Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue No. 22 - Evidence - Meeting of April 12, 2017
OTTAWA, Wednesday, April 12, 2017
The Standing Senate Committee on Foreign Affairs and International Trade, to which was referred Bill C-30, An Act to implement the Comprehensive Economic and Trade Agreement between Canada and the European Union and its Member States and to provide for certain other measures, met this day at 4:18 p.m. to give consideration to the bill.
Senator A. Raynell Andreychuk (Chair) in the chair.
The Chair: The Standing Senate Committee on Foreign Affairs and International Trade is meeting this afternoon to examine Bill C-30, An Act to implement the Comprehensive Economic and Trade Agreement between Canada and the European Union and its Member States and to provide for certain other measures.
Since we have new members, and to refresh the memories of older attendees to this committee, I am proposing a motion that the papers and evidence received by the committee during its special study on free trade agreements from any witness who again appears during its study of Bill C-30, An Act to implement the Comprehensive Economic and Trade Agreement between Canada and the European Union and its Member States and to provide for certain other measures, be also considered part of the papers and evidence received during its study of the said bill.
This is to bring all members up to speed and to point you to the evidence around our omnibus trade report, which we have filed, and it's to facilitate some of the witnesses who presented before us and wished to have that evidence stated but want to add to it, so we are not repeating the evidence.
This is the motion I propose. Do I have a mover? Senator Dawson moves. Are we in agreement? It's routine usually. All right.
I think the clerk has distributed the evidence. As the witnesses come forward, you'll receive the evidence of that witness before this committee. We'll use that procedure for our future meetings.
Senator Downe: Do you have something regarding witnesses, or is that something you want to talk about?
The Chair: Only with the steering committee at the moment. We are going to need to close the witness list at some point and continue with written submissions from anyone until we complete our study. That's an alert to the committee, but the steering committee needs to meet.
Senator Downe: A further question, chair: Have we heard from Public Safety or anyone? I'll ask the clerk, I guess. We requested they come to discuss the visa issues regarding Bulgaria and Romania.
The Chair: It's Immigration that you wish to hear from?
Senator Downe: Yes.
The Chair: I took the opportunity at our event today at noon. The minister was there.
Senator Downe: Yes.
The Chair: I asked him to follow up personally on that issue. He has assured me he will.
Senator Downe: Wonderful. Given the significance of the issue, I don't think it's possible for Bill C-30 to leave this committee until we hear from them.
The Chair: I have conveyed that to the minister, and I'm sure he'll follow through. We have a two-week break, which gives ample opportunity. He certainly was receptive to following up on that.
Senator Downe: The Minister of International Trade?
The Chair: Yes.
Senator Downe: Thank you.
The Chair: Now we will turn to our witnesses. These witnesses have appeared before on various studies, and we appreciate your appearance here today. I'm just going to introduce you. Your bios and everything is always circulated in advance, and I don't want to take time away from the committee.
We are pleased we have Brian Kingston, Vice President, Policy, International and Fiscal, Business Council of Canada; Corinne Pohlmann, Senior Vice President, National Affairs, Canadian Federation of Independent Business; and Mark Nantais, President, Canadian Vehicle Manufacturers' Association.
We are pleased that you have come before us. I trust that you'll have some pointed opening remarks. Please leave sufficient time to hear questions that the senators will wish to put to you. Welcome to the committee. I will take you in the order of introduction. Mr. Kingston, the floor is yours.
Brian Kingston, Vice President, Policy, International and Fiscal, Business Council of Canada: Thank you, Madam Chair and committee members, for the invitation to take part in your consultations on Bill C-30. I've amended my remarks right now just to make sure they are as pointed and quick as possible to leave lots of times for questions. I'll get right into it.
The Business Council is a strong supporter of the ratification and implementation of CETA. There are four key reasons why.
First, CETA will boost economic growth. That seems a little obvious, but it really needs to be emphasized. The joint study showed that Canadian GDP would grow by about $12 billion. We know it will benefit businesses of all sizes, because it gives Canadian companies access to a market of over 500 million people. The EU is the world's largest importer of goods and a major services importer. It creates huge opportunities for Canadian businesses.
At the same time, the agreement will benefit Canadian consumers. This is a message that sometimes isn't as evident. We're looking at nearly $1 billion in total tariff elimination, which is very significant for Canadian consumers. That will be a boost to the Canadian economy. It also helps businesses, which inputs into their supply chains and production lines, so it's helpful on two ends there.
Second, it's Europe's first comprehensive economic agreement with a Western developed country. This gives Canadian companies a very significant first-mover advantage, particularly over competitors in the U.S. As we know, the U.S.-EU Transatlantic Trade and Investment Partnership negotiations are stalled, so Canadian companies have this window of opportunity to take advantage of the access they have been given under CETA. We see that as very important. This will mean new business opportunities and potential sales increases.
We also think it will help attract investment to Canada. Canada now has a very attractive suite of trade agreements. We have preferential market access into the U.S., of course, and now into Europe, so if you're looking to invest in or export to either of those countries, putting production facility in Canada is extremely attractive. That is part of the first-mover advantage.
Third, CETA sends a positive signal to the world at a time of increasing protectionism. We know that since the Second World War, trade has been a powerful driver of the global economy. As trade flourishes, incomes grow, and there are widespread economic benefits.
However, we have been witnessing an increase in protectionist measures. The WTO measures how many trade- restricting policies are put in place, and since 2008, there have been over 1,500, while only 387 have been removed. This is a very concerning protectionist environment. Just last year, we saw global trade growth of 1.3 per cent. That is the slowest global trade growth rate in 15 years, which is very concerning. So we think this is the right time for Canada to sign a trade agreement and show the world that we're still open to free trade.
My last point is perhaps the most important: CETA helps diversify Canada's trade. I feel like we have been talking about this for a very long time, but as you know, 76 per cent of our exports last year went to the U.S. There is a great deal of uncertainty created right now by the imminent NAFTA renegotiation discussions. Now, more than ever, Canada needs to double down on diversification efforts. What better way to do it than implementing a trade agreement with Europe?
We're calling on the government to develop a new trade strategy, which should include increasing market access in Asia where there are a number of fast-growing economies, but implementing CETA should be the absolute first priority in that new trade strategy.
With that, I'll conclude my remarks. I look forward to your questions. Thank you.
Corinne Pohlmann, Senior Vice President, National Affairs, Canadian Federation of Independent Business: Thank you for the opportunity to be here today to share CFIB's perspective on Bill C-30 to implement the CETA agreement.
You should have a slide presentation in front of you. I will point to certain slides as we go through. I'm not going through every single one — I will highlight some that I think are relevant to the discussion today — but I'm happy to take questions on any one of them.
CFIB is a not-for-profit non-partisan organization, representing more than 109,000 small- and medium-sized businesses across Canada. They are all independently owned Canadian companies, and they're in every sector of the economy and every region of the country.
