Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 19 - Evidence - Meeting of November 20, 2014
OTTAWA, Thursday, November 20, 2014
The Standing Senate Committee on Foreign Affairs and International Trade, to which was referred Bill C-41, An Act to implement the Free Trade Agreement between Canada and the Republic of Korea, met this day at 10:30 a.m. to give consideration to the bill.
Senator A. Raynell Andreychuk (Chair) in the chair.
[English]
The Chair: Honourable senators, the Standing Senate Committee on Foreign Affairs and International Trade is continuing its study of Bill C-41, An Act to implement the Free Trade Agreement between Canada and the Republic of Korea.
We're pleased to welcome this morning Mr. Bob Kirke, Executive Director, Canadian Apparel Federation; Dr. Ailish Campbell, Vice President, Policy, International and Fiscal Issues, Canadian Council of Chief Executives; and joining us by video conference from Toronto, Mr. Jim Stanford, Economist from Unifor.
I'm going to take our witnesses in the order that they're on the agenda. I will ask for short opening statements and then we will go to questions.
Mr. Kirke, I'm going to turn to you. Welcome to the committee.
Bob Kirke, Executive Director, Canadian Apparel Federation: Thank you. Madam Chair, honourable senators, I'd like to thank you for inviting us to speak before the committee on bilateral trade between Canada and Korea. I have about five minutes of remarks, and then I will be happy to answer questions.
My name is Bob Kirke. I'm the executive director of the Canadian Apparel Federation. Our association represents several hundred apparel manufacturers, importers and suppliers based in Canada. Members of our association manufacture domestically, they import and export apparel. They manufacture here and abroad. They sell here and abroad.
I last had the pleasure to speak to you on Bill C-23 in 2012 on the Canada-Jordan Free Trade Agreement. Before I address the merits of the agreement before you, I wanted to provide an explanation of product-specific rules of origin and how they apply to apparel and bilateral trade agreements.
Before the Canada-U.S. FTA, Canadian exports of apparel were minimal. After the FTA we grew as an industry almost exclusively on the basis of exports to the United States. Canadian apparel manufacturers prospered under the Canada-U.S. FTA and NAFTA, and we became far more export oriented, albeit within the North American marketplace.
Once import quotas on imports from low-cost countries were eliminated in 2004, many Canadian companies reoriented their production. In basic terms, that meant supplying their domestic and international customers from production in Canada, and increasingly from production in Asia.
We have had and continue to have good success under NAFTA, but I want to underline for you that our success under NAFTA came despite the rules of origin in NAFTA and not because of them. Under NAFTA, for apparel to qualify for free trade, the yarn must be produced in North America, the fabric has to be manufactured within North America and the garment has to be cut and sewn in one of the NAFTA countries. This is called a yarn-forward rule of origin.
The challenge created by this rule is that it establishes the unlikely scenario where the origin of a suit, like the one I'm wearing, is determined by the origin of the yarns woven into the fabrics, which are then cut and sewn. For the record, the Canadian apparel industry never supported this rule of origin, as this rule is cumbersome and serves as a barrier to trade.
To the extent we have succeeded under NAFTA, it has been because of our ability to use specific and limited exceptions to these rules. Since NAFTA, virtually every free trade agreement NAFTA has negotiated has been based on these rules of origin.
With respect to the proposed agreement with Korea, our message to the committee and the government is very simple: We support this initiative in part because the rules of origin are much simpler than the NAFTA rules. Essentially what the Canadian government did is took the advice of industry and adopted a much more straightforward rule of origin, which we support.
Under the proposed agreement, apparel need only be cut and sewn in the territory of one of the parties to qualify. These are precisely the types of rules that our industry needs when we are trading with other developed countries. For both Canada and Korea their main domestic production of apparel is focused on niche markets and higher value of goods.
There is a potential to grow this trade between the two countries, but only if we adopt simple rules of origin, as we have done. The likely result of this agreement will be modest growth in our bilateral trade with Korea, and that is a useful tool for higher end producers in both countries.
For the record, the Canadian government has recently implemented agreements with simple cut-and-sew rules of origin, similar to this. Our FTA with the European Free Trade Association, with Jordan and Korea all fall under this.
In previous appearances before the committee we have argued for what we call commercially viable trade agreements, and this is what we're talking about: simple rules of origin that allow people to manufacture goods here and trade freely with our free trade partners.
Second, we would urge the government to proceed on a similar basis with Japan. Obviously we are in negotiations with Japan, but the challenge is that under the Trans-Pacific Partnership we will get the old rules. We'll get NAFTA rules of origin, essentially, yarn-forward rules of origin for apparel that are largely useless.
Our third point is basic: Don't forget the United States. To put this in context, our exports to Korea in a year are basically equivalent to what we ship to the United States in two days. Please remember that the Canada-U.S. trading relationship is paramount for our industry.
The last point I would say is we are committed and encourage the government to remain committed to a rules-based multilateral trading system. As I mentioned, the Canadian apparel industry has shifted from domestic production to global production for global markets. We make product here, we make product in Asia, we buy raw foreign materials, bring them here and we export finished goods. For these supply chains to operate we need strong multilateral trade rules, and it's in Canada's interests to support such a system.
It is also very much in Canada's interests to support trade facilitation measures, which were negotiated last year at the Bali WTO Ministerial Conference but remain to be implemented.
With that, I will conclude my remarks.
The Chair: Thank you, Mr. Kirke. I'll turn to Dr. Campbell.
Ailish Campbell, Vice President, Policy, International and Fiscal Issues, Canadian Council of Chief Executives: Thank you, Madam Chair and committee members, for the invitation to appear before you on the Canada-Korea Free Trade Agreement.
Before I begin my short remarks, please let me introduce my organization. The Canadian Council of Chief Executives is a not-for-profit, non-partisan organization composed of CEOs of Canada's 150 leading firms. Our member companies employ 1.5 million Canadians, collectively administer $6 trillion in assets and are responsible for the vast majority of Canada's exports, investment, research, development and training.
