Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 18 - Evidence - Meeting of November 5, 2014
OTTAWA, Wednesday, November 5, 2014
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 4:15 p.m. to examine the subject matter of those elements contained in Division 15 of Part 4 of Bill C-43, A second Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures.
Senator A. Raynell Andreychuk (Chair) in the chair.
[English]
The Chair: Honourable senators, the Standing Senate Committee on Foreign Affairs and International Trade is meeting this evening, and our first item is the subject matter of those elements contained in Division 15 of Part 4 of Bill C-43, a second Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014, and other measures.
As you know, this matter was referred to us by the Senate. We have just this one specific issue to deal with in the budget. We have not received any indication of any further witnesses, so we will be turning to Foreign Affairs, Trade and Development Canada to indicate to us why this amendment is necessary and what the intent of it is.
We have before us today Mr. Cameron MacKay, Director General, Trade Negotiations Bureau; and Mr. Stacy-Paul Healy, Counsel, Trade Law Bureau. You can proceed to tell us what the amendment is about and the relevance of it for the free trade agreement with Chile. Welcome to the committee.
[Translation]
Cameron MacKay, Director General, Trade Negotiations Bureau, Foreign Affairs, Trade and Development Canada: Thank you, Madam Chair. I am briefing you this afternoon on the amendments to the Canada-Chile Free Trade Agreement Act, found in clause 227 of the budget implementation act.
The act contains amendments to the legislation implementing the Dispute Settlement Chapter of the Canada-Chile Free Trade Agreement, as part of Canada's ongoing modernization of this FTA. These amendments will allow for modification of the method of selecting panellists in the FTA's state-to-state dispute settlement mechanism.
[English]
These revisions are part of a broader effort to ensure that the FTA continues to address the needs of Canadian businesses. The FTA is the cornerstone of the Canada-Chile bilateral commercial relationship, and Chile is a priority emerging market under Canada's Global Markets Action Plan, the GMAP. In that light, in September 2013, in addition to the proposed amendments to the FTA's dispute settlement chapter, Canada and Chile also added a new chapter on financial services, and updated the existing chapters on government procurement and customs procedures. Outside of dispute settlement, these amendments did not require legislative changes and they entered into force in September 2013. We haven't stopped there. Canadian and Chilean officials continue to discuss how to further broaden and modernize the Canada-Chile Free Trade Agreement, in areas such as technical barriers to trade, and sanitary and phytosanitary measures.
With respect to the specific legislative change regarding dispute settlement, it should be noted that, when the FTA entered first entered into force in 1997, Canada's approach for the selection of panelists in state-to-state disputes was based on the approach used in the North American Free Trade Agreement. The Canada-Chile Free Trade Agreement Implementation Act, chapter 14 of the Statutes of Canada, 1997, included a provision based on the roster system for the Governor-in-Council to appoint persons to a roster pursuant to the dispute settlement chapter of the agreement. This required that the parties agree on a roster of candidates who could act as panelists, or the chair of a panel, and could then be selected by the parties in the event of a dispute.
Subsequent experience demonstrated potential challenges regarding the roster approach. In particular, if a roster has not already been agreed to, the defending country in a dispute can effectively prevent a panel from ever being established to hear the dispute. This happened in the late 1990s in a dispute between the United States and Mexico. Even when the parties can agree on a roster, it is not necessarily the most efficient process as it can take a significant amount of time to create and agree on the roster.
Therefore, in more recent free trade agreements, starting with Peru and Colombia but also including Jordan, Panama, Honduras and Korea, the parties have agreed to use an ad hoc panel selection process, where in the event of a dispute, each party appoints a panelist and nominates several candidates to act as the chair of the panel. The chair is then selected randomly from the proposed candidates. This process is a more efficient, streamlined approach and prevents one party from blocking the establishment of the roster.
[Translation]
Once this amendment to the Canada-Chile Free Trade Agreement Implementation Act is made, the change to the method of selecting panellists in the dispute settlement mechanism of the CCFTA will be given effect. The resulting technical amendment will bring the Canada-Chile FTA in line with Canada's more recent trade agreements.
Thank you. I am happy to answer any questions that any of you may have.
[English]
The Chair: Mr. Healy, do you have any comments, or are you here in support of the comments Mr. MacKay made and ready to answer questions?
Stacy-Paul Healy, Counsel, Trade Law Bureau, Foreign Affairs, Trade and Development Canada: I'm here in support and ready to answer questions.
The Chair: I have one clarification. You said we would go to an ad hoc basis and it would be in line with the new generation of free trade agreements, but you say each would put in names, and then you said they would randomly select the chair. What do you mean by ''randomly select''?
Mr. Healy: Thank you for the question, chair. In terms of selecting randomly, it means both parties would propose up to four candidates, and then it's basically just a random draw. You put the names in a hat and randomly draw the name for the chair.
The Chair: Who draws the name? You both appoint a person from your side. Each country appoints. Do they select out of a hat, or is it the countries that do that?
Mr. Healy: It's the parties through the joint commission. They're the ones that would select.
The Chair: And the parties are the governments?
Mr. Healy: Yes.
Senator Downe: Who requested this change, Canada or Chile?
Mr. MacKay: Canada would have proposed it in keeping with the modernization of the FTA and keeping it in line with our other FTAs, and the Chileans were pretty quick to agree.
Senator Downe: The Governor-in-Council appoints people to these panels. Where does the list come from? Is it generated by the department, or is there an advertisement for people to apply to serve on these panels?
Mr. Healy: I can speak to the approach under NAFTA. The department puts forward candidates who meet all the qualifications, and those are the candidates that are proposed for Canada's part of the roster, and that is what the Governor-in-Council approves.
Senator Downe: For example, in NAFTA, there have been no disputes between Canada and Chile, so we've never used this. Is that correct?
Mr. MacKay: That's right. There has not yet been a dispute between Canada and Chile.
