Standing Senate Committee on Agriculture and Forestry
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Proceedings of the Standing Senate Committee on
Agriculture and Forestry

Issue 27 - Evidence - Meeting of May 7, 2015


OTTAWA, Thursday, May 7, 2015

The Standing Senate Committee on Agriculture and Forestry met this day at 8 a.m. to study international market access priorities for the Canadian agricultural and agri-food sector.

Senator Percy Mockler (Chair) in the chair.

[English]

The Chair: Honourable senators, I welcome you to this meeting of the Standing Senate Committee on Agriculture and Forestry.

To the witnesses, we will introduce you shortly. Thank you for accepting our invitation.

My name is Percy Mockler. I am a senator from New Brunswick and chair of the committee and I would ask the senators to introduce themselves.

Senator Merchant: I'm Pana Merchant, Saskatchewan.

Senator Tardif: I'm Claudette Tardif from Alberta.

Senator Moore: Wilfred Moore from Nova Scotia.

[Translation]

Senator Maltais: Hello, I'm Ghislain Maltais from Quebec.

[English]

Senator Unger: Betty Unger from Alberta.

Senator Ogilvie: Kelvin Ogilvie from Nova Scotia.

The Chair: Thank you. This morning, the committee is continuing its study on international market access priorities for the Canadian agriculture and agri-food sector.

[Translation]

Canada's agriculture and agri-food sector is an important part of this great country's economy.

[English]

The Chair: Canada's agriculture and agri-food sector, in 2012, accounted for one in eight jobs in Canada, employing over 2.1 million people and it represents close to 6.7 per cent of Canada's gross domestic product.

[Translation]

Internationally, the Canadian agriculture and agri-food sector was responsible for 3.6 per cent of global exports of agri-food products in 2012.

[English]

Also, in 2012, Canada was the fourth largest exporter of agri-food products globally. Canada is engaged in several free trade agreements. To date 12 free trade agreements are in force: The Canadian-European Union: Comprehensive Economic and Trade Agreement is concluded; and the 11 FTAs' negotiations are ongoing, including the negotiations to modernize the Canada-Costa Rica Free Trade Agreement. The federal government has also undertaken three exploratory trade discussions with Turkey, Thailand and member states of Mercosur; Argentina, Brazil, Paraguay, Uruguay and Venezuela.

Honourable senators, this morning we have for our first panel, Jean Michel Laurin, as an individual; and Kathleen Sullivan.

Thank you for accepting our invitation and sharing with us your professionalism, vision and recommendations on the order of reference given to the Senate of Canada to the Standing Senate Committee on Agriculture and Forestry.

I have been informed by the clerk that Mr. Laurin will be the first to make the presentation, to be followed by Ms. Sullivan.

[Translation]

Mr. Laurin, you have the floor.

Jean Michel Laurin, as an individual: Hello. I am pleased to be here with you this morning to discuss international market access. My name is Jean Michel Laurin. I am the Vice-President at Octane Strategies, a consulting firm located in Montreal, Quebec City, and Ottawa, which has been in business for over 25 years. Our multi-disciplinary team offers public relations and government consultation services in economic research and analysis, strategic planning and social acceptability.

I assume that the reason I am here today is mainly because I have been working on issues related to trade policy and market access for over 12 years now as a consultant for various organizations. Up until 2013, I was working as the vice-president of global business policy for Canadian Manufacturers and Exporters, or CME.

My role in the organization involved, first, understanding the trade priorities of the thousands of CME member companies and the 50 industry member associations of the Canadian Manufacturing Coalition. Second, it involved defining the association's trade priorities, which were of course related to the interests of the company members, and third, it involved working with our government partners to promote our interests.

Members of the association included many companies in the food processing sector and the agricultural sector, such as manufacturers of farm machinery.

People often wrongly believe that the agricultural and manufacturing sectors are two mutually exclusive sectors. However, it is important to remember that Canada's top manufacturing industry is the food processing industry. This industry alone accounted for over 15 per cent of manufacturing sales last year with $95 billion in revenue. That is more than the automotive manufacturing sector, the petroleum refining sector and the aerospace industry.

To complete my introduction, I would like to share some initial observations with you. The first is that international market access is vital to an economy like ours. Because our domestic market is small, we have no choice but to participate in free trade if we want to continue to improve our standard of living and prosper.

My second observation is that, if we have no choice but to participate in free trade, it is in our interest for international markets to be increasingly open and for our trade to be governed by clear and transparent regulations that can be enforced effectively.

Over the past few years, Canada, like many of our trading partners, has been jumping into the negotiation of all kinds of regional and bilateral agreements. The chair mentioned a few.

That is excellent news, and trade agreements, such as the one that was just negotiated with the European Union, warrant recognition. However, it is important not to lose sight of the fact that the negotiation of agreements such as that one and the Trans-Pacific Partnership were supposed to be our Plan B. Plan A was to negotiate a multilateral agreement with all members of the WTO. Negotiations with the WTO broke down for reasons that are not necessarily Canada's doing, but I am among those who think that a country like ours can and must play a more dynamic role in strengthening the world trading system.

My third observation is related to the fact that Canadians need to understand how important it is today to negotiate comprehensive trade agreements. Strengthening international trade is not just a matter of customs tariffs, because today, trade is about more than just the exchange of products. We also need to think about lowering trade-related costs. I am talking, for example, about regulatory differences, red tape, rules governing trade in services, promotion, investment, and mobility of staff and business travellers, just to name a few.

In closing, I hope that your study will also include China. China is the world's second-largest economy and our second-largest trading partner. It seems to me that the way we talk about China today is the way we talked about the United States in the 1980s. It is a highly charged issue, as we saw in recent discussions on the application of a simple investment protection treaty. We have to be able to have a rational dialogue on advancing our commercial interests in China.

I will stop there, but I am happy to answer any questions you may have.

[English]

Kathleen Sullivan, as an individual: Thank you very much and good morning. My name is Kathleen Sullivan and I have spent the past 20 years working in Canada's agriculture and food sectors, including the role as president of the Canadian Agri-food Policy Institute, CAPI, and also as executive director of the Canadian Agri-Food Trade Alliance, CAFTA, and most recently as an independent consultant with my own firm. My agri-food trade experience has included extensive work on the WTO and on most of Canada's current and major trade deals including the Canada- EU CETA, the Canada-Korea FTA, The Trans-Pacific Partnership and others. In addition, I had the pleasure of sitting on Minister Fast's advisory panel on the Global Commerce Strategy 2012 and 2013.

Today I work as an independent trade consultant, where I represent both Canadian and European companies in analyzing Canada's trade policy and in helping them navigate the implications of Canada's trade deals. For full disclosure, I actually represent both Canadian and European cheesemakers, which adds a nice twist.

As you have no doubt heard from many witnesses already, international trade is critical to many of Canada's agriculture sectors. Today, Canada exports over $44 billion in agriculture and food products, and we are today the fifth largest agri-food exporter in the world. Unfortunately, a couple of years ago, China scooted ahead of us, so we've been bumped from fourth to fifth place.

It's estimated that Canada exports about half of all of the food that is grown or manufactured in the country. For some sectors, that figure is significantly higher; for example, our canola industry exports, in some years, 80 per cent, if not more, of its products.

It is important to note that, for virtually all of Canada's agriculture and food sectors, Canada is actually our most important market, and domestic consumers are the most important customers that we have. But, as Canadian food consumption plateaus, our agriculture sectors are increasingly reliant on foreign export markets if they want to expand their production and, in some cases, increase the value of their goods.

Unfortunately, though, trade is very complex. It requires a multi-faceted strategy and a continuous investment in resources in order to succeed. Canada must work increasingly hard to preserve our existing markets. Canada is not alone in the world, and we face stiff competition from other major agriculture exporters, like the U.S., the EU and Brazil. These and many other countries are busy negotiating preferential trade access to a lot of our major trading partners. We saw this most recently with the Canada-Korea FTA, where both the EU and the U.S. were able to get into that market ahead of us.

Second, just like the Canadian marketplace, many of our major trading markets are maturing. To continue to grow, we must identify new export opportunities and new markets where we can sell our goods. The Canada-EU CETA was a unique example of Canada being able to obtain access to a mature market, but there are few of those in the world. We really need to focus on markets like Asia, where we're seeing consumption of the kinds of products that we manufacture growing.

The third main area where we have to focus our attention is non-tariff barriers. As agriculture tariffs start to come down, countries are really turning to trade distorting market-access barriers, and these are really the new frontier of protectionism. We saw this most recently, for example, with U.S. country-of-origin labelling. Non-tariff barriers are very difficult to combat. They take many different forms. They are very difficult to address proactively through trade deals, and, when they arise, they can take many years and millions of dollars to dispute.

Canada's agri-food sectors have significant opportunities abroad, particularly in the wake of the current government's very aggressive trade agenda. But our agriculture sectors must have a solid and strategic understanding of international trade in order to succeed, and that includes understanding the mechanics and benefits of international trade deals and also the perils and the disruptive impact of trade barriers that can be imposed by our major trading partners.