[Translation]
We engage in an active program of research, consultation and advocacy on public policy matters. The CCCE is a source of thoughtful comment on the business perspective of issues of national importance to the economic and social fabric of Canada.
[English]
Senators, your meeting today is important and timely. Korea already has in place free trade agreements with the U.S. and the EU. Tariffs between these nations are, as we speak, being cut, and improved market access is in place for products for firms based in these countries. Canadian exports to South Korea have dropped by nearly one third since the implementation of the Korea-U.S. deal.
The Canada-South Korea FTA gives our exporters a fighting chance to regain lost market share and in so doing protect jobs in Canada. Given this context, it is imperative that Parliament ratify the Canada-Korea FTA before the end of 2014. Your approval will allow Canada's first free trade agreement with an Asian nation to come into force by January 1, 2015. By so doing, the reduction of barriers between Korea and Canada would not fall further behind our competitors.
Approval for the Canada-Korea FTA will allow nearly 90 per cent of Canada's current exports to Korea to become duty-free on the date of implementation. The rest of the market access provisions will, of course, come into force over time.
The Korean Parliament currently has both the Canadian and Australian free trade agreements under consideration for ratification. The Korean equivalent to your committee — and indeed to that of the House of Commons, given the unitary nature of the Korean legislature — has recommended approval already of both the Canadian and Australian FTAs. A vote by the Korean Parliament on these agreements is expected any day.
The imminent ratification by the Korean Parliament of both the Canadian and Australian FTAs provides a backdrop of urgency — and I would say opportunity — to your deliberations today, senators. I take note of the support for this agreement from the Conservative government, the New Democratic Party and the Liberal Party of Canada. All three parties agree that increasing Canada's trade ties with Asia are necessary in order to ensure Canadian prosperity into the 21st century.
Please let me make three additional points for this committee's consideration.
First, Canada's trade with Korea is diverse and there is opportunity to grow our commercial relationship. As Len Edwards, Canada's former Ambassador to South Korea and Deputy Minister of Foreign Affairs, has outlined in his public analysis of the agreement:
The Canada-Korea FTA establishes a 21st century framework for our economic and trade partnerships, updating and deepening the relationship we already have with Korea through the World Trade Organization.
As Mr. Edwards has outlined:
Canada's agriculture, seafood and forestry sectors will be amongst the biggest winners. The agreement also gives Canadian manufacturers and service providers a means of using South Korean partners and operations as a gateway to sales, services and technology opportunities in the Asian components of today's dynamic global value chains.
In the auto sector, Canadian firms have tabled their concerns with this agreement. They have highlighted that the U.S.-Korea FTA has not yet provided the boost they expected in terms of market access to Korea.
The Canadian Council of Chief Executives is of the view that a specific auto sector strategy for the Korean market would help to ensure that Canadian auto and auto parts manufacturers are positioned for success. Such a strategy could examine exports, two-way foreign direct investment and non-tariff barriers, cooperation between Canada and major exporters — the U.S. and the EU — to ensure an open market with Korea is essential.
Second, the Canadian Council of Chief Executives recommends the creation of an advisory council to Minister Ed Fast to ensure the effective implementation and promotion of the South Korea FTA. I'd be happy to expand on this point during questions and answers, but let me say that the partnership approach in which business and government are aligned and execute on opportunities is critical to success and is at the core of the government's Global Markets Action Plan.
To measure the success of the Canada-Korea FTA, it's important that the starting point is well understood. Canada imports far more from Korea — at $7.3 billion in 2013 — than it exports, at $3.5 billion. However, we must also consider that Korea invests far more in Canada than we do in South Korea, at almost $5 billion in 2013 compared to Canadian investments in Korea that sit at about $535 million. Foreign affiliate sales in both nations are also on the rise.
I would suggest that this advisory committee could report to the minister annually on basic milestones, including increased exports, analysis of the sub-sectors that compose these exports, foreign direct investment and sales in South Korea by Canadian foreign affiliates, joint ventures and revenue from licensing agreements.
The Korean business community is well organized and highly integrated with its government's trade, investment and promotion efforts. The same team effort must be organized on the Canadian side in order to take full advantage of this agreement.
My third and final point is to reiterate the vital importance of the deeper Canadian engagement with the Asian region. By 2050, Asia's share of world GDP is expected to exceed 50 per cent. The growing economic importance of Korea and its neighbours creates enormous opportunities for Canadian companies and workers. The Canada-Korea FTA will help to establish a platform for Canadian companies that are seeking to sell goods and services to Asia's expanding base of middle-class consumers.
As the Honourable John Manley, my CEO, the CEO of the Canadian Council of Chief Executives, has stated:
This agreement is a major step towards ensuring that Canada is positioned to benefit from Asia's growing economic importance.
It demonstrates to other partners in the Asian region that Canada is a reliable and serious partner.
CCCE members are active across Asian markets and want to do more business in Asian markets, ranging from India to Indonesia. Concrete next steps for this government could include concluding an economic partnership agreement with Japan. The government should also begin negotiations of a free trade agreement with China. The New Zealand free trade agreement, which has increased dairy exports, for example, from that nation to China five-fold, and the recently announced China-Australia Free Trade Agreement provide templates. These trade deals also indicate that our competitors are not standing still in the broader Asian region.
I would be happy to take questions on the CCCE's broader priorities for Asia, including the Trans-Pacific Partnership, in the question-and-answer section, should this be of interest to you.
To conclude, the Canadian Council of Chief Executives congratulates Minister Ed Fast, Chief Negotiator Ian Burney and the entire negotiating team for concluding Canada's first free trade agreement with an Asian nation. We now call upon parliamentarians to ratify this important agreement and ensure its entry into force by January 1, 2015.