CFIB as an organization takes its direction solely from our members through a variety of different surveys we do throughout the year. That's what the slides you have portray. We also found through those surveys that a strong majority of our members support free and fair trade. This is because most of them understand that trade is good for Canadian small businesses, good for the economy and good for jobs.
We also know that many of our members appear to be in a position to benefit from the big trade deals such as CETA. As you can see on slide 3, which is page 3, almost two-thirds of our members are supportive of international trade agreements, such as CETA. However, when you look at that particular chart, nearly one in five of those small business owners felt they didn't have enough information to answer this question, suggesting that perhaps more needs to be done to inform them of the opportunities that trade agreements can bring to their business.
A few others, including what I would say are potentially some supply management producers, may have strong concerns. We continue to carefully listen to our members who have expressed those concerns. We communicate those concerns to government. One concern we have expressed, for example, is the importance of ensuring that any economic harm to supply-managed producers, for instance, as a result of CETA or any other trade deal should be fully compensated.
I also to want talk a bit about what small business owners would like to see in an agreement like CETA. That's on page 7 of your slide deck. It shows a question where we asked about the priorities for a free trade agreement and what would most benefit their businesses. As you can see here, small businesses want to see more consistency, fewer regulations, standards that are simple to comply with, simpler border processes, less paperwork and red tape, and lower costs.
The good news is that CETA tries to address each of these areas. It not only lowers tariffs, which is important, but also looks at ways to reduce non-tariff barriers that can be particularly difficult for smaller companies by finding ways to better align European and Canadian regulations and standards as well as looking at ways of simplifying the border processes, which can also be a very stressful part of trade for a lot of smaller companies.
Obviously, a big part of what we need to do with CETA is understand how to communicate its benefits to smaller companies. Thinking about ways to encourage lots more small firms to trade with Europe, it might help to provide them with advice on how to overcome some of the challenges others have faced when trading into Europe previously. This is on page 11. The slide provides some ideas of some of those challenges they have faced.
We would recommend things like providing small firms with guidance on how to deal with a fluctuating dollar and how to better manage costs associated with things like shipping, which tends to be a big challenge for them. Many of the rest of the challenges listed on that particular chart are things like high tariffs, different rules and standards and complexities. All of these will be somewhat addressed by CETA, which is good news as well, and will hopefully encourage more to take on the opportunity to trade with Europe.
In summary, a strong majority of our members have been supportive of free and fair trade. Many of our members appear to be in a position to benefit from CETA as well, but a few do have concerns. We have communicated these concerns to government and have stressed the importance of finding ways to mitigate any economic harm to sectors that may be adversely affected as a result of the trade deal.
Finally, it's really important that the benefits and advantages of CETA be well communicated to smaller firms so that more of them will feel confident about expanding their trade opportunities into the EU.
Thanks for the opportunity to present. I'll be happy to answer questions when you have a chance.
Mark Nantais, President, Canadian Vehicle Manufacturers' Association: Good afternoon, honourable senators. I'm certainly pleased to represent my member companies, which represent Fiat, Chrysler, Ford and General Motors.
Together these companies produce roughly 60 per cent of all the vehicles in Canada on an annual basis. Each of these companies also has provided a century of high-value job creation in Canada. The auto sector is Canada's key driver in terms of contributing significantly to our nation's manufacturing GDP. There are roughly 130,000 direct jobs and 500,000 direct and indirect jobs across the country relating to automotive manufacturing.
Vehicles are the top Canadian export, valued at roughly $64.5 billion on an annual basis, of which 95 per cent is exported to the United States. The current number of Canadian-assembled vehicles exported to EU countries is roughly 13,000 units annually, so we see CETA as a pretty tremendous opportunity to increase Canadian exports from our plants right here.
CVMA fully supports the CETA agreement. We look forward to passage of this bill and its implementation as quickly as possible.
We also want to acknowledge the effect of consultations the negotiating team held with our industry throughout the development. These consultations were a critical element to reaching a trade agreement that supports Canadian auto manufacturing.
I also want to commend Canada and the EU for including a high standard and comprehensive agreement that maximizes potential benefit to Canada's automotive companies exporting into that market.
What is novel about this agreement is that it unifies us rather than separates us, by recognizing that auto manufacturing in Canada, and automakers, as some of the largest multinational companies in the world, have a significant presence not just in North America but also in the European trade zone, each representing mature markets that are open to two-way trade. Moreover, this agreement includes certain provisions that reflect and properly recognize the fact that Canada's auto industry operates within the highly integrated NAFTA trade region, with our supply chains deeply entrenched on a North American basis, providing economies of scale beneficial to consumers in many respects. This is what sets CETA apart from other bilateral agreements to date.
As the focus turns to implementation of CETA, we encourage the government to continue its engagement with the industry as it develops the critically important framework for the export vehicle origin rules, or vehicle quota, as we call it. In this respect, we recommend that the vehicle-quota-related regulations be implemented without delay upon passage of this legislation. We further suggest the following points be factored into the quota program design for consideration.
First: Overly complex quota systems create an unnecessary administrative burden and detract from company business plans and the achievement of the trade agreement objectives. We suggest that any quota allocation method be kept as simple as possible and take into consideration that product planning is often done three to five years into the future. It's also important to allow for flexibility, as business and market conditions can often change quickly and often.
Second: It is highly recommended that the quota regulation be drafted in a manner that includes flexibility and a review period to ensure that the agreement serves the industry well and is able to maximize the commercial benefits to all Canadians. This approach will enable all parties to develop a better understanding of what does and does not work.
Third: Work is needed to determine the best method for allocating the quota and to build flexibility to review and readjust volume limits as we move forward. In addition to developing a quota allocation methodology, we encourage Canada to look to enhance export opportunities under CETA as implementation of the trade agreement progresses. Canada's export infrastructure, including shipping routes, port infrastructure and customs procedures, should also be continually reviewed to ensure they efficiently and effectively support Canadian exports in this agreement.
The CETA agreement has recognized the highly integrated North American industry, and in a more general context this recognition should be extended to any new trade agreements the Government of Canada pursues, including the renegotiation of NAFTA. The success of Canada's highly integrated automotive industry and its economic benefits across this country has been underpinned by the North American Free Trade Agreement. President Trump's plan to renegotiate NAFTA brings into sharp focus the need to ensure Canada capitalizes on opportunities but also protects what is essential to the long-term health and viability of Canada's auto industry and the economy overall.
In closing, the CVMA supports four key principles for Canada's trade policy. First: seeking outcomes that are favourable to the highly integrated North American auto industry interests and to the economy. Second, currency disciplines are required to ensure that market access provisions in the final agreement are not undermined by a country's inclination to manipulate its currency given the intersection of trade and finance. Third, free trade agreement rules of origin must fully consider our strong, historical and ongoing reliance on deeply integrated supply chains within North America. This will continue going forward as companies rely on existing manufacturing footprints and sources of inputs. Last, alignment and recognition of vehicle technical standards with the U.S. ensures Canadian consumers have access to the safest, cleanest cars in the world at the most competitive prices. Vehicles assembled in one jurisdiction need to be available for export and sale in other jurisdictions without regulatory constraint. As Canada moves forward accelerating trade with other countries, this recognition of vehicle standards will need to be an accepted component of any trade agreement to support global competitiveness.
