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

Issue 31 - Evidence - Meeting of June 11, 2015


OTTAWA, Thursday, June 11, 2015

The Standing Senate Committee on Agriculture and Forestry met this day at 9:03 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.

[Translation]

I am Senator Percy Mockler from New Brunswick, and I am the chair of the committee.

[English]

At this point I would ask senators to introduce themselves, please.

Senator Beyak: Senator Lynn Beyak from Ontario. Welcome.

[Translation]

Senator Claudette Tardif: Senator Claudette Tardif from Alberta.

Senator Maltais: Senator Ghislain Maltais from Quebec.

[English]

Senator Enverga: Tobias Enverga from Ontario.

Senator Unger: Betty Unger from Alberta.

[Translation]

Senator Dagenais: Senator Jean-Guy Dagenais from Quebec.

[English]

Senator Ogilvie: Kelvin Ogilvie, Nova Scotia.

The Chair: Thank you, senators.

The committee is continuing its study on international market access priorities for the Canadian agricultural and agri-food sector.

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

In 2013, the sector accounted for one in eight jobs in Canada, employing over 2.2 million people, and close to 6.7 per cent of Canada's gross domestic product.

[Translation]

Internationally, the Canadian agriculture and agri-food sector was responsible for 3.5 per cent of global exports of agri-food products in 2013.

[English]

In 2013, Canada was the fifth largest exporter of agri-food products globally.

Honourable senators, today we have appearing as a witness Dr. Peter W.B. Phillips, Professor, Johnson-Shoyama Graduate School of Public Policy, University of Saskatchewan.

Dr. Phillips, thank you for accepting our invitation and for sharing with the committee your opinions, comments and recommendations going forward in the agricultural field in order to enhance Canada's position and to be part of emerging markets.

At this time I will ask you to make your presentation. It will be followed by questions from the senators.

Peter W.B. Phillips, Professor, Johnson-Shoyama Graduate School of Public Policy, University of Saskatchewan, as an individual: Thank you very much. It is a pleasure to be here again today.

I bring today some comments and views that are based on 13 years as a public servant in a province that is trade dependent. I was a trade negotiator, so I have sat at tables that are trying to implement policies coming from discussions like this. I am also a trade economist who has moved beyond trade to look at innovation policy.

I think you've picked an important topic. Trade is a hotly contested policy area. Half the world wants more of it; half the world would like to stop it.

Quite often, though, we forget that trade policy is about trying to achieve better socio-economic outcomes. It's not an end in itself; it's a means to another end.

Most trade economists are trained and firmly believe that more free trade is better than less. That's a mantra. Of the people trained in that field, 95 per cent will tell you that, all other things being equal, free trade is better.

The challenge is that that notion of free trade is dependent on some critical assumptions that are increasingly implausible. It assumes that markets are atomistic. That is, there is no market power; no one who commands the operation of the system. It assumes that all transactions are arm's length and it assumes we're dealing mostly with undifferentiated goods and services.

The reality, if that is the world we are in, is you can treat trade policy separately from all other policy domains that you're interested in. You can do it as a discrete, unique policy field.

The reality, though, is that we have highly integrated global production networks. We are not self-contained. Nobody is self-contained in the food system. We import a whole series of inputs, we produce certain things and we export to the world. It doesn't matter where you are in the world. Even in the countries trying to achieve self- sufficiency, that is their reality.

On the input side, companies like Monsanto in the marketing and wholesales chain; companies like Cargill in the processing system, the branded food products like Kraft and the other major products, and in retail the Walmarts and Carrefours of the world have dominant positions.

Second, we are not dealing with arm's-length trade anymore. We're dealing with inter-sectoral and inter-firm transactions. It's not me selling to someone else; it's me selling to myself. More than 50 per cent of the global trade, and significantly more in the agri-food chain, are not clear transactions. It's transfer pricing between units in the same production chain.

Third, most of our products are highly differentiated. To the uninitiated a ton of wheat may look like a ton of wheat, may look indistinguishable from what we sold 50 years ago. There are 200 or 300 classes of those. Not only are they differentiated by their agronomic and baking properties, they're also differentiated by when and how and under what terms and conditions they're conveyed internationally.

The world is highly integrated. In that kind of world the benefits from free trade require coordination and consideration across a horizontal set of policy fields. I want to talk about three in particular.

Trade is inextricably linked to the innovation agenda that is not only in Canada but globally being driven in the agri-food chain. Canada has a long history of being an innovator in this area. This is not a small area. There is about $40 billion of investment, public and private, across the world in the food chain. Public is mostly upstream, primary R&D; private is mostly downstream, branded products and technologies. These networks exploit market access. If there isn't market access in a large enough market size, the investments don't come. It's important to keep in mind that, as we open up markets, we're also opening up innovation spaces, opening up places where people will invest to change the technology and production possibilities.