The Chair: Thank you, Dr. Campbell.
I will now turn to Mr. Stanford. Senators have received a rather lengthy submission from Mr. Stanford, and I draw that to your attention.
Mr. Stanford, your opening comments, please. Welcome.
Jim Stanford, Economist, Unifor: Thank you, Madam Chair. Thanks to you and to the members of the committee for having me. I will note that I can hear you, but I can't see you. So when it comes time to cut me off — and I'm sure that time will arrive, madam — let me know verbally, not with a hand signal.
As you have in front of you my written notes, I will just mention some of the main points. The notes also make reference to some longer research references that may be useful in your deliberations.
I am the Economist and Director of Economic Policy for Unifor, Canada's largest union in the private sector of the economy. We represent over 300,000 members, working in at least 20 different sectors of the economy, many of which will be affected, both positively and negatively, by this trade agreement.
I do want to stress that, in my judgment as an economist and Unifor's view as a union, promoting Canada's exports, fixing the problems in our trade balance, is in fact a crucial priority for government policy, and also for business and labour. Canada has been suffering from very large current account deficits and a regressive trend in the composition of our exports. Those have both been very negative trends in our overall economic performance in recent years.
I do want to stress that we're very much in favour of trade and strategies that would boost Canadian exports. If anything, we don't have enough trade. Certainly we don't have the right kind of trade.
The problem is that most free trade agreements do little to fix that problem, both the quantitative problem of poor exports and the qualitative problem of the composition of our exports, and, if anything, make those problems incrementally worse. I believe this bilateral agreement with Korea would do the same.
On the quantitative side, in 2013 we had a large trade deficit with Korea, almost $4 billion. Dr. Campbell made reference to that. We import $2 from Korea for every dollar we export back there, and that bilateral deficit has contributed to our overall negative performance on international trade markets.
I will point out that Canada's exports to Korea have been trending downward since the late 1990s. I think it's very misleading to point to the decline in our exports since the U.S.-Korea Free Trade Agreement was signed as being the sum total of our problem with Korea. We have a much bigger and longer-lasting problem in our trade with Korea, and it's not just a problem of quantitative imbalance. The composition of our trade with Korea is also very negative for Canada.
Canada primarily exports unprocessed or barely processed resource products to Korea, yet we import sophisticated, innovation-intensive, high-value products back. Our top exports to Korea last year were coal, copper, aluminum and pulp. Our top imports from Korea, as you can imagine, were autos, electronic circuits, auto parts and smartphones. That is an incredible qualitative mismatch that is a losing proposition for Canada in the long run.
With the free trade agreement, given the imbalance and the structural mismatch in our trade relations with Korea, there isn't a lot of upside for Canadian exports and there is a lot of downside.
In particular, our resource exports that make up the bulk of our exports to Korea will not be significantly affected by a free trade agreement. The problem is exacerbated by the relatively non-labour-intensive nature of our resource exports compared to the relatively labour-intensive nature of our imports. That means there will be more jobs lost, displaced by growing imports from Korea, than will be stimulated by modest growth in our exports.
In my remarks to the House of Commons Trade Committee on this matter, I proposed a gentleman's wager to members from any of the parties. I proposed a wager of $500 of my own money on the outcome that our bilateral trade imbalance with Korea will grow by at least $1 billion in the first three years after the FTA is implemented.
I'm still waiting for anyone to take me up on that. It's my own money, I stress, not the union's. I will open that wager to anyone on this committee who would like to engage with me on the likely impact of the agreement on our bilateral imbalance.
In terms of the auto industry, of course that accounts for three quarters of the trade deficit with Korea. We export virtually nothing to Korea in automotive products; $15 million worth in 2013, import almost $3 billion back. That imbalance has become much worse since the late 1990s. Our exports of automotive products to Korea were never large, yet they have declined by 82 per cent since 1999. Our imports have grown by 450 per cent.
This is not an accident. This reflects deliberate and successful policy efforts by the Koreans to stimulate the global performance and success of large Korean-based multinational firms. That includes an approach to trade that I don't think is what you would call free trade or a level playing field. They've been deliberately stimulating their exports, limiting their imports and providing any supports they can to the export-led growth of Korean-based companies. That's why Canada has $5 billion worth of FDI from Korean companies here and very little going back. That's another dimension of the success of Korea's export-led national champion strategy.
We can learn from the experience of other jurisdictions, including the United States. It's not just in autos that the U.S. relationship with Korea has been disappointing with the FTA. In fact, total manufacturing exports from the United States to Korea have declined since the free trade agreement was signed, and the bilateral trade deficit has widened enormously.
In the automotive sector, the new inflow of automotive products from Korea has been 22 times larger than the new exports of automotive products going back the other way, yet the American deal was superior to Canada's in many ways. There was much higher performance requirements on the Korean side to open their market to American-made products and a unique snap-back provision that would re-impose tariff protection in the event the markets were not open. Canada does not have any of those similar protections, so if anything, our experience will be worse than the Americans'.
In the European case, the inflow of Korean-made vehicles to Europe is three times larger than the new vehicles sold from Europe to Korea, and the Europeans have the added advantage of producing homemade high-value global brands like Mercedes, BMW and Audi, which high-income Koreans do want to buy. For the most part, Canada does not have that valuable component.
It isn't just the auto sector we anticipate will lose. We have done a sector-by-sector analysis of 20 different non- agricultural sectors. We think 15 of them will lose net sales as a result of tariff elimination between Korea and Canada.
Auto is not the worst. We expect computers and electronics will be hurt the most in terms of job loss, followed by machinery. Automotive products, the third largest decline; metal manufacturing hurt as well. We anticipate a net reduction of up to 30,000 jobs in manufacturing and other goods-producing sectors.