Senator Downe: Let me ask a question, then, about the NAFTA panels. The department puts names forward. Where are those names? Are they departmental officials, full-time employees, former employees, people from the business community, the legal community or academic? Where do you get the names from for NAFTA? I assume it would be the same for Chile and Canada.
Mr. Healy: Yes. The names come from a variety of sources. There are academics. There are people who have experience in trade law. You can have business people as well, as long as they meet the set of qualifications.
Senator Downe: How are these qualifications known by the Canadian public? If somebody listening today thinks they have the qualifications, how do they bring that to the attention of the department?
Mr. Healy: The qualifications are set out in the dispute settlement chapter of the agreement.
Senator Downe: Do you have many people applying, or does the department have to go out and solicit people?
Mr. Healy: Typically it involves the department speaking to people who have been recognized with the experience and soliciting to see if they would be willing and able to serve on a panel.
Senator Downe: Roughly what percentage of the participants in NAFTA are former departmental employees who would have expertise in this area?
Mr. Healy: I can't speak to a specific percentage, but it's very few. There have only been one or two who have been former officials.
Senator Downe: I assume people are reimbursed for the actual days they attend sessions, or do they receive a contract if they're named to a panel?
Mr. Healy: They would only receive compensation for the expenses of the panel operating, and that would only be in the event that there is actually a panel constituted.
Senator Downe: If you're on the Chile-Canada panel and there is a dispute at some point, they receive no compensation for their time, just for their expenses? Did I understand that correctly?
Mr. Healy: I believe they receive a stipend for taking the time to participate in the panel.
Senator Downe: And that's the same for all panels? NAFTA and Chile would be the same?
Mr. MacKay: I might just jump in and add that the roster with Chile has never been completed. We currently do not have a roster with Chile. Although the treaty requires one, we never actually established one, which is why we're moving on to this new method now that would require no roster.
Senator Downe: I understand that, but if something comes up tomorrow, the Governor-in-Council, the cabinet, would appoint people on the recommendation of the department, is what I'm hearing. Is that correct?
Mr. Healy: Yes, that's correct.
Senator Downe: If there is a dispute with Chile, would the compensation for the panel members be the same as for others like NAFTA? There would be no variation. The compensation is set, I assume. And my next question is, what is it.
Mr. Healy: Unfortunately, I don't know the answer to that question. Just on the last point, the agreement has been changed so that now we do have the ad hoc method. As the amending agreement did come into force in September 2013, that would be the process now under the agreement with Chile. If a dispute came up, we would actually use the ad hoc method.
Senator Downe: Explain the difference between the ad hoc method and the previous method.
Mr. Healy: In the ad hoc method, nothing is done until a dispute actually arises. Once a dispute arises, each party appoints one panelist, and then they put forward names for the chair and the chair is drawn by lot. Under the roster system, the parties would have to agree on the roster, so you have to go through this process where each party would put forward names to be on the roster. In our case, it would have to be approved by the Governor-in-Council. Then you need an agreement between the parties through the joint commission.
Senator Downe: Under the ad hoc, are the names approved by the Governor-in-Council or by someone else?
Mr. Healy: They would be approved by the Minister of International Trade.
Senator Downe: So it's not cabinet. The minister approves them.
Mr. Healy: Correct.
Senator Downe: If you're not aware of the compensation or don't know, you can send that to us.
Mr. Healy: I'm not aware, but I can follow up on that.
[Translation]
Senator Fortin-Duplessis: Welcome to our committee. My questions will be very brief.
My question relates to this new ad hoc process in our most recent trade agreements, for instance those with Panama and Korea, which we will hear more about after your testimony. Have we ever used this new method?
You said earlier that it was a very good process. But if one reads your presentation closely, one sees that the selection of those who will sit on the dispute settlement panel may take some time. Could you elaborate on the advantages of this new method?
Mr. MacKay: I can confirm that we have not yet used this method formally.
[English]
Canada has not had a formal dispute with one of our free trade partners outside of the North America free trade agreement and the WTO. We see this as a best practice. We're trying to ensure that the system works as efficiently as possible. However, we have not utilized it yet, because most of the differences between our trading partners, including our free trade partners, are frankly resolved long before they reach the stage of dispute settlement, either through informal or sometimes through more formal consultations.
To make a long story short, we have not formally used this, but we do think that it will be a more efficient way of selecting panellists. Moreover, it will prevent a situation, such as happened between the United States and Mexico under NAFTA, where one party can prevent the establishment of a roster or a panel, and frustrate the dispute-settlement system. We think that this panel selection method will allow the dispute-settlement system to function more fluidly. We have not had any real controversy. Most of our trading partners that we've proposed this to find it agreeable. It's a logical way to proceed.
[Translation]
Senator Fortin-Duplessis: So it is better to proceed in this way?
Mr. MacKay: Absolutely, yes.
[English]
The Chair: I want to follow up on what Senator Fortin-Duplessis was asking. We have this new ad hoc system in our newer trade agreements. Where did this ad hoc system come from? Is it similar to what is being done in the WTO? Is that an offshoot of that, or is it from other countries? Who developed ''ad hoc'' as opposed to ''roster''? I remember why the roster system came up in FTA, but I'm not sure where the ad hoc came from.
Mr. MacKay: If I recall correctly, it was first agreed to in the Canada-Peru Free Trade Agreement. It would have been something, in particular, Canadian negotiators and especially those from our trade law bureau, would have looked at. We have experience with the dispute settlement systems under the NAFTA, the WTO and some of our older FTAs and were trying to design a system that would work better, be more efficient, and ensure that neither party can block the establishment of a panel. It was during the Peru negotiation that we first agreed to it — with a foreign country and we proposed it and developed it with them. Since then, we've replicated it several times, because it seems to us and to most of our partners to be very logical.
The Chair: Are other countries using this method in their trade agreements, or is this something unique to Canada's development with its trading partners?
Mr. Healy: There are other countries that use this approach. For example, Korea uses the ad hoc approach and they have used it in the agreement with the United States. Different countries do take different approaches. There are some that prefer a roster, others prefer the ad hoc and some use a mix of the two.