In that context trade liberalization is critical, because it creates the price environment that attracts the private capital, but to direct it to something that matters to Canada we have to put it in places that can exploit it and effectively do it. We need to create places of scale. Saskatoon, Guelph and Laval are in the agri-food space, and others do that in some other categories. We need to have efficient processes so that the systems in the tri-council space, the Industry Canada portfolio of investments, the R&D done in NRC and Agriculture Canada, are critical to the innovation system. The ability to move people, ideas, technologies and intellectual property between them and the private sector is a critical. It's part of your trade agenda, really.

Finally, you need to move people. The international research system is driven by elite people who are often stateless. People transfer across boundaries, and visas and visiting fellowships are critical. Right now, we are almost in a freeze in the university system because of the new immigration policies. It is next to impossible to bring in foreign scientists without significant effort to overcome the barriers of the immigration system. Innovation is fundamentally about getting those four things together and trade policy is a critical part of that.

Second, industrial structure is important. These are not small firms competing independently. These are large, managed industrial supply chains, so our competition policy is important. Most of our competition policy is constructed in complete ignorance of what is going on in the agri-food chain. That is one area where you can't do through this kind of committee but, over time, we need to start integrating and considering the links.

The third and final one, which is always a common issue in Canada, is the risk management question. How do we deal with the uncertainties of market access and product safety? Our entry level regulatory systems need to be responsive and consistent with what is happening in the rest of the world. It also means that when risks are detected, we need appropriate systems to handle sustaining market access while managing the risks. Investment areas like One Health Initiative, vaccinology in the animal food chain and other programs that Canada has been part of, are critical to getting an effective trade regime. Opening the system is fine, but you have to keep it open in the face of uncertainties in the marketplace.

The key message I bring is that as you think about talking about Canada's trade policy, more liberalization is probably the right way to go, but it needs to be thoughtful liberalization. It is possible we could open up markets between and among some of our trading partners to expand our ability to access export markets, but if at the same time we can't access the leading edge technologies that make us competitive in those markets, we may simply be making ourselves worse off. There is a balance to liberalizing in ways that trigger appropriate changes in the rest of the policy system, not only at the federal level but also at the provincial level with the commodity groups and with the industrial associations and industries.

[Translation]

The Chair: Thank you, Dr. Phillips. Senator Tardif will be first, then Senator Maltais.

Senator Tardif: Thank you, Dr. Phillips, for your very interesting presentation. You touched on several important points, particularly with regard to innovation. I fully agree with you that it is important to invest in research and innovation. How can the federal government help Canadian exporters develop innovative products for world markets?

[English]

Mr. Phillips: The public sector, not only in Canada but worldwide, is asking that same question. Governments in almost every agri-food region are major players in the innovation chain. They finance universities that generate high quality personnel. They often run the primary research facilities that if not developing are at least absorbing, adapting and adopting appropriate technologies to their industries. As well, they're often major investors in the development process. Agriculture and Agri-Food Canada and the National Research Council, through partnerships such as the Growing Forward initiatives with commodity groups, are major players in helping to identify priority areas and to move technology forward.

If there is a challenge, it's that in this world of everyone trying to determine a measurable value for investment, there is a pull away from the upstream areas where there's a high spinout in public good down toward product and service development. For instance, I am an investigator who's regularly funded through Genome Canada projects. The early investments in that $2-billion portfolio of activity were very much upstream, developmental research. They were about bringing technologies to the various parts of the genomics world, applying them, advancing them, and trying to build multiple possibilities for product and technology development and use.

In practice, though, as the rubrics for evaluation have become tighter, these investments are moving downstream closer to products and services. There's value in those but it's quite limited. The economics say that the public sector gets the highest return when it invests upstream in general purpose technology — things that open up areas of investment. When you get into product categories, you're closing areas of investment. That's one of the balancing acts. It is not one part of government, it is everywhere. It is happening in the Tri-Councils, the NCEs, the Genome Canada space, Ag Canada, and the NRC and platform projects. They are being pulled downstream. We are exploiting what we know now, but we're not adding to our stock of knowledge and that's a real risk in an industry that has a 50-to 100- year horizon to think about. Most of the things that will change our productive capacity to ensure that we're competitive in the 21st century haven't been invented yet. If we are not part of inventing them, they won't be relevant to our needs. We're marginal in the global food system, but we're really important in terms of advancing the technology of food security in Canada.

[Translation]

Senator Tardif: In your opinion, have the research priorities in the agri-food sector been well chosen, or are we simply going in the wrong direction?

[English]

Mr. Phillips: There are probably two-ways of answering that. First, many people in the sector have their favourite shiny thing they would like to pursue. If their ideas have been chosen, they are happy. That is a poor way of evaluating the system, but as you interrogate people like me up here, you will find that many of them will have their favourite technology.

We have many of the right priorities, but we tend to be missing some big pieces. Canada, for example, is world-class in three or four areas that are differentially underinvested when new tranches of capital come up, for example, vaccinology. We were the world's first in creating vaccines for animal health. Now the world is moving toward a one- health view of the world, which means if you want to break the infection chain that causes those massive social disruptions, like SARS, MERS and other human diseases, you have to start not in the human population but in the animal population and release things that gestate, mutate and become dangerous.

