Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue No. 2 - Evidence - Meeting of February 18, 2016
OTTAWA, Thursday, February 18, 2016
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 10:32 a.m. to study foreign relations and international trade generally (topic: bilateral, regional and multilateral trade agreements: prospects for Canada).
Senator Percy E. Downe (Deputy Chair) in the chair.
[English]
The Deputy Chair: This is the Standing Senate Committee on Foreign Affairs and International Trade. The committee, as you know, is authorized to examine issues that may arise, from time to time, relating to foreign relations and international trade. Under this mandate, the committee will hear today from witnesses on the topic of bilateral, regional and multilateral trade agreements, prospects for Canada.
During the first hour of the meeting, we will receive a presentation from Mr. Pierre Marc Johnson, former Premier of Quebec, a lawyer and physician by training and education. Mr. Johnson is also known for his expertise in the fields of international trade negotiations, international partnership, environmental law, health law and public policy.
Given his experience, he can not only speak to the advantages and disadvantages of bilateral, regional and multilateral trade agreements but also provide a provincial perspective toward trade negotiations and trade agreements.
Mr. Johnson, thank you for taking your time to be here today and accepting our invitation. You have some opening remarks, and senators will have questions.
Pierre Marc Johnson, Counsel, Lavery Lawyers, as an individual: I will make my opening remarks in French, and I will, of course, submit myself to questioning.
[Translation]
Mr. Chair, I would like to thank you and say what an honour it is to appear before the committee to speak to three topics, presumably, although I saw only one and a half on your agenda. First, I'd like to discuss the advantages to Canada of favouring multilateral agreements over bilateral, plurilateral or regional agreements. Second, I'd like to talk a little bit about the Comprehensive Economic and Trade Agreement, known as CETA, the agreement that is almost concluded with Europe except for a few steps. And finally, on a more specific note, I'd like to discuss the role of the provinces in this type of negotiation. I am pleased to speak to the CETA experience in that regard.
I'm not certain that the issue is choosing between multilateral and bilateral trade agreements. We are more or less compelled to conclude both types of agreements, first, because bilateral, regional or plurilateral agreements generally provide a political opportunity to enter into negotiations of an economic nature. Allow me to explain.
The interests are much clearer in the case of bilateral or regional agreements. The stakeholders are easier to define and the interests are more obvious; all of that entails managing political authority, which may ultimately be more straightforward than in the case of multilateral agreements. Multilateral trade agreements give us an overview and a framework for trade activities that have the benefit of being universal, applying to everyone and giving rise to relatively clear jurisprudence, which can then provide insight into the future as far as further negotiations of other chapters are concerned.
There are, however, multiple drawbacks, including the challenge around aligning interests, unlike bilateral agreements. The second advantage of multilateral agreements stems from their universal scope: they do not overlook any regions of the world when it comes to trade, an important element in an increasingly integrated world.
Take, for example, the African continent, which had long been overlooked from both political and economic standpoints. Within the next 25 years, however, the region will play a huge economic role. And the way to gain trade access to the African continent is very likely through the World Trade Organization, rather than through bilateral agreements with 38 countries, even though there are also blocs in Africa that hold opportunities for Canada.
Quite a transcendent example of a major bilateral agreement is indeed the Comprehensive Economic and Trade Agreement between the European Union and Canada, whose legal language is being finalized.
Canada is not a juggernaut, economically speaking. With 35 million people, it still holds appeal to a region like Europe, which has 12 times our GDP and nearly 13 times our population. Canada is attractive to Europe for a variety of reasons. We don't really offer a consumer market, given that we are just 35 million people. When it comes to consumer markets, I would say that certain countries in Asia hold much more appeal to Europe than Canada does. The same is true of the U.S., which represents an enormous market, not just for us, but also for the Europeans.
In the context of our agreement, however, the Europeans had very specific interests, and that explains why the provinces were invited to the table. They were interested in the government procurement opportunities at the sub- national level. That made the negotiation appealing to Europe, whose interests revolved more around government procurement, intellectual property and the value of the precedents that would be created under the agreement. Conversely, Canada's interests essentially had to do with gaining access to 500 million rich people in Europe, currently the world's biggest market in terms of trade value.
In conclusion, Mr. Chair, I will just say that I would be happy to answer any questions you may have and perhaps elaborate on the three themes I just talked about: the difference between multilateral and regional agreements, on the one hand, and CETA and the specific role of the provinces, on the other hand. Thank you.
Senator Dawson: First of all, when we talk about multilateral agreements and the economic cycle, global economic growth is in everyone's interest. In other words, the fewer barriers there are to economic trade, the better it is for everyone. The more multilateral agreements there are, the better it is for everyone. We have signed some 20 agreements.
From time to time, the chair of our committee uses the Jordan-Canada analogy. For Prince Edward Island, trade with Jordan represents 0.001 percent of its economic trade, which won't affect the province's economic growth. But, when the time comes for our politicians to make choices, they have two options: the Pacific region and Europe. The new government has to prioritize certain elements and make choices. In what respects must the Liberal government make sure that the Trans-Pacific Partnership does not hurt the progress made under Canada's agreement with Europe?
Mr. Johnson: Thank you, Senator Dawson. I would say that the agreement with Europe is essentially deeper and more ambitious than the Trans-Pacific Partnership. The TPP represents 12 countries, including Canada, the U.S., Mexico and Chile, essentially North America, and a host of important Asian countries excluding China, such as Japan, Malaysia and Vietnam, as well as Australia and New Zealand. That represents 800 million people, growing markets and very often lower production capacity in terms of labour costs. That isn't true of Japan, the U.S., New Zealand or Australia. But it is true for most of the other countries, such as Vietnam.
From the outset, then, the TPP differs from the agreement with the EU with respect to production and the flow of goods. The agreement with Europe is between Canada and a bloc of 28 countries, representing 500 million people, who can do anything and everything, let's be clear. Because of how many universities and industries they have, those 28 countries can manufacture any product, which will be a European product, using essentially internal resources, with a few exceptions when it comes to natural resources. Looking at the agricultural, industrial and manufacturing sectors, we can expect Europe to make just about any product and we can expect those products to be extremely high quality and to be competitive with those made elsewhere in the world, which may be less durable and of a lower quality. But it's expensive to make those products in Europe. So we are dealing with a domestic market in Europe that is rich, from our perspective, and that can produce things that will certainly appeal to our consumers, but at costs that are not necessarily competitive with Canadian products or those that we import from the U.S. and Mexico under NAFTA. So that's the first issue.
Second, there is a fundamental difference between the Pacific region as defined by the TPP and Europe, a difference that revolves around the role of government and the state. We share with the Europeans a certain view of state interventionism, within the context of the rule of law, common law, civil rights, and human rights and freedoms— which includes the transfer of taxes to the less fortunate— as well as a context defined by the desire to align our economies more and more with technology.
In that sense, Canada and the European Union have basic similarities in terms of economic analysis and economic perspective that we do not entirely share with the Pacific group, even though those aspects may appear in the future in all those countries, and even though we share some of those aspects with as much intensity in the case of New Zealand and Australia. I think that is a second difference that should be pointed out.