Senator Downe: Concerning this ad hoc approach or preference, have we made any changes to NAFTA?
Mr. MacKay: No.
Senator Downe: The Americans agreed to the ad hoc approach with Korea, but I assume we've asked the Americans to use this approach. Is that negotiation under way?
Mr. MacKay: The NAFTA is not being renegotiated. Certainly, there are discussions between Canada, the United States and Mexico, to make sure our dispute system functions as efficiently as possible. No one has yet formally proposed to re-open the NAFTA. Nothing has been renegotiated in the NAFTA since it was first agreed to.
The Chair: I see no other questioners. You have obviously answered all our questions. We would like to know about the remuneration portion. If you could get back to us on that as quickly as you can, we can report back efficiently.
Gentlemen, thank you for appearing on short notice, and we appreciate your input. Thank you.
Senators, from the questions that I have, we are to assess and determine what we should do with this. I think that the steering committee will draft our report. When we return, after our Remembrance Day break, you will have a copy to determine if it is in line with what you wish to say. I'm not sure whether we send it back to the Senate or to the Finance Committee. That's one of the details we'll have look into.
We have no other witnesses on this topic. When we come back after Remembrance Day, we're going to start at the report stage.
Honourable senators, the Standing Senate Committee on Foreign Affairs and International Trade is beginning its study on Bill C-41, An Act to implement the Free Trade Agreement between Canada and the Republic of Korea.
Appearing before us, representing Foreign Affairs, Trade and Development Canada is a panel, but, before I turn to that, we will have the minister appearing before us. He was not available today due to a trip overseas, but I'm anticipating, should the Senate give us clearance, that the minister will appear on Tuesday when we reconvene. So we will have the minister's input at that time. To be efficient and meet the deadlines of the Canada-Korea agreement, we've agreed, on both sides, that we would hear from the officials today.
We have before us Mr. Ian Burney, Assistant Deputy Minister, Trade Agreements and Negotiations and Canada-Korea Free Trade Agreement Chief Negotiator; Mr. Marvin Hildebrand, Director General, Market Access Bureau; Ms. Nadia Bourély, Director, Trade Policy and Negotiations Division, Asia and CKFTA Deputy Chief Negotiator; and Mr. Vernon MacKay, Director, Investment Trade Policy Division. He's coming. Since we moved earlier, we'll apologize to him that we started without him. We'll keep any questions we have for him until the later point, should we have some. We also have: Mr. Matthew Smith, Director, Intellectual Property Trade Division, Foreign Affairs, Trade and Development. From Employment and Social Development Canada, sitting at the corner of the table, is Mr. Pierre Bouchard, Director, Bilateral and Regional Labour Affairs.
Welcome to the committee. I think some of you, if not all of you, have appeared before the Standing Senate Committee on Foreign Affairs and International Trade. We welcome you. We understand there is one opening presentation which will be made by Mr. Burney, and then we will go to questions. Welcome to the committee. The floor is yours, Mr. Burney.
[Translation]
Ian Burney, Assistant Deputy Minister, Trade Agreements and Negotiations and CKFTA Chief Negotiator, Foreign Affairs, Trade and Development Canada: I appreciate this opportunity to appear before the committee to provide an overview of the historic Canada-Korea Free Trade Agreement, and to answer any questions that committee members may have.
As you are aware, the agreement was signed in Ottawa in September, in the presence of Prime Minister Harper and President Park, and the implementation process is proceeding well, with Bill C-41 having passed third reading in the House of Commons last week. This is Canada's first FTA in Asia. It is a key element of the government's ambitious trade agenda, as laid out in the Global Markets Action Plan, and it heralds a new era in Canada's bilateral relationship with the Republic of Korea.
[English]
That relationship is already significant, with two-way trade nearing $11 billion last year and roughly $6 billion in two-way investment. Given the size and sophistication of our economies, the potential between us is much greater and the CKFTA offers a key to unlocking that potential. Most urgently, the agreement is needed to restore a level playing field for Canada in this increasingly important market with a population of 50 million and a $1.3 trillion GDP making it the fourth largest in Asia.
Canadian companies have been getting squeezed out of the Korean market by U.S. and European competitors, who already benefit from their respective FTAs with Korea. Others, including from Australia, are soon expected to benefit from similar treatment.
With the implementation of the CKFTA, Canadian companies will be able to compete on an equal or preferential basis in the Korean market. Our modelling indicates that the agreement will boost our annual GDP by some $1.7 billion and our exports by about a third over current levels. Those are big numbers, but they probably still underestimate the true value of the agreement.
Beyond the direct bilateral benefits, the CKFTA will also give Canada greater leverage in our other ongoing negotiations, particularly those in the region, including the Trans-Pacific Partnership and our bilateral negotiations with Japan, as well as provide a stronger platform for Canadian companies to pursue opportunities throughout the Asia-Pacific region.
Korea's leading conglomerates have extensive ties throughout Asia and are major players in global value chains. By stimulating partnerships between Canadian and Korean firms, the CKFTA will open doors for our companies, including SMEs, to develop business throughout this most economically dynamic region of the world.
Turning to the agreement itself, the CKFTA is an ambitious, state-of-the-art free trade agreement that covers virtually every facet of modern commerce. The core is the elimination of tariffs. Nearly 90 per cent of our current exports will become duty free immediately upon implementation and all but a small fraction of the rest will over time. This means that we will quickly be able to restore our competitive position in the Korean market.
The terms of the tariff package are commensurate with those obtained by our key competitors and stronger in a number of priority areas for us. Moreover, the results are particularly advantageous for Canada, given that average Korean tariffs are about three times higher than ours, 13.3 per cent versus 4.3 per cent.
From a sectoral standpoint, all Korean tariffs on all industrial and manufacturing sectors will be eliminated, such as aerospace, rail, information technology goods, chemicals and pharmaceuticals, to name a few. Korean tariffs in these areas run as high as 13 per cent, and the vast majority will be eliminated on the day the agreement comes into force.