In the plant world, it's about understanding what happens inside the seed. We don't really know much about the seed. We know how it works and we can manipulate it. However, we don't know how it turns on and off. On things like soil — and I am not a scientist — the scientists I work with say we know about 5 per cent of what we should know about what happens below ground and yet that's the critical part in terms of productivity in the plant system.

Even in areas that are more trade related, Canada is a world leader, such as the barcoding life technology. I don't know whether my colleagues from Guelph have informed you of that. The iBOL technology is world-class. It has the ability to deal with a lot of the trade disputes we have done. The United States is using the technology. We developed it but Canada hasn't figured out how to use it. That's a perennial problem. We invent things that are world-class and then we don't have the courage of our own conviction and say that someone else has to use it first. It is not just at the federal level as it happens at the provincial level too.

In the food system, that's not a good idea because we are, as I pointed out, one of the top five global traders. We have a responsibility to manage the system. We're one of the few countries that have that capacity. We're developing the technology and the people to do it, but then we don't have the courage of our convictions to go to the final step and implement it.

[Translation]

Senator Maltais: Welcome, Dr. Phillips. You explained your theory brilliantly. It was a good course. You spoke mostly about innovation. How did we, in Canada — Quebec, Ontario, New Brunswick, the Maritimes and British Columbia — come to produce the best milk in the world? What type of innovation made it possible for us to offer a high quality, internationally recognized product?

[English]

Mr. Phillips: I'll preface my remarks by saying that I'm not a milk expert. It's hard to be a milk expert in Western Canada because that's not one of our primary industries, but the story in milk is consistent across the piece.

Unlike the United States, which relies on big public money in land grant universities and big private capital from multinational companies, Canada has a different model. We have more of a blended model. Industries fund a lot of the research themselves, but they do so in partnership with government labs and universities. So if we have a competitive strength in the research space, it's this ability to build networks that transcend the proprietary interest of firms and the often challenging domain of strict public investments. We built a really good public-private producer model of research development. It's right across the piece. It's not in any one sector. It's not universal, but the milk industry has done a lot as well.

[Translation]

Senator Maltais: You are right. To produce better quality milk, you first need to have good safety measures. You also mentioned that it is important to take advantage of innovation to conquer new markets. Are there any sectors in particular where we should innovate to acquire these new markets?

[English]

Mr. Phillips: I started my career as an economic forecaster, and I learned early that forecasting is a challenging business, so anything I say should be taken within that context, that no one has a crystal ball.

If I were giving advice to you as people engaged in trying to help the federal system and their partners allocate scarce public resources, I would say worry less about the product categories and more about getting the foundational science system correct, the system that can then exploit that knowledge, that expertise and those developments.

I think there's a real desire for us to find the next big product. We were successful with canola. It's our Cinderella crop, a multibillion-dollar crop. It's ours. Uniquely, unambiguously it's a Canadian innovation, and the rest of the world knows us because of that.

It's not the only one, though. We have a lot of those. They're sometimes smaller and more discreet, but the probability of finding that gem in all of the research possibilities is hard. I think we will position ourselves better if we build a strong and engaged foundation of science. It's partly through the universities; they need to become more adaptable to the needs. It's partly in the federal investments and NRC and Ag Canada, but it's critically in the portfolio investments from Industry Canada that fund most of the operating capital.

[Translation]

Senator Maltais: In the context of your studies, do you build connections with Canadian educational institutions? I am thinking of places like the University of Guelph in Ontario, McGill University in Montreal, the Food Research and Development Centre in Saint-Hyacinthe, and Dalhousie University in Nova Scotia. Do you work closely with university professors on innovation? I think a distinction needs to be made between innovation and marketing. There is the research aspect and the sale of the product. Once you have found an excellent product, if you put it on shelves, you will not end up selling it. It is important to focus on marketing but, in my opinion, the federal government is not responsible for granting subsidies in that area. The businesses are the ones who have to sell their thing. Do you agree with me on that?

[English]

Mr. Phillips: I agree entirely. One of the namesakes of our school, Al Johnson, was very clear that governments have a profound role in society but it's not as buyers and sellers so much. It's creating the conditions and the structures for people to make personal choices.

The federal government in the past 10 or 15 years has not been bad, but at times it gets pulled into that idea that we need every public sector scientist to become an entrepreneur. They are not hard-wired to be entrepreneurs in many cases; they are hard-wired to be scientists and thinkers and tinkerers and problem solvers. Entrepreneurs are a whole different class of individual. I grew up in a family of entrepreneurs. They have the animal spirit. They don't care about roles and structures. They see beyond the predictable and the presentable.

In that sense, I agree entirely. The state and all of its partners have a lot of potential influence in the research space, and there is more we could do to knit us together. If we are knit together, in many cases I have collaborations with my colleagues in other universities as well as my science partners through international consortia rather than national consortia. It's sometimes easier to do a deal in Brussels or Washington or Dallas than it is in Saskatoon or Edmonton. It's just the weird nature of the space we're in.