[Translation]

Senator Tardif: Thank you for your excellent presentation. Both of you spoke about trade barriers. According to several witnesses, it is important that Canada successfully eliminate the tariff and non-tariff barriers faced by Canadian exporters. What restrictions are Canadian exporters facing with respect to the application of sanitary and phytosanitary measures on global markets?

[English]

Ms. Sullivan: Non-tarriff barriers take a lot of different forms, and, probably, the one that's perhaps most familiar to people today is country-of-origin labelling in the United States. So you have situations where countries put certain regulatory requirements on imported products that make it more costly and more difficult for the imported products than for the domestic products. You also have situations, for example, in the EU and many other countries — China, Russia — where they have banned the use of growth promotants, even though those products have received safety assurances from international bodies.

You see countries that are blatantly going against the international bodies, of which they're members, that have made the recommendations. Those are really difficult to address because, at the end of the day, even though we have trade deals with countries, every country reserves its sovereign right to make its own regulations, and a lot of times countries will make decisions for political reasons or for internal reasons, even if they are going to go against what internationally they've agreed to.

We also have problems where — and this is quite common in food processing, particularly in the meat sector — the actual processes that are used in the manufacturing plants are different in the two countries. One country will say that Canada's standards aren't as high as theirs, and they will insist that Canada do something a certain way. In those cases, what Canada always pushes for is to have what's called "mutual recognition." We want to have the other country acknowledge that our regulations, although they may look a little bit different from theirs, in fact, achieve the same goal, which is food safety.

[Translation]

Mr. Laurin: Questions regarding non-tariff barriers are always complex. As Ms. Sullivan just explained, it is a fine line because the government has the authority to regulate any particular sector. When that line is crossed, the government is starting to set out requirements that favour local producers, which harms foreign companies seeking to penetrate that market.

When we were negotiating the free trade agreement with Korea, we learned that Koreans had to indicate on their tax return where their car came from. That is the type of measure that can encourage — I even heard that, in some countries, exporting businesses were forced to use a certain port even though that port was experiencing delays of several months.

So, there is often a fine line between bad and good faith, or between market access restrictions and the adoption of legitimate policies. As Ms. Sullivan mentioned, the best solution is to strengthen co-operation. In general, the two countries share the same interests. When it comes to agri-food products, that interest is protecting the health of consumers. It is important for the regulatory authorities of both countries to sit down together and figure out a way to mutually recognize their processes or find a common solution that will meet their requirements.

Senator Tardif: Does the Canada brand strategy support the export of our products on international markets?

[English]

Ms. Sullivan: You'd have to ask the individual commodities, but I think that, overall, it has. Canada has a very strong image internationally in terms of both the quality of the products we manufacture and grow and the safety. I hear this a lot in my regulatory work: Canada is considered to have one of the most rigid and effective regulatory systems in the world. It's a very difficult system to get through sometimes for people who are trying to have products certified because it is so rigorous, but it is generally regarded as being in the top five in the world. When you go out with Brand Canada, which is very recognizable, a lot of countries say they are quite envious because, of course, we have the Maple Leaf, and it is such a recognizable symbol. Very few countries have something that's so recognizable. It really does evoke quite a lot in people. We obviously can't just rely on that, but it is a very strong brand internationally.

Mr. Laurin: I would add that that applies not just for the agri-food sector. In manufacturing, we hear about it all the time. Companies put a lot of emphasis on that aspect and say that we need to continue to reinforce that because, increasingly, whether in the agri-food sector or in the services industry, everyone is trying to differentiate themselves from the competition by adding value, being innovative, finding something better to do than the competition. So I don't think there are many companies in Canada competing based only on price.

Having a strong Made in Canada brand also helps you to differentiate your product and your service offering from that of the competition. When we were doing roundtables with manufacturers and exporters across the country, we consistently heard that from companies. They rely on the government to kind of build that brand and continue to project that image.

[Translation]

Senator Maltais: I would like to welcome our guests.

Mr. Laurin, Canada has signed free trade agreements and is currently in the process of negotiating others. You said that you look forward to an agreement with China in particular. In the event that all of these agreements work out — I am talking about export-driven agreements for Canada, of course, because we have 36 million consumers — could all of these agreements pose a threat to domestic markets and products? Free trade means that we export, but it means that we are purchasing too. Will the products that are manufactured for Canadians in Canada be able to remain as competitive and high quality as they are now?

Mr. Laurin: That is a very good question. I would just like to clarify that I am not promoting the negotiation of a free trade agreement with China. What I am saying is that there has to be a serious discussion about what could be done. Is a free trade agreement the best solution to advance our commercial interests in China? I'm not sure. However, it is important for us to continue to improve our relationship with China.

Your question is a really good one. Will free trade agreements harm our production capacity? You are talking about our manufacturing capacity, but these agreements could also affect other sectors. Canada represents about two per cent of the global market. As a result, more and more, if manufacturing companies want to survive in a competitive environment — Canada is not a country where costs are low. Canadian companies must set themselves apart by offering value-added products and services and they must be flexible enough to quickly respond to consumer demand. They must set themselves apart by undertaking research and development activities and by proposing innovative solutions. The more specialized a company is, the more limited its market niche is and the less potential the Canadian market has for that company.

I think that all manufacturing companies want to sell their products in Canada, but they cannot limit themselves to that. For a long time, Canadian companies survived by selling products to the United States. We expect that market to continue to stimulate Canadian export growth in the coming years. However, more and more, the medium- and long- term trend involves emerging markets. Speaking of Asia, it is vital that our companies make the most of opportunities offered by the markets there.

I think we have no choice but to participate in free trade. We have defensive interests every time we negotiate a free trade agreement. There are industries that are worried or that have concerns about production losses and their industry's lack of competitiveness compared to foreign companies. However, generally speaking, the other country also has defensive interests, and that is the beauty of a negotiation. It is the ability to concede on certain points but to ask the other party to give us other things in our best interest in return. There are always defensive and offensive interests. The beauty of it is that we are able to resolve those issues by negotiating a fairly broad agreement.

Senator Maltais: I want to give you a striking example, that of clothing manufacturing plants. Fifty years ago, Canada filled its own clothing manufacturing needs and even produced clothing, shoes, women's handbags and other fashion-related items for export. Today, clothing for well-known international brands from France, Spain and Italy are made in China.

I am making particular mention of the clothing industry in Quebec, which was very important. It is estimated that we lost 10,000 jobs in the clothing and shoe industry, which you will likely tell me have been replaced by jobs in other industries. However, are we not running the risk of seeing some Canadian production sectors disappearing completely in the long term because those markets have been flooded with lower-cost products? That is what happened in France, for example. Today, we are buying Pierre Cardin clothes that were made in China or India. The only thing that hasn't changed is the price. Could some aspects of our industry disappear because the sectors are no longer competitive?

Mr. Laurin: The short answer is no. This is not about which industrial sectors will win and which will lose. It is about a major change in the type of activities that are conducted within each sector. The textile and clothing industry is a good example. This sector generally requires a lot of workers, which means that labour costs are fairly high compared to the cost of the merchandise that is produced. Labour-intensive manufacturing has unfortunately left Canada for countries such as China. We need only look at the tags on our clothing to see this, and that is the case everywhere in the world now. Generally, decisions regarding manufacturing in this industry are guided by the cost of labour.

However, there are clothing and textile companies in Canada that are doing well. Generally speaking, they manufacture the type of materials that are found in the protective clothing for firefighters or in linings — textiles that are not necessarily worn by people but that are used in other sectors. It is no secret that this creates fewer jobs, but there is still a textile and clothing industry in Canada, even though it is more limited and very different than it used to be. In some cases there is still a lot of design and distribution being done, but I agree with you that there is a lot less manufacturing being done in Canada.

Senator Maltais: Could a company like yours promote companies in other sectors? For example, I am thinking of Atmosphere in Quebec City, which focuses on producing extremely high-quality goods, which could easily be exported but are not competitive on the international market, where the same quality of athletic clothing and winter wear is not found. It is not as cold in Bangladesh as it is here, so we can specialize in some types of clothing and fibres, as you said. That will be a new niche for Canadian companies.

Mr. Laurin: That is what I have noticed. I am not an expert on the textile and clothing industry, but from what I've seen and heard from the member companies of the associations that I used to work for, the type of production that is occurring in Canada is much more specialized and caters to specific markets where we had the expertise and where the cost of the merchandise is not related to manufacturing labour but to research and development, to the engineering of the fabric and what it is made of.

The Chair: Thank you, Senator Maltais.

[English]

Ms. Sullivan, do you have anything to add on those two questions?

Ms. Sullivan: Jean Michel as an economist has the broader perspective. I think in terms of agriculture, I would say that Canada already competes in the world with all of our major agriculture competitors and we certainly have shown that we can hold our own. Canada will never be the low-cost agriculture producer of the world. I think most of our sectors have really learned to specialize in quality because that's really what we specialize in, even from an agriculture perspective. We're manufacturing canola oil. That's an expensive oil, but it's also very high end and has specific health properties. Our beef is considered to be incredibly high quality, but is also expensive. We are not creating low cost products here. We already, in some ways, established a niche, when it comes to agriculture and we certainly have shown that we can compete. Against foreign markets, we already receive a lot of competition from exporters, even here in Canada.