Korean tariffs in the forestry and wood sector, which run up to 10 per cent, will also be fully eliminated, creating major opportunities for Canadian exports, such as spruce, pine and fir lumber, plywood and oriented strand board.
In the sensitive fish and seafood sector, where Korean tariffs run as high as nearly 50 per cent, the agreement will provide for full tariff elimination on terms that are faster than what our competitors obtained for products that accounts for nearly half of our exports in the sector, including lobster, hagfish and frozen herring, halibut and Pacific salmon.
In agriculture, which is Korea's most heavily protected sector, with some tariffs running as high as nearly 900 per cent, the agreement will eliminate Korea's tariffs on all priority areas for us, including beef, pork, grains, pulses, oilseeds and processed foods. As well, our outcomes are more advantageous compared to what our competitors obtained in key areas such as canola oil, barley malt, some pulses, baked goods and maple syrup and sugar.
To complement tariff elimination, the agreement contains a wide range of disciplines on non-tariff barriers that are such a concern for our companies, such as provisions relating to standards and technical barriers, transparency and non-discrimination, and fast and effective dispute settlement procedures.
[Translation]
Beyond trade in goods, the agreement has ambitious outcomes on services and investment that will provide improved access for Canada in key areas, such as professional and financial services, and treatment on a par with the best provided by Korea to any country including the United States.
The government procurement provisions will provide businesses in both countries with expanded opportunities at the central government level, putting Canada on an equal footing with the United States and in a better position than others, such as Japan and the EU.
The agreement also includes commitments to strengthen the protection of intellectual property rights, and high standards of environmental and labour protection.
[English]
Let me now turn to the auto sector, an area of intensive focus throughout the negotiations, given its importance to our economy and to the bilateral trade relationship.
The extensive negotiated outcomes in this area are commensurate with, and in some cases superior to, those obtained by our competitors. With respect to tariffs, Korea will eliminate its 8 per cent tariff on cars immediately under our agreement, compared to five years in the Korea-U.S. agreement, or KORUS, and three to five years with the EU. Canada's smaller 6.1 tariff, meanwhile, will be eliminated in three equal, annual cuts. This means that, even with our later start, Canadian automakers should have full, duty-free access into Korea before the United States and Europe. They will benefit from tariff protection in our market for some period of time after tariffs on Korean cars have been fully eliminated in the U.S. and EU.
We also negotiated strong rules of origin in this sector that recognize the integrated nature of production in North America by allowing for U.S. input to count towards the origin requirements. Korea did not accept such cumulation provisions in its agreements with other partners.
In the critical area of non-tariff barriers, including internal taxes and technical standards relating to emissions, fuel economy and vehicle safety, our outcomes are at least as strong as those obtained by our competitors.
With respect to safeguard measures that protect against import surges, our agreement not only matches the very strong provisions obtained by the United States in the area of autos but extends them to all sectors, including, for example, steel.
The CKFTA also provides for strong institutional mechanisms to address auto issues and specialized dispute settlement provisions with significantly accelerated timelines for disputes involving motor vehicles.
In this regard, there has been some confusion over a provision in the U.S.-Korea deal referred to as ''snapback,'' which I would like to try to clear up. In general, the concept of snapback refers to the reinstatement of an MFN tariff. This can typically occur in two distinct situations: as a safeguard measure to respond to an import surge triggered by tariff elimination, or in retaliation for non-compliance by the other party in a dispute settlement process. As I indicated, our provisions relating to safeguard actions to address import surges are as strong as those in the U.S.-Korea agreement and allow for the full reinstatement of our MFN tariffs.
With respect to retaliation in a dispute, our agreement does not have the automatic ''snapback'' provision on autos that is in KORUS, as Korea refused to extend that to any other trading partner, including the EU.
In the event of non-compliance with a dispute settlement finding under our agreement, each party would still have the right to re-impose one or more of its MFN tariffs, but only to a level that corresponds to the damage caused by the underlying violation. That is the usual approach taken in almost all trade agreements.
Frankly, we don't think this distinction between our agreements is particularly meaningful. For one thing, the value of the snapback provision in KORUS is questionable. The U.S. auto tariff is only 2.5 per cent and cannot actually be snapped back during the first four years because it is still in place. Most importantly, the snapback provision will sunset in 10 years, along with the accelerated timelines for auto disputes in the U.S.-Korea agreement if Korea has not in the meantime been found by a panel to be in violation of its auto obligations.
To the extent that the KORUS provision does help to discipline non-tariff measures, Canada would still benefit indirectly anyway since, as a practical matter, it would be difficult for a non-tariff barrier to be implemented in a way that distinguishes between a U.S. and a Canadian-made car, given the integrated nature of our production.
The upshot, therefore, as we see it is that we expect to have the benefit of the KORUS provision for as long as it's in place, albeit indirectly, and then, in the likely event that it sunsets, we will still have the accelerated dispute settlement timelines in our agreement, which are permanent, whereas those, too, will have sunsetted in the U.S. agreement.
The views of the auto industry about this FTA have been mixed, but some, including Honda and Toyota and their association, have been strongly supportive. The concerns that have been expressed come down to two main points: that tariff elimination will harm automotive production and jobs in Canada, and that the FTA will not achieve any real access in Korea because its auto market is closed to imports. Let me take each in turn.
On the first point, every credible study that has been conducted on the subject has concluded that the impact of the CKFTA on auto jobs and production in Canada would be negligible, on the order of 0.2 per cent of domestic production. That is mainly because most of Canada's production, nearly 90 per cent last year, is exported and so will be unaffected by increased competition in the Canadian market created by the Canada-Korea Free Trade Agreement. Moreover, Korean-branded cars sold in Canada are increasingly coming in from plants in the United States duty free under NAFTA. That volume is now nearly 50 per cent, so the protection afforded by the tariff is declining in any event.