But I think there is more we can do to be more effective. Efficiency is not the issue. It's about the effectiveness of the investments we're making. I think there's a lot the state can do there. You don't want to get into being the marketer of products. That can get you into a whole series of debates about state trading and other things. That's not where I want to go today; I have spent part of my life in that space already.

Senator Unger: Thank you, Dr. Phillips. This is a fascinating topic.

You mentioned in your presentation a bit earlier about trade liberalization being the right way to go but it must be thoughtful. Would you consider Canada to be thoughtful in their approach to trade liberalization?

Mr. Phillips: I think every sector would probably have a different answer. I think in the agri-food sector, on the whole, we have done most things right. The development of the rules through NAFTA, while not perfect, is certainly better than the context we had before. The development of the WTO and, in particular, the phyto-sanitary and technical barriers to trade rules, are powerful levers to stop protectionist actions in other countries. That's how we pushed back COOL and a whole bunch of barriers to our products in international markets.

I think on the whole we have done many things right. Where we've perhaps been a bit less strategic than we might have been is that we tend to go in with a narrow view of what we want. We want to reduce the tariff on product X in market Y, and we often succeed, but we don't have strategies and tactics that will then allow us to exploit those market openings and the innovation file is part of that.

We are not taking advantage of the opportunities we're generating as much as some other countries are. Some of them are very mercantilist. They go in and they know they want to open up this market because they have a company that would be in there one day after the market opens. We haven't got that degree of integration. Differentially our firms are smaller. They are in the global supply chain but are not running it. Hence, they don't have that critical mass to be able to push their way into the markets. We have to be a bit more nimble and organized to take advantage of it.

Some countries have perhaps had a bit more success than us. I don't think anybody has cracked that one entirely. My judgment would be that policy is pretty good; the follow-up not quite so good. I don't think we are doing anything absolutely wrong, but I think there are areas where we could sharpen or tighten our focus.

Senator Unger: When you say "we,'' to whom are you referring?

Mr. Phillips: That's an excellent question. Having been in a province, provinces usually pass all their problems on to the federal government. Having been in industry, they just blame government writ large for all of their problems, mistakes and difficulties.

There is no "we.'' I think Pogo said it right: "We have met the enemy and he is us,'' particularly in the agri-food chain. There's nobody in absolute control. Everybody has a part to play. It's more like an orchestra than a hierarchy of decision-making.

In that sense, Canada has structured many of the right mechanisms for building that degree of not so much formal coordination but awareness and responsiveness of different systems, but to some extent we, writ large, build these things and then don't use them as well as we might. We go through the motions without having that sense that there's a specific set of goals, outputs and outcomes that are desired from these processes. So the process becomes the outcome rather than the socio-economic change that the policy is all about.

Senator Unger: To what degree, if any, do regulations provide obstacles to innovation?

Mr. Phillips: That's a hotly contested question. There are some people who argue we don't need regulation at all, just create the appropriate tort system, transparency and accountability systems and let the market win out.

I don't buy that. The State is an integral part of creating markets, and they create markets by creating confidence and understanding that technologies, while they may be disruptive, will not be fundamentally hazardous to human or environmental health.

In that sense, the regulatory system is a profound part of creating markets, confidence and the ability to transact between people who don't know each other. In the old days, we traded with people we trusted. When you're moving food 10, 15 or 20,000 miles through 5, 10 or 15 different hands, you don't know who to trust, so the state stepping in is a powerful influence.

Let me give you two illustrative examples where we may do it right or may have the right instincts but haven't quite accomplished what we wanted.

Historically, in Canada, we have had a challenge of adapting, adopting and improving technologies as fast as our adjacent neighbour the United States, and we're in an integrated production system. If we can't be as fast as them in adopting technologies, they will get the early adopter benefits, and we're going to be playing catch-up and there is no profit in catch-up. There's just survival. So chemicals, seeds, vaccines — we've had a succession of always being a little bit behind. Sometimes they are our technologies. We've just been hesitant to make the first judgment. That's where we have had a challenge.

Where we have actually led the world is in things like the adventitious presence policy that the federal government is in the process of developing. The rest of the world says that's what we need. We need to be able to sell products that have trace elements of unapproved or unaccepted technologies.

Purity is a fiction that we've created, because we can actually measure things now. Nothing is pure. It never has been. It's purer than it ever has been, but now we're asking for zero tolerance.

The world is trying to figure out how to keep what I think is currently the second biggest part of our international trading system, the seeds and oil grain system functioning when you have half the world accepting things like trans- genetically modified technologies, and half the world saying, "All other things being equal, we prefer not to use those.''

There is no reason we can't co-exist in that same production space, but we need rules. If it's going to be based on markets, you'll get Bunge saying, "Sorry, I won't be taking your technology because I can't figure out how to differentiate it so I can satisfy Japan, the United States and Europe at the same time.''

