become incredibly politicized. All the signs point to that happening now. There will be big strategic decisions down the road about what to do in energy, given Canada's role in that market. I do not think we can take it as a done deal that India and China will be free traders. History has examples of large, fast-growing countries turning inward and not outward to the markets. One can imagine the ends of this particular cycle being about U.S. protectionism followed by India and China bowing out and moving to the domestic model. In both cases, Canada would be on the outside of that. It would be useful to develop a political dialogue to help us now. Certainly, we could not control it and we would be a very small player in that circumstance.

Senator Stollery: This has been an extremely useful discussion. Clearly, some of us thought that the softwood lumber agreement would lead us into the whole area of Canada's trade direction for the future and what Canada should do about trade policy. Over the next little while, the committee will look at this from time to time. I thank our witnesses for appearing this afternoon.

The Chairman: I express profound thanks to Professor Helliwell and Professor Harris. I should tell viewers and others that these two scholars give their time to this committee on a pro bono basis, which we appreciate very much.

Professors, our understanding of the issue has been helped immensely by your intervention. We thank you for the time you have taken to share your perspective and your experience on these issues with us.

Honourable senators, we have a small administrative matter to address. We have a prophylactic budget of $4,500 in the event we are asked to consider other matters such as Bill C-24 that may come before us. This is advice from committee staff as to what might be necessary for us to do in some constructive way. That is the bill dealing with softwood lumber. We do not know.

[Translation]

Just in case, as they say, whether it happens or not, we want to be at least prepared and to have the authority to spend these quite reduced amounts for our work.

[English]

Senator Stollery: I move the adoption of this budget.

The Chairman: Do we have a seconder? All in favour? Contrary minded, if any?

Hon. Senators: Agreed.

The Chairman: Passed. Thank you very much.

Senator Stollery made a fascinating, thoughtful comment with respect to the broader trade issue which is clearly emerging in the discussions we are having. I am the last person to offer any authoritative review or opinion on what constitutes the nature of our reference from the Senate, but my understanding of the reference under which we are operating now is to deal with softwood lumber.

I am not troubled by going back to the Senate for a reference for a broader discussion, but I do not believe that the present reference — that the committee analyze, among other things, the impact of Canada's resource management on sovereignty, the impact on the interpretation of NAFTA chapter 11, and the provisions contained in the SLA agreement with regard to financial support for the industry and its workers — would necessarily be broad enough to have a much more detailed discussion. If colleagues have a view on the matter, they could share that view with the members of the steering committee so that we can benefit from your advice and counsel. I am in the committee's hands.

Senator Di Nino: I think you should review the general mandate of the committee. I suspect you may find that, particularly under the newly changed moniker of the committee, which is Foreign Affairs and International Trade, we have some broad authority under which we may be able to conduct business. That is just a suggestion.

The Chairman: Without a separate reference?

Senator Di Nino: If you are to do specifics, you may need a reference. Within the mandate, we, as a committee, have certain authority to initiate actions dealing with issues that fall under the broad mandate, and international trade is certainly quite specific.

The Chairman: Other views, colleagues?

Senator Corbin: The question left to be resolved is whether we ask you to seek an extension or respect the date on this reference.

The Chairman: That is a very good question. The date we now have for a report on the existing reference with respect to softwood lumber is November 30, which is eight or nine days from now. We have finished, I think, all the scheduled hearings on this matter, and we certainly have enough information to do a report narrowly on the matter we are asked to reflect upon, but I am in colleagues' hands.

Senator Stollery: I do not know if I have spoken to everyone. I am working with Peter Berg on our Africa report. I talked with him about it earlier today.

Why do we not just ask for an extension of this reference? I think what Senator Di Nino says is right. We can poke around with this. We have had a couple of very interesting meetings with very interesting witnesses. I do not think that we need another reference to pursue this from time to time. We may decide that we want to have a reference, but why do we not just get an extension on this reference? That, combined with the fact that we are the Standing Senate Committee on Foreign Affairs and International Trade, would allow us to pursue it and then decide whether we want to get a reference. Does anyone else have any thoughts? This is maybe something the steering committee can decide.