Of course, there has been a lot of discussion that Canadian beef and pork exports to Korea will increase under a free trade agreement. I suspect that is true. However, the potential scale of those benefits in processed meat has to be considered relative to the impact on other sectors. In my notes, you will see we estimate even in a best case scenario recouping all lost market share. New meat exports to Korea could offset only 1/20 of the anticipated increase in the bilateral trade deficit that we would see after a free trade agreement.
This agreement, like other FTAs, is not mostly about tariff reduction. There are many other structural and policy provisions that we're concerned with, including investor state dispute settlement, which we view as profoundly harmful and risky for Canadian policy-makers, services industry deregulation and the liberalization of government procurement.
We would like to see some key changes in the bilateral relationship with Korea before moving forward with an agreement. We'd like to see the investor state dispute settlement mechanism removed. The more experience we have with that the less valuable and more concerning it is.
We would like to see a deliberate effort to try and link trade policy with foreign direct investment in Canada. In the automotive sector, for example, Dr. Campbell proposed an auto-specific strategy. A key part of that must be trying to get the Korean-based automakers, Hyundai and Kia, to build something in Canada, not just sell here. We've proposed for years that Canadian trade negotiators should try to connect those dots. Failing that, we would propose to carve the auto sector right out of the agreement, because it is the auto sector that would experience negative impacts.
The impact of currency fluctuations in our bilateral trade must also be considered. The Koreans are very proactive as part of their generalized export-led strategy in trying to suppress their currency to make their exports more competitive. Canada has not done the same, to our disadvantage.
Those are my opening comments, Madam Chair. Thank you for your attention. I look forward to the discussion.
The Chair: Thank you, Mr. Stanford. Are you still in a position that you can't see us but we can see you?
Mr. Stanford: I can see you now. You popped into view halfway through my remarks. Thank you to the technical folks who fixed that.
The Chair: Thank you very much.
[Translation]
Senator Fortin-Duplessis: Thanks to all three of you for your presentations. My first question goes to Ms. Campbell. The president of your association, the Honourable John Manley, wrote a letter to the international trade minister in which he indicates his support for this free trade agreement. He then wrote an article on the topic. In the recent article, he mentions that, for the agreement to reach its true potential and to be honoured, resources will be needed to actively promote Canadian businesses. What kinds of resources is he referring to?
[English]
Ms. Campbell: Both Mr. Manley and those with extensive experience in promoting Canada's trade — John Weekes, our former ambassador to the WTO has written extensively on this — have suggested that marketing is an important aspect of ensuring that we are able to improve our trade position once the agreement is implemented.
I would say two specific things. First, those firms with the greatest experience in the Korean market should form the core of any advisory and promotion groups. Those firms with experience in the market, understanding the culture and the consumer taste of Koreans are important, and also those who have accessed the incredibly large and valuable value chains of Korean chaebol firms. They are some of the largest firms on the Fortune 500. Korea has 13 such firms; Canada has 11.
The second point I would make is related, but I think it also goes to the commentary we heard from Mr. Stanford, which is that a trade-remedies system to protect against dumped goods is also an important part of Canadians' faith in the free trading system that we are fully immersed in and are further promoting by this agreement. By that, I mean protecting Canadian companies from anti-competitive practices. I would take note of the recent CITT preliminary judgment against rebar, for example, from South Korea, Turkey, and I believe also China.
The economist in me would remind all of us that Canadian consumers benefit from the lowest price and valuable goods, but the business person in me also would suggest that those goods and services cannot arrive here on the basis of anti-competitive practices.
I hope that gives you some sense of the fully integrated nature that we need in order to best capitalize on this. I would note that government resources to the Trade Commissioner Service, to Export Development Canada and for SMEs looking to export through Business Development Canada are also important aspects of promoting this agreement.
The Chair: I have a supplementary question. Minister Fast did come before the committee and pointed out why he was in favour of this agreement, why he entered into it, but also laid out some of his global strategies. Thanks to the questions of Senator Downe, we went a little further than that.
I'm not sure if you're aware of his testimony before this committee. Was he covering the kinds of things that you're talking about?
Ms. Campbell: I read Minister Fast's testimony earlier this week. It certainly did cover some of those aspects, and I would amplify that further by recommending an advisory committee specifically on the Canada-Korea FTA. Part of that would include sub-sector expertise, including in the auto sector, all nested, of course, in the Global Markets Action Plan implementation.
[Translation]
Senator Fortin-Duplessis: Some of the provisions of this free trade agreement deal with labour. They commit the parties to honour international criteria in terms of basic labour standards and for national legislation to be complied with.
In your view, to what extent are these provisions necessary? Are they sufficient to guarantee compliance with those standards and with national labour legislation?
Senator Robichaud: Good question.
[English]
Ms. Campbell: I think it's a vital part of all of our FTAs that we have labour agreements. I would take note, too, that, in FTAs, thanks to the work of parliamentary committees such as yours, we've seen excellent innovations in Canada's free trade agreements. They don't stand still. They modernize along with the norms, values and imperatives of the Canadian population. In the Canada-Colombia FTA, for example, we saw an important addition of reports on human rights. Again, I think this is part of creating broader support for globalization and trade. Canadians have absolutely every expectation that labour agreements, domestic law, should be followed and implemented. I would also take note of Canada's ratification of the International Labour Organization, ILO's, core labour standards, which cover issues ranging from child and prison labour to the right to organize.
I think that, alongside these FTAs and our domestic law, these international norms are also an important part of the respect and structure and rule of law around the treatment of labour.
[Translation]
Senator Fortin-Duplessis: Mr. Kirke, did you want to add anything?
[English]
Mr. Kirke: Certainly. I would echo Ms. Campbell's comments, except to say one thing. Korea is among the different countries with whom we are negotiating free trade agreements. I think labour compliance is less of an issue in Korea than in some other countries. We've taken different stances in different countries. As I said in my remarks, the last agreement that I appeared before this committee on was our Canada-Jordan Free Trade Agreement, where there were the same labour provisions, but, more important than that, was that, under the global strategy now, they're trying to align trade agreements with aid and other aspects of our international involvement.