Again, I want to thank you, Madam Chair, for this opportunity to appear today. I would certainly be willing to answer any questions the honourable senators may have.
The Chair: I thank all three of our witnesses for putting their main points on the table and giving us sufficient time to turn to questioners.
Senator Woo: Thank you for your testimony. I have a question on government procurement. The survey by CFIB suggests a relatively low priority given to government procurement, I guess because of the high thresholds in the CETA agreement. I just want to explore that a little bit more and ask if your members perhaps haven't done enough thinking about what procurement opportunities might be. Even small businesses can access contracts that meet the threshold of $7.5 million, I think it is.
Then I would ask the same question to the business council. What is your take on the government procurement liberalization provisions and how do you see these to be an opportunity for your members and possibly competitive threats from European entities seeking to bid on Canadian government procurement contracts?
Ms. Pohlmann: Sure. We know about 20 per cent of our members do sell to governments in Canada. I think there are opportunities for those businesses to potentially be able to do so in Europe. You're right, it's less of an issue because the thresholds are fairly high and for the most part smaller companies don't tend to bid on projects that are well into the millions of dollars. So it doesn't seem to be as big a threat as it might otherwise be.
The Canadian free trade agreement was also just announced last week. That has similar provisions, though the thresholds are much lower. In some respects, that might be where we see a little bit more of a concern in local municipalities.
On the CETA agreement, we haven't really heard much concern around that because the thresholds are as high as they are. In fact, I think people see opportunity.
Mr. Kingston: From the business council perspective, given that we represent large companies, we definitely see it as a huge opportunity. The EU is the largest procurement market in the world, so this is a huge win for Canada.
Another opportunity out of that is the fact that in a way it spurred the Canadian free trade agreement discussions. One of the interesting situations created by CETA was the fact that European companies would have better access to the domestic market than we would have across provincial boundaries, so that's another benefit of this.
In terms of threat, yes, it will encourage more European companies here to compete for contracts, but we think competition is a good thing and that will spur productivity gains and innovation and so on. All in all, it is very positive on procurement.
Senator Woo: Thank you.
Senator Bovey: This is all very interesting and your words were very helpful.
I want to move to automobiles for a minute. I want to look ahead to projections of what will be new realities. We witnessed a growth in electric vehicle sales worldwide this past year. Europe seems to be a particular hotbed for the studies of the use and testing of these vehicles, and of course EV sales and increasing automated sales coming along. We know the continent has a goal of having 8 million EVs on the road by 2020, and with my simple mind, it seems that that's the kind of vehicle that Europeans will be driving in the future. Are we ready to take advantage of these opportunities? Is there a lot of advance work that's been done? You mentioned standards. I'm just interested in probing that a bit further.
Mr. Nantais: Clearly, electric vehicles are very much a part of our future. The auto industry has spent, just in North America alone, roughly $100 billion in terms of research and development for electric vehicles.
The companies I represent, and others as well, are indeed global companies. Electric vehicles will be supplied based on demand. There will be an increasing number of models available. In fact, the number of models in Canada alone has increased from roughly 7 in 2011 to over 30 today. That's an unprecedented introduction of new vehicle models.
The biggest country now for EV sales is China. That stands to reason when you look at some of their environmental issues, but you also just look to the size of that market.
In Europe as well, there's a great deal of interest there. Countries like Norway, for instance, have introduced very significant consumer support incentives to help them afford some of these more expensive technologies. They have also invested heavily into infrastructure. They have also heavily invested into other non-financial supports for consumers, such as access to high-occupancy vehicle lanes, reduced registration fees and parking fees and so forth.
Many things go with the support for the vehicles, particularly in these early stages of introduction, and those countries and those states and provinces that lead in EV sales are those jurisdictions that are doing all of the above. Through the early stages of introduction, that is what's absolutely necessary in order to get these vehicles out there.
Most importantly, help people get over this comfort with gasoline vehicles and become more comfortable with electric vehicles in terms of range, anxiety and being able to recharge their vehicles and things like that. It is very much a part of our future.
Senator Bovey: To get back to the CETA with this, you feel the industry can benefit through CETA with the work that your organization has been doing in Canada?
Mr. Nantais: In terms of electric vehicles, they are a very small portion of the overall sales globally and in Canada and virtually in every major country simply because the infrastructure is not there, but we are prepared. We are also prepared to compete with all other vehicles into that market. In fact, we have many manufacturing plants there ourselves. We have invested in Canada so that global platforms and global mandates that we have here can ship vehicles that we produce here into that market.
Senator Bovey: Thank you.
Senator Gold: Thank you again for your testimony, all three of you.
I am following up on cars for a second because 13,000 vehicles into Europe seem like a really small number. Apart from the impact of tariffs and the liberalization that CETA would affect, is there another issue, a problem vis-à-vis matching up with European tastes in the market? Or is it just we're so far away and there are plants in Europe? In your mind, how does your industry plan to actually benefit from CETA quite apart from the liberalization of tariffs?
Mr. Nantais: You correctly mentioned 13,000 vehicles. It is roughly one-tenth of the European vehicles that come into Canada, so we're in a very disparate position relative to the market. That means there's a big opportunity, but you also have to remember that the companies I represent all have manufacturing plants within Europe. They are already building vehicles that meet customers' needs and demands in those markets.
However, the thing is how do we position ourselves here in Canada to service that market, to provide product into that market through some of the investments that the companies have put in place, through the supports that the federal government has put in place, through the supports the Province of Ontario has put in place, right through to modern labour agreements? These are all things now that allow us to compete for what we call global mandates.
We see that we may not have across-the-board demand for the product we build here, but there is certainly demand for the types of vehicles we build here because there are such a variety of models now available, globally speaking. There's something for everybody, so to speak. So we see opportunities. Yes, the numbers are low, which is why we see growth opportunities. That's why we want to position ourselves so that we can supply from Canada.
Senator Gold: Ms. Pohlmann, you talked about the opportunities for Canadian business that are opened up by CETA, but CETA, of course, opens up the markets and will increase the flow of European goods into Canada. Can you talk a bit about the concerns that your members must have about being in a more competitive environment and what steps they're taking or what steps you would recommend the government take in order to mitigate that impact?
Ms. Pohlmann: I would say that for the most part, and why I shared with you the data that I did, businesses, even those that aren't directly involved in international trade, tend to support international free trade agreements because they understand the benefits that they can bring to Canada.
Most entrepreneurs will tell you that as long as they have a fair and level playing field, they don't mind competition. They just want to make sure that it's fair and level. That would be the most important thing to be communicated, that no European company will get an advantage, which is why the Canadian free trade agreement was an important thing to have happened at the same time because there would have been advantages for European companies over Canadian companies. I think that's an important element of it.