Canada is in the vanguard. We developed a policy, and the rest of the world said, "Wow, that's great. But we can't figure out how to make it work for ourselves,'' even though it probably works. It wouldn't take much to go from concept to reality, and we won't promote it to the rest the world. One way of promoting it is to show it works in your own market. Canada at the federal, provincial and industrial levels has some excellent policy people, some excellent scientists who are finding solutions to profound problems in the food system, and then we don't use them. We often talk about that as the innovation gap in the product cycle. It's equally true in the policy cycle.

Senator Unger: Who has this responsibility to push and make sure that these things happen? Government?

Mr. Phillips: I think it's a mixed responsibility. Clearly, government has the ultimate authority to make some of these rules, but industry needs to be responsible and part of the discussion. The scientists and experts who have contributed the evidence in support of it have to be part of it. They can't all hide behind the government and say, "Well, let the government take all the risk,'' because they were part of developing the solution.

These were solutions that weren't just developed in the bowels of some department or agency in the federal system. They were collectively developed with industry, scholars and practitioners. That collective response is important.

Let me give you an illustrative example of where we did it well. When GM canola entered the international marketplace in Canada, we had a technology that was world first, but our second and third biggest markets, Japan and Europe, had not approved the technology. Instead of the Canadian government stepping in and saying, "Okay, we're going to solve your problem,'' the Canadian government got together with industry, developers and the supply chain, the people who were marshalling and moving product to international markets, and they developed their own containment system that had no regulatory authority around it. It was simply an industrial-government partnership that developed the system.

As a result — we did some work in this — the industry generated a net present value of about $100 million from that one simple little exercise. They accelerated adoption by two years.

Other jurisdictions that were unable to find ways of building those partnerships outside of the regulatory regime — these are policy regimes — had delays in technology. Australia, for example, is still now just limping into using GM canola, and they should have been as fast as us in developing. They are 15 years behind us. We can do it, but we don't always succeed.

Senator Enverga: Thank you for the presentation. This is in regard to what you mentioned a while ago about the GMO.

I think I read your article only last year. It's about your economic consequences of genetically modified crop technology. According to you, poorly harmonized global regulations may encourage biotechnology companies to invest in traditional markets, at the expense of niche markets. Can you provide more information about it?

Mr. Phillips: Yes, I have a simple example. When I started to work on biotechnology, I worked a lot with multinational companies, and they had what they called a 20-20 strategy: 20 technologies in 20 product categories, 20 crops. Now, it's a 3-3 strategy: three technologies and three products. Well, it's four products, but canola has been sidelined a bit. It's corn, cotton and soy. There is a little bit of other stuff, but all the other crops have been cut out of their strategies.

I produced some work a couple of years ago where we looked at all of their supply chains, and they're simply not investing much in wheat. They're not investing much in niche crops like flax, they are not investing in critical vegetable and green crops, and they pretty much pulled out of animals.

The inability to access markets, large enough markets, means they have more or less said, "If we can't make enough money in the United States, we're not going to do.'' They know they can mostly get through the regulatory system in a reasonable period of time in the United States. Everywhere else is lagged or more costly.

In most cases, we're just repeating science that is well accepted by everyone. Everyone wants to do molecular characterization. It doesn't change depending on the market. We don't accept each other's evidence, even though it's peer reviewed and in the international space.

There are a lot of things we could do. Canada, the United States, Australia, Japan and Europe at times get together and create mutual recognition. That's great, but we're a long way from a system that's seamless and efficient at getting safe and efficacious products to the markets.

Senator Enverga: You mentioned cost increases associated with the various regulations. Don't you think the approval process at the international level will compromise food safety?

Mr. Phillips: None of these products has gone through without extensive regulatory oversight. Just like in the drugs business, they also have an adverse effect on responsibility. If for whatever reason, evidence of something comes in and evidence accumulated that it's not safe, the onus is on the developer and owner of the licence to modify or withdraw it from the markets. So there's no evidence that anything has entered the market, has generated any safety effects.

There is much debate, but it's a bit like trade policy. A lot of the noise around trade policy is that it's bad, but 95 per cent of the experts say that it's safe, efficacious and economically viable. It's the same thing with biotechnology. Ninety-five per cent of the scientists generally agree, but the notion of fair play suggests that we give equal balance to the 5 per cent who have concerns. They may be concerns that are theoretical or even speculative. There may not be any evidence or theory that suggests that there is something there, but there are people looking. That's what science is about. But it shouldn't necessarily determine what public policy is.

[Translation]

Senator Dagenais: Dr. Phillips, thank you very much for your presentation. A number of agricultural organizations have indicated to the current government that they are concerned about the integrity of the supply management system; we know that Canadian agriculture is of high quality, and that it generates thousands of jobs and significant revenues.

Yesterday, during a press briefing, the President of the Fédération de l'UPA-Estrie in Quebec, the President of the Producteurs de lait du Québec, the President of Agropur, and several partners, asked the following question: Why is it necessary to go elsewhere and encourage our own market to open up?