The rest has to do with the vision of Canada as a source of primary resources. It is clear that access to the Canadian resource markets is extremely important to the Europeans. In the case of the countries that are members of the Pacific treaty we are talking about, that access is important for some of them, but not for others, such as Australia, which is as rich in resources as Canada. So that is not why those countries are joining the treaty. They are not especially interested in Canada in terms of investments in the energy sector. And Canada is also not especially interested in Australia in terms of energy investments.
Europe's case is different. When it comes to natural resources, Europe no longer has the pool of resources we still have, as it has 500 million people living on a much smaller territory that is sometimes less rich in resources. Let us take for example Europe's dependence on Russia in terms of energy. It gets 53 percent of its oil and gas resources from Russia. We are not facing those kinds of issues, and even our American neighbours can occasionally have that kind of dependence on Canada.
Therefore, Europe wants to strengthen its relationship with Canada for reasons that go beyond the trade in goods. Part of the issue is political, but it is also a matter of a vision of the progress to be made over the next 20 years and potential exchanges in terms of cooperation, especially in the research and development sector, which is not currently represented in the Pacific.
Senator Rivard: Welcome, Mr. Johnson.
I would like to come back to the Canada-Europe economic agreement. We know that one of the irritants currently preventing the implementation of that economic agreement is the inclusion of a mechanism for resolving disputes between an investor and the state. We also know that there are legal delays and ratifications.
The negotiations did take several years. Why was that shortcoming only identified after the two parties signed the agreement? Is this a major factor that could delay the agreement's implementation? Can you explain that mechanism to us a bit?
Mr. Johnson: We could have a three-day seminar on the topic.
Senator Rivard: You could perhaps give us a quick summary.
Mr. Johnson: Basically, the use of investor-states is a mechanism that has been around since the late 1950s, when Germany and Pakistan signed an agreement, as Germany wanted to ensure that German investors would have certain guarantees in terms of the application of the rule of law.
Since then, 4,000 investor protection agreements of that type have been signed around the world. Canada is currently negotiating, has negotiated or has implemented about 80 of those agreements. However, CETA contains a provision that mirrors part of what is found in those agreements and improves it considerably.
Why are we still discussing that today? Ultimately, it is because this is a chapter like any other, because it is a free trade agreement that will refer to the notion of arbitration in terms of investor-state redress, which is common practice. People who have criticized the European agreement have focused their criticisms on that fact, most of the time describing provisions not in the agreement. Instead, they have brought up some much thinner texts, which are less of a guarantee of a transparent process, such as a process that enables the state to claim its right to legislate and have it very clearly recognized, especially in the environmental protection sector and the social sector.
The CETA text reflects that kind of concern, but, when the agreement was concluded, some criticisms— I would say most of the European criticisms— were expressed on that agreement and caricatured it, presenting it as a text that contained provisions it did not contain. You will say that those criticisms should have been responded to, but the issue is that no one has responded.
So, for a year, the only version of CETA heard in Europe was a negative one, especially because of that investor- state redress issue. I recognize that there are some arguments regarding certain concerns people may have about the content of the text, but, for the most part, the most important criticisms regarding those redress provisions have been responded to in the original text, and some of the criticisms will have a response in the current legal shuffling, I am sure.
[English]
Senator Johnson: You negotiated on behalf of Quebec on the Canada-EU trade agreement. Could you elaborate on the experience of representing a province alongside the federal government in negotiating a free trade agreement?
Mr. Johnson: The reason why the provinces were at the table was essentially to consider and accept the concerns of Europeans as to their main offensive interest, which was public procurement markets.
The European Commission and their advisers know that in constitutional terms, even though there is a clear jurisdiction for the federal government to negotiate international agreements, the capacity of the federal government is limited by sections 91 and 92 when it comes to implementation, and you're in the domain of provincial jurisdiction.
The federal government, for instance, could not force a province to open its public procurement markets for universities or hospitals or school boards. So in practice, the Europeans, who were targeting that as a major objective to justify this agreement in the eyes of many in Europe, asked the federal government to get some guarantees about that. The federal government decided to invite the provinces after Quebec insisted. Why? Because the provinces have both jurisdictional and economic interests in terms of policy, and the federal government accepted that. The previous federal government accepted the presence of the provinces, and I must say it went pretty well.
The fundamental issue as to why it went well is that it allowed the federal government to put on the table a much richer proposal to the Europeans than otherwise they would have, because the provinces could pitch in with issues related to services, subsidies and public procurement markets. That allowed the federal government to put on the table offers which were more interesting than if the provinces had not been there.
At the beginning it was sort of tense. The first meetings with provincial and federal officials on an international negotiation even related to trade was sort of a surprise to some public servants, especially in the federal government, who were, I think, asking themselves why are these people in the room, because they weren't used to that.
But along the way confidence built up through a series of formal and informal meetings, in regrouping of certain provinces. For example, say in fisheries, the Maritimes would get together with B.C. and discuss issues of fisheries, and then they would be able to come back to the Canadian federal negotiator with a position that was interesting in terms of the alignments it represented on the national level. There were all sorts of fora to do that, which we did on dozens of issues, literally.
Senator Johnson: How were the provinces negotiating in their positions? They were integrated along with the federal government, and so you ended up speaking with one voice in many cases.
Mr. Johnson: We did. It's a discipline we gave ourselves that we would always speak with one voice. That didn't mean there weren't tough discussions among us on quite a few issues. But there was a determination that in front of the Europeans we would speak in one voice, through Steve Verheul, the chief negotiator.
There were lots of bilaterals between the Europeans and some provinces. I spent a lot of time, either in the company of the chief negotiator or alone, with the chief negotiator of Europe on cultural issues, for instance, which was a major issue for us, would you believe, and on supply management issues when it comes to agriculture.
I will give you an example how these things can go by an event that happened. A cocktail was offered. I would say after years of exchange with the Europeans, the Quebec delegation in Brussels offered an evening at the residence. All the negotiators were there. There were 120 people in the room. It's a big house. It is going to be sold, incidentally.
The chief negotiator tells me, "Mr. Johnson, I'm sure Quebec will renounce its supply management system,'' knowing that Quebec had pretty clear interests on that. My answer to him was, "A hundred per cent, we will let it go if you totally abolish subsidies to agriculture in Europe.''
I guess that was the end of that discussion, but it allowed, in a very informal setting, to transmit the basic resistance of one party on an issue in front of an offensive interest of another party on the same issue.
That happened many, many times, on many, many subjects, and once again with a clear discipline from the provinces that we would make the effort to never divide the country in front of the Europeans when it came to addressing substantive issues.
Senator Poirier: Thank you for your comments and your presentation. They're very welcome.
Out of the 11 free trade agreements, Canada has a negative merchandise trade balance with 10 of them. However, our overwhelming trading with the United States gives us a positive trade ratio. Beyond the economic benefit of the FTA, what are other benefits for Canada in these agreements, and is it problematic or worrisome if we have a negative trade balance with 10 of the countries from the FTA?