The segments that we have heard a little bit of concern from, as I mentioned, are a bit in the supply management area. Again, we don't think it should stop this type of agreement from moving forward, but we do think we need to watch closely the impacts this type of agreement has on those segments. The other has been a bit on the auto industry side, the supplier side and how that's going to affect them. We need to watch closely what those impacts are. I think some of the initiatives that have been brought forward to address that are a start, but we also need to watch closely the impacts and potentially look at ways to compensate. We created this system, and we should be able to support that system going forward if we're going to keep it.
Mr. Kingston: I am echoing what my colleague has said. Our members are all global companies, very much in support of free trade, so as long as the rules are clear and consistent, that's the key point.
Senator Gold: Thank you.
Senator Marwah: Thank you again for each of your presentations. They were very insightful and informative, and I'm glad that all three of you and your organizations are highly supportive of the CETA, as am I for that matter.
What troubles me is that CETA is great, and we are all happy with that, but if you look at all the free trade agreements that we have done, we have done — Colombia, Peru, Korea, notwithstanding that, our share of global trade — I think, Mr. Kingston, you noted yourself in your submission — has gone from 4.3 per cent to 2.5 per cent. Why are we underperforming in terms of utilizing our free trade agreements?
Are there any other impediments? You mentioned some of the impediments. You mentioned an overly complex quota system. You mentioned the export infrastructure is not there. What are the major impediments that our Canadian businesses are seeing, or is it something else that factors into us not performing up to our potential when it comes to free trade? What else is there?
Ms. Pohlmann: I think a big part of it from a small business perspective is they don't know what they don't know. When it comes to free trade agreements, it will be critical for organizations like ours and for governments to make very clear what the opportunities are and how they can go about it.
About 20 per cent of our members actually have some experience with exporting, which is bigger than the number that StatsCanada will give you. The problem is that they face two or three barriers, and it's hard. Exporting is difficult for a small company to do. Once they hit barriers or they get penalties or something happens that makes their shipment not get where it's supposed to go, it's very discouraging and many of them stop. So it's finding ways to make sure that we can get them over those humps and to make sure we remove those barriers.
Critically, what CETA has done is it has looked at non-tariff barriers, which is really the bigger issue. People can deal with tariffs if it's clear, but it's the non-tariff barriers and not knowing what the standards or regulations are, what you need to do at the border to get your shipment across. Those are the things that can derail a small company from continuing going down that path. It will be critical for governments and organizations like ours to communicate well why this is different and why they should take the leap.
Senator Marwah: Are you doing that?
Ms. Pohlmann: Yes, definitely. We are doing what we can to promote and get them on board. About 7 per cent of our members currently trade into Europe, so it's still very small. We would love to see it move up even farther.
It's also going to be about making sure that what the agreement says it's going to do does get done, so that we do actually see movement over the next year or two towards easing of the border processes, simplifying the regulations and making it more cohesive so you don't have to get twice the certification and all those things.
Now that we've got the agreement, the key part is making sure we're actually putting it into place and communicating it appropriately. We are doing what we can, but it's not just up to us. It is going to be up to governments as well.
[Translation]
Senator Saint-Germain: Thank you for your presentations. You have clearly outlined the issues faced by the businesses and industries you represent.
Bill C-30 is a bill to implement the agreement. If I understand correctly, you are not submitting specific comments or amendments that could be made to other acts or to the bill itself. Your position seems to be, rather, that for the Canadian economy to benefit the most from this terrific opportunity, the opening of the European Union markets, our government has to support businesses by offering them better information, better promotion and better support to access these newly opened markets. You spoke about a potential new international trade policy or strategy. So you are, generally speaking, in agreement with this bill. You have no amendments or improvements to suggest to us which we could include in the recommendations we will be making in our report.
[English]
Mr. Nantais: Our focus is on implementation through the regulations primarily. The regulations really have to come forward as soon as the bill is implemented. The regulations are very critical to how we, for instance, might be able to access the market.
Every vehicle manufacturer who has the potential to export to Europe, because we are integrated on a North American basis, has a quota or will have a piece of a quota. How that quota is designed is what's really critical to us. There's what we call a derogation of only 100,000 units. Not that I want to go into the details of this, but that's limited. It was there as a placeholder when TTIP or when the U.S. and the European Union were to come to an agreement of their own, and that would allow us to accumulate content. Because we can accumulate content in the trade zone under NAFTA, that allows us, of course, to build with benefits to our supply chain, whether it be in Canada, the United States or even Mexico.
However, we don't have that, so the only way we can access that market now, and on the insistence of the EU, was we'll agree to a set number of units that could be exported to that market until such time as the U.S.-EU comes forward with an agreement that addresses rules of origin appropriately. That's why we have focused specifically on regulations that will assist us in accessing that market.
[Translation]
Senator Saint-Germain: Thank you for the information you shared with us in your reply to Senator Bovey's question. Thank you also for taking part in the study of the Standing Senate Committee on Transport and Communications. The chair of that committee is in fact here with us today.
[English]
The Chair: Mr. Kingston or Ms. Pohlmann, would you like to add to the question?
Mr. Kingston: I will just note that generally we agree with the bill. However, I will defer to my colleagues from the pharmaceutical sector on specific issues relating to that.
Ms. Pohlmann: We have no amendments to the bill. Our membership is so broad-based that it would be difficult for us to pinpoint specific amendments. We are happy with the bill and will likely start looking at regulations in the same way.
Senator Downe: I would like to go back to these 13,000 cars we export to Europe. Why would we export any cars to Europe if all your manufacturers have plants there anyway? How are these special? Why would these be sent from Canada to Europe?
Mr. Nantais: In the industry now, which is very different than it was even 10 years ago, the long-term viability of a plant is in part decided on what markets and what products you service, and what markets you service with what products.
What benefits Canada is that if we are able to put together a business case that allows us to get what we call a global platform or a global mandate, then the idea is you have a product that essentially is designed for any potential market that you wish to export to. Long-term viability is necessary in terms of keeping our footprint in Canada and keeping the jobs here.
Yes, we do have manufacturing plants there, and they do service those markets, those countries in the EU, but we also have product now from Canada that can also service those markets. We're global companies, and we source products from wherever we can build them in the most cost-effective way. We see that Europe is a potential market, notwithstanding what we produce there, and that benefits Canada. We would love to ship products to 40 other countries. In some cases, we do, or at least a number of those. There's a real economic benefit by getting a global mandate and being in a position that's facilitated by an appropriately designed free trade agreement that allows us to ship into those markets.
We have trade agreements that don't help us, and this is why I wanted to make it very clear why CETA stands out and why it is different than the others. It recognizes the integration of our industry here in North America. We have other trade agreements that were either in the process of being negotiated or are already in place that fail to do that, and we end up on the short end of the stick.