With respect to the Korean market, certainly it remains challenging, but imported auto sales have been growing by about 30 per cent annually over the past four years, and the import penetration in the Korean market has risen from around 3 per cent when our negotiations started to over 12 per cent today, meaning that nowadays one-in-eight cars sold in Korea is an imported vehicle. Although some may remain skeptical about the extent to which the Korean auto market is opening up, the bottom line is that our access can only be improved with the enhanced access and disciplines provided by the CKFTA.
[Translation]
Turning to next steps, the agreement was formally signed on September 22, 2014, during President Park's state visit to Canada, the first in 15 years for a Korean president. Leaders at this time reiterated their mutual commitment to have the agreement come into force as quickly as possible.
Now that the agreement has been signed, national ratification processes are underway in both countries. In Canada this requires the passage of the implementation legislation — in this case, Bill C-41 — which passed third reading in the House of Commons last week and is now before the Senate.
In Korea, the ratification bill was tabled in the National Assembly on October 1. It is expected to be taken up in the coming days by the relevant committees and then put to a vote in the full National Assembly.
[English]
While there's currently a backlog of pending legislation in the Korean National Assembly that could affect the timing of its consideration of the CKFTA, President Park has called for swift passage of the agreement, and it appears to enjoy broad support from members of both the ruling and opposition parties. I can't provide a specific forecast for when the agreement will come into force, but Bill C-41 envisages entry into force as early as January 1, 2015. For their part, Canadian stakeholders have been emphatic that early implementation is a high priority for them, given the competitive landscape they face in the Korean market.
To conclude, the CKFTA is an historic agreement that will raise our bilateral relations with Korea to a higher level, provide inroads for Canadian companies throughout the Asia-Pacific region, and create significant opportunities in Canada across all regions and sectors of the economy.
We appreciate this opportunity to appear before the committee and are ready to answer any questions that you may have.
The Chair: Thank you, Mr. Burney.
Senator Downe: Did I understand correctly that 50 per cent of the Korean automobiles coming into Canada come from the United States and Mexico, 50 per cent are duty free?
Mr. Burney: Almost 50 per cent. I believe the number is around 43 or 44.
Senator Downe: The concern expressed by the Canadian Automobile Association, the workers, was pertaining to disparity. The figures I have are that in 2013, the value of Canadian automobile exports to South Korea was $2.3 million, while the value of Canadian automobile imports from South Korea was $2.3 billion. Do you understand those figures to be correct as well?
Mr. Burney: I believe the export figures reflect Canadian export data, but Korean import data actually show a higher volume of imports of Canadian-made cars coming into Korea, on the order of $40 million last year. But broadly speaking, yes, there is an imbalance in the trade in finished vehicles.
Senator Downe: A significant imbalance. I notice the Canada-Korea deal has a section that would facilitate access to the South Korean automobile market and protect the Canadian automobile sector from a significant increase in South Korean vehicles being imported into Canada. What does that mean? How does that work?
Mr. Burney: That could be a reference to the safeguard provisions that are built into the agreement, which I spoke to in my presentation. We have the very robust safeguard provisions that the U.S. obtained with Korea as it pertains to autos, and we've extended it to all products. That means that if there was a surge of imports that caused injury or threatened to cause injury to the domestic industry, it would have the ability to petition the CITT for reinstatement of protection.
Senator Downe: Under the investment protection, the provisions of the Canada-Korea Free Trade Agreement would limit the ability to claim compensation in some areas. Is that standard in all our agreements regarding Chapter 11, or is that an extension just for Korea?
Mr. Burney: I'm not sure I followed the premise. You're saying there's a provision in the investment chapter that limits our ability to seek?
Senator Downe: I'll read you what I have. The Canada-Korea Free Trade Agreement chapter on investment resembles the template used for foreign investment promotion and protection. This template, which includes a dispute settlement process that permits an investor to initiate proceedings against a state, is based on Chapter 11 of the NAFTA, but reflects lessons learned — I'm not sure what that means, and maybe you could explain that — from Canada's experience with Chapter 11. Therefore, this provision in the Canada-Korea free trade agreement would limit the ability to claim compensation in certain situations.
Mr. Burney: It's true that the chapter in the Canada-Korea agreement is modelled on NAFTA, but the model itself has evolved over the years and we have indeed improved it. One of the areas is to make it more transparent.
Our current approach to investor state dispute settlement allows for the participation of third parties and for the full publication of documents. Those are some of the improvements we've brought into subsequent models, including this one.
I suspect that what you're referring to is a clarification of the indirect expropriations provisions. I will ask my colleague Vern MacKay to speak to that.
Vernon MacKay, Director, Investment Trade Policy Division, Foreign Affairs, Trade and Development Canada: Good afternoon, everyone, and thank you.
There are some new provisions in the Canada-Korea agreement compared to the NAFTA. In addition to what Mr. Burney has said, I would add also that there was an article added, article 8.34, preliminary objections to jurisdiction or admissibility. In the event of a claim the respondent can ask the tribunal, before it proceeds, to consider the merits of the case to look at whether the claimant actually has jurisdiction and can block the claim from going further on that basis.
But there are other provisions in this agreement that the NAFTA does not include, such as the clarification on indirect expropriation that says that only in rare circumstances would a claim go forward with regard to regulation to protect health, safety and the environment.
Senator Downe: Is that unique to this agreement? Has it been in other recent agreements with Peru, Jordan and Panama?
Mr. MacKay: Yes, most of our FTAs now contain these provisions.
Senator Downe: And the Canada-Europe would contain it as well?
Mr. MacKay: That's true.
[Translation]
Senator Fortin-Duplessis: Welcome, Mr. Burney, and welcome to all of the members of your team as well. I am very pleased to see the first free trade agreement between Canada and one of the Asia-Pacific countries.
South Korea is the 15th largest economy in the world, and the 4th in the Asia-Pacific region. South Korea has already signed free trade agreements, one with the European Union, which came into effect in July 2011, and one with the United States, which entered into force on March 15, 2012.
How do the market access provisions in the Canada-Korea agreement compare to those in the agreements that South Korea has with the European Union and with the United States? You said a few words on this in your presentation. I would like to hear your reply.