Mr. Johnson: You are talking about the European or the Pacific?
Senator Poirier: European.
Mr. Johnson: It is not all about balance of trade; it is also about investment. It is interesting to notice that there is about $175 billion worth of Canadian stocks in Europe, and about the same amount from Europe in Canada, whereas they are 12 times more populous than we are. A free trade agreement not only allows you to address the freedom of circulation of goods— and of services sometimes, and of capital— but it also allows a context where people get interested in each other, which is exactly what happened in the context of NAFTA.
The trade between the partners in NAFTA, in the case of Mexico, increased 20 times. In the case of Canada it increased fivefold over the period, and all of that translated into economic development for the country.
If we look at trade balancing statically and take just a photograph, it doesn't tell you about the investment, about the change in the texture of the economy. It doesn't tell you about the types of partnerships you can have between two parties as they act in a third country. In that sense, despite the fact that we have a balance of trade with the most important European countries— like Germany, France and Great Britain, which are the three major ones— it is by itself a good idea to have access to the European market, where in certain areas tariffs are still very high. They will go not down but to zero. Generally speaking, you add up to 70 per cent of goods which were subject to some kind of tariff, and they will go to zero in the case of manufactured goods. Once again, maybe we're addressing one of the reasons why the balance of trade is negative in our case.
Finally, there's a nuance I would make in terms of the way we compile data. You have goods that come to Montreal and that will go elsewhere, including in the U.S. You have goods that are part of goods that will be part of manufacturing a third good that we will be exporting. In that sense, we have to look at it much more broadly than just a balance of trade.
Senator Poirier: In your opinion, why would Canada have a negative merchandise trade balance with the ten?
Mr. Johnson: We are a large country with not that many people. Concentration is not a simple thing. All provinces have to deal with that, and the Canadian government, when it establishes economic policy, has to take into account the sort of morcellement, the fractioning of the elements of the economy. That's one part of it.
The second part is that we do remain and are an important trading partner when it comes to natural resources, for most of our partners, and the value added in that is sometimes much smaller.
We are, I believe, going through a profound transformation of our economies in OECD countries. That transformation will be driven by science and by technology, and I think the positioning of Canada in that context is an exceptional one, considering the resources we have, considering the types of universities we have, considering the free flow of persons— or almost— between the United States and Canada.
Canada, in the medium term, in the context of what is almost a revolution in the way the economy is going to function, because of science and because of technology, has a great advantage. In that sense, opening up markets in Europe becomes extraordinarily important, because ours are already pretty much open. Canada has disarmed unilaterally in terms of its tariffs for years. In practice we have fairly few tariffs against Europe at this point. The concession we're making with the Europeans is much more interesting for us on tariffs because they're dismantling 100 per cent of their industrial and manufacturing tariffs over a very short period— 98 per cent of them on the day of implementation, when we get through that.
The Deputy Chair: I would like to follow up on the question from Senator Poirier. You gave a good explanation of the merchandise trade deficit and so on. The numbers are quite shocking for many Canadians when they're looking at it. For example, in 1994, when we signed the NAFTA agreement, we had a trade deficit of $2.9 billion with Mexico; and in 2015, it was $24 billion. When we signed the agreement with Chile in 1997, we moved from a surplus of $75 million to a $1.1-billion deficit now.
A number of things are happening. I am particularly interested in your explanation of the future economy, which is the science and technology and the university base. What is the government not doing to commercialize the scientific research being done in this country so that we can sell higher-value commodities rather than low-margin commodities so that we can change some of these numbers around?
Mr. Johnson: It is interesting that you quoted Mexico and Chile — and you could have quoted Colombia; indeed the trade deficit has increased for Canada with these countries over the years. But generally speaking, when you look at the growth, and when you look at the prosperity, it didn't thwart that prosperity and growth. With more-or-less fast- developing countries, in some cases, that is what usually happens.
In the case of Europe, we're dealing with countries — except for parts of the countries that used to be Central Europe and that are now part of the European Union — that are fairly mature in terms of their economies.
We're dealing at the same level. I don't anticipate that we will increase our trade deficit with Europe. Quite the contrary, precisely because they're dismantling their tariffs.
To come to your second question — which is really how we operationalize the new economy — I think the new economy by itself will work out. Markets will be a large part of the answer. I think cooperation between economic policy-makers, departments of finance, departments of industry, and cooperation and consultation with universities has become important.
It is important that universities open up to free capital. The U.S. does it a lot. We have an approach — which is sort of fairly European — where we resist the presence of big money, which is private, in universities. I think we should loosen up a little on that. It might be a good idea.
Why? Because industry needs knowledge. Knowledge comes out of R&D, much of which is done in universities. I have been working for the past 15 years with a group of universities in France and in Canada on the Entretiens Jacques Cartier, which takes place every year either in Lyon, France or Montreal. They bring together universities on both sides, from Canada and from Europe, mostly from France, in the Rhône-Alpes region.
I'm impressed by what I have seen in changes in the past 10 years, where universities here as well as in France are opening up to the necessity of some type of direct cooperation with the private sector and private capital. That, for me, is where we will have to go in Canada; the Europeans are beginning to do it, and I'm talking about continental Europe, mostly. Great Britain has had no qualms with that for many years, like the U.S.
Senator D. Smith: The background paper prepared by your staff for today's meeting is called, "Canada, the World Trade Organization and free trade agreements: an Overview.'' It is an excellent paper and deals a lot with free trade agreements in general, and NAFTA, TPP and the WTO.
We currently have before us a specific study that relates to Argentina. I'm curious as to whether or not you can think of aspects, issues and subjects that might have specific reference to Argentina or pan-America and their OAS stuff that you could identify so that we are aware of them? We are working on Argentina, and if you have any specific references to that subject, we would like to hear them.
Mr. Johnson: I do not have particular comments on that. If I had had the briefing paper on Argentina, I would have gone through it and tried to give you my 10 cents' worth of opinions on it, but I do not have the briefing paper. No, I don't have anything in particular to say about Argentina and its relationship with Canada when it comes to trade.
Senator Ngo: Twelve countries participate in the TPP negotiation with the signed agreement, and Canada is one of them. Does Canada support expanded membership in the TPP to include other countries? If so, is that support limited to certain countries only?
Mr. Johnson: It is an interesting question. I can answer from the outside because I am not one who formulates Canadian foreign policy. You are touching on a subject that is actually politics at the international level, or I should say political issues in the international community, which is why these regional and bilateral agreements are so interesting.
In a perfect world, we would have the WTO and everybody would comply with that. The reality is, A, we are not in a perfect world; B, there are opportunities we must not let pass; and C, when we realize that we can do more trade with areas in the world which are of interest to us, we're concerned often about the broader picture.
If I take the broader picture of Canadian foreign policy in general terms, it is that on any major issue we have to get a sense of what is the American interest, how is it expressed and how important it is, on a given issue, to align or not align with the U.S. There are costs to both choices for Canadian foreign policy. If we align with the U.S. on certain issues, there's a cost with some of our other allies and friends across the world. If we don't align with the U.S., sometimes it is at a price.