[English]

Mr. Phillips: Canada is an interesting country. We actually have two agri-food trading systems cohabiting in the same state. If you're in the East, then you have a large population base, both within the areas of southern Ontario, southern Quebec and within the adjacent U.S. states. They could virtually absorb all the supply you could ever produce for most products and even under supply management. No problem. In the West, it's totally different.

Not just to the United States or the rest of Canada, but we export to the world about 95 per cent of what we produce. We physically couldn't eat it all. We would be out of business, if we couldn't export to the world.

There are two realities coexisting in the same state. The question is: How long can they coexist before they start to hurt each other? That's the conundrum. I don't have the answer. Other countries have said that we're going to test other models. You probably heard about the New Zealand liberalization in the 1980s and 1990s. It worked for them. But they only had one industry, the dairy industry, and it was supply managed. They moved to an open market system and by all accounts in the economic literature that was a very good move.

Other states are equally challenged by this mix of supply management and generally market-based trade dependent industry.

I don't think there is a simple answer. This is one of those Gordian knots that you're going to be working on for years.

Senator Ogilvie: Thank you for your presentation. I am very much aware of what you have said and I agree with you in terms of the overall issues.

I would disagree on your comments on Genome Canada and NRC. I think Genome Canada is making a major transition of a very important fundamental area of research into one that can bring social and economic benefit, particularly in the agriculture area. NRC is getting back to its historic mandate and stopping trying be just another university.

The issue that you've raised is critical to our future. During my career, and certainly in the last 30 years, Canada has been at, or near, the bottom of the OECD countries in its ability to transform basic knowledge into social and economic benefit. We play above our weight in terms of fundamental research but way below any measure of weight in terms of the issues that you've raised.

What I'd like to get you to do is to comment on the following observation: Many suggest that one of the problems that we face because of the vastness of our country and the spread of our resources is a lack of critical mass of the elements needed to transition basic knowledge into social and economic benefit.

What I'd like you to comment on is whether you feel that we need to take a different approach with regard to facilitating the development of the critical mass of expertise in everything from basic discovery through the application concept stage and into commercial and economic development. We have to find a better way to bring those knowledge bases, which you clearly outlined as being distinct in many ways, but they have to work together or they have to interface in some way.

Could you give us some advice on how we make that transition process more effective?

Mr. Phillips: Let me make three observations.

To the first question of are we effective at adapting, adopting and using the best technology there is, whether it's from here or somewhere else, interestingly, agriculture, I think, is the exception to the Canadian numbers. We actually are very adaptive of new technologies. We almost meet the 3M rule of 30 per cent of our revenues coming from the products or technologies that we didn't use three years ago. We are really innovative. But it's masked in the data because it's a small enough part. It's more on the industry side where that's a problem. But in agriculture we're really good. I think that's something to build on.

On the question of critical mass, I fundamentally agree with you. I think the question is how to achieve critical mass. The historical model was the IRB model, Industrial Regional Benefits, and that was profoundly damaging to where we are today in agriculture. For instance, when the UN wanted to place their vaccine and infectious disease unit — at one point, it was proposed to be 50 to 100 people — the federal government intervened in the selection process and decided to put it in Montreal because they said it would fit with our drug business. But it didn't fit because it wasn't about drugs; it was about animal and human vaccine development, which was actually in Western Canada. As a result, we got 2 people instead of 100 people, in Canada.

We've had other examples where governments have stepped in. Saskatoon, Saskatchewan, where I come from, was early and had most of the multinationals with significant private investments in R&D in the mid-1990s. That was mostly in canola. Then wheat came along and many of the companies said that we'd like to do some of our work in Canada. The federal minister at the time said that we can't look like we're benefiting Saskatoon, so let's put it in Winnipeg. As a result, they built the building but the company never moved in. They can't have two units in Canada and so they did it all out of the United States. There's an example where we actually undercut the building of capacity.

You have a good policy in place right now where if we used it more rigorously it would probably build the capacities that you're talking about.

Back in the 1990s, where money had been clawed out of public institutions, universities, the IRB policy started to shrink and there were two critical situations that changed the dynamics of the innovation space across Canada. The first one was the government of the day said that when we have money to put back, we're not just putting it back where we took it from. We're going to require every university to identify strategic priorities. Hence forward, strategic monies will only be matched with your strategy priorities. If you say you're into food then you had better come forward with food proposals and not medicine proposals. As a result, you have seen Lakehead become a mining centre, you've seen Saskatoon make major investments in food and other universities similarly get infrastructure and research that they never would have gotten under an IRB policy.

The second thing that happened — and as much as I may sort of bite the hand that feeds me, of the granting agencies that give me funds — I think one of the best things that's happened with some of the monies that we allocate is that we've gone to international peer review. This is a really small town. We're 3 per cent of the world's scientists and we used to adjudicate ourselves. I know everybody that works in my field. There is no blind review in this country in terms of advanced science. So it was very hard to have unbiased allocation of capital in the R&D system. What we have gone to is international peer review for these larger projects. So projects are going into places that political or bureaucratic systems would have never conceived of fitting because they are going into places with the acknowledged international excellence to do the work. Sometimes that's frustrating for the people who say, "No we wanted to invest over here'' but it is what will build the sustainable research capacities. Building unsustainable ones is a waste of time. You put the money in and as soon as the money is done, people leave.