[English]
Mr. Burney: Thank you for the question. As I indicated in my opening remarks, the outcomes in our agreement are broadly commensurate with those that our key competitors obtained. By that I mean the United States and Europe. In a number of areas we think the outcomes we obtained are superior.
I mentioned a number of products where the tariff outcomes are faster in our case. In the seafood sector, as I indicated, products that account for nearly half of our exports are subject to a faster tariff phase-out in our agreement compared to our competitors. Our top export in that sector is lobster, and that is subject to a faster tariff phase-out in our agreement.
In the agricultural sector there are a number of products where we have more favourable outcomes in our agreements, including canola, barley malt, some pulses and baked goods. I mentioned a few others in my opening presentation.
On the whole, these agreements will generally lead to the complete elimination of tariffs on virtually merchandise trade. The specific terms will reflect the particular interests of the different parties. We negotiated an outcome that reflects the priorities of Canadian economic interests, so you might see some differences in terms of the precise tariff phasings.
I would say that on the whole the investment agreement we have is comparable to the U.S.-Korea agreement, but it's far superior to the EU agreement, which doesn't contain investor state dispute settlement protection because it was before the European Union had a mandate to negotiate that.
The service packages are broadly commensurate again, but Canada has the most favourable outcomes in the area of labour mobility. Korea agreed to more ambitious outcomes in terms of temporary entry for business people in our agreement than it has ever agreed to in any other agreement, including with the United States and Europe. So Canadian professionals, such as architects, engineers, management consultants and the like, will have the best access that's available in the Korean market.
In the area of government procurement, Canada negotiated an outcome that matches the U.S.-Korea agreement but exceeds that of Korea's other agreements, including with the European Union.
In the auto sector, I went through provision by provision. On the whole we think our outcomes are as strong. They are stronger in some areas, including the elimination of the Korean tariff, which will be immediate in our case whereas it's being phased out over time for the Americans and Europeans.
There are some other distinctions in some of the other areas that I touched upon.
On the whole, I think it's comparable in terms of ambition, but stronger in those areas that reflect specific Canadian interests.
[Translation]
Senator Fortin-Duplessis: The president of Ford Canada, whose name is Dianne Craig, stated that despite the Canada-Korea Free Trade Agreement, South Korea will remain one of the most closed automobile markets in the world, because South Korea imposes non-tariff barriers on imported vehicles. What is your response to that criticism?
Mr. Burney: As I said in my presentation, it is certain that certain challenges will remain in the Korean market. However, automobile imports in the Korean market have increased by 30 per cent yearly over the past four years, and the rate of penetration for imports is now over 12 per cent, which means that one car out of eight sold in South Korea is an import. It is difficult to say that the market is completely closed, and change is happening quickly.
[English]
I can perhaps also add that we've seen, since the U.S and European deals have come into force, a substantial increase in the volume of exports from those two countries. In both cases, automobile exports have doubled since those free trade agreements have come into place. Our own exports to Korea have been growing, too, but not that quickly. In the case of the European Union, I believe their exports are in the order of $4 billion whereas their imports are around $5 billion, so the trade is coming almost into balance.
Coming back to the point made earlier about the imbalance in our automotive trade, it's true if you look at the Korean market specifically, but if you look at the global picture Canada runs a huge automotive trade surplus with the world as a whole.
The Chair: Is that because of our trade with the U.S.?
Mr. Burney: That accounts for the surplus primarily, yes.
The Chair: You talked about government procurement. I want to be certain. It's only at the federal level?
Mr. Burney: That's correct. The incremental access in this agreement basically lowers the thresholds at the central government level only. Under the government procurement agreement at the WTO, the thresholds are roughly $200,000 Canadian. Under this agreement the covered procurement thresholds drop from $200,000 to $100,000. All of the procurement above that threshold will now be open to procurement between the two parties. It's an expansion of procurement opportunities at the federal government level only.
The Chair: You've pointed out all the benefits we have in this agreement as compared to our competitors, and you've talked about automotive. Is there anything in this agreement we should know about where we're not doing as well as the other agreements outside of the automotive? Where did we have to give, in other words?
Mr. Burney: Certainly trade is a two-way street. Of course, Canadian tariffs are being eliminated as well, and that will create benefits to Korean exporters as well as to Canadian consumers.
I spoke to the one area where parts of the automotive industry have pointed to the absence of the snapback provision in our agreement, and I addressed that in my remarks. The only other concern that I've heard relates to the impact of tariff elimination on production and jobs, which I also spoke to. The government has commissioned many studies on this to indicate that the impact would be very limited.
Now, there have been some comments about the tariff elimination period in our agreement on the automotive tariff at three years. It compares quite favourably to what the Europeans obtained, because they're starting with a higher tariff and that's being phased out in four years, but that's front-end loaded where ours is a linear cut. It is true that the American tariff is being eliminated in five years, but the important point to note is that it's only a 2.5 per cent tariff. In many jurisdictions that is close to what would be considered a nuisance tariff. That was not fundamental to the overall bargain that was struck in the U.S.-Korea deal.
Aside from that, I have not heard of any areas where there have been concerns from stakeholders about the outcomes obtained in the Canada-Korea agreement. To the contrary, the reaction from the business community across Canada has been extremely positive.
The Chair: Maybe just for my benefit, we have access to WTO, but then we'll have access to dispute resolving mechanisms bilaterally. Is it an option, in some cases, which route we go? Can you explain that?
Mr. Burney: To the extent that there was a violation that violates both WTO rules and the rules of this agreement, then in theory we would have the option to have recourse under both agreements.
The Chair: We don't have to exhaust our bilateral first?
Mr. Burney: I don't believe —
The Chair: Somebody was waving back and forth.
Mr. Burney: I don't believe there is any requirement to exhaust the procedures in one agreement before proceeding with the other. I would say that the procedures we have in this bilateral agreement are much faster than the procedures available in the WTO. They're faster than what our competitors obtained as well, so dispute settlement is another area where I would say our agreement stands up quite well.