Senator Merchant: Some economists look at these big trade deals, like the TPP and the Canada-EU, as deals made by corporations for corporations. The question is: How does the bulk of the population benefit from these deals, let's say in Canada? How does the ordinary person benefit from these trade deals?

Ms. Sullivan: I worked quite extensively on the Canada-EU CETA. I was in Brussels and Ottawa for all of the negotiating rounds. My job was representing farmers for the most part, who I think are not corporations. Pretty much every farm in Canada is still family owned. We were really heavily involved in trying to do a couple of things: First of all, make sure Canada negotiated a deal that allowed Canadian farmers to export their products to the EU. In that regard, we were successful. The estimates are that agriculture and food exports to the EU will grow by $1.5 billion when the deal is done, which really will make the EU one of our major markets. There are very few $1.5 billion agriculture markets in the world, so that's phenomenal.

The other thing that we were looking at in that deal was making sure that, even though we had access to the EU, they wouldn't put in place non-tariff barriers, these regulatory barriers that would keep Canadian products out. That will continue to be an ongoing struggle we have in all markets, including the EU, but that was a real focus of it. At the end of the day, if we can open up a $1.5 billion market, that is significant additional value for Canadian farmers, which means Canadian rural communities and Canadian food processors, in terms of the products that we're shipping.

Also, in some cases, it adds value to the products that we're making at home. In the case of meat, for example, you have to find a market for all 150 cuts of meat that come out of any one animal. If we can identify a market in the EU where we can sell our hams, something that we sell for very low value here in Canada, it's very high value there. Even if we don't sell more, we're selling our current production at a much higher level. There are very real benefits that trickle down to everyday Canadians from across the country from a deal like this.

Mr. Laurin: I would just add that, in general, the more you have open markets, the more you have competition. The more you have competition, the lower the prices are. So you would expect that, in general, trade deals and more open markets lead to more choices and lower prices for consumers. I would also say that, in terms of our own economy, because our domestic market is so small in relative terms, when we do these trade deals — and the agri-food sector is a perfect example — it removes the barriers to doing business in foreign markets or reduces the costs. So our companies are able to basically ship more products to foreign markets, thereby employing more Canadians and creating higher paying, better jobs for everyone.

Another element that we need to remember is that, especially in manufacturing, a significant share of our economy is driven by foreign investment — foreign companies investing and setting up operations in Canada. These companies can locate investment anywhere around the world, and, usually increasingly, they're looking to set up a manufacturing operation that will supply the entire world with a specific type of product or technology. When you have free trade deals like CETA or TPP, these are critical. It's your company, and you're global and looking to set up operations in a country. When you have privileged, duty-free access to both the United States and the European Union, it really gives you an edge, as a country, as you're trying to attract investment.

Let's not forget that Canada did the deal with the European Union. We're looking forward to getting it implemented as soon as possible. The United States is in negotiations with Europe right now. Who knows when they'll conclude their deal. If the United States concludes a deal with the European Union and we had not, thousands and thousands of Canadian jobs would have been in danger. I think the government needs to be proactive on trade, and it has done so. Sometimes we wonder: What's the impact? The downside is that other countries around the world are doing trade deals. If we're not keeping up, we're going to lose ground here.

Senator Ogilvie: Ms. Sullivan my question is in a non-tariff area. First, I'll give a little bit of background, and then I'll ask two related questions. Antibiotic resistance is becoming a major worldwide concern. The WHO has identified it as an international pandemic. The British Parliament has identified it as a major pandemic.

This initially deals with the impacts on human health, but I'm sure you know where I'm going with this. The concern is — and it's a particular concern here in Canada — that there is totally unregulated use of antibiotics in our major agricultural food-producing areas, in the beef, dairy and poultry industries. It is particularly severe in poultry. It's totally unregulated, and the amounts of antibiotics that are used as supposed growth promotors are enormous.

I saw you shake your head. So I guess I'm not going to get an answer to it, or the answer may be no. The two questions are the following: Are you seeing any examples yet of the use of restrictions o imports from countries where animals are treated with antibiotics for growth promotion in an unregulated manner, and have you detected any movement within the Canadian producers? These are largely within our supply-managed areas, of course. Are you detecting any awareness or concern in these sectors with regard to planning for the future? It is my opinion that it's going to come.

Ms. Sullivan: I'll start by saying I'm not an expert on the domestic production practices, particularly in the supply management industry, so I don't know what they're doing in terms of the antibiotic use, either from a practical or a policy standpoint. I would say, from a trade perspective, yes, we do see countries around the world that impose bans on products that are manufactured using certain additives, we'll say. The big one is the growth promotant Ractopamine. We see that, for example, in China. We're seeing it in the EU. We see that in Russia. That would be the area where I would see the most dramatic impact from a trade perspective. Certainly, I used to work in the Animal Nutrition Association. I ran the trade association for feed manufacturers a number of years ago. Questions of antibiotic resistance were swirling around even then. It's certainly an issue that has been around for a long time.

Senator Moore: Thank you both for being here. Mr. Laurin, you referred to Kathleen Sullivan as Dr. Sullivan?

Ms. Sullivan: No, I'm a lawyer.

Senator Moore: You mentioned Canada and its attempt to have an agreement with South Korea. The EU and the U.S. got in before us.

Ms. Sullivan: That's right.

Senator Moore: How does that happen? Do we initiate contact with the appropriate authority there, and do they do it at the same time and even after us? How do they get ahead of us?

Ms. Sullivan: Jean-Michel had talked about the WTO. If you are in favour of trade, then, in a perfect theoretical world, the WTO is the forum that you would want to do that in because it creates at least a level playing field around the world. The problem we have with these bilateral and regional trade deals is that, while they can be quite fruitful for us, you're basically engaged in a game of leapfrog. So it used to be that Canada, the EU and the U.S. all exported to South Korea. Take pork, for example. Canada, the U.S. and the EU are the biggest pork exporters in the world. We're number three. We were all exporting to South Korea. South Korea had a set of tariffs that they had negotiated in the WTO, and we were all subject to the same tariff. So there was a tariff —

Senator Moore: Same rate of tariff?

Ms. Sullivan: Same rate of tariff. There are now 162 countries in the WTO. Every country has what's called a "most- favoured-nation rate," so they have to apply the same tariff to every other country in the WTO, unless you have a free trade deal. So we would have all been subject to a tariff, which is never good, but at least it was the same.

Canada actually started negotiating with South Korea first. Of course, the idea is that, if we can get a lower tariff than our competitors, we can grow our sales. But our negotiations stalled, and the U.S. and the EU started negotiating separate deals after us, and they concluded. Then Canada came back to conclude ours.

So what has happened is, in all three deals, tariffs will be phased out over lengthy periods of time, let's say 15 years on pork, for example, but because the EU and the U.S. started before us, we're always behind them.

Senator Moore: Why did it stall?

Ms. Sullivan: I suppose everybody would interpret it differently and I certainly wasn't a negotiator there, but there were two sticking points for Canada: one was on autos; and the other was on agriculture. You'll remember back when Canada was first hit with BSE, in about 2003. Korea shut the market to Canada. There was a lot of concern: Why would we negotiate a trade deal with Korea when they have actually gone against international standards and imposed a block on our beef going to their country? So Canada was actually embroiled in a fairly heady WTO dispute with South Korea for many years. That ended. Canada was able to get over the concerns. Our auto industry was quite concerned about Korean car exports coming to Canada. We were able to work through all of those things and we concluded our deal. But, sadly, it was a couple of years after the U.S. and the EU.

Senator Moore: Did that WTO thing get resolved before we started or was it still ongoing when we started negotiations on the trade deal?

Ms. Sullivan: It was still ongoing as we resumed negotiations with South Korea. It was a huge lesson for Canada: if we were going to be involved in trade and if the world is focused on regional and bilateral trade deals, then we have to be ahead of our competitors. It's unfortunate.

Senator Moore: But if we had that ongoing dispute when do you jump in?

Ms. Sullivan: It's very tough.

Senator Moore: I'm involved in the Canada-U.S. Inter-Parliamentary Group down in the States, and constantly meeting and arguing with our colleagues in the house and the Senate with regard to country of origin labelling, COOL. I don't have to tell you that we're winning all the cases. Is the WTO coming down momentarily?

Ms. Sullivan: End of May.

Senator Moore: I expect we're going to be successful again.

Ms. Sullivan: Yes.

Senator Moore: But you made an interesting comment that the countries reserve the jurisdiction to make their own laws for the non-tariff. Where does the rule of law enter into this? We went through this on the softwood lumber. We won every decision. They still took $5 billion of our Canadian producers' money and gave it to our American competitors, in the face of all the court decisions. So the rule of law — does it matter?