The decision to open up the TPP eventually, when it is implemented, because it is ratified by a sufficient number of countries representing a sufficient amount of the trade and populations concerned, will be a strictly political issue.
I would gather that a smaller country in the Pacific area would not pose bigger issues, but I would gather that a very large country which borders the Pacific might pose more complex issues. In that sense, it is up to foreign policy policy-makers and the Department of Foreign Affairs and International Trade and Development to see the medium and long term on these issues and to try to define the interests of the country in a perspective which is not six months, a tweak time or even an election. Maybe that's why their Senate sometimes—
Senator Johnson: Absolutely.
Mr. Johnson: I think it is pretty fundamental to consider where we think we might be in 20 years. It is more and more difficult to predict, and what is of even more concern for me is that that question sometimes is totally put aside and we think of where will we be next month. When we think about an issue like the one you just raised, senator, we have to ask ourselves deeper questions than, "Where will we be next month or next year?''
[Translation]
Senator Ngo: Based on your experience, are human rights issues as important as the objectives of bilateral negotiations? As you say, it may be easier to have those exchanges in an informal context.
Mr. Johnson: The human rights issue is not formally part of the CETA with Europe. However, it was raised at the very beginning, especially by the Europeans, but in a context that gave rise to a separate negotiation for the strategic partnership agreement the provinces were not part of. However, that partnership is a political agreement between Canada and the European Union on issues mostly related to national security, but also to the establishment of a shared vision within multilateral forums on issues such as human rights or environmental protection.
I would say that it is easier to negotiate a certain number of provisions and even trade agreements with Europe, with which we share a basic vision of the law and the rule of law that is nearly 400 years old. We have a traditional vision of the age of enlightenment, of its consequences and of its integration into states' national legislation that is self-evident, or almost. That is not always the case with other countries or other civilizations that have been influenced by a different vision of the state, of the state's role, of the concept of equality, and so on. Therefore, trade agreements are not an ideal way to try to resolve those issues in texts, but they provide exceptional opportunities to discuss those issues in informal contexts and in a context of bringing people together through trade. In that sense, I am among those who believe that the trade vehicle is a useful vehicle for states to encourage a permanent dialogue on matters other than trade.
Senator Rivard: Over the course of the negotiations, parliamentarians and the general public could not find out what the snags were in the negotiations, and I think that is normal. Now that we are nearly at the inception, what were Europe's irritants when it came to Canada? Among others, I am thinking about seal products, oil extracted from oils sands, and in Quebec's case in particular, the acceptance of ice wine and ice cider— those are Quebec issues. Was it difficult to come to an agreement on issues that may have derailed the negotiations? Maybe not for ice cider and ice wine, but the witnesses who appeared before the agriculture committee were worried that their products would not be accepted.
Congratulations on the European cheese quotas, as we could not have opened up the entire market. I believe it is thanks to negotiators like you that we managed to impose a quota to avoid the flooding of the market.
Can you tell us more about that, or is it part of private or confidential negotiations?
Mr. Johnson: Seals and seal hunting, as well as oil sands development were very public issues, but they were not on the table. Those issues were resolved or should be resolved in other forums. At the beginning of negotiations, that is all we talked about, and that brought out some excerpts from an old documentary on seal hunting in the 1940s, which was admittedly not very elegant back then. That also gave an opportunity to all sorts of groups opposing the use of fossil fuels to focus on the use of oil sands. Once again, that was not part of the negotiations.
As for ice wine, producers can be reassured, as the agreement signed initially by Canada with Europe in the late 1980s and renewed in the early 2000s was integrated into the CETA. Therefore, that agreement, which has helped our ice wine and ice cider industry's development, has not been modified, and it is the status quo when it comes to that.
Senator Rivard: However, the imposition of quotas on the importing of European cheeses is part of the negotiations, as the Europeans would have liked to have no quota. So Canada has made some gains to protect the dairy industry, among others.
Mr. Johnson: Absolutely. You are right, even in Canada, earlier in the negotiations, people were momentarily shocked and were wondering whether it was the end of the supply management system. My mandate from the Government of Quebec was very clear. It was to defend the supply management system, and we did that. The European ambitions may have been a bit too high, and they accepted an increase of 17,000 tonnes of cheese they could put on the Canadian market over a five-year period. That is mainly in line with the increase in the consumption of cheese anyway, be it domestic or foreign. In principle, the market— and the study was carried out by the federal government— will absorb through the anticipated increase in consumption a large portion of those additional quotas granted to Europe. I want to remind you that the Government of Quebec, from the beginning to the end of those negotiations, did not make life easy for the Canadian negotiators, for whom I have a great deal of respect. Negotiating agricultural issues is a headache for any international trade negotiator. Therefore, Steve Verheul— a man who is very familiar with the sector, as he spent part of his career in Geneva negotiating agricultural issues for Canada— ultimately had to make a decision, with his minister, that the federal government was prepared to accept, and the Government of Quebec refused to define the concession and let the federal government take on the responsibility for it. That being said, I think that our line of argumentation was strong enough for the federal government's decision to ultimately be a decision everyone can live with.
[English]
Senator Cordy: This has been most interesting. In response to Senator Ngo's question, you spoke about the rule of law in human rights. You said that maybe trade agreements are not the place to be dealing with such things. Yet every time a trade agreement is to be signed between Canada and another country, or particularly a large group of countries like the TPP or in South America, those kinds of issues are certainly brought to the forefront by Canadians. It's understandable because they don't like to think that Canada is saying it is okay the way you are treating your people from a human rights perspective.
How do we say trade is trade but we certainly don't agree with your perspective on human rights? How do we balance the two when we're coming to an agreement? It's hard to separate those in the minds of Canadians.
Mr. Johnson: You have to give a life of its own to the human rights issue. Trade negotiations are an occasion to exchange on priorities as well as what the texture of your own society is in order to explain certain things you will do or not do in the case of trade. That creates an area where people can discuss things like the relationship with the environment, the degree of intervention of governments when it comes to environmental issues, human rights and respect of labour rights.
These are three important subjects which are in the background of many of these negotiations, depending on who the actors are. It's always a delicate area. I'm among those who believe that during the trade negotiation, which often lasts years, you can organize in parallel a series of events in which you have academics, politicians, officials, people from tribunals, people from unions and parts of civil society, largely in the environmental sector, and they hold activities which then perpetuate themselves beyond the negotiation. That's a practical approach to these issues.
You're not implementing law. You're not in a context where you will sanction or use the sanction capacity of a trade agreement because of a human rights violation; but you're in a context where the development of human rights as an important issue in the international stage can thrive. That's what should be done, and I think Canadian foreign policy can reflect that by being systematic about it.
The Deputy Chair: Thank you for your tremendous overview at the beginning and your answers to the very detailed questions. I want to thank you for being here.
We have before us, in Ottawa, Mr. Dan Ciuriak, Director and Principal, Ciuriak Consulting; and on video conference we have Eugene Beaulieu, Professor, Department of Economics, and Director, International Economic Policy, University of Calgary.
Thank you both for accepting the invitation to appear before us. We look forward to your presentations.