The Chairman: I am glad to get the views.

Senator Downe: I have a contrary view in the sense that I believe that we should finish the mandate we have been given. At the same time, I think Senator Stollery raised a good point about the importance of international trade, particularly considering what we heard today and knowing the emerging markets and what the government is doing to advance Canada in those markets.

I was shocked when I had the opportunity to go to Chongqing, China, where there are 30 million people and one trade person in an office trying to deal with that type of economy. We heard yesterday about how Mexico has a massive expansion of diplomatic consular trade officials in the U.S. One witness spoke about how the Mexicans are flooding congressmen and senators with additional information, more than Canadians are doing. If we cannot even keep up our trade presence in the U.S. as compared to the Mexicans, what are we doing in emerging markets?

I think Senator Stollery raised an issue that the steering committee may want to consider as a future study for this committee. It is a much bigger issue than an add-on to what we are now doing. Therefore, I would recommend we wrap it up and the steering committee can come back with a recommendation about future business.

Senator Eyton: I agree entirely with that. It seems to me we have a pretty good understanding of the softwood lumber agreement. We have had witnesses and I think we can write an intelligent and useful report.

The description of international trade, of course, is a vast subject and it seems to me to be useful in any further study. We should focus on some aspect of international trade so that we can render a useful report. Perhaps your suggestion in terms of the efforts we are making now to promote trade with our countries and the deficiencies that may exist would be a useful one.

Senator Corbin: Why not take note of these comments and discuss the matter further in Internal Economy and then report back?

The Chairman: The steering committee. I am glad to do that. That is very good advice.

I want to encapsulate what I hear colleagues saying. I hear essentially that there is value in bringing this narrow- gauge study on softwood lumber to an end on time. We have already sought one extension on it. Then we consider, at steering committee as well, what the frame of reference might be for a larger study on the brick and notional trade development issues in other fast-growing economies and that we consider that as an area of potential study down the road. I want to be clear that that is what I am hearing and that that is what the steering committee can consider on your behalf.

Senator Di Nino: I do not have a problem with that. I do not want to prolong this. The comment I am making is that as a committee we have a mandate to look at foreign affairs and international trade. If you are going to look for a specific mandate, it should be wide enough and large enough so you do not have to go back each time you want to add something, other than that you have to go with the budget, obviously. That in itself brings a certain discipline; we do not have carte blanche to spend whatever we want. We still have to go through the process. We need a mandate that would allow us, if the committee so felt, to conduct investigations or look at issues dealing with foreign affairs or international trade.

The Chairman: Just so colleagues are aware, the matter of the Lebanese evacuation question we can deal with in the coming year. That deadline is in the spring. The Africa matter we have the option of concluding and reporting on, depending on how that goes, before the end of the calendar year. If we did decide at the steering committee to recommend that we close the proposition with respect to softwood lumber quickly, we would then have an opportunity to consider as a committee what our agenda for the coming year might be beyond the Lebanese inquiry, which would not take up necessarily the lion's share of our time going forward. Thus there is an opportunity for that.

Senator Downe: I would remind you as well that we had some discussion at this committee about interest in exploring Central and South American foreign relations with Canada. That is under consideration as well.

The Chairman: Yes, indeed. Colleagues, I have no other matters for us to consider as a committee. Do others wish to raise any matters?

Senator Stollery: We are in camera.

The Chairman: No, we are not in camera.

Senator Stollery: It does not matter. It is not a matter for which we have to be in camera. I am trying to stave off the idea of doing the softwood lumber report because, frankly, I have been meeting regularly, as everyone knows, preparing the Africa report. It is 60-some-odd pages at the moment. We are going along very well and I hope to have something shortly, but I do not want the staff to have to do something that is not as important right now. I do not want to overwork them.

The Chairman: It is a work-planning issue.

Senator Stollery: Yes. The steering committee can discuss that.

The Chairman: We will sort that through. I think making the committee aware of the pressures on staff is a good thing to do, because we will try to deal with that constructively.

I declare the committee adjourned until next week.

The committee adjourned.