Ms. Sullivan: Here's the challenge. I always say trade deals are contracts. You and I negotiate a contract. But unfortunately, if we had negotiated a contract here in Canada and one of you reneged, then we would go to court. The judge would impose some sort of ruling on us. But when it comes to international trade, there's no court. Every country is sovereign. No court can force a country to do something when it comes to trade. We go to the WTO and it has a dispute mechanism. At the end of the day, even if the WTO rules against you or rules against me, it can't force either of us to do anything. It can allow the other to penalize.

So, for example, if we win the final appeals of Country Of Origin Labelling, and the U.S. doesn't change its laws to comply, then the most we can do is retaliate. So that is the sole mechanism that there is at the end of the day. You can't force another country. Let's face it; Canada would not agree to allow another country to force us to do anything either. So the sole thing that we can do is negotiate with the other country or at the end of the day retaliate which is, for example, what we did with the EU with their hormone ban. We took them to the WTO. We won. They didn't change their law. They still haven't changed their law. They still ban imports of meat produced with hormones. We retaliated by putting tariffs on their pork products, for example. But then those only last for so long. It is ultimately the great imperfection of the international trading system.

Senator Moore: You may know that we met with the office of the chair of the Agriculture Committee in the house, and they were urging us to retaliate. It's the only way we're going to get their attention. To try to get it through the whole legislative process is long and lengthy.

One other question: In early December, we were in Washington and there was a meeting on the first-ever Canada- U.S.-Mexico in a parliamentary group. The whole theme of that was to create our own North American marketplace — buy North American. What do you think of the possibility of that happening, in view of your experience dealing in international trade and other countries?

Ms. Sullivan: It's interesting. I think that to be a good business person you have to wear a lot of different hats. On the one hand, for a lot of our agriculture and food processing sector, it is a fairly integrated North American market. Certainly, COOL aside, it was a pretty liberal flow of animals across the Canadian-U.S. border, subject to what economies look like. So in some ways, we would view the U.S and Mexico as our friends and allies, but in other cases, if you go around the world, we are fierce competitors. I suppose every sector would have to do its own calculus to determine whether it made sense in other markets for them to be working together, or not. Typically, if you're a good competitor, you want to stay ahead of the other guy who is making the same product.

Senator Unger: Thank you both for your very interesting presentations. This is sort of a side question: Do you ever turn your attention to helping interprovincial trade in Canada?

Mr. Laurin: The short answer is yes. I have an interest in the issue. In my previous life, and even as a consultant, I've been involved with it. There are several associations that have been working together to try to encourage provincial governments to negotiate or modernize, I would say, the Agreement on Internal Trade that we've had for the past 20 years. I can share some ideas in terms of what I personally think would be the way to go for Canada.

Ms. Sullivan mentioned earlier that one way to resolve regulatory differences between jurisdictions is to have some sort of mutual recognition. The European Union now has 28 member countries? They have mutual recognition between all of them. Essentially, if you're trying to sell a product in one of the EU countries, let's say France, and you meet French regulations for selling that product into that market, then you can automatically sell that product in any other EU country because of the principle of mutual recognition. Essentially, what it says is, "if you can sell in one country, you can sell in any other." A member state that says, "No, we have special restrictions or we have a special regulation in our country," then the onus is on them to prove that they deserve an exception.

Unfortunately in Canada, our economic union doesn't work in such a way, so that in some sectors, especially in the services industries, there is sort of a litany of small differences because each province has its own jurisdiction. For example, when you talk about environmental regulations or the transportation industry, it has a different set of rules in each province. We've talked a lot about securities regulation in this country. These are all areas where each province has a specific, separate way of dealing with them. Our provincial governments have, in my opinion, made the mistake of trying to resolve these issues on a one-by-one basis. When I worked for a foreign association, they would always come to us saying, "Can you give us specific examples?" We gave them specific examples. It's tough. It's like doing the trade deal with the European Union. If the European negotiators had come to us and said, "Can you give us a list of specific examples" — you try to work, basically build a set of rules that would apply to everything.

In the case of the Agreement on Internal Trade, my belief, and I know several business leaders in Canada share that view, is that the way to go would be to use the European approach: say we'll have mutual recognition. Each province recognizes the other province's standards and by default, if you can sell it and do it in one province, then you should be allowed to do it elsewhere in the country, unless the province has a good reason to justify having an exception. If they want an exception, there should be a process for them to file one. Right now the onus is always on the specific company to try to break down that barrier. Quite frankly because the Canadian market is so small in relative terms and some provincial economies are fairly small, companies are just saying, "Well, we're just going to go over to the U.S. to do business. It's much easier."

Senator Unger: That's really a problem.

Mr. Laurin: It is a problem. I'd say it's less of a market access issue than the cost of doing business issue. Securities I think is a good example. Securities companies do business in every jurisdiction across the country, and everybody would agree that it's adding to the cost of doing business and it's not necessarily doing a better job of protecting consumers. The trucking industry is kind of the same thing. Weight categories and weight loads and all these different regulations are different by province. If you talk about the construction industry, yes, there's been some progress in recognizing credentials between provinces. We've done a lot to facilitate the mobility of labour across provinces. For example, for apprentices, it's still difficult for them to get their apprenticeship in another province. All these small differences by themselves are not huge issues, but when you add them up, it has an impact on our economic competitiveness.

Senator Unger: Thank you for that. I'd like to refer to the last part of Ms. Sullivan's speech, where she says that Canada's agriculture sectors must have a solid and strategic understanding of international trade, including the mechanics, benefits, perils and disruptive impact of trade barriers.

Having said that, in your opinion, are our agricultural sectors up to that task?

Ms. Sullivan: Overall, yes. I think that the government has certainly put, obviously, a lot of effort into negotiating trade deals. I always say that we have two trade ministers. Minister Fast, and Minister Ritz as well are constantly travelling the world and engaged in trade negotiations, and also in dealing with trade barriers in many countries and promoting our goods. When it comes to the individual sectors, we have some that are incredibly sophisticated. Our canola, cattle, hog sectors have had to be very much focused on trade because: they either face challenges like BSE and markets shutting down — a lot of challenges for our pork sector. Our canola industry is almost all export oriented, so it has had to be focused, and there are other sectors, like the grain sectors. We do a lot of specialty crops where they're not as big and certainly could probably use a bit more focus. Even seeing our standing in the world is helpful to know that we do well.

One thing that is really important, though — I had said that Canada has slipped from fourth to fifth place as a major agriculture exporter. If you look at how we do on food processing, about 10 years ago, I think we were the third largest in the world and now we're ninth. That's not because our exports have gone down. It's because other countries' exports have gone up. Relative to how other countries are doing, we are not doing as well anymore even though our overall levels of expors are growing. There still is, very much, a need as well to focus on our food processing sector and helping ensure that they're competitive, and that they have a good understanding of what their export opportunities are.

[Translation]

Senator Dagenais: Thank you to our two guests. Obviously, I would like to come back to the Temporary Foreign Worker Program. You know that the government has put a law in place under which foreign workers who have worked in Canada for four years must then wait four years before they are eligible to come back and work again. This provision does not pertain to seasonal agricultural workers, but it does affect those who work in slaughterhouses. Do you think that these laws pose challenges in sectors such as the agri-food sector? We know that the law encourages people who come here to work to become permanent residents and that it seeks to make jobs available for Canadians. It is not always easy to work in a slaughterhouse and Canadians may not be interested in doing so, but I would like to hear what you have to think about that.

Mr. Laurin: That is a good question. Unfortunately, one of the main constraints on the growth of Canadian exports is related to how difficult it is to find workers. I often met with companies that said that they were in a position to promote growth but that they could not find Canadian workers to grow their operations. That is one reason that companies invest abroad. For example, they are going to increase their production but they are going to do it in the United States or in another country where their clients are located because they cannot find workers in Canada.

In my experience, for the employers I met when I was working in the manufacturing sector, hiring temporary foreign workers was always Plan B. Plan A was to find a way to hire Canadians at competitive wages. No one liked using the Temporary Foreign Worker Program, but everyone was glad it existed, because it helped meet a very real need.

The government had to make changes to the program, and time will tell what impact those changes will have. I'm not up on the latest developments in the implementation of these measures at the business level, but a lot of people are concerned about this. There are two categories of workers: less skilled and more skilled. I'm more familiar with the programs for highly skilled workers. Today, large companies do business all over the world and need better mobility for their skilled workforce. If there is an expert somewhere in the world in the type of programming you need or the type of machinery you want to sell to a customer in Canada and that person is a French national and you want him or her to come to Canada and work for a year, it is important to be able to move people efficiently. In the case of the less skilled workers we often see in the agricultural sector, in my experience, people must have access to this program, because they can't find workers locally.

Senator Dagenais: Ms. Sullivan, do you have anything to add?

[English]

Ms. Sullivan: As I understand it, it's a considerable issue for all of the agricultural sectors, not just packing houses, but I think on-farm labour as well. As you would imagine in Western Canada, it has been particularly problematic because there's a high demand for labour in other industries. Yes, I think that continues to be one of the top issues that the agriculture community faces.