So last week I was in New York for an International Labour Organization meeting around the Better Work Program. Canada was essential in funding that program, and it paralleled our negotiation and conclusion of the FTA with Jordan. It's not just within the context of the agreement that we express those views and those principles. I think we've actually done a very good job. The agreement is one element, and there are others. Again, I would actually say that now, more than ever before, we have a policy to align them.
The Chair: Mr. Stanford, is there anything you wish to add, or can I go to the next questioner?
Mr. Stanford: That's a very interesting topic. In our judgment, these labour side agreements or the labour related chapters of free trade agreements are largely there for symbolic reasons. The actual requirements of those chapters on the governments that participate in the agreements are minimal, generally consisting of requiring them to live up to their own laws. The references to international standards are vague and unenforceable. In cases like the Canada- Colombia agreement, which was mentioned, those labour side agreements have not stopped the repression and even assassination of trade unionists in Colombia. In our judgment, these side agreements are largely there for cosmetic appearances to help the agreements get passed.
That being said, this is not the source of our concern with the Korea agreement. Korea is not a dictatorship. There's a strong labour movement there. Wages are not low in Korea. In fact, they have been growing very rapidly as a side effect of the impressive increases in productivity and innovation that Korea has achieved. The strong asymmetric advantage of Korean value-added producers in their trade with us does not stem from cheap labour per se. It's more the successful nature of that chaebol system, the close relationship between government and corporations, and a very asymmetric export-led strategy. That's why we have a huge trade imbalance with Korea that will get bigger, not because of the suppression of labour rights, in our judgment.
The Chair: Thank you.
Senator Moore: I thank the witnesses for being here. Ms. Campbell, you mentioned that 90 per cent of the current exports will become duty free under this agreement. What are the other 10 per cent of items, and how long will it take for them to become duty free if they're going to be duty free?
Ms. Campbell: Under the agreement, Canada will obtain full duty-free access across all industrial and manufacturing sectors, which make up the majority of the composition of our exports, and will also secure similar access to Korea's fish and seafood markets where their tariffs currently run as high as 50 per cent.
The phase-in of the tariffs varies. I think that's an issue on which you should ask the Foreign Affairs experts to testify. It's my understanding that some of the phase-ins are as long as a decade. We would have enjoyed seeing an agreement, frankly, that was duty free all on day one, but, of course, this is a negotiation. I take note, as well, of Mr. Stanford's excellent points on autos. If only you could pick and choose the sectors you wanted to liberalize. Unfortunately, in a free trade agreement, it's an all-or-nothing proposition, according to World Trade Organization rules.
Senator Moore: I didn't know that. Anyway, I want to know: What are the other 10 per cent items?
Ms. Campbell: I'll have to return to you with a more specific answer.
Senator Moore: Maybe you could do that and send it to the clerk.
Ms. Campbell: Sure.
Senator Moore: Has your organization had a chance to respond to the draft of this agreement? Was this your first look at it?
Ms. Campbell: We had provided ongoing information to the chief negotiator and to Minister Fast, as well as to the broader community, but, like all stakeholders, we had not seen the detailed agreement until it was released.
Senator Moore: What do you make of the fact that Canada didn't get that snapback provision like the Americans did?
Ms. Campbell: In an ideal world, I believe that Canada should be negotiating with the U.S. and, in fact, Mexico, given that, essentially, we make a product in North America. That being said, should we have done that, that would have kept us from concluding the Canada-EU trade agreement, which I'm very pleased that this government has also proceeded on. We're seeing, in the TPP negotiations, a bilateral negotiation, nested inside that broader agreement, between the U.S. and Japan on autos. We believe that is incredibly negative in the sense that Canada should be at the table negotiating these provisions, but I would note that Canada has secured a permanent, accelerated dispute settlement mechanism on autos, while the U.S. equivalent is expected to be sunset in seven years.
Senator Moore: I don't have a lot of faith in these dispute mechanisms. I saw what happened to Canada with softwood lumber. Even the Americans did not observe the rule of law. We won all the cases. So I don't know what this means. I look at the huge imbalance with trade. I do not know why we just didn't say to Korea, ''If we're not going to do this, given the current imbalance, you're not going to enjoy the same trade.'' I don't know why your organization wouldn't push for that. I look at what's happening to the auto sector here. According to Dr. Stanford's brief, it says that the Canadian trade negotiator did not try to win any condition. Did your organization know that, and did you advocate against that?
Ms. Campbell: I would say, to your broader point, that no one likes lawyers, but the alternative to this agreement for Canada is no agreement at all, a trading system based on brute power. Canada is a market of 35 million. I'm much more comfortable in a system under the rule of law in the World Trade Organization and these agreements than I am trying to go toe to toe with much larger nations and, frankly, firms that are integrated with their governments in a much more complex way, shall I say, than the clear division between the state and the market in Canada.
It's not an ideal world perhaps, but it's the one we live in and so I think these agreements are very important. Our organization stands firmly behind opening up the Korean market to auto trade. I also note that our auto parts providers have gone into the Korean market to provide auto parts for Korean cars, so that you will in fact see a vehicle that's increasingly, shall we say, made with the brain power of the world as opposed to any one single nation.
Senator Moore: I would like to see some of that brain power making cars in Canada.
Ms. Campbell: It's here, sir, and it's an incredibly important part of our exports.
Senator Moore: I'm glad to hear that we're shipping parts.
Ms. Campbell: That is the biggest value in the car.
Senator Moore: It's very important, but I look at this and I think if, as Dr. Stanford says, it's not much of a trade- off. We'll see. I hope you're right, but I wouldn't want to bet against his $500. Thank you very much.