Dan Ciuriak, Director and Principal, Ciuriak Consulting Inc.: Thanks to the Senate committee for having me here.
Canada is at an historic juncture with regard to trade policy. The Canadian Parliament will soon be considering the CETA and the TPP for ratification. And looming ahead of us is also the potential conclusion of the negotiations between the United States and the European Union on the Transatlantic Trade and Investment Partnership. These will have far-reaching implications for the world of trade.
The multilateral option, which the committee has been considering, is off the table. The Nairobi WTO Ministerial Conference ended with a rupture, which was remarkable in terms of the communication, where some members affirmed the Doha Development Agenda but others openly rejected it. In my view, this is now the death knell of negotiations at the WTO.
Such ruptures are normally papered over with constructive ambiguity; even if there's disagreement inside the room, ministers walk outside and give the alternate interpretations of the agreement, but they normally do paper them over. In this case, it was open.
The reason for this is clear: Trade and geopolitics are inevitably joined at the hip, and here I echo the remarks of Mr. Johnson before me. The previous instance where we had a similar sort of rupture was with the Havana Charter back in the 1940s when the United States walked away from that charter, which was supposed to establish the International Trade Organization as the third leg of the stool, with the IMF and the World Bank, as part of the Bretton Woods framework for the post-war reconstruction. Today, we have the United States walking away from the Doha Development Agenda because the agreement or the negotiations there no longer meet its needs. The needs are geopolitical in nature.
President Obama has said openly that, through the TPP and the TTIP, the United States hopes to write the rules of the road for international commerce for the future and is doing so in a contest with China. In a blog, Mr. Obama wrote that:
[English]
. . . China wants to write the rules for commerce in Asia. If it succeeds, our competitors would be free to ignore basic environmental and labor standards, giving them an unfair advantage over American workers.
The emphasis is on environment and labour, but when we examine the TPP, the emphasis is entirely on intellectual property.
The WTO is not a place to advance intellectual property interests, because tightening rules on intellectual property is not in the interest of the vast majority of its members. It has been difficult to make yards there. Therefore, the activity on trade negotiations has shifted into the plurilateral agreements that are dominated by the major parties with intellectual property interests: the European Union and the United States.
The implications of this are problematic for countries that do not create a lot of intellectual property. The name of the game in the innovation economy is monopoly. You create intellectual property, you build companies on it and then you charge the world rent, as it were, for the intellectual property they use which you have created. The trick in this particular game, or the interesting feature of this, is that whereas in the game of monopoly you have to buy the properties, in the game of intellectual property, you create the intellectual property.
We live in a patent mill environment. The United States issues now close to 600,000 patents a year. There are 6,000 patent examiners, so do the math in terms of how many patents they are considering for validity and for innovativeness on a daily basis. China is now passing the million mark— a million patents a year. Canada issues 20,000 patents a year. In the game of creating intellectual property, we are falling well behind.
With international treaties that lock us into enforcing the intellectual property that is created by our partners, we then wind up agreeing to enforce and to honour a vast amounts of intellectual property on which there is no discipline in terms of its creation.
This is a recipe for disaster in the sense that you have an intellectual property bubble building up with massive amounts of new patents being issued, many of them — this is well documented— for so-called inventions that have actual prior art established and so forth. Most of these are non-performing in terms of generating wealth, but they do generate the requirement for companies to cross-license, which is expensive. It raises the risk for companies of being attacked by patent trolls or being sued in the courts for infringement on issues that probably had no legitimate and innovative step— which every company's engineers would have solved for themselves when the challenge came up.
This is the environment that we live in. For Canada, the calculus on how to proceed is very difficult. The TPP will bring relatively modest gains in terms of incomes. I have a paper coming out shortly in the C.D. Howe Institute. We haven't finalized the simulations, but we anticipate that the gains, measured conventionally, are in the order of $3 billion to $4 billion for Canada in today's Canadian dollars. The gains would be largely due to tariff elimination. The TPP, carefully scrutinized, does not liberalize services very much and foreign direct investment hardly at all. The main gains in services would come from increased certainty to the extent that one buys into the theory that increased certainty through binding of commitments matters.
The offset to that is the fact that there will be a cost to using preferences. These are the costs of compliance with rules of origin. There's a welfare cost to the administrative burden on companies, and this mostly impacts smaller companies.
The other offset is the subsidies that Canada will be issuing to deal with the dairy situation, and this will detract from the welfare gains from the agreement that we measure.
The wild card here— and the critical issue from my perspective— is that we are not equipped to measure the impact of intellectual property provisions on trade. The models we use draw on a database that was developed at an agricultural college in the United States, Purdue University. It has a well-articulated agricultural sector, but it doesn't break out pharmaceuticals, let alone a distinction between generic pharmaceuticals and patented drugs. It does not break out software, movies or digital media.
We are well equipped to model, evaluate and provide you advice on the impact of the TPP on the 20th century economy. We're not well equipped to provide you with advice and analysis of an agreement on the 21st century economy. This is a significant liability in our analytical capacity. I apologize for my part that we will be putting out studies that will give numbers that do not reflect the intellectual property elements of these agreements.
In terms of the costs of this, they're going to be negative for most countries. New Zealand has estimated that the copyright extension would cost it about $10 per person eventually. When you add up this kind of figure at the national level, it is quite significant. Health care costs are likely to rise. We don't know to what extent we will get an offset to that from increased innovation and R&D in Canada, but we are not the world locus for that kind of activity.
Equally important, in my view, is that the TPP doubles down on an economic policy framework that has led the world into a situation of stag-deflation. For those of you who may recall the 1970s when we were in a situation— the opposite situation— of stagflation, at that time the solution to breaking out of a situation of stagnant growth and high inflation was to expand supply. So we had the supply-side revolution.
And this policy executed over 40 years has left the opposite situation of stagnation and deflation. The TPP reinforces that economic model. It is not an answer to breaking out of that particular supply-side trap.
Senators, you may have seen my op-ed in The Globe and Mail perhaps a week ago on this issue. I do give numbers here. They may be dated. Basically, it says Canada has underperformed in this recent period, and with the TPP, we would be reinforcing this particular economic model rather than seeking a new economic model to break out of the situation.
If the TPP is not the answer in these areas, what are the options? As I said, the WTO option is off the table for the time being, I think. There's no reasonable expectation of that being resumed.
Bilateral trade agreements have the problem of rules of origins, which are tailored to each agreement. So if a company sets up its supply chain to meet the CETA requirements, it may not be able to satisfy the rules-of-origin requirements for TPP. If we then were to go out and strike a deal with China, the company that satisfies TPP rules of origin might not satisfy the rules of origin for the Canada-China agreement.
For large companies with global sourcing and many production facilities, this might be surmountable, but the SME community is where the major gains from trade would lie in terms of the impact and the dynamic gains from trade of companies entering into international commerce, then investing in R&D, training and improving their capital framework and learning by exporting. For those small companies, serial bilateral negotiations are not a good deal. You will enter into one agreement, but the subsequent ones are not useful.