The Chair: In some of our other agreements, we're concerned about the quality of workers and their benefits and rights. In the case of Korea, was that ever a question, or do we feel they are of a standard sufficient that we didn't need to highlight on address those?
Mr. Burney: Pierre may want to add to this. I would say Korea is generally regarded as a jurisdiction that has very high labour standards, so that was not an area of acute concern.
We wanted to have ambitious provisions in that area with this agreement, because we think we could be a role model vis-a-vis other countries. When we began this negotiation, Korea didn't have a lot of experience negotiating either labour or environment provisions in its trade agreements, so it was a learning curve. Particularly after they negotiated with the U.S., they were more amenable to considering such provisions with us. The outcomes are state of the art from the standpoint of the obligations we seek. It's a very high level of obligation supported by robust dispute settlement provisions. I don't know if there's anything Pierre wanted to add.
Pierre Bouchard, Director, Bilateral and Regional Labour Affairs, Employment and Social Development Canada: To confirm, if we're doing a comparison in terms of the obligation, certainly we've surpassed what's in the Korea-U.S. and even in the European agreement. From a labour perspective, this agreement is probably one of our best to date.
The Chair: I have a final question. Do we benefit from any other agreements that Korea has with others? I'm thinking of one case scenario where you can sign a trade agreement and others may have a customs union agreement, and you have a flow-through benefit beyond the country you're signing with. Are there any other advantages regionally for us, beyond Korea, by signing this agreement?
Mr. Burney: There are a number of areas where we have MFN obligations in the agreement. So Korea has committed to provide Canada — now and going forward — with the best treatment that it provides to any other trading partner. That's a feature of a number of the provisions in our automotive package. For provisions that relate to fuel economy, emission standards and internal taxes, Korea has made MFN obligations in these areas. This means that if they make concessions to the United States or others in the future that go beyond the current regime, then they'll automatically apply to us. That's by and large true in the investment and services areas as well.
In all of those areas, this will be an ever-green agreement where we will continue to benefit from the best treatment that Korea provides to others.
In terms of the point I made in my opening comments about Korea being a platform to pursue opportunities elsewhere in the region, what we have in mind is that Korea's chaebols, the conglomerates, have extensive links throughout Asia, and they have formidable resources as well. To the extent that this agreement helps create partnerships between Canadian companies, particularly the smaller ones that may not have the wherewithal to establish a global presence, they team up with these Korean chaebols to pursue opportunities in Korea and could in turn open doors to their business elsewhere in the region. We already see some examples where Canadian companies are teaming up with Korean companies to pursue opportunities in China and elsewhere, and we think this agreement will stimulate a lot more of that.
Senator Downe: This may not be your area and if you can't answer it that's fine, we'll ask the minister. What plans does the department have with Export Development Canada and others to assist Canadian businesses in taking advantage of any opportunities that are in these deals?
Mr. Burney: We, of course, have the full panoply of services that are available to all businesses at all times. There is the Trade Commissioner Service, which is represented throughout the world and of course in Korea. We have market development programs in the department. EDC is certainly on cover in Korea and has played a major role in developing business there.
Beyond that, there's a very clear determination, which our minister has expressed, to engage in an active marketing campaign across the country to raise the profile of the agreement, ensure that Canadian companies are aware of the opportunities, and do everything we can to support them. At the end of the day the agreement opens the doors, but, of course, it will have to be the companies themselves that flow through.
We'll be doing all kinds of outreach activities, marketing programs, and roundtables. The minister and his colleagues will be very active in doing a lot of this in the context of a broader effort to promote the Global Markets Action Plan, and I believe these will be getting under way quite soon.
Senator Downe: You're familiar with the Canadian Chamber of Commerce report, Turning It Around: How to Restore Canada's Trade Success that was published this year?
Mr. Burney: I'm aware of many reports; I'm not sure I know that one specifically.
Senator Downe: This one talks about the trade imbalance that has been built up. The more trade deals we sign, the more trade imbalance we have. They have a series of recommendations on what the government should do, a whole-government approach like the Australians and Americans, to try to address some of the problems with our trade.
You're concerned, as well, I assume, that signing the deal is not the end in itself but simply the beginning, and there seems to be either a lack of will from the Canadian business community or assistance that they require from the government to achieve the objectives and targets of these agreements. What is the department doing to address the chamber's report? If you're not familiar with it, we'll ask the minister when he's here.
Mr. Burney: I think the government laid out its blueprint in the Global Markets Action Plan and that lays out an aggressive suite of negotiating initiatives. That's my area. Beyond all of the free trade agreements, we also have an active negotiating agenda for foreign investment protection agreements. We're negotiating air service agreements. Frankly, it is the most ambitious array of negotiating initiatives we've ever pursued at one time.
That creates the framework at the same time there is an enhanced effort to strengthen the capacity of the department and other government actors to support Canadian companies in their direct efforts to expand market opportunities. Now that's the other side of the business that I'm not directly responsible for, but the business development has to work hand-in-hand with the trade policy, and we do.
As I mentioned, all of these initiatives will be rolled out in the coming weeks and months to ensure that the advantages we negotiate in the agreements are actually realized.
Senator Downe: For my second last question, I want to follow up with the chair's comments about government procurement. The Canada-E.U. deal is much more extensive, so I assume we couldn't get that from the Koreans in this deal. Would that be correct?
Mr. Burney: Our objective in the case of Korea was to establish a level playing field vis-a-vis the United States. So our objective going in was to arrive at the same level of access they offered to the Americans and we obtained that. It's better than what Korea gives to anyone else, including the European Union.
Senator Downe: So we didn't try this?
Mr. Burney: The biggest difference between this agreement and the one with the E.U. is that it isn't incremental access at the sub-federal in this agreement. That was not an objective that we had in this negotiation, so we didn't pursue it.
Senator Downe: My last question is on the timing. We were advised there was a bit of a rush on this to get it done as soon as possible. Maybe I didn't understand you correctly. You seemed to indicate it could be delayed on the Korean end. Is that correct?