Senator Enverga: Thank you for the presentations. As we go along with having trade agreements with so many countries, one of the issues that came up during the talk about the TPP is that we should make concessions with regard to our supply management. Could you comment on that? Do we have to make concessions and what would be the impact if we did?

Ms. Sullivan: I'm used to supply management questions. I guess the answer is: maybe yes, maybe no. Really, when you're in a trade negotiation, what you get is related to what you're prepared to give. There's not a lot of low-hanging fruit left when it comes to international trade. For industrial goods around the world, most tariffs have been pretty much eliminated. It's really agriculture that's kind of the last bastion where countries are holding out. Just to be clear: agriculture is precious to virtually every country in the world. We're not the only country that has agriculture industries that we'd like to protect. Many others do as well.

What we're finding in trade negotiations, and it would be the same if we were negotiating the WTO as well, is that we're running out of things to talk about. So we're going to have to start talking about the stuff that's sensitive and matters to us. If we want to continue negotiating trade deals then we have to keep digging deeper into the things that hurt. But we don't have to negotiate those deals.

Also, in the TPP, I think the key thing is to take a look at how ambitious the other countries are planning to be. Let's face it, if we're in a trade negotiation with 12 countries and they all say, "we're going to eliminate all of our tariffs and open up every sector," then we're going to have to do the same thing if we want to be in on that trade deal. What's happening with the TPP right now is that everybody is looking at the U.S. and Japan to see what they do. If the U.S. and Japan come up with a really aggressive package, then Canada, if it wants to stay in the deal probably, will have to do some work to liberalize tariffs on those supply-managed sectors. Remember, supply management is about more than just tariffs. It's a domestic system. The tariffs are in place to try to manage the level of supply in the country. But largely it's a domestic system. Creating more access or reducing tariffs for dairy products doesn't in and of itself destroy supply management. Over time though, that is where you end up, right? If you eliminated all of the tariffs and all of the products could come in, you get to that point.

I think people are in a wait-and-see mode with the TPP. Everyone is kind of trying to see what Japan and the U.S. are going to do, how ambitious they are going to be. Based on how ambitious they are, Canada and every other country is going to have to meet that level of ambition. If you're not comfortable doing that, you can always walk away as well. Nobody can force us to sign a trade deal we don't want to sign.

Senator Beyak: I've heard a lot from you both today that I haven't heard before, and it's very impressive. I'm going to go back to Senator Dagenais' question on the temporary foreign workers. I wonder if you two have input somewhere and could offer suggestions and your knowledge. I know it's a very serious issue, and we seem to have run out of ideas on how to make it better.

Mr. Laurin: Input. You mean, for example, research we would have done?

Senator Beyak: Committees that you might be on or people that you're working with through your past organizations.

Mr. Laurin: Nothing comes to mind right away. I do know some individuals who would have done research on this, so I could maybe pass that along to the clerk.

Senator Oh: Thank you for being here and for your information. We have signed a lot of trade pacts and FTAs to get our trade going. Do we do enough on our brand? Does the Government of Canada have a good strategy of promoting our Canadian brand? Whatever the trade is that's coming in, we want to outsell them. We have to have good quality product to go. Otherwise, there is no point in signing all the FTAs and trade pacts if you can't sell overseas. Do you think the government is doing enough to promote our trade brand?

Ms. Sullivan: From my experience, I have had the pleasure of accompanying several ministers and even the Prime Minister on some trade missions and, in some cases, Brand Canada initiatives. I think the Canadian government does a lot, and I think its Brand Canada initiatives are very strong, very good and very effective. You can always do more. That's just the reality of it. Trade is complex. As we've seen, even markets that are very stable for us, like South Korea, are gone like that, in the blink of an eye, when other countries get in ahead of us. You have to be very strategic and very nimble. You have to be not just on top of what you're doing, but you have to be monitoring what everyone else is doing. In some ways, you can never do enough. Yes, it would be great for the government to put even more money into it, but I think it comes down to balancing priorities in the economy. Certainly, what the government is doing now is very good and very effective.

Senator Oh: Good. Thank you.

The Chair: We've heard from previous witnesses, in the last year, that our strength in Canada relies on our four Fs, meaning our strengths such as production of food, fertilizer, fuel and forestry, our natural resources base. With your experience in free trade agreements, would you say that our market access strategy strengthens the four Fs?

Ms. Sullivan: Yes, I'm certainly not an expert on the energy sector, but, in terms of the trade deals that we're negotiating, I think that the Canadian government has really had a focus on opening up markets, certainly for the agriculture and food products and, I would say, fertilizer as well.

I have to say that Canada has world-class trade negotiators. We are a small country, but we definitely punch above our weight in terms of the calibre of our trade negotiators. They do very well for us when it comes to trade deals. I'm curious about what Jean Michel has to say. I'd like to think that the Canadian economy and what we're looking for in our trade negotiations isn't limited to those four items. It's very heavily resource based.

Food can be a resource, but it can also be a processed product, as we've talked about. Certainly, one of the things that we need to be focusing on is not just opening markets for our commodities but opening markets for our processed foods. That has a whole other twist because a lot of countries go to great lengths to protect their processing sectors, even though they might allow in the commodity goods. So I think we have to focus on that too.

Mr. Laurin: To use an analogy, to quote Wayne Gretzky, you need to skate to where the puck is going, and I think that, with trade deals, it's sort of like that. Ms. Sullivan mentioned that they are contracts. They are contracts that remain effective and in place for a long time, so it's important. Sometimes, we take our short-term interest into account as we're trying to get into another country for a commodity-type sector, where, 20, 30 years down the road, we want to go up the value chain. The processing of these resources is critical, so we need to make sure that our trade agreements take that into account because manufacturing remains a specific part of the economy.

The Chair: Before you go, there's a last question I will ask if I can have a short answer, please. You can answer yes or no, or you can expand on it. Knowing the experience we have, we're at WTO for the third time with COOL. We're expecting a decision mid-May, and we are waiting. Should Canada retaliate?

Ms. Sullivan: Yes.

Mr. Laurin: Yes.

Ms. Sullivan: No need to expand.

The Chair: Honourable senators, to the witnesses, thank you very much. You have been enlightening, and there is no doubt in my mind that we will ask you to come back as we go forward.

We have on the second panel Richard R. Barichello, Professor, Food and Resource Economics from the University of British Columbia; and James Rude, Associate Professor, Resource Economics and Environmental Sociology, from the University of Alberta.

Thank you for accepting our invitation and for being here this morning.

The clerk has advised that Mr. Rude will make the first presentation, to be followed by Mr. Barichello.

James Rude, Associate Professor, Resource Economics and Environmental Sociology, University of Alberta, as an individual: Being from Alberta, it's appropriate that I'm on the left-hand side this morning.

Good morning, honourable senators. I was asked to participate in this process as part of the Canadian Agricultural Trade Policy and Competitiveness Research Network, CATPRN. Unfortunately the network is no longer funded and therefore I'm here as an individual. I'm going to limit my discussion to conditions for improved market access. First I would like to remind you that trade works both ways. It works with respect to exports, but also with respect to imports. Imports are necessary for downstream industries and consumers. They offer a greater variety of choice. They provide disciplines on the domestic industry to get it ready to trade and ultimately they increase everyone's welfare.

Previous testimony has emphasized that the potential growth will come from Asia, primarily the middle class consumers. But what's the potential? Who's positioned to take advantage of it? My CATPRN colleagues Cairns and Meilke have a study that may shed some light on this. They forecast the value of agricultural import growth, based on income and population. So in the table, you can see the growth rates — looking at Canada, Australia and the U.S. The import markets are the BRICs and the next 11, and the G7. So for the next 11, we really only have to worry about the countries that I think are in the TPP: Malaysia, Mexico, Peru and Vietnam. While the BRIC countries represent the greatest potential growth, the next 11 present significant growth opportunities.

The problem is that Australia and the U.S. are better positioned to take advantage of these markets because of location, historical ties and productive capacity.

What does targeting the middle class mean in terms of food consumption? As economies develop, consumers move from starchy staples, cassava, to grains and high protein foods, and ultimately to highly processed foods. The USDA in its analysis of the TPP looked at baseline growth rates and the fastest growing sectors were with respect to meats, fruits and vegetables. Likewise, that's our greatest potential. I provided you with a table with tariffs for meats and grains across all of the TPP members. You can certainly see the tariffs are higher for those countries that we don't currently have a free trade agreement with. For the most part, they are somewhat higher for meats. It depends. Japan is certainly not the case.

Although tariffs are not trivial, non-tariff barriers are probably more important. So the low-level presence of residues in crops and hormones in meats are a major irritant, as previous witnesses have attested to. John Whalley, another CATPRN colleague, has estimated that trade costs, or the costs of exporting, transactions costs, are very high in range, from 50 per cent for Korea and Japan, to 80 per cent for Malaysia, Singapore and Vietnam. These trade costs relate directly to supply chain issues.