I think the policies are there. In some cases we don't fully abide by them. We still want to have some equitable distribution rather than accentuate the strengths that Canada has.

Senator Ogilvie: I have a comment. I think if I hear you correctly, you're saying we should concentrate our effort where the potential and expertise exist rather than spending the money politically to spread it across regions and dilute the resource.

Mr. Phillips: Slicing and dicing the money will mean that you don't get much return beyond the activities that you fund.

Senator Beyak: Thank you, professor, for a very knowledgeable and comprehensive presentation. I think you've touched on just about everything the committee is studying.

You mentioned the need to move people, immigration and the new immigration policies making it difficult for a university to bring new scientists in. We have heard from countless witnesses about the labour market shortage, the problem of workers in agri-foods.

Have you looked into that in your research or studies? And could you give any suggestions to the committee on how we might improve that when we write our report?

Mr. Phillips: I think there are two halves to this story. A portion of Canadian industry does rely on seasonal labour and it's difficult to get indigenous supply of that, but with most of the industry I look at, that's not the problem. They are highly capitalized, there's a very high capital labour ratio. They're not using imported labour. If they have a difficulty it's getting skilled labour that's local because they're competing against mines and other high paying employment opportunities.

The issue from a trade innovation perspective that's invisible to the media and to the public, but is profoundly destructive to the long-term interests of the Canadian industry, is that we're having difficulty getting the leading scientists into Canada, the people who are not a threat to jobs. They generate jobs. They are going to generate capacity to move our industry to newer and higher orders of technology and productivity.

Many of them don't want to come here permanently. We're a small part of the world, but we need to get them here for part of their lives. It could be a week, a month, a year, but with the concerns about migratory workers and people who may be trying to use the visiting status to avoid the immigration rules, the new rules to deal with that problem have generated a problem for bringing in highly skilled people who want to come for a week. They're not going to spend six months in an immigration queue for a one-week visit. They say, "Forget it. I'll go to Australia or the United States.''

Somehow we have to figure that out, and it's not a trivial matter. I haven't done work in this area for a while but when I looked at the development of canola, virtually everyone who was part of advancing that technological innovation was a foreign scientist. They came in, stayed here and built an envied world research team. If we hadn't had the ability to bring them in quickly, efficiently and in a timely way, that wouldn't have happened in Canada. And if it didn't happen here, it wouldn't have happened anywhere in the world at that point. This product was valuable because we were able to move people at the right time and into the right places.

Senator Beyak: That's a very helpful perspective on it.

[Translation]

Senator Fortin-Duplessis: First of all, I would like to tell you that I really enjoyed your brief, Dr. Phillips.

My first question follows on the questions that Senator Tardif asked. Could you tell me if there have been other examples of recent innovations that have improved Canada's agri-food exports? You spoke about pharmaceutical products for animals. You also mentioned canola and wheat. Are there others?

[English]

Mr. Phillips: The simple answer is yes. I think in almost every product category we export there has been innovation. Sometimes it is dramatic. Most of the innovation was iterative. It's just slightly better than the last, 1 per cent or 2 per cent better. It's not going to get the headlines but that's where the big returns are.

If there is a weakness, it's not in the adoption channels and chains. That's the good news. We can adopt technology as fast as anyone, faster than most. Some of those transformative technologies are harder to bring into the market. We're not willing to take that step up. We're willing to follow the pathway.

It's things like the barcoding of life technology, some of the advanced vaccines, some of the new crop developments and new technologies and even things like fish and forestry. We can do it. We have those technologies and many of them were developed here, but we've not been quite able to get them into the market. They won't just add 1 or 2 per cent. They could add a step of 5 or 10 per cent that accumulates over generations. That's the real risk we have.

If you asked any producer in any of the product chains in the Canadian agri-food system, they can identify a handful of technologies that they didn't use five years ago. It could be digital, biological, mechanical or organizational. They're innovating all the time and that's the positive news. That's the story that never gets out because it gets swamped in the industrial data and we don't differentiate agriculture from all the rest.

[Translation]

Senator Fortin-Duplessis: Following the negotiation of the free-trade agreement with Europe, our cheese producers told us that they did not know whether to be concerned about exporting their products to Europe, or even to be worried about the fact that cheese from European countries might invade the Canadian market, which would hurt them.

I realized that research is being done in Quebec. A number of our cheese producers are putting new products on the market. For example, the Dufour family in Baie-Saint-Paul, who are known for the Migneron, a divine cheese, just released two new cheeses. We are seeing the same thing with the Bergeron and Perron cheese dairies. I do not know about the Duplessis cheese from New Brunswick. Perhaps the chair could tell us if anything is happening there.

So should our Canadian cheese producers be concerned about the flood of European cheeses?