Mr. Burney: What I indicated was that the Korean National Assembly currently has a major backlog of legislation before it, so there is no guarantee on the timing.
I also indicated that the president has made it clear that it's her priority to see this agreement ratified as quickly as possible. We've heard positive echoes from both the ruling and opposition parties in the National Assembly, so our belief is that there is a genuine desire on the Korean side — in the government, certainly, and in the National Assembly as well — to move this forward as quickly as possible. However, because of an impasse that arose over the ferry disaster in the spring, there is now a backlog of legislation that they will have to work their way through.
There are some imponderable risks that I was flagging, but our sense is it's on the right track. My understanding is that it will be taken up in the relevant committee later this week and that a plenary vote could take place as early as November 20. That's the most recent information. What I think I indicated is that as an official, I can't predict the outcome of a legislative process in either country.
Senator Downe: That's a safe decision.
Senator D. Smith: I basically want to say that I'm quite supportive of the objective of doing a deal with Korea, and I want to compliment Senator Yonah Martin. She has been a champion of it, understandably. We are both involved in the Canada-Korea group and I applaud her efforts on this.
I've been to Korea many times on private business, not in this Senate capacity. I used to go there a lot in the 1980s and 1990s. I did legal work for Kia and LG, which was always called Lucky Goldstar, and their business community is incredibly impressive. The work ethic of the Korean people is second to none, and I was always in awe. On numerous times, I would go to Panmunjom and look at that bridge of no return, but I certainly never walked across it.
With the muscle they have for their population, we want to be in that country. The members of the Korean community in our country are incredibly impressive and it has successful business people; I know quite a few of them personally who have done very well.
A few years back, Jim Pattison, one of the wealthiest guys in Canada, an old friend of mine who owns car dealerships for every manufacturer, said to me that on a dollar-for-dollar basis, you can't get a better product for the money than Hyundai. That, coming from him, is pretty impressive.
I hope I live long enough to see the North Korean regime collapse, because in terms of human rights and stuff like that, it just isn't there at all. It's kind of in a league of its own. That would be quite exciting if, in fact, that ever does happen. Sooner or later, it will. I hope I live long enough to see it.
I'm very, very impressed with the country, been there countless times, all on business, and it's one that we want to do a deal with, and I'm glad we're going down that road. We, of course, have to look at every clause, but in terms of the big picture, it's the right thing to be doing, in my view.
Mr. Burney: I might simply say that when the president was here, the Prime Minister did note there was no better partner for Canada in the region than South Korea.
Just on a personal level, I had an opportunity to live there as an adolescent in the late 1970s and the changes that have taken place in that country over that time span are breathtaking. There is no question that Korea is one of the tremendous economic success stories of our time, so I would echo a lot of those comments.
Senator D. Smith: Do you like kimchi?
Mr. Burney: I do.
The Chair: I think we're straying from Korea into a menu option.
I have on my list for the second round Senator Fortin-Duplessis.
[Translation]
Senator Fortin-Duplessis: Mr. Burney, on those non-tariff barriers, certain stakeholders consider that the non-tariff barriers are relatively serious obstacles in the way of the free circulation of goods and services.
Given the provisions contained in the Canada-Korea Free Trade Agreement, can you think of other obstacles that could have a negative impact on Canadian trade and investment activities?
[English]
Mr. Burney: Thank you for that question. Certainly, on the part of our stakeholders, we have often heard that non-tariff barriers can be more difficult than tariff barriers. We have devoted a great amount of attention to that in this negotiation. We have state-of-the-art provisions on trade facilitation that reduce red tape at the border, and encourage automated procedures and electronic filings. There is a strong chapter on trade facilitation.
We also have state-of-the-art provisions on transparency to ensure that we have a better insight into the regulation-setting process in Korea.
We have disciplines relating to national treatment that ensure that Canadian products are treated no less favourably than a Korean product.
We have specific provisions in a number of sectors. In the automotive sector, we spent a lot of time on non-tariff issues. Whether it is about standards relating to fuel economy, emissions, vehicle safety or internal taxes, all of the issue areas that can be subject to non-tariff barriers, we negotiated robust provisions to ensure they would not become obstacles to our trade and that the benefits we obtain through lowering tariff barriers aren't offset by increases in barriers on the non-tariff side.
The other important point to note is that across this agreement, we have negotiated very strong institutional provisions that will give us a forum for raising specific problems as they arise with Korea. In the areas of technical barriers, sanitary and phytosanitary measures, and the automotive sector there is a dedicated committee. In the forestry sector, we have a dedicated committee and also a working group to look at building products. We have specifically targeted those sectors of greatest importance to our stakeholders and negotiated not only the substantive disciplines to address them but procedural and institutional mechanisms to address them going forward.
Senator Ataullahjan: The South Koreans' direct investment in Canada was at $4.9 billion, making it the twelfth largest source of foreign investment in Canada. Do we know what sectors they are investing in?
Mr. Burney: Yes. They have extensive investments in the energy sector, above all, but they're also in the manufacturing and financial services sectors.
Samsung is a very active player in the clean energy sector in Ontario. Its biggest steel company, POSCO, has significant investment in Canada; Korea Gas Corporation and the Korea National Oil Corporation have investments, particularly in the West. Those would cover the main ones.
I believe that just in the past year there was a pharmaceutical-related investment in the province of Quebec.
It's a multi-faceted relationship. Actually, my number of their investment in Canada is closer to $5.5 billion, so it is substantial.
The Chair: Thank you. I think we've exhausted the questions. Thank you for coming, to you and your team, to set the stage of our study. We've covered some areas of concern. We appreciate the time you've taken on this, not only in your negotiations but also in your coming here to make a presentation. Thank you for that, and we'll await the minister's comments to complete our study from a government perspective.
Senators, we will be adjourned until 10:30 tomorrow when we will start with our study on Canada-U.S.-Mexico.
(The committee adjourned.)