In academic trade literature there is an emphasis on differences in size and productivity of firms that actually export. I believe Dan Ciuriak has testified to the Senate trade committee on these issues. Large firms are successful because they can spread their trade costs over large volumes of sales. Large firms can manage their supply chains because they internalize their problems and the costs. Bulk handling systems work well for cereals, but a lack of economies of scale means that niche sectors don't have nearly the advantages. Like it or not, large traders are the ones who will gain from sales of meats, fruits and vegetables to middle class Asians.

Other witnesses have testified to a schism in vertical coordination, mostly in traceability between pre and post- processing. The issue for the agri-food sector is that it is increasingly driven by consumer demands for particular attributes, for instance, natural beef. The mechanisms that ensure those attributes are maintained through the supply chain are particularly important.

I will turn to trade negotiations past and present. It's important to ensure the success of recently concluded negotiations. For instance, on the EU negotiation, we got access to 50,000 tonnes for TRQ for beef. However the beef must be hormone-free, and this requires complete traceability from the newborn calf to the delivered cut of meat.

I haven't seen a study that compares additional costs through segregation versus the benefits of preferential access, but I would very much doubt that the benefits exceed the costs by a large margin, so that the TRQ will not necessarily be filled.

In terms of the ongoing TPP negotiations, they are likely the most important forum for negotiations. Of course the elephant in the room is supply management, but it's important to remember that our trading partners have sensitivities as well.

The U.S. will not want complete free markets for either dairy or sugar. Japan is well-known for its protectionist sentiments with respect to grains, especially rice.

So it's likely the market access in many areas will come incrementally through expansions of TRQs, just like in the European Union agreement. In terms of dairy liberalization, I have published some work showing that for a 40 per cent reduction in over-quota tariffs, there is an annual $230 million loss. This has to be kept in context. There has been work that has been done by DFAIT, jointly with Japan on a Canada-Japanese agreement, showing the potential annual gains in GDP are between $4 billion and $9.3 billion. That has to be kept in mind. Whether the TPP is ever successful depends on whether the president gets negotiating authority and whether the negotiators can actually achieve a consensus.

I'd like to leave you with one passing thought. When Canada entered the Canada-U.S. negotiations, the potential market was $17 trillion — that's in today's terms — and 318 million people.

In terms of the current regional negotiations, TPP, CETA, Korea and India, the incremental potential market is $30 trillion with 2.1 billion people. So it's quite a different playing field than when we negotiated before.

The Chair: Thank you.

Richard R. Barichello, Professor, Food and Resource Economics, University of British Columbia, as an individual: Thank you for your invitation. It's a pleasure to be here with you. I would like to speak to the subject at a somewhat more aggregate level than Professor Rude. Our comments are quite similar.

Of course, international market access hinges heavily on the removal or the reduction of trade barriers in our overseas markets. Previously, that access was provided most substantially by WTO agreements and that gave us a series of cases where we've had good market growth.

But, as you know, the current round, the Doha round, is pretty much moribund, and what countries have done instead, of course, since that time, is turn to regional trade agreements, such as what we have been just talking about — CETA most recently, the Canada-Korea agreement very recently and the current TPP negotiations. So that's what my comments will relate to.

Another important point that you have heard before is that not only does it give us access to those markets by reducing trade barriers, but it also gives comparable access to those of our trading partners. Many in the industry have noted, as well, that, if we are denied access to those agreements, those competitors of ours will be able to essentially dominate those markets.

One message I would like to give is the importance of achieving those agreements, the one on the table at the moment being the TPP.

Which international markets? Where is the greatest growth for agricultural and food markets? In general, it is in those markets where incomes are growing most quickly and, particularly, when they're growing from a low base, when incomes are relatively lower. The clearest answer to that, of course, is Asia, so we can think more specifically about China, Southeast Asia and India. It's also an area where I do a fair bit of my work.

As you may know, incomes are growing in this region at 6 to 9 per cent per year. All of them are low- to middle- income countries and all have large populations.

What has to be also remembered and is quite often forgotten when we're in a rich country is that the propensity for people to consume more and better food products as their incomes rise is very high in these countries. As James has just mentioned, there are significant shifts in diet, particularly toward more protein. You could say to better quality cereals, but, most of all, toward meat and dairy products.

I have a little bit of data that quantifies this. It's data for China, but, in the studies that I have seen, the results are similar in the other Asian countries. So, if incomes go up by 10 per cent, Chinese demand for dairy products rises by 16 per cent, for beef and mutton by 6 to 9 per cent, for poultry by 7 per cent and for oilseeds by 10 per cent. All of those apply to 2010 data, so they are relatively recent.

There is a lot of evidence for this kind of growth. If you look at Canada's world trade experience, global food trade tripled in the last decade, with an 11 per cent annual growth rate, heavily influenced by Asia. That's global food trade. Canada's food trade, food exports, grew at 9 per cent per year, roughly over the same period. When we're talking about these growth rates, let me just emphasize that, when you get into double-digit growth rates, those are quite striking success stories. It's not that common to have that kind of growth. So it's deserving of attention.

Some very specific examples: Canadian canola exports to China tripled to $3 billion in the four years from 2008 to 2012. I know that's faster than the longer term, but that's a 30 per cent growth rate. Canada's pulse export value increased by 10 per cent per year since 1990 — 1990-2011 — and the current level, as you know, is not at all the trivial, $2.7 billion, probably the third major category for Canada.

Mostly, of course, to India, Canada is now the number one exporter of lentils and chickpeas, and, more recently, in the last two years of data, the numbers I have are that the export tonnage of lentils grew at 24 per cent per year and other pulses at 14 to 15 per cent.

Whichever of these you look at, the growth rates are really substantial. They are heavily Asia oriented. I have another note on the Chinese dairy market. It's growing even more quickly, and so, as to the potential, if you want growth in market access and exports, I think you can see where that lies. I have a graph to show you some of these examples.

Canada has some further advantages. Food safety is a particular issue all over Asia, particularly in China, as you may know. We have a certain reputation in this regard as being green and clean, although I would say, from what I have seen of the marketing campaigns, that New Zealand has pushed this particular characteristic in a very single- minded and successful way. But there is lots of potential for us here. I would also note that small, bilateral trade deals are helpful as we're negotiating those, but the largest gains are in the largest agreements with the largest partners, again, such as the TPP. James has already mentioned existing trade barriers and how some of them are still quite high, especially in India and, in some cases, in Japan and for certain products in China. It is important when you have those existing trade barriers that we make sure we're able to keep up with our export competitors.

Discussion has included the question of what we might have to give up, and it's almost certain we'd have to give up something. The supply management sector, of course, has been discussed in that context.

So the alternatives to doing nothing in this area in our supply management sector should also be remembered. The status quo in the supply management sector is not particularly attractive in that domestic per capita consumption is gradually declining. We've had a lot of changes in dairy technology, where you now have trade in dairy constituents that are increasing imports of those. The end result is that domestic production quotas have been actually stagnant or even slightly shrinking over time.

Another thing is that, in trade agreements, there is some question as to what we might have to give up, as the last several speakers have mentioned. The way that Canada has proceeded is to diminish the domestic product quotas by adding to TRQs. That's certainly one component, but it does diminish domestic production.

Along with this, there have been quite relatively high rates of exit from the dairy industry, and it's just another feature.

Let me just conclude quickly by saying that Canada has very large potential gains from expanded trade in agri-food products. To seize these, we really want to get access to these offshore markets, which means being a signatory to trade agreements that include Asian countries, including the TPP. We might have to compromise to secure that deal, to gain access or remain a party to such agreements. So that might mean relaxing some pillars of our supply management regime, even if some one-time adjustment is required.

These agreements would result, of course, in benefits to all of Canadian agriculture, and I've said nothing at all about all of the rest of the economy to boot.

Senator Tardif: Thank you to both of you for being here today and for your most interesting presentations. I want to get to the question of supply management.

Our previous witness, Ms. Sullivan, indicated that, when you negotiate a trade deal, often what you get depends on what you're willing concede. It appears that both of you have taken a position saying that there have to be changes in our supply management policy. Am I correct in interpreting your comments as saying that, if Canada wants to go forward, the trade-offs would be better for Canada because we would be able to get into the large partnerships where the numbers are much larger, in looking at the benefits, than what we would give up if we made changes to our supply management process? Is that correct?

Mr. Rude: I'll take a shot at that, first of all. Let's consider dairy. The U.S. has as much sensitivity as we do. They're worried about New Zealand in terms of selling components and in terms of selling butter. Nobody is particularly concerned about their cheese. I suspect we'll end up with another TRQ negotiation —

Senator Tardif: What is that?

Mr. Rude: Tariff rate quota. What you would have is, for a certain volume of imports, a relatively low tariff, a few percentage points. Once you hit that volume of imports, then you have a very high tariff, for instance, 300 per cent in some dairy products.