The main option that the committee has not listed in its topic is unilateral liberalization. I have co-authored a paper on the gains from trade of unilateral liberalization. The gains are fairly significant in terms of income and rival those of the CETA and TPP combined. They have the advantage of doing away with the administrative costs of preferential trade, and that's a major welfare gain.
Canada could consider adopting a position of being the Switzerland of North America, being free and open to trade and investment but not locking itself into a rules regime. Switzerland does not necessarily lock itself into the rules regime of the European Union. That is one option which I think the committee might consider.
However, for Canada it is a difficult situation in terms of ignoring the TPP and CETA, which would marginalize Canada in our two major markets, the United States and the European Union. At the same time, locking ourselves into those agreements means buying into a rules regime that has not worked for us in the past decade. We need to find a way out.
I think it is a difficult decision. Canada needs to do the math on this and urgently needs a strategy on trade and innovation.
The Deputy Chair: I believe our video link from Calgary is working, so I will ask the professor for his opening comments. We then have a list of senators who are prepared to ask questions.
Eugene Beaulieu, Professor, Department of Economics and Director, International Economic Policy, University of Calgary, as an individual: Good morning. I would like to start off by pointing out that Canada has benefited from unprecedented growth in trade. The world trading economy has grown over twice as fast as the GDP of countries, and that world trade and growth in world trade has been a major engine of growth for the world economy. Canada has benefited from that. Canada, in turn, has also benefited from a rules-based approach to trade. It is important for Canada to be part of all and any efforts to establish rules that will support and enhance Canada's trading environment.
I was asked to comment on bilateral, regional and multilateral approaches, so I will do that in a few brief comments.
The first comment and first key message is that the Canadian government should not take the openness of the world trading system and investment for granted. We have to work hard. We have to play a leadership role and push forward along a multi-faceted and pragmatic approach to liberalizing trade and investment. We have to get our own strategy and policy in place, but as a small economy, we have to look to rules-based systems.
The other key point I want to mention— and I won't elaborate on this very much; I will focus mostly on trade— is that we have to understand, and I think we do, that trade and investment are intrinsically linked. With global value chains in the globalized world economy, we have to keep in mind that trade and investment go hand in hand. Keep that in mind while you listen to my remarks.
You could argue that Canada has taken a pragmatic approach to a rules-based international trade and investment system. We have participated at the multilateral level, we have participated in bilaterals, and we more recently got involved with mega regionals. These can be effective and prudent ways for us to engage in a multilateral and rules- based trading system.
One of the key challenges that we face as a nation and as a world economy currently is that the world trading system is contracting. This really started with the great trade collapse following the financial crisis in 2008, but it has led to what some observers have called the global trade slowdown.
One author has pointed out that this major engine of growth that is international trade has lost its mojo. That's the title of a paper by Davies in 2013.
The great trade collapse was really a synchronized across-the-board decline in world trade following the financial crisis, which really did highlight how integrated the world economy is and was largely based on the fact that we have global value chains. When the decline of demand hit the economy, it didn't just reduce trade in final goods, it reduced trade in intermediate goods, and that led to an across-the-board, across-countries, across-industry collapse in world trade. Subsequently, the world trading system did rebound a bit. However, since 2011, it has basically flatlined and more recently declined.
We have to be careful. We have to be vigilant. We have to recognize that we can't take growth and trade for granted. We're losing a tremendous engine of growth by this decline in trade.
A big question— and I think it is still open for debate— is whether or not the decline in trade is cyclical or a trend. Again, that's somewhat debatable. However, there are concerns that this is a relationship that has broken down.
Why has trade collapsed? A strong dollar. A lot of people point to falling commodity prices, which have played an impact; also, a retrenchment in supply chains. China and a lot of countries are looking inwards to establish supply chains rather than going offshore. That's affected world trade.
Increasingly, countries— and again this is somewhat debatable— have become somewhat more protectionist. They put up barriers to trade, and that has contributed to the fall of global trade.
It is interesting to point out that shipments of motor vehicles have actually increased over 10 per cent since October 2014, so over the past year. When we have seen this enormous decline in trade shipments of motor vehicles have increased, whereas a lot of other manufacturing products, where more trade restrictions have crept in, have declined. That has led to this decline of world trade.
I do think, although it's somewhat debatable, that there's pretty good evidence that there are increasing distortions. A lot of them could be in the form of export subsidies, which are a bit harder to detect and a bit easier to get around the trading rules, but countries are increasingly looking at protecting their domestic markets. That should be of great concern to Canada. Again, Canada is a country that benefits enormously from an open and transparent trading system based on rules. We need to pursue that.
What should Canada do? Well, I think we have two really important agreements in front of us that we need to ratify. We need to show a leadership role and push the TPP as hard as we can. This is not a done deal. There are political and other obstacles that could be in the way of a ratified TPP. Canada could play a leadership role in ratifying the TPP.
Canada also should ratify the CETA agreement and make every effort we can to ratify that agreement as soon as possible. Both of these agreements are broad in scope and bring us into a very large trading group with rules that will benefit Canada.
The multilateral system again is very important for Canada, but it has really stalled out. This isn't anything new. This isn't news. We know that nothing has been happening on the world multilateral system for a long time, but fairly recently, in 2013, the WTO did come to an agreement on trade facilitation, which recognizes that there are a number of hindrances at borders that could easily be removed and that would reduce costs of trade by 10 to 17 per cent.
Canada has not ratified that agreement on trade facilitation. Again, if Canada did show leadership in that regard, that could help with reaching the two thirds of members required to ratify that agreement and make it a WTO rule.
I do think we should continue to work at the multilateral level, but with not a great deal of hope or prospect on moving forward there. One thing to keep in mind is that countries of the world have been signing bilateral investment treaties, in Canada the Foreign Investment Promotion and Protection Agreements. We've been signing these bilateral investment treaties at a rapid rate, although it's slowed down a little recently; but Canada has been increasing their numbers.
Those bilateral investment agreements might benefit from a more multilateral approach, but the multilateral trading system is cumbersome. We've taken a pragmatic approach, and that is why we focused on bilateral and multi-regional trade agreements. It's important for Canada to show some leadership on the North America agenda. We've dropped the ball on the North American agenda, and Canada needs to step up and push forward on that.
We also have to manage our relationship with the United States better. We haven't done very well on that file in recent years. We need to improve on both the trade and investment fronts. We have to be prepared to manage trade irritants that are coming up, such as softwood lumber. We have to manage our relationship with U.S. while looking more to a North America approach, not just a bilateral Canada-U.S. approach.
Although it adds complexities, the fundamental argument for free trade is either a multilateral or, as Dan has pointed out, unilateral case for free trade; but those aren't working in a practical way, so negotiating bilaterals or regionals is a pragmatic approach and option.
On that front, we have begun and extended over a long period of time negotiations with India. We need to push forward on that. We need to look to China as well. We recently signed a free trade agreement with Korea, but we haven't done enough to engage in Asia in trade and investment. We need to do a better job of that. Looking to these large countries is an important option.