We see a potential here. We see it's designed in a much more modern way than previously; it recognizes the integration of our industry. That's what's going to lead to a higher level of success, not an agreement which fails to recognize how we are structured in Canada and how integrated we are on a North American basis. We need an agreement that recognizes that and benefits the industry and the jobs that come with it.
Senator Downe: How did the Korean free trade deal affect you?
Mr. Nantais: Companies were divided on that. To give you some examples, even the U.S.-Korea agreement went forward. My understanding, in all the information I have seen, shows that agreement has not really produced the results it was expected to produce. We continue to see the implementation of non-tariff barriers to trade, resistance, if you will. What the potential export market was has yet to materialize, from what I understand.
Senator Downe: Obviously you don't share those concerns about CETA, given your previous comments.
Mr. Nantais: We feel much more comfortable with CETA, because it recognizes the integration of our industry and how we produce economically and with maximum benefits to consumers. We can do it that way in the most cost- effective way. That's what helps us.
If we fail to do that, then there is probably a much less chance of success under the agreement for the auto industry. That may not be necessarily true for all sectors, but when it comes to our industry, after full integration since 1965, these are all things that are very hard to undo.
This is why we look very closely at any potential renegotiation of NAFTA. We need to look at what things we need to preserve in NAFTA, and we need to look at what things maybe we could potentially improve under NAFTA. We come at that new agreement, if it's to be a new agreement or a refreshed agreement, in a way where there are pluses and potential minuses if we don't do it correctly.
Senator Downe: Back to the 13,000 cars — they could be one or two models, in effect.
Mr. Nantais: They are usually a number of varied models and maybe not individually large numbers but a broad cross section of vehicles that come in.
Senator Downe: There are tariffs on those cars going to Europe?
Mr. Nantais: At present, yes.
Senator Downe: There are equal tariffs on cars coming in from Europe?
Mr. Nantais: There is also a tariff coming in from Europe.
Senator Downe: It's the same?
Mr. Nantais: I don't think it's quite the same. I would have to confirm.
Senator Downe: The advantage you get, as you indicated earlier — the Europeans will be bringing in more Audis, Mercedes and so on — the cost for Canadians would be cheaper?
Mr. Nantais: That's the theory.
Senator Downe: Go on. I'm waiting to hear the second part.
Mr. Nantais: Technically speaking, that should be the case, but when you see the numbers where you roughly have 120,000 units coming from Europe, will this agreement change those prices? That would be up to individual companies. Whether it's our technical standards or safety emission standards that tend to be more stringent, it doesn't seem to have bothered them to date. So whether that will translate into a price reduction is pretty much entirely up to those companies.
Senator Downe: Thank you.
The Chair: Following up, you're saying that there is a benefit in having cars from Canada to Europe. But since you're into a global situation with your companies, are there benefits for the plants already there in Europe — for example, for parts coming in from Canada that could be produced here? In other words, is there a spin-off into the existing market and the plants that you have there, separate and apart from the 13,000?
Mr. Nantais: Parts and components is a very different story. Sourcing of those parts and components is very different. Generally now, all plants operate under a just-in-time delivery system, for instance. This is why the integration of the North American industry is so critical.
There are nonetheless still parts and components that are less time-sensitive, if you will, that we can source more globally, and we do. But now, we have to also be mindful of different things. Under global supply chains, we have weather incidents. A good example would be the tsunami in Japan or Thailand. Components that came from those countries were curtailed for some time, which made a significant impact on plants here in Canada, and vice versa.
There may be some opportunities, but generally, we'll go where it's cheapest to do so. Generally, parts and components are sourced closer to where the plant resides because of the just-in-time delivery system.
The Chair: Thank you. We completed a trade study recently. In that study, one of the comments we made was that trade agreements alone don't bring the economic prosperity and the results that you want. All three of you have underscored that today. In our report, we said there should be a more comprehensive strategy of implementation.
We talked about pre-negotiation during negotiation, but I want to concentrate on after. Mr. Nantais, you say that you were consulted throughout, and your focus now will be on regulations. Mr. Kingston, I believe you said you were consulted, but it's dependent on how it's implemented. I think, Ms. Pohlmann, you said the same, and you added that your small- and medium-sized businesses need more information and assistance, which mirrors what we have said in a number of reports.
We're not going to give up on that strategy, because it was unanimously upheld at this committee and adopted in the Senate. Have you been consulted on the implementation and the regulations? Are you already embedded in that process, or are you still waiting? What concerns me is if you haven't been continuously involved, the chances of success diminish. I would like to hear to what extent you're being consulted on the implementation stage of the agreement.
Mr. Kingston: Yes, I'm happy to report that we have been consulted. Global Affairs Canada has created a CETA group that is working on a rollout plan. It consulted us frequently on how to go about that and which sectors, industries and parts of the country need to be made aware of it. We have been very much kept in the loop.
The only caveat for us is that, given we represent large companies that already have significant interests in Europe, we're not necessarily the target of awareness campaigns, but we're still providing input into that. We are in complete agreement with your recommendation that implementation is the key to success.
Ms. Pohlmann: Yes, we have also been consulted or contacted by Global Affairs Canada and the task force that's been put together to push for the CETA implementation and make sure it has been communicated broadly.
I still think there is a lot more to be done. We're certainly going to try to do our part to get the information out there. The problem is that getting to small business owners is tough, as we all know. Doing a seminar in an ad hoc town every once in a while is not going to cut it. It's about trying to be creative around uses of social media, webinars, using organizations like ours to sort of get the word out and getting some real examples of people who have been successful. Those are the key things that you will have to do. It's got to be consistent.
It's not going to happen overnight. The problem with CETA is that, even if it's implemented July 1, everything doesn't necessarily change the next day for the small business owner. Those tariffs may suddenly disappear, and that's great, but it will take time for them to understand how this will impact their business. There has to be a long-term strategy, too, in order to make sure they are coming on board and understanding the benefits to their business.
Mr. Nantais: From our perspective, very large companies and multinationals may be a different perspective. I really have to commend actually the negotiating team members for consulting our industry particularly. They were very good and generous with their time. They were interested in understanding what works, what doesn't work and what might. Without giving away the negotiating strategy, they tried to understand where we're coming from and understand what could help us.
At the regulation phase, as I mentioned, the quota system is something where they have consulted with individual companies, because there are some competitive issues here. That's a good thing for them to have recognized that there are competitive issues here.
Now it's about proceeding with the regulations and getting them right. We have every commitment from them that they are going to continue to reach out to industry on that.
Senator Woo: I wanted to continue the discussion on global product mandates in the vehicles. I'll ask you to speculate a bit on the relocation of production in the automotive industry in light of — is it a dangerous question?
There are many things happening in the world, but the three that spring to mind are, first, CETA; second, the failure of the TPP; and the third one is Brexit. Starting with Brexit, we know there is a modest auto industry in the UK that is going to be challenged by Britain's withdrawal from the EU.