What they would do is they would expand the size of the quota. So the quota might be expanded 17,000 tonnes, to take the European example with respect to cheese. What it would do is that it wouldn't completely open up the market. It's essentially managed trade. Some of the products would come in at a lower price. Depending on what they are, the domestic industry would have the ability to adjust. They have options when you expand the size of the TRQs. They could cut back production in order to keep prices constant or, at the other extreme, they could allow the product to come in, and the price will come down somewhat, or some combination of that.

In the extreme, where tariffs come down sufficiently, rather than using a cost-of-production formula to set prices, what you would do is rely on the landed price of the product as the maximum price you could charge.

Mr. Barichello: First of all, there is this question of what we would have to give up. If you look at what Canada has done in the recent past in trade negotiations and the Canada-EU trade agreement, we've done just what James was mentioning. We increased the TRQ, the import quota, effectively. In that particular case, in the European case, we did it specifically for cheese. What that has meant, or will mean, is that we will have an increased quantity of European cheeses entering Canada. What it will mean for the industry depends on just that question that he raised — whether we compensate for that increase in imports by reducing domestic production an equivalent amount — and that would hold the domestic price constant.

Of course, one could keep domestic production at the same level, and then prices would have to fall, and/or any combination in between. What we've done in the past and the industry has preferred is to make sure the price doesn't change and then to reduce domestic production, domestic quotas, by the commensurate amount. But that's a choice. One can choose to do that or not.

Another question is: Will that be sufficient for our trading partners to accept? That gets back to the question of: What kind of a trade agreement will the TPP be? Will it be a very aggressive agreement, or will each country essentially keep some protected products. Then, in that case, Canada would have a fair amount of latitude in doing what I'm just saying.

It's interesting that, when Canada's European agreement became public, the U.S. dairy industry, being quite aggressive on this issue, as you might guess, said that that kind of a compromise is not acceptable. This kind of story has come out in the press more recently, and, of course, we have no idea, really, whether that's just a negotiating position and bargaining or whether it's something serious.

I can only say that past history would guide you to thinking that the way we would respond, what we would give up, is to increase the TRQ, perhaps specific to those countries that are negotiating partners in TPP, and that would be it.

Senator Tardif: The Conference Board of Canada provided the committee with its report on reforming dairy supply management, which you co-authored, Dr. Barichello. According to the report, it states:

. . . it is possible to grow Canada's dairy sector by reorganizing assets under the most efficient producers.

Was the question of the TRQ what you were referring to in this quote, or is that something different?

Mr. Barichello: In that report, what we tried to do is raise the question of these very rapidly growing export markets. We tried to essentially make the case that producers might actually find this an attractive option, that there are these very rapidly growing markets and that the industry might want to think about seizing those markets. But that would require a serious departure from the current regime.

Senator Tardif: The current regime of supply management?

Mr. Barichello: Right. Think of that as not likely to be something that would come out of the TPP, although the U.S. dairy industry would argue that this is what should come out. All we were doing was trying to say, "Look, there are tremendous gains that could be made here, but, to do that, to seize on those gains, you would have to be able to compete on the world price, roughly speaking." Canada would probably get a premium because of these attributes that we have of having good-quality, especially clean products, et cetera, but, essentially, we would be coming down to something within sight of the world price. That's quite a lot less than what our producers are receiving now. You can't really be competitive at those prices at the sizes of some of our dairy farms.

For example, our family farm couldn't compete at a small size. You would have to expand sizes up to where the larger farms are today.

[Translation]

Senator Dagenais: Thank you to our two guests. Obviously, I think you are very brave to talk about reforming supply management. I come from Quebec, and if you want to talk about supply management in front of the Union des producteurs agricoles, then you had better come well-armed. I went through that during an election campaign, and I learned all about supply management.

I'd like to talk about a specific case. I don't know if you're aware that McDonald's restaurants in the United States are using antibiotic-free chicken. We have a restaurant chain in Quebec that you may not have heard of, called Les Rôtisseries Saint-Hubert. The chain would like to buy antibiotic-free chicken. However, the owner said on Radio- Canada that supply management was a cartel and that he was being prevented from buying antibiotic-free chicken. There was a response from poultry producers who are prepared to sell it to him, but at a higher price. A war of words played out in the media. The person buying the chicken feels as though he is stuck with supply management and sees it as a cartel forcing him to pay big bucks for his poultry supply. Even producers, and I know a few, have told me not to touch supply management. When you are talking about supply management, it would seem that it is better not to talk to a farmer.

I would like to hear what you have to say about this, because we are going to have to look at supply management sooner or later.

[English]

Mr. Rude: I have a couple of comments. First of all, McDonald's is doing a pilot project in Alberta with hormone- free beef as well. It's not just an issue of supply management. If you have something where you're trying to maintain an attribute throughout the supply chain, then bulk handling systems or facilities don't adequately deal with it. For instance, with grain, when the Canadian Wheat Board had a monopoly, if a British miller wanted a certain type of wheat, they had to spend an inordinate amount of time trying to segregate this product to be able to provide it to them and had a complex system of bureaucratic buy-backs. It's not an issue that's solely related to supply management. I think you can only push a rock uphill for so long. There are pressures continually on supply management. Whether that is the one that breaks the camel's back, I don't know.

I can tell you that every industry is very concerned about having certain attributes and maintaining their integrity throughout the supply chain. Bulk handling facilities don't handle it very well. I was just at a conference in Red Deer. The industries are very concerned about this particular issue and how they're going to meet the mandates.

Mr. Barichello: There have often been criticisms like this about how certain aspects of our supply management system have inflexibilities. They usually arise from: a specific problem that a buyer has had; that they can't get what they want; or the terms they find are difficult. For those kinds of details, I would have to just accept what was being said by the two sides in the case. I'm not privy to those kinds of arrangements. But I will say that the need for greater flexibility is something that we hear a lot about. It's probably the case that there are various ways in which our supply management boards and agencies could perhaps be more flexible. There are certainly these pressures and they have been around for quite a while.

But this is just one of many issues that might be addressed. There's great variance across Canada in the responses of different boards. You'll find some boards are much more willing or eager to experiment with flexibilities of various sorts. Just one example is the willingness between provinces to move quota, to trade quota between provinces. That is one flexibility. This is not dealing quite with the specific buyer problems that you raise, but it's just another example of flexibility, more at the farm quota level.

Another one is: Suppose you're a producer and you need access to more quota for a short period of time, like a year or less. You would normally say, "Why can't they rent it?" But in many jurisdictions that's not permitted. So there's no particular reason that can't be permitted, and in fact in British Columbia and Alberta, those kinds of flexibilities have been adopted.

So there are many issues of flexibility that I think are very useful, that are in the interest of the larger industry to embrace and should be considered.

Senator Merchant: My question is directed to Professor Rude, and it has to do with relationship between Canada and the U.S, regarding the changes in the Canadian Wheat Board: whether it's improved, the same, or worse? I believe that you have written something on it.

Knowing that the federal government has announced its approval of the deal that the Canadian Wheat Board has reached with strategic investors that will allow it to become a private competitor in the Canadian wheat sector, is the wheat industry better off now following the end of the CWB monopoly? What is our relationship with the U.S.? What are your findings?

Mr. Rude: It's a pretty broad question. I think one of the questions that I asked in the article that you're probably referring to was whether trade-flows to the U.S. would go up dramatically and as a result there would be some form of a trade action. If there's a surge of exports, I think it is going to certainly bring the attention of farmers in the other region and you have trade remedy laws that can be used.

The very large crop in 2013 and the problems with our grain-handling facilities, or system, meant that a lot of grain went into the States, at that point in time. Not a word was said. Now, I don't know; they have their own problems relative to Burlington Northern Santa Fe Railway. I think it really depends on the situation, whether we will face another anti-dumping duty or whether they will attempt to go after a countervailing duty in some manner. It appears to have shortened or to have relieved some of their complaints. But the complaints were really about the ability to compete, not so much about the Canadian Wheat Board. They were complaints of a competitor that was trying to get a strategic advantage relative to us.

Senator Merchant: I don't think you have something to add, do you, professor?

Mr. Barichello: Not specifically.

Senator Unger: My question, first of all, is for Dr. Barichello. You mentioned in your presentation that existing trade barriers are still high in India, and similarly in Japan. Could you expand on that? I'm curious about why India would have higher trade barriers than Japan.

Mr. Barichello: First of all, in each country there are tariff schedules, and trade barriers vary quite a bit by particular commodity. As James already mentioned, in Japan, their meat tariffs aren't as high. By contrast, their rice tariff is perhaps the highest in the world. My last reading of that was around 600 per cent.

Mr. Rude: 777 per cent.

Mr. Barichello: I don't have the list in front of me, although I read it very recently. India has a large array of tariffs on food products that are relatively high; 25 to 40 per cent is very common. Among our trading partners in the Asia- Pacific, if you accept these kinds of rice tariffs that Japan and Korea have: that's quite high. It's not just on processed foods, which is often quite high, but even on commodities; it's higher than what we're normally used to seeing.