The Chair: I'm glad you put that on the record. Others have not. I'm not asking for any other comments on the bet.
Senator Housakos: My question is addressed to all three members of the panel. It seems to me there are some people who look at trade arrangements from a perspective of simply ''am I exporting more than I'm importing?'' I was wondering if all three members of the panel can share their views of whether there are other elements in trade agreements above and beyond just the balance on one side versus the other, of how much I'm bringing in versus how much I'm sending out?
I'm a senator from Quebec and I can tell you that the pork industry is extremely excited with this agreement, and we've heard from the cattle industry and the agri-food industry. There are a number of Canadian industries right now that are particularly enthused by the opportunity to go into that marketplace.
I would like your commentary above and beyond, like I said, the very cut and dry perspective of how much we send out versus how much we bring in. What other elements should we be looking at when we evaluate trade agreements like this?
Mr. Kirke: As I was mentioning before, our industry's current position is it is almost absurd to measure imports and exports because we design it in Montreal, we make it around the world and we sell it all over the world. That is actually our industry. Our main partner in support of that from the Canadian government's perspective is Export Development Canada. The previous president of Export Development Canada, who has gone on to other things, called that integrative trade. We're a model of that in the apparel industry.
That is the first thing. That is the context we operate in. We have a certain amount of product that is made here and it will be the nice, simple count. Our exports increased by 60 per cent last year to Korea and I know that because I was walking around Seoul last December, it was brutally cold and people were walking around with Canada Goose parkas, so that was good.
In this agreement we have a limited perspective but I want to mention one other thing. Until a year ago, when the negotiations restarted, we were negotiating a NAFTA-type rule of origin. I think it's to be commended that the minister asked staff to go back and ask if this is right.
In point of fact, the government has shown some flexibility so that's the first thing, to the extent that it is a tit for tat, export-import kind of deal, we are quite satisfied with it and we should use it in other developed countries for agreements. The other stuff may build stronger relationships because the Korean textile industry is a world-beater. If you go into Central America, I remember having one conversation in Nicaragua and a phone call with the Nicaraguan industry and they had to translate it into Korean because the Korean industries have invested there to the extent that they basically run the industry in Nicaragua. The bottom line is if we build better relationships with those conglomerates it might be positive for our industry.
Ms. Campbell: In response I will lay out a few stylized facts. Canada is a small domestic market. We produce far more than we could consume simply ourselves. Access to other markets is absolutely imperative to our standard of living. I take note that we are in this fantastic First Nations room. The art here is incredible. These are Canada's first traders, and they didn't have to deal with borders. In fact one could say perhaps they were even more progressive than our outlook on the world today.
Here we are. The rule of law is what it is, and I would say that we live and die by access to the U.S. market. While we're preoccupied today with Korea, of course, I would always commend work we can do to update NAFTA provisions, address the issue that Senator Moore addressed, which is protectionism in the United States, which takes many insidious forms of subsidies and ''Buy America'' policies. I would also say we have to look to future growth in Asia where the middle class is growing and has huge demand for Canadian products. I think that's what this agreement is about, it's about the future.
I commend us to look both at imports and exports, as well as foreign direct investment, and I would also suggest that this committee, along with the House of Commons trade committee, ensure that Statistics Canada is able to keep pace with measuring what we're actually doing. That includes updated statistics on services trade, on foreign direct investment trade, on foreign affiliate sales, and I can assure you that some data there is a bit muddy. Time series have not been updated. With respect, we have to do a better job measuring the footprint we have because when we look around we see an effective standard of living in a country that's ready to compete.
Mr. Stanford: Senator Housakos, that's an important question because it gets to the gap between the economic theory of free trade in an idealized world and the reality of international trade flows that we experience in the real world.
In free trade theory the issue of a trade balance or imbalance is actually assumed out of existence. The assumption in free trade theory is that all resources in the country will be fully employed both before and after trade has opened up with a free trade partner. As a result, you can be safely assured that everyone is going to be working, no one will lose their job because of a free trade agreement, and the impact of trade will not be on the balance or the number of jobs, it will be on the efficiency of work. It's supposed to be a productivity gain resulting from the reallocation of labour that drives the assumed gain from a free trade agreement.
That theoretical approach is also embodied in the computable general equilibrium models that are the main tools you've often seen. When a free trade agreement is negotiated economists are hired to use one of these computer models that assume full employment and balanced trade, in essence, to estimate the productivity gains coming from the agreement.
There will be productivity gains. There's no doubt that there is a certain reallocation of output and employment and capital and labour after a free trade agreement. In Canada's case, that has mostly meant putting more capital and labour into resource extraction instead of other sectors of the economy.
The problem is that those assumptions do not apply in the real world. We cannot assume that Canada will be fully employed under free trade. We have official unemployment of 1.4 million today, true unemployment of more like 2 million, and the fact that we have a current account deficit of over $50 billion a year explains many hundreds of thousands of those unemployed people.
We cannot ignore the trade balance effects, which is what the computable models and the free trade policy-makers would have us do. You could have small reallocation or improvements in efficiency of a global supply chain, but it would all be overwhelmed by the losses from what we estimated would be 30,000 jobs as a result of the growing imbalance.
Those global supply chain effects may be important for Canadian companies, although in the auto parts case which Dr. Campbell alluded to, there is no significant auto parts exports to Korea, and the foreign direct investment footprint of Canadian firms in Korea's auto industry is negligible.
You can have some supply chain effects but the main priority of policy has to be whether Canadians here are employed gainfully, in good jobs, producing to the best of their abilities. On that scale, a big shift in a trade balance against Canada, which I expect will occur under this agreement, clearly outweighs any marginal efficiency gains resulting from the traditional reallocation of factors that is emphasized by economic models.
Senator Housakos: Thank you for those answers. More specifically, my next question is to you, Mr. Stanford.