Can you just talk a bit more about how you see Canada potentially benefitting from the relocation of production? We have now superior access to the two richest markets in the world. Asian companies don't have preferred access, by and large, to the U.S. or the EU. Could we see global product mandates in the auto industry from Asian auto companies, for example, increasing their presence in Canada so they can access these very lucrative markets?
Mr. Nantais: Brexit is probably the least I'm able to speculate on. I'm not going to speculate; I'm going to tell you the way it is. Canada is one of the highest, if not the highest, jurisdiction in which to produce in the world.
Senator Woo: Highest cost, you mean?
Mr. Nantais: Highest cost. That is derived from a combination of regulations, whether it be environmental regulations, whether it be the cost of electricity in Ontario or whether it be cap and trade programs that add costs. These are all costs that many of these other jurisdictions don't have.
That's why we have seen such a migration of plants initially to Mexico and then with some reshoring back in the United States, in terms of the Midwest and southern states. Many jurisdictions that want an auto industry because of the economic benefits have put packages of incentives and supports together that are so highly competitive between them. That's what draws new investment.
We have made some recent announcements this past year of new investments, which is great, but this is the continual competition we face in terms of getting new product mandates into Canada. We have seen brand new what we call greenfield plants not coming to Canada. Canada wasn't even on the list for a potential location. They are going to these other jurisdictions. We are seeing also some migration into the Asian countries as well.
It's kind of perverse in some ways. You introduce a trade agreement that allows duty-free access into the country, and the country in which you are exporting into, those companies that have to produce there are producing at some of the highest costs. Why would you want to invest into this country? Why wouldn't you simply export from these other jurisdictions into Canada?
So that's the dynamic. It's an unfortunate one. That's the dynamic that is playing out. What we need to do is concentrate on keeping what we have. If we can grow what we have, even better, but it's going to take a coordinated and coherent approach to attracting new investment. That's why we're working with Ontario. That's why we work with this federal government and the federal government before that and the one before that, because everybody sees the benefits, both in terms of jobs and economic spin-offs, that are derived from the automotive industry. We'll continue to do that, to keep what we have if not grow what we have.
Senator Cordy: Thank you to the witnesses for providing us with good insight into how this is going to affect small- and medium-sized business. One of the first comments you made was the importance of CETA to diversification.
Ms. Pohlmann, when we look at your slide 5, you show the trade with the United States, which is significant, and then look at the other countries with whom Canada trades and the numbers are smaller, although I have to say when I look at China, I'm quite surprised because it seems when I go shopping 98 per cent of the things on the shelves are made in China. It surprises me it's only 9.3 and 3.2 percentages.
Within the EU, we purchase 8.7 per cent within the small and medium companies that you deal with, and we sell to 6.5 per cent. Do you see this increasing with CETA, if CETA is approved? Mr. Nantais, you suggested — which is a good thing — we have to make sure we keep what we have and build on that.
Second, within the small- and medium-sized businesses and trade, how much of an effect does the dollar have? My guess would be exports could increase and imports would decrease, but I don't know. Could you expand on that?
Ms. Pohlmann: Sure. On the first part of your question, I would hope and certainly we would push for small businesses to expand their trade into Europe. This is of our membership. Just on the China question, this is for small companies, too. I expect many large companies import a lot more from China than smaller companies do.
Depending on what happens in the United States in the coming months and years, that could also have an impact on the European Union becoming a more attractive place to do business. We saw during the downturn in the economy in 2009-10 a lot of businesses pull out of the United States and started looking for other economies to potentially go marketing into. If we see a retrenching in the United States over the next few years, I suspect Europe will become the beneficiary of that, given this free trade agreement. We are hoping to see some growth and encouraging business owners to definitely look at that as a new market to go after. Definitely, we want to see that.
As for the dollar, one of the questions we did ask is on page 11. The fluctuating value of the Canadian dollar was one of the challenges identified by small business owners. It's less about where the dollar sits at and more about the changes. It's the fluctuation that really causes the problems with smaller companies because they don't know how to manage that. Like any company, you often price things months in advance. Suddenly the dollar changes and you're stuck with a much higher cost. If it's the other way around, it's great. But the part where you're losing money, then it can be a real problem; so it's finding ways to help them mitigate that. They don't have the same ability and resources as large companies do to manage a fluctuating Canadian dollar. That's an important piece of evidence that we learned through this process, and we need to find ways to help them understand how to manage that process. If it's stable at a lower rate or stable at a higher rate, they can eventually manage that process and price accordingly. It's the fluctuation that can really cause issues.
Senator Cordy: Thank you.
The Chair: Are there further comments? If not, I would like to thank our witnesses, Ms. Pohlmann, Mr. Kingston and Mr. Nantais. You have underscored that implementation will be the key to this agreement. We appreciate that because we've spent quite some time analyzing previous trade agreements and have come to a similar conclusion. We do have the capability to ask for answers from the minister or ministers in charge should Bill C-30 be adopted. One effective way for Parliament to manage the implementation is to have the ministers provide us with what their strategies are and then to track them. We may need to have you back again. You have been kind to do so many times. We appreciate the good working relationship, and your expertise is very helpful. On about behalf of all of the senators, I want to thank you for coming today.
I would like to welcome in this second hour, from the Canadian Generic Pharmaceutical Association, Mr. Jim Keon, President, and Ms. Jody Cox, Vice-President, Federal and International Affairs; from Innovative Medicines Canada, Mr. Declan Hamill, Vice-President, Legal, Regulatory and Policy; and Ms. Lesia Babiak, Executive Director, Worldwide Government Affairs and Policy (Canada), Johnson & Johnson, Family of Companies in Canada. Welcome to the committee.
We have, of course, heard from other witnesses and followed the other debate. Pharmaceuticals are certainly an issue we wish to address. We appreciate that you have come forward to put your positions to us. Thank you for coming.
Jim Keon, President, Canadian Generic Pharmaceutical Association: Thank you to the committee for allowing the generic pharmaceutical industry to appear as part of your study on CETA.
I would like to start with a few words about our industry. The generic pharmaceutical industry in Canada is proud of our industry, and we have a long history in Canada. We are Canada's primary pharmaceutical manufacturers and exporters. We are among the top research and development spenders across all industrial sectors.
Our members operate the largest life sciences companies in both Ontario and Quebec and directly employ more than 11,000 Canadians in highly skilled research, development and manufacturing positions. We are strong supporters of free and open trade. Our companies export high quality generic-made medicines in Canada to over 115 countries.
Our industry also plays a significant role in controlling health care costs in Canada. Generic drugs are dispensed to fill 70 per cent of all prescriptions in Canada. Seven out of ten prescriptions are now with generics, but we account for only 22 per cent of the cost of the $26 billion spent by Canadians annually on prescription drug medicines. Five or six generic prescriptions can be filled for the cost of one brand name medication. We are an integral part of Health Minister Philpott's mandate in ensuring access to affordable medicines for Canadians.
I would like to quickly address some myths about Canada's pharmaceutical intellectual property system. Canada already had strong intellectual property for pharmaceuticals prior to the CETA negotiations. This is widely acknowledged by the former Conservative government which, as we know, had started these negotiations.