One problem is slow movement. I don't think these actions, even if we take them, will do very much to counter the impact of the declining world trade. That, of course, is a major concern, which is probably, again as Dan has pointed out, an important consideration for G20 and macroeconomic coordination. Certainly, trade policy and reducing irritants in trade and investment are an important part of that effort.
I'm happy to answer questions.
The Deputy Chair: Thank you; you came through loud and clear.
Senator Johnson: Thank you and good morning, gentlemen. I have a question I would like both of you to answer, please. There's been a lot of criticism worldwide of secret investor-state dispute settlement mechanisms. They're criticized for eroding national sovereignty and putting the interests of multinational corporations above those of national parliaments.
What are your views on ISDS mechanisms, and do those criticisms hold any water? Would multinationals be able to sue national governments, even for anticipated losses due to national legislation on the environment or social issues?
Mr. Ciuriak: I guess there are legitimate concerns. The proliferation of agreements with ISDS has led to a growing number of suits. There are some famous cases out there. For example, Australia was sued by Phillip Morris in Hong Kong for plain-packaging rules on cigarettes. That led Australia to reject signing any future agreements with ISDS. Germany was sued for closing a nuclear plant, which led to Germany's reluctance to sign onto the CETA as long as it has ISDS. I don't know the current German government position on that. There are concerns. The number of outstanding suits is not that high, and governments have won in quite a few cases; but the concerns are not without foundation.
Mr. Beaulieu: Importantly, these bilateral investment agreements or bilateral investment treaties typically include ISDS, as does CETA. The concern is about sovereignty. When we sign these kinds of agreements, implicitly we are giving up some sovereignty in how we manage our industries and how we govern. Any trade or investment agreement will have a sovereignty component to it.
The ISDS gives companies a right to sue governments if they're being treated poorly and outside what they consider fair and reasonable. I'm not a lawyer, but I have consulted with lawyers on this question. The data, as Dan has pointed out, show that the number of suits is not as high as some alarmists would have us believe. Some people argue that these cases are biased in favour of corporations; but the data don't bear that out. Governments win these suits. The fundamental reason we have these in our agreements is to give businesses some recourse if they're treated poorly in a country that may have weak institutions. Canada's original and ongoing motivation for signing these was to protect our companies when they invest abroad and about unfair treatment in local courts.
Because these are negotiated agreements, we're giving up reciprocal rights on this side, so companies are allowed to sue governments. You have to recognize that this is not different from local companies. There's an avenue for local companies to sue governments as well.
The one aspect of this that really creates a lot of tension and criticism is that in a local matter, it would be a local open-court system, whereas in these cases, it's a closed-door hearing by legal professionals. That part of it is controversial. The implications of it haven't been as dire as some people have made them out to be. Certainly, it does impose discipline, and as Dan has just pointed out, some countries like Germany who actually originated these provisions have started backing off from them and trying to move away.
I don't know what will happen with ISDS. I'm not a big fan of having closed-door systems like this, but it is a way to ensure fair treatment by foreign companies that might not get it in a local judicial system.
Senator Johnson: Would it be a major concern, however, with regard to environmental going forward? Does the same apple? We don't know that, but it is a huge thing. There are a lot of things going on in that respect with regard to environmental practices.
Mr. Ciuriak: If I may, the main concern should be with climate change issues, which are the major environmental issues facing the coming generation. As long as the issues are being litigated in the WTO, you have a transparent and well-established dispute settlement mechanism. The Appellate Body has demonstrated that it is sensitive to the Article 20 issues regarding the right to legislate in areas that are of importance to social and environmental issues, and it has struck a good balance, overall. And there is a coherent body of law that emerges from the WTO system.
ISDS, on the other hand— if environmental issues were to be tackled in these tribunals — there is no coherent body of law, it's not transparent and we don't know how this outcome will emerge. My concern is that, and I'm on record saying it, one of the most dangerous features of the emergence of ISDS is the issue of climate change. That's my main concern.
Notably, by the way, the TPP excludes tobacco from the ISDS provisions, I think to satisfy Australia's concerns.
Senator Johnson: Do you have any further comments, professor?
Mr. Beaulieu: We have these kinds of provisions in NAFTA and the Canada-U.S. Free Trade Agreement.
I would reiterate that the trilateral bodies that hear these cases have not been shown to be biased against governments or government regulation. The key thing is to make sure that the rules are fair and there is national treatment.
We have a case right now where a Canadian company, TransCanada, is going to go to a NAFTA panel because of treatment on the Keystone XL pipeline, and it's not because it's an environmental rule; it's because they feel they have not been treated fairly— that the same government has treated domestic companies in a different way.
So that's the case. It's not because it's an environmental regulation. If you're going to shut down a pipeline because of an environmental reason, treat domestic firms the same as you do foreign firms. It's really about ensuring foreign firms are treated in a fair and national-treatment manner.
Senator Oh: I have two questions. My first question is on intellectual property. As we know, China filed 1 million patents last year, and Canada filed 20,000. Many other countries are registering all kinds of intellectual property. Intellectual property seems to be one of the hottest topics on any trade delegation to overseas or anywhere. How do we handle this?
Second, we have so many trade agreements— TPP and FTAs; small countries get together; the ASEAN have their own trade pacts, and it's the same thing for South America. They have many trade pacts. Who supersedes these trade agreements? Which ones come first when you enter into an agreement? Are we creating more trade barriers between countries? Are we having more difficulties to trade these days?
Mr. Ciuriak: First, yes, the IP issue is a big issue, and the 21st century economy is an innovation economy— the main business model. When you buy a Microsoft product, you don't buy a product but a restricted-use licence, basically for the intellectual property.
As I mentioned in my remarks, the way you make money in this economy is that you create intellectual property. The problem is that when everyone goes about this at the same time, you have this bubble of intellectual property being built up.
I would point out that Albert Einstein was once a patent examiner. The question arises, what would have been non- obvious to Albert Einstein? You have 6,000 patent examiners in the United States and 1,000 in Canada who are not Albert Einstein. To them, what is not obvious might actually be quite obvious to a PhD technical engineer working for Microsoft or Apple.
So we have this proliferation of low-value patents. This creates patent thickets that actually impede innovation. What we're seeing in the innovation age is a waning business dynamism and a slowing down of innovation. We now have people writing long books about maybe the reason for this is the fact that our innovations are no longer as good as the innovations of the previous generation.
But to me, there is an intellectual property bubble building up, and it will have the same damaging impacts on the innovation economy as the financial bubble that burst back in 2007-08.
The way you move back from this is through a strategic arms limitation agreement, like the nuclear agreement between the United States and the Soviet Union, whereby you impose disciplines on the issue of patents. You enter into a treaty that requires that patents now have a legitimate innovative step. There is no way on God's green earth that 600,000 patents in the United States and 1 million in China are actually generating legitimate new ideas that would be non-obvious to the smartest people on this planet, working in a normal environment in an industrialized innovation society.
To me, the pathway out of this lose-lose proposition whereby we create more and more intellectual property in order to profit from the innovation society but then create barriers to innovation that slow down overall growth— the way out is a strategic arms limitation. You agree to tamp down on the issue of low-value patents.