I'll simplify my interpretation of trade agreements. My interpretation of free trade agreements is giving Canadian industry opportunity to perform in and to get access to markets that they otherwise wouldn't have. Inevitably, in those types of exchanges, the industries that are most efficient, most effective and most competitive on a global scale are the ones that are going to benefit. Inevitably, in the capitalist free trade theory, the ones that are not efficient and effective will have to find other ways to occupy themselves. There will be a give and take and there will be a certain adjustment.
Major adjustments were made in the last 20 years after the free trade agreement was signed with the United States. The doom-and-gloom-sayers at the time claimed the clouds were going to fall from the skies and Canadians would lose millions of jobs; but that did not materialize. Imagine what would happen to the Canadian economy if the U.S. had said: ''We're buying more than we're selling, so we're shutting down our borders and we're not going to exchange technology, services and financial sector exchanges, and so on.''
Are the United States and the EU, two of the world's biggest markets that have aggressively signed agreements with Korea and who have a greater trade imbalance than Canada, as misguided as we are?
Mr. Stanford: That's a very good question. I actually don't disagree with the way that you characterized it — that a free trade agreement is going to work for industries that are competitive enough to benefit, given the competitive situation of the firms in the other country, and those that aren't will need to find other ways of occupying themselves. That's absolutely correct. When we actually parse the Canada-Korea trade relationship, we find five sectors, as I mentioned, in our analysis that are either unaffected or would actually experience net sales as a result of the elimination of bilateral barriers. In those five, the calculus works in our favour.
In the other sectors, it works against us because the Koreans have been more successful than we've been, even though they're a small economy, too. Remember, their GDP is smaller than ours is, but they have been much more focused and successful than we by building national champion companies like Hyundai, Kia, Samsung, LG and so on. They've been successful in building such companies that can reach and penetrate global markets. In Canada, we have focused on digging stuff out of the ground and selling it to the rest of the world and then buying back the stuff they make out of our resources. That asymmetry is the exact source of the problem.
Are the Americans as misguided as we are? Despite NAFTA, if we were selling twice as much to America as they were buying from us, I would suggest we would hear about it. We absolutely would have a situation, but the trade imbalance between Canada and the United States is very, very small relative to the total flow that goes in both directions, especially if you include services and investment income where the Americans have a strong surplus. A balanced two-way flow like we have with America can be genuinely beneficial. But that is not what we have with Korea. There's a lot of second-guessing, certainly in the auto industry in both Europe and America. The view is that those agreements should not have been signed in the way that they were. That gives us a chance in Canada to avoid making the same mistake.
Senator Downe: Mr. Stanford, I wouldn't take your bet because I've looked at the numbers, and yours were pretty conservative. In our trade with Chile, for example, we went from a surplus of $73 million in 1996, the year before we signed the free trade agreement, to a deficit of $950 million in 2013; and it goes on and on. In one of the more recent deals, we signed a free trade agreement with Peru two years ago. Our deficit went from $2.1 billion to $2.5 billion. I think your money is pretty safe, even if you find anybody to take your bet.
I'm interested in your comments about the 38,000 potential jobs lost. The trade deficit has been a major problem in this country for a long time, and it has really impacted manufacturing jobs, particularly in Ontario and Quebec. We've seen thousands of jobs transferred outside our country — stable, well-paying middle class jobs that support families and communities are now gone. Is your estimate of 38,000 job losses with this agreement based upon the current value of the Canadian dollar? Many of those losses occurred when our dollar was at par with the American dollar. I'm not sure what the dollar is trading at today but it was 87 cents or 88 cents last week. Does that impact your numbers and, if so, how?
Mr. Stanford: You're quite right to refer to the experience of other free trade agreements that we've signed. In fact, in other research we've done that is referenced in the notes before you we've done precisely that and looked at the series of other free trade agreements that Canada has signed and considered the balance of trade impacts of those agreements. In virtually every case, we find a significant deterioration in the net balance against Canada. That reflects the structural asymmetry — the fact we don't have enough global champion companies selling high value products to those countries. Bringing down the barriers on both sides will lead to a much larger flow of imports than exports.
Our estimate of the net impact on employment of around 30,000 job losses does not assume the dollar stays where it is. It doesn't assume a particular level for the dollar but assumes that the dollar stays constant after the trade agreement is signed. It's only counting the effect of tariff reduction on both sides, given the existing footprint that Canada and Korea have in each other's markets.
There's no assumption about the level of the currency required for those numbers. Future changes in the currency would work for us or against us. Potentially, those changes would be much larger than the tariff effects. If the Canadian dollar continues to depreciate as it has in the last couple of years, and I hope that's true, a fair sustainable value for our dollar would be around U.S. 80 cents, that would offset some of the expected harm from the Canada- Korea deal.
However, the Koreans are very active in the currency manipulation business. They have used their capital market structure and the central bank to try to suppress their currency as a tool of their successful export-led growth. In the long run, I wouldn't expect the Koreans to sit idly by if their currency is working against them. Their government and central bank will almost certainly intervene in order to preserve a currency advantage.
In precise answer to your question, the estimate of 30,000 job losses does not depend on any assumption about the level of the dollar but merely assumes that the dollar will stay roughly where it is relative to the Korean counterpart.
Senator Downe: Ms. Campbell, you mentioned in your opening comments about your association consisting of major exporters around the world. Given the problem of our balance of trade and the manufacturing job loss, what has your association done other than depend on the government for action? I noticed the Chamber of Commerce, and I'm sure you're familiar with this report, published a document recently, Turning it Around: How to Restore Canada's Trade Success. I wonder if your association takes any other action as well. Around the world, the countries that are doing well in exports and maintaining manufacturing jobs put a lot more resources into their exports, the U.K., Australia, the Germans and so on, than we currently do. They seem to be much more proactive. The Americans have Direct Line and some other initiatives to assist their businesses.