[English]

Mr. Phillips: I think the cheese industry, like most industries facing greater competition, will find that as technical barriers and border barriers go down, there will be parts of the industry under stress, but there will be opportunities in other areas.

I'm mindful that when we brought in the Canada-U.S. free trade agreement, there was great concern in Canada about the textile industry, that it would be gone overnight. Every industry has the same concern because they're used to the way the markets operate. But once the market opens, you hear from the people who are going to lose; they're very vocal. The people who are going to win are often too busy to complain. They're out there accessing those new markets.

Quite often you will find a shift in the markets and in some cases that means there is greater growth. However, it's growth in areas that are not in the product categories we're in now. Some of those might be under stress.

It's an evolutionary thing and it's hard to add those up in a political or policy debate and say, "Well, we're going to have winners,'' because the losers know who they are. The winners aren't identified yet. You always hear from the losers, not winners.

There's never an absolute downside from liberalization. If you don't adapt, yes, that will be a problem, but it sounds like the artisanal and specialty cheeses will find new markets because there is an insatiable demand for variety. It's not permanent, but it's almost insatiable. It's not satisfied by accessing one single market. You probably need global markets for those, but other producers might find that that puts them under stress.

The Chair: Before we conclude, the chair will recognize the Deputy Chair, Senator Tardif.

Senator Tardif: Professor Phillips, you mentioned something interesting, and I want to get back to it to make sure I understand. You said it is mostly me selling to myself. You were talking, I think, about intersectoral transactions. What did you mean by that?

Mr. Phillips: Most economics assumes that firms almost don't exist, that we transact and that, when we transact, I actually hand you something. You hand me something in exchange. It could be a barter; it could be monetary compensation. Those transactions we understand very well in theory. The difficulty is that, when you get into intersectoral and interfirm transactions, I don't have any interest in having full price discovery. I just figure out some notional price. If it is my company, do I charge you full market? Do I charge you my marginal cost? What do I charge you? It becomes very hard to know what is going on there. We have had transfer pricing litigation for years in all jurisdictions. The fear is that companies are trying to shift profits to jurisdictions with low tax.

When you are trying to deal with improving productivity, the assumption is that, if you open up markets and we are cheaper than they are, we can go and access their market. However, if all of your product is going through a supply chain and they say, "No, I have already invested over there. I don't want to take any risks. I don't want to change my production system,'' you may not be able to access that market. We get caught in existing supply chains. In the innovation space, we know that big innovations don't come from big companies. They come from the new market entrants. Why are you going to destroy your capital base? You bring in a new technology, and you have cannibalized your own product market. It's the same thing in these large industrial supply chains. They've built up major investments in the flow and the infrastructure, and then, all of a sudden, instead of shifting it all between point X and point Y, you want to go to point Z. You say, "But I don't have any infrastructure over there, and I have my capital sunk over here. So I'll just keep servicing this market. So you have created an opportunity but you have not realized it. That is the risk when you get into these larger integrated chains.

They are making decisions that are in their own interest, but not necessarily reflecting our comparative capacities and competitiveness in the international marketplace. You can get some weird distortions once industrial supply chains overlay on trade flows. The trade flow numbers almost mean nothing at one level. There are some economists who have reconstructed the world looking at how product actually moves, and you would be surprised. It doesn't look like economists think its looks like. It is heavily U.S.-dominated. It flows through ways that have nothing to do with exchange in the normal sense. They have to do with optimizing within large chains, and that means preservation of capital, which means that sometimes you don't adapt as fast as you might to opportunity.

Senator Tardif: Are you saying that large multinational firms can be distorting?

Mr. Phillips: Yes.

Senator Tardif: And it is not a true free trade market.

Mr. Phillips: It doesn't just have to be large industrial supply chains. We have invested heavily in terms of marketing Canada in ports, delivery points, trains and trucks, and they are focused on east-west flows. What happens when somebody says, "I don't want to go east anymore; I want to go west,'' or, "I don't want to go east-west anymore; I want to go south?'' Somebody has to build that infrastructure, which means that, sometimes, there is stranded capital. We have ports that are underutilized; we have rail lines that are underutilized. That is not because the product is no longer there. It is just that the product is moving in different directions and different ways. Capital will be stranded as you change and adapt to new market conditions, new productivity and new production possibilities. The more it is centrally organized, whether by the state or by industry, the more they will be slow to respond to market pressures. That is really the main point.

The Chair: As we conclude, the chair would like to recognize, on behalf of all the senators, two notes that I would like to share with you.

One is that tomorrow is Independence Day for the Philippines. Senator Enverga, on behalf of the committee, we want to congratulate Filipino Canadians, and we also want to take the opportunity to thank you for being a member of this committee on agriculture and forestry.

[Translation]

Since this is Senator Fortin-Duplessis' last meeting, I would like to take this opportunity to thank her for her strong contribution to the Senate. You have led an exemplary career. You are obviously a distinguished individual. You have served Quebec and Canada with verve. On behalf of the committee, we wish you a healthy retirement for many years to come.

[English]

I declare the meeting adjourned.

(The committee adjourned.)