But we are not at the point where the leading players are there. And Canada has no leverage in terms of trying to engineer that.
We have to deal with the issue: How do you survive in a patent-mill world?
Mr. Beaulieu: As Dan has argued and illustrated, the whole idea of the patent is to give an incentive and a return to the creators to design and create technology and to undertake innovation. That is the role. It has also been argued today that there's a bubble of intellectual property. Certainly the discipline on low-value patents is problematic and leads to big costs in terms of actually undertaking innovation such that the very system designed to create innovation is actually putting some sand in the wheels of innovation.
In terms of tying that back to trade and investment agreements, Canada does have intellectual property rules. We want our trading partners to recognize intellectual property that Canadian firms have created. We again need transparent rules, and we need to have a rules-based system that will recognize patents and intellectual property as it's developed.
We need to be part of that system. I agree with Dan that we need to fix it. We need to be part of an effort to fix the patent system.
But that doesn't mean we should not participate in the TPP. We should participate in the TPP, ratify that and, in the meantime, work to reform the patent system internationally.
Senator D. Smith: I suppose in theory we're all sort of like free trade agreements and things like that. I like to keep it simple. I think we have 11 of them. When you ask for statistics on them, we seem to be getting the short end of the stick on almost all of them in that we import more than we export. Are we doing something fundamentally wrong, or what are we missing here?
Mr. Ciuriak: The issue of bilateral balances was addressed by the previous speaker, Mr. Johnson.
My observation is as follows. I did a study when I was at Foreign Affairs, as Deputy Chief Economist there. I looked at the bilateral balances of Canada with every single country in the world. We have balanced trade with only a very few, and those are with small Pacific islands with whom we trade very little. At the time the issue was Korea. Canada has a bilateral deficit with Korea of about 2 billion or 3 billion, and that was one of the smallest bilateral deficits that we had. It's not normal in a multi-lateral system to have balanced trade. That's the first basic point.
The fact that there is a bilateral imbalance that even grows as a result of a trade agreement is not evidence that the trade agreement itself is not working for you. What you need to look at is your overall global balance: whether or not the system you're putting in place might include, for example, importing more and better sophisticated input products which make your products more successful in third markets, and whether or not your overall global balance works. Canada was doing well in terms of overall trade performance for quite a long time. In the last decade or so, that has disappeared. The free trade agreements have not worked to alter that. On paper, if you analyze these agreements, they promise that there are balanced benefits for both countries from putting in place an industrial structure that's more efficient for both countries.
There are so many other factors: exchange rates, recessions. For example, in Canada, shortly after we ratified and implemented our agreement with Korea, we had a case of BSE emerge in Canada, and Korea shut down the beef trade. This was one of the biggest areas of potential gain for Canada in that deal. These are unexpected things, and they do happen. Our analyses of trade agreements are not a forecast of what will happen. What they do tell you is whether the structure you put in place will, over the long run, yield you a stronger economy. I believe the economics in that regard.
It is not encouraging to see that we haven't had any surplus cases.
Senator D. Smith: I know. That's why I'm asking you.
Mr. Ciuriak: I think it's worthwhile to do ex post analyses. We do very little of this in Canada, to go back and look at the agreements as negotiated and how they have performed.
The European Commission routinely commissions, at the five-year mark, a performance review of agreements. I know for example that Foreign Affairs has looked at the case of Chile, and we determined that the main factor there was that copper prices soared, and we're a big copper importer from Chile. It wasn't about the agreement. There are other factors that enter into these things. It does warrant study.
Senator D. Smith: Depressing.
Mr. Beaulieu: Again, thank you for the question. I agree with you, senator, that we should keep it simple. The simple answer is that you do not measure benefits from trade by looking at a trade deficit. That's a fundamental and important aspect of this. Countries are going to import more than they export, especially at the bilateral level. Even if we run a deficit in trade, that doesn't mean trade is hurting us. We are a very open economy. We export a lot, we import a lot, and we import more than we export but, that doesn't hurt our economy. It has been a tremendous engine of growth.
If you look at the impact on Canada of the NAFTA and the Canada-U.S. Free Trade Agreement, you can't measure this in terms of increasing or decreasing trade deficits. The fact of the matter is that trade within North America has expanded enormously, and that has had significant impacts on productivity and long-run growth in the Canadian economy.
I don't know what more to say on that. Trade deficits aren't a measure of the success, or not, of trade.
The Deputy Chair: The counter argument is often advanced that our trade deficit with Mexico when we signed NAFTA in 1994 went from $2.9 billion $to 24.1 billion in 2015. A large part of that was the automobile industry decamping from Canada. How do you address the argument about the manufacturing decline since so many of these trade agreements have come into force?
Mr. Beaulieu: Manufacturing is declining in industrialized countries with or without trade. The trade agreements may have been shown to contribute to that, but where some industries within manufacturing are expanding, some are contracting. There have been productivity improvements, and we are part of a North American auto sector that we wouldn't be part of if it wasn't for, first, the auto pact and the Canada-U.S. trade agreement, and then NAFTA. Now TPP, by not being a part of that, would jeopardize Canada's position in a global value chain of autos.
The trade deficit should not be a concern. What should be a concern is that we have access to, and we have opportunities to be part of, a global trading system that allows our manufacturing firms to be more productive and more creative and more innovative.
Mr. Ciuriak: I would add the following comment: If we go back and look at the experience with the Canada-U.S. Free Trade Agreement, at the time that we signed the agreement and implemented it in 1989, we were also introducing the GST, and the Bank of Canada ran a high-dollar policy to offset the inflationary impacts, and we then entered a recession. We had a rather traumatic first three or four years with the Canada-U.S. Free Trade Agreement. Dan Trefler, who is Canada's leading trade economist, wrote at that time that he was dismayed and thought he was part of the group that betrayed Canada in encouraging this deal.
Over time, Canada recovered. It took a while, but we did recover, and I think the consensus on the Canada-U.S. Free Trade Agreement is that it was of net benefit to Canada. As Eugene said, the major issue was not balance of trade but rather the overall expansion of two-way trade, which increased productivity in Canada and made Canada a much stronger competitor on the global stage. That tells you that the context in which you enter a trade agreement does matter, and after the traumatic first three or four years it can take a long time to recover the income lost if you are not prepared to deal with the competition. If Canada is entering a horse in a TPP race, and we don't have the horses and are coming up against War Horse and we wind up eating dust, that will not be comfortable for the first few years, even if, in the long run, the productivity gains from expanded regionalized trade within the TPP region compensate, as the trade models suggest they will. One concern I would have right now, and this goes back to the innovation issue and the manufacturing decline, is that the last period saw a significant decline in Canada's manufacturing capacity. The number of companies with global footprint in Canada has declined. We have not had the next generation of significant new firms emerge, and that reflects poorly on our innovation system. We are entering this new era of innovation and trade agreements with not the strongest stable of horses to enter the race. That would be my concern for this committee to examine.
The Deputy Chair: Thank you, gentlemen, for your insights today. Obviously by the questions, you caught the attention of all the senators, and we appreciate your participation.
(The committee adjourned.)