Part of the problem here, we hear, and the chamber of commerce reinforces it, is that we sign these agreements and then it's over to you in the business community and things seem to fall apart compared to what other countries are doing. What has your association done on its own, if anything, to assist Canadian exporters?
Ms. Campbell: Let me say that the imperative here is with globally active and exporting firms. It is the business strategies of firms and the way that they're able to use their comparative advantages in Canada, have an innovative product and access to new consumers, that's truly critical as well as the enabling environment you've talked about. There was quite a bit in your question. Let me parse that out into three tranches.
First, in regard to the government, I think we have an excellent business environment, rated number two in the world after Hong Kong. Important enabling factors, such as our logistics networks, the border rail and airports, are essential. The government also has a critical role to play in funding innovation. I would argue that the U.S. does a much better job than Canada does by using its military and government procurement to incent innovation. We could have a whole session on that alone. Let me just say that the business and taxation environment is very positive in Canada.
Second, when it comes to firms, their strategy has to be to go to where there are customers, which includes growing their businesses in Canada. We've seen, under incredibly difficult global economic conditions, the footprint of our financial services industry, both banking and insurance, increase rapidly to growth markets. That's an incredible success story. Of course, it involves an expansion of the Canadian footprint but it also means going to where those customer are in India, Indonesia, Latin America and South America.
The third piece to that is the world of associations. I can assure you that our role is to collaborate with our members and the government to make them aware of opportunities.
For example, I would highlight for this committee the partnership that we have with the Canada-China business council, the Canada-India CEO forum, which we're a part of, to try and promote Canadian opportunities into these growth markets. Again, when it comes to Canada, I think complacency is our greatest enemy. Fragmentation is unfortunately our greatest problem. The government, business and associations working collaboratively with institutions like Export Development Canada, we all have to leverage each other's expertise.
Senator Downe: Thank you for that. Just back to this, though, you have a large research department.
Ms. Campbell: No, we don't. At the Canadian Council of Chief Executives, it's me, on trade.
Senator Downe: I thought you headed up a whole wing, with all the work that you do. So the Chamber of Commerce document, which is called Turning it Around, they've identified the problem, they put some people on it. You don't have a similar independently produced document, do you?
Ms. Campbell: I'm familiar with the chamber's excellent document, Turning it Around. I would point you to specific studies that we have done on specific markets: China, India, and the study we commissioned on the suggestion to unilaterally liberalize Canada's trade, including supply management. One word I always like to hear at any committee's discussion on trade is the ''consumer.'' The price that consumers pay ultimately helps us to be competitive and attractive, a market with a high standard of living and that certainly is down to free trade.
The other thing that I think is important is that we talk about tariffs. Tariffs are essentially a tax. They are an additional price that the government places on a product that is passed on, ultimately, by the company onto the consumer. It is intriguing to me that an advanced economy like Canada's, which is able to raise taxation on companies, consumption and individuals, would still have any tariffs whatsoever. We continue to take into the treasury anywhere from $3 to $5 billion annually, taxing products, which makes it more expensive for consumers.
There are those types of issues. If there's a specific issue, that excellent report by the chamber also covered trade promotion and re-striking the advisory committee on trade to the minister of trade. That's another proposal, for example, that the Canadian Council of Chief Executives would support fully.
The Chair: Thank you. We've come to the end of our time and the questioners.
I'd like to thank Mr. Kirke, Dr. Campbell and Mr. Stanford for your input into our assessment of Bill C-41.
I should put on the record that this committee continues to study international trade issues, both geographically and on specific topics, and we intend to continue that approach. Some of the broader issues that all of you have brought to the table are very useful in our continuing study. We thank you all for your contributions today.
Senators, we will suspend for five minutes.
(The committee suspended.)
(The committee resumed.)
Honourable senators, we're reconvening the Standing Senate Committee on Foreign Affairs and International Trade. We are continuing our study of Bill C-41.
Is it agreed that the committee move to clause-by-clause consideration of Bill C-41, Canada-Korea Economic Growth and Prosperity Act?
Hon. Senators: Agreed.
The Chair: Shall the title stand postponed? Agreed?
Hon. Senators: Agreed.
The Chair: Shall clause 1, which contains the short title, stand postponed? Agreed?
Hon. Senators: Agreed.
The Chair: Is it agreed that I group clauses? Agreed?
Hon. Senators: Agreed.
The Chair: Shall clauses 2 to 10 carry? Agreed?
Hon. Senators: Agreed.
The Chair: Shall clauses 11 to 20 carry? Agreed?
Hon. Senators: Agreed.
The Chair: Shall clauses 21 to 30 carry? Agreed?
Hon. Senators: Agreed.
The Chair: I hear no voices to the contrary. Shall clauses 31 to 40 carry? Agreed?
Hon. Senators: Agreed.
The Chair: Shall clauses 41 to 50 carry? Agreed?
Hon. Senators: Agreed.
The Chair: Shall clauses 51 to 60 carry? Agreed?
Hon. Senators: Agreed.
The Chair: Shall clause 61 carry? Agreed?
Hon. Senators: Agreed.
The Chair: Shall Schedule 1 carry? Agreed?
Hon. Senators: Agreed.
The Chair: Shall Schedule 2 carry? Agreed?
Hon. Senators: Agreed.
The Chair: Shall clause 1, which contains the short title, carry? Agreed?
Hon. Senators: Agreed.
The Chair: Shall the title carry? Agreed?
Hon. Senators: Agreed.
The Chair: Shall the bill carry? Agreed?
Hon. Senators: Agreed.
The Chair: Is it agreed that I report this bill, without amendment, to the Senate? Agreed?
Hon. Senators: Agreed.
The Chair: Thank you, senators. We will file the report with the Senate. We will then return to our study next week on Canada, the United States and Mexico, with witnesses. Thank you, senators. We are adjourned.
(The committee adjourned.)