The European Union's pharmaceutical demands in CETA were not tabled to increase pharmaceutical R&D spending in Canada. That wouldn't have been in the European Union's interest. That's not how trade negotiations work. The demands were made to increase the profits of pharmaceutical companies headquartered in Europe.
Because of the nature of intellectual property, an increase in intellectual property measures also benefits brand-name pharmaceutical companies headquartered in United States, Japan and other countries. That is because intellectual property has national treatment and any invention is eligible for the same protection in Canada, regardless of where it is made.
Let me outline what we see as the major CETA outcomes affecting the pharmaceutical industry. While a number of aggressive measures were tabled by the European Union, the final outcome was less harmful than it could have been. Canada did agree to pharmaceutical intellectual property concessions in CETA, not because it was in Canada's domestic interest to do so but to conclude the trade deal. It was part of the give and take.
CETA requires two major changes to Canada's already complex pharmaceutical intellectual property laws. The first one is called Certificates of Supplementary Protection, or CSPs. I won't go into detail on these, but I would be happy to talk about them. They are essentially going to extend pharmaceutical patents from 20 years to 22 years for pharmaceutical product protection.
Equally important were changes to the Patented Medicine (Notice of Compliance) Regulations. The previous speakers were talking about regulations. Regulations are critical for us. These are sometimes referred to as a patent linkage system because they link the patent protection system to the Health Canada approval. Generic companies cannot get their approval from Health Canada until patent issues are addressed. That's the nature of these regulations.
This system has been problematic for many years and has exposed generic pharmaceutical companies who are successful in initial litigation to tremendous post-launch risk exposure. I can go into more detail in questions if you would like.
The generic industry agrees that the current system requires urgent review and changes by the Government of Canada. The details of these reforms are not in the bill. They will be spelled out in regulation, and the regulations will not be published until sometime after Bill C-30 receives Royal Assent.
At this point, CGPA believes that the new patent linkage system has not yet achieved the balance that is necessary and will create too much risk and uncertainty for generic pharmaceutical companies. We are concerned that there will not be the balance or incentives needed for generic pharmaceutical companies to continue to challenge weak and frivolous patents in the future.
If this system is unworkable, Canadians will be left to pay monopoly drug prices for longer than necessary and appropriate. This is not what we want. This is not what is in the best interests of Canadians and the Canadian health care system.
There is still time to make improvements to the regulations that are being changed, and we would urge Minister Bains and his staff to carefully review our outstanding concerns.
In conclusion, Canada has a strong and competitive intellectual property system, despite the rhetoric that has accompanied trade negotiations in recent years. Our primary goal with CETA implementation is to mitigate the impact of the CETA pharmaceutical IP concessions on the Canadian patients, payers and the industrial interests of generic pharmaceutical companies to the greatest extent possible.
While the implementation of Certificates of Supplementary Protection, CSPs, has been straightforward and is included in the bill, we believe that there remain a number of improvements that will need to be made to the patent linkage system to ensure the best interest of Canadians are met.
Declan Hamill, Vice-President, Legal, Regulatory and Policy, Innovative Medicines Canada: Madam Chair and honourable senators, it's a pleasure for us to be here today on behalf of Innovative Medicines Canada as you continue your study of CETA. With me today is my colleague Lesia Babiak, Executive Director, Worldwide Government Affairs and Policy (Canada); Johnson & Johnson, Family of Companies in Canada.
[Translation]
Médicaments novateurs Canada is the national association that represents innovative Canadian pharmaceutical companies dedicated to improving the well-being of Canadian men and women through the discovery and development of new medications and vaccines. Together, we invest more than a billion dollars in research and development every year to support the knowledge economy in Canada.
[English]
In our sector, patents and data protection provide the incentives necessary for biopharmaceutical companies to make the enormous investments required to discover and develop new innovative medicines. Each new innovative medicine costs on average $2.6 billion and takes 10 to 15 years to develop.
I'm pleased to note that we have supported CETA since the beginning of negotiations in 2009, and we are fully supportive of the goal of bringing balance back to Canada's domestic life sciences intellectual property system. CETA's IP provisions are intended to increase protections for Canadian pharmaceutical rights-holders, most of whom are members of our association, in two key areas.
First, Certificates of Supplementary Protection, sometimes referred to as patent term restoration, restores the life of a patent under the CETA agreement for up to two years for delays that are due to clinical trials, development and regulatory processes needed to grant market authorization to a new medicine in Canada.
Second, CETA contemplates a right of appeal that would provide equal and effective legal remedies for innovative companies vis-à-vis the generic sector.
Taken together and subject to their implementation, and I stress subject to implementation, these changes represent modest but positive steps in bringing the IP environment in Canada closer to the regimes already in place in the 28 nations of the European Union, Japan, the United States and other developed countries around the world.
Innovative Medicines Canada supports Bill C-30 in its current form. We are of the view that this legislation should be passed without further amendments, which can only serve to delay the implementation of the treaty. As with any negotiated treaty, rights given in one section were likely the result of concessions elsewhere, and further potential legislative amendment risks upsetting the delicate balance achieved by the negotiators in the overall treaty.
Lesia Babiak, Executive Director, Worldwide Government Affairs and Policy (Canada); Johnson & Johnson, Family of Companies in Canada, Innovative Medicines Canada: Madam Chair, it is with optimism that my company, Johnson & Johnson, has sought to ensure that CETA's IP measures are incorporated into legislative actions that demonstrate a meaningful commitment to better aligning Canadian IP policy with our competitor nations. It is our view that Canada has lagged behind other countries.
Since CETA was agreed to, Johnson & Johnson committed more than $1 billion in initiatives to contribute to and attract global life sciences investments to Canada. Johnson & Johnson is not alone in making these kinds of sizable investments.
CETA provided a very important signal to us from the Government of Canada to the value it placed on innovation and an enabling IP environment.
In addition, I would like to mention that there have been a number of studies on the impact of these changes on the future cost of Canadian medicines. Some have claimed that they will increase drug costs for provincial formularies.
A recent 2017 study by the C.D. Howe Institute addresses these unfounded claims of high future drug costs resulting from CETA changes. In terms of the overall impact of CETA's changes to PTR, patent term restoration, and the right of appeal, the report concludes that the annual cost of drugs could rise by at most 4 per cent beginning in 2026, but that the actual amount will be considerably less.
In closing, I would be remiss not to mention for the record that while Bill C-30 legislation sets out the broad parameters for CETA implementation, the rights and systems associated with pharmaceutical IP changes will be substantially defined by the regulations that are currently being prepared by Innovation, Science and Economic Development Canada, as mentioned by Mr. Keon.
Extensive consultations with ISED have taken place, which are covered by non-disclosure agreements. These have left Johnson & Johnson and other Innovative Medicines Canada members with deep concerns with respect to the risks they bring to Canada's ability to live up to its CETA obligations and the future stability and reliability of the Canadian pharmaceutical patent litigation system.