For a country like that, it represents a particular opportunity: if we can achieve a trade agreement with India, and especially if we can get a trade agreement ahead of other competitors. So the gains in that particular arena are quite large. But you can go across the whole region and you can find cases like this. Indonesia, with which I am perhaps most familiar, has relatively lower tariffs for those products, but they have quite substantial non-tariff barriers. They keep out beef. The Australians are always angry with them for their beef restrictions. It's not so much a tariff; it's a non- tariff barrier.

Mr. Rude: First of all, you have to keep in mind that India is a developing country. You have to keep in mind that India, I believe, is still the largest wheat producer, or maybe China is. They're protecting food security. They're primarily worried about issues with respect to poverty, and they have very vocal groups within the country that are resistant. So you've had a long system, since independence, of very protectionist policies that have only gradually been reformed over periods of time. I don't think their regimes are comparable. There are certain issues within Japan where you have very high measures of protection. The Japanese food agency, in its transactions, may cause some distortions, but, relative to India, this is an open and freely functioning market.

Senator Moore: Thank you both for being here. I want to follow up on something that Senator Merchant was asking with regard to that glut in getting the grains and wheats to market. At that time, was any of that caused by farmers holding back, waiting for the big price? Then, they didn't get it, and, all of a sudden, you've got aging product. You've got to get it out there.

Mr. Rude: No. I think they realized the price was going to go down, and they didn't have the ability to move it. The decision you're making in the middle of the winter is: What's the opportunity cost of me storing the grain in the bins and possibly having some deterioration in the quality of the product, versus any sort of discount that I would have, the basis between the price at the port and the price that you'd receive. I think there was an unfortunate set of circumstances that happened at that time, including the pullback of the Canadian Wheat Board as an arbitrator or a facilitator of the movement of grain. They didn't do it, but they were responsible for car allocations.

The railroads have been criticized a lot. But they had their own problems, and you had a very cold winter.

Senator Moore: In your brief, you say that it's important to remember that our trading partners have sensitivities as well. The U.S. would not want completely free markets in dairy or sugar. So do they have a supply management scheme, though maybe not labelled as such, in those areas?

Mr. Rude: Yes, they do. Sugar is very highly protected, and you also have the fact that you use corn sweeteners in all soft drinks because of the high price of sugar, so the people providing the corn sweeteners also want the protection. So you have a relatively large lobby.

As to dairy in California, I believe there was an element of supply management there. Certainly you have similarities between Canada and the U.S. You have classified prices. You have restrictions on milk moving between marketing orders. You have subsidies there. We do not have direct subsidies. We have consumer subsidies.

Mr. Barichello: I think the fundamental feature of dairy and sugar in the U.S. is their very tight import quotas.

Senator Moore: Between states or nationally?

Mr. Barichello: Nationally. Just like we have these tariff rate quotas protecting our dairy industry, the U.S. sugar industry relies almost exclusively on those tariff rate quotas, which are very tight. So it's a very restrictive market with respect to international trade. The dairy industry used to be like that in the U.S., but it is no longer. As to its prices, domestic prices have trended downward and world prices have moved upward. So, actually, the U.S. now, without subsidy, is exporting onto the world market, especially powder. So it's not in the same boat as sugar, and I don't think the analogy with a supply management system with domestic quotas is applicable. But those tight import quotas are applicable in the case of sugar; and, as James said, in both cases, they have very strong lobbies.

Senator Moore: They amount to the same thing as supply management. They have a lot of cheek to tell us we should be giving up some of ours. They're not giving up theirs, and they have huge subsidies.

Anyway, with regard to your comment, Professor Barichello, with respect to, first of all, the numbers you had in China, which were for 2010. That's five years old. So where do they come from? Out of China? Is that why they're so old? Do you have difficulty getting numbers?

Mr. Barichello: This was a study or a couple of studies that were done by agricultural economists in China. So, of course, the research would take a little bit of time, and then you would have to get as updated data as you could. In our business, having those kinds of numbers on the characteristics of consumer demand, 2010 wouldn't be considered terribly old.

Senator Moore: So you are comfortable with it.

Mr. Barichello: Right. As incomes go up, those numbers would start to come down. For Canada, for example, those numbers would all be 0.1, 0.2, something like that. So when we get more income, we spend a very small amount of it on increased food demand. It's very different in China, with the demand for meats. We have barbecues for our students, and, for our North American students, we try to make sure we have vegetarian options. Our Chinese students won't touch the vegetarian options. It's meat, meat, meat.

Senator Moore: With regard to the size of farms, you said that the Alberta and B.C. farms are well on the way to increasing in their size. They're much larger now than the Quebec farms. You say our data suggests at least 200 cows. What does that mean? Did that mean that Quebec farms are now at 200 or that Alberta and B.C. farms are?

Mr. Barichello: The latter. So for B.C., the data I have for 2014 is that the average herd size in B.C. is about 165 and, in Alberta, it's a little bit less, 155.

Senator Moore: So are you saying you need 200 to make it work?

Mr. Barichello: Yes. Your costs come down if you get larger. By about 200, you've achieved a lot of it. Of course, if you get larger still, you can save an extra penny or two per litre. That's what it's referring to.

[Translation]

Senator Maltais: Gentlemen, you are professors of food economics and sociology, but I get the feeling that you are making theoretical statements that do not apply in practice. In any case, I cannot see how they apply.

Canada has the best-quality milk in the world. Our dairy producers are concentrated in Ontario, Quebec and New Brunswick. You mentioned British Columbia, but quite honestly, we are talking about small quantities of butter and cheese.

You spoke strongly about abolishing supply management. Today I was expecting to hear not only solutions that would allow us to safeguard supply management, but also new ideas, because you do research in food trade. I would have liked you to focus on that.

I would invite you to give the speech you just gave the Senate committee to farmers in Ontario, Quebec and New Brunswick. An article in the newspaper this morning says that Quebec, Ontario and New Brunswick are urging the federal government not to touch supply management. Your vision runs counter to that of 65 per cent of the population. Your theory is doubtless very good, but it is not applicable in practice.

[English]

The Chair: Professors, do you have any comments? I believe there is a question in this.

Mr. Rude: First of all I'm not a sociologist and I find that highly offensive.

I think there are things that you can do to reduce rigidities in the system. For instance, both Ontario and Quebec have a system of plant supply quotas. So if you liberalize the system of plant supply quotas you could probably leave production quotas in place. It isn't all upside for producers either. If you are paying $3 million to $4 million to get in the industry to get 100 cows, which would be less than the minimum efficient scale, supply management is not helping you. If you're already in the sector and you already have everything set up, then yes, you don't want to lose a very healthy lifestyle.

[Translation]

Senator Maltais: I'm going to stop you there because your theory doesn't hold water. Most of the time, the larger the farm, the lower the quality. We checked that on the ground. A farm with 50 to 75 cows produces better-quality milk, cheese and butter. In large businesses, quality declines in favour of money, but small family farms that have been in operation for centuries are offering products whose quality is steadily improving. We are seeing that with the fine cheeses from Quebec, which are competing with French cheeses. Ontario is now following Quebec's lead and producing fine cheeses that are higher in quality than what is produced in Europe. However, you can't do that on a farm with 500 cows. Thank you.

[English]

The Chair: Professors, if you want to provide comments to our clerk, then the committee would appreciate that — if you have any additional comments made in reference to Senator Maltais' statement.

Senator Beyak: I wanted to tap into your personal expertise Mr. Barichello; and Mr. Rude. You mentioned the family farm and talked about imports and exports. We talked to the dairy industry and the brands-Canada people about Canada's cleanliness, beauty and quality. I wondered about your personal thoughts on a Canadian cheese, newly invented, that we sell overseas as an export? Do you think there is any chance the exports of that one type of cheese that no one has developed yet, with the Canada brand, the Maple Leaf, could balance out the supply management to some extent?

Mr. Barichello: I can't speak to the specific cheese type that you might be suggesting. We already have a number that are quite well known. For example, we have several types of cheese from Quebec, just as Senator Maltais was saying, that are very good. We have some wonderful cheddar cheeses. When I'm in any international market, I seek out good quality Canadian cheddar. I'm not sure if there is a new variety. Others might be able to speak to that.

We have lots of these very positive attributes internationally. I think if you attach those to any one of a number of our, for example, cheese products, maybe even other dairy products like yoghurt, etcetera — I'm not saying it is only cheese — then we have great potential. They're smuggling milk powder into China right now because of the food safety problems that you're aware of, which happened about four or five years ago. Chinese consumers want anything foreign in terms of dairy products and the impressions of Canadian products are very strong. I have a student who is trying to see if she can export, even today, Canadian dairy products to China. So I think there is great potential.

The Chair: Mr. Rude?

Mr. Rude: As you differentiate your products and compete on quality, it's a lot easier to compete. Historically, before the U.K. joined the European Union, we were an exporter of aged cheddar. We still have a worldwide recognition of having a quality for that. Certainly products out of Oka, from the small fromageries in Quebec, are very well respected. I think that we have a system where we don't know whether or not they can compete. Give us the opportunity.

The Chair: I now declare the meeting adjourned.

(The committee adjourned.)