It is imperative that the regulatory framework that follows from Bill C-30 be subject to a public and transparent consultative process, and that the amendments reflect the letter and spirit of what was agreed to by Canada and the EU in the treaty.
Thank you for inviting us before the committee, and we'd be pleased to answer any questions that you may have for us.
The Chair: Thank you, and it will not surprise you that I have a long list of questioners. We will turn to Senator Saint-Germain.
[Translation]
Senator Saint-Germain: Thank you for your presentations, which are quite complementary. My question is for Mr. Keon, but you may all answer it. I will ask you the question you would like us to ask. You said that two important amendments will have to be made, one of them concerning additional protection certificates. Would you give us more information as to the nature of that amendment, bearing in mind that it concerns the implementation act and not the agreement that was signed?
[English]
Mr. Keon: What I said was that CETA introduced two major areas of amendments. One is the patent extensions or Certificates of Supplementary Protection.
We are not here today calling for further changes to Bill C-30. I should be clear on that. We are not. We did make suggestions at the parliamentary committee at the House of Commons, and some of our amendments were actually incorporated at that time.
As far as the Certificates of Supplementary Protection go, it extends the protection for two years. It is important for us. It provides for the right to manufacture for export during the two years. Again, it is important for our manufacturing base in Canada that we not be delayed beyond where the product is available in other countries.
Another very important component is that the extra protection will only apply to brand name pharmaceuticals approved after the agreement comes into force. That was one of the amendments we wanted at the parliamentary committee, was to make that very clear.
That is why the extra costs, and there will be extra costs. Clearly if generic entry is delayed two years, there are significant extra costs. That is why they will be in the future and not immediate, because the protection will only begin when the agreement comes into force.
If I was unclear, I want to be very clear: we are not asking now for further changes to Bill C-30.
Senator Saint-Germain: And you agree with your colleague that the extra costs might begin in 2026, and the estimate is around 4 per cent of additional cost?
Mr. Keon: I think the extra costs quite possibly will begin earlier than that. Let's say the agreement comes into force this year. You get an approval in 2017. You have a 20-year patent, or in most cases, several patents, applying to a product. When the extension occurs on the product depends on how much patent protection is left as of 2017. Quite likely, the movement from 20 to 22 years will be several years in the future. I don't know exactly when.
The absolute size of the cost, 4 per cent of the current $25 billion, would be an extra $1 billion a year. That is not insignificant. We think it's actually greater than that, but it is speculative. We don't know which products are coming to market, and so any estimate is very speculative and is based on historical evidence.
[Translation]
Senator Dawson: I am very pleased to see the "innovators'' and the "generics'' around the same table. That is rather rare. I understand that you don't necessarily have the same agenda nor the same things to say, but I am happy to see that we live in a world where both systems can be acknowledged and encouraged.
One of your predecessors, the automobile manufacturers, explained that for each vehicle that is exported to Europe, we import approximately nine. Are there comparable data in your pharmaceutical world with regard to products we import from Europe as compared to those we export?
[English]
Mr. Keon: I'm happy to start. From the generic pharmaceutical side, the majority of the products sold in Canada are actually manufactured here. We have a strong industry centered in the Greater Toronto Area, as well as the greater Montreal area. The majority of our products are actually manufactured domestically. That's a good thing. It shortens the supply chain and ensures that if there are shortages or other problems they can be addressed quickly.
In terms of exports, we export to 115 countries. I don't have the exact numbers, but our exports are larger than our imports, yes.
[Translation]
Senator Dawson: And what do the innovators think?
Mr. Hamill: Thank you for your question. May I answer in English?
[English]
Senator Dawson: No problem.
Mr. Hamill: In terms of the balance of trade, there's sometimes a tendency to look at this in a kind of mercantilist sort of way, which is heads we win, tails we lose. From a macro perspective, that's not how we see these changes.
Pharmaceutical value chains are global in nature, and my colleague Lesia can talk a little bit more about that. They usually involve supply chains that stretch across different national borders and include active product ingredients that are sourced from different jurisdictions as well. It's difficult to look at it from that perspective.
Our view is that overall net-net, and again subject to implementation, which appears to be something that we agree on, we believe it will have beneficial effects for the Canadian life sciences industry.
In terms of exports, there are exports of vaccines from our members to other jurisdictions, including Europe, mainly out of the Greater Toronto Area, although I do not have the figures for you.
Senator Dawson: Thank you.
Senator Downe: Like the previous panel, you talked about these regulations, and I would like to explore that. I assume you were consulted on the CETA agreement during negotiations. Is that correct? Everybody is nodding.
You are being consulted on the regulations as well? You mentioned in your presentation confidential discussion.
Do you have any veto? Who is doing these regulations? They seem to be critically important, not only to you but to the previous panel. Are public servants doing them or people in the industry? How is it working?
Jody Cox, Vice-president, Federal and International Affairs, Canadian Generic Pharmaceutical Association: The regulations are in respect to the Patent Act, and the Patent Act resides within Innovation, Science and Economic Development Canada, so it would be the officials within that department who are drafting the regulations, in consultation with Justice.
Senator Downe: Are they consulting with the negotiators of CETA? Are they included in those discussions?
Ms. Cox: The CETA negotiators themselves?
Senator Downe: For Canada.
Ms. Cox: Well, again, this is work within the department here in Canada to implement the Canadian components of CETA.
Senator Downe: But I guess my question is this: The CETA people negotiating it understood what they were agreeing to. The devil is in the details. Now there are people doing the regulations. Is there disconnect between the negotiators and the officials of the two departments?
Ms. Cox: That's a very good question. It's not one that I think I can fully answer.
Senator Downe: That's fair.
Ms. Cox: I know there is some dialogue between the two departments, but the extent of that, I can't really speak to that.
Senator Downe: You indicated there's a confidentiality agreement that you can't disclose, which I understand, but you also indicate in your presentation that there should be some public discussion on this.
Tell me about the confidentiality agreement. Assuming CETA is finalized, the regulations come into force when, and how does your industry have additional input if all your negotiations are confidential? There must be somebody outside the circle who will be surprised by what the rules are.
Mr. Hamill: Thank you for that question and your comment, which I agree with.
With respect to the earlier question about what kind of liaison or coordination is taking place between International Trade and Innovation, Science and Economic Development Canada, that's something that I sincerely hope is happening. I believe it is happening, but it's not something that I can comment upon. I have no direct knowledge of that. However, I would agree that it's crucially important, given that what was agreed to at the table needs to be reflected in the regulations. It is crucial.
With respect to the NDAs, the NDA process started some time ago. At the time the process was started, the agreement was not finished. It had not been formally approved by Canada and the European Union, and I think there was a policy rationale for it.
Given that there is an approval in the European Parliament by the European Council and Bill C-30 has been approved by the house and is hopefully going to make its way through the parliamentary process here, I question at this stage whether indeed that level of confidentiality is needed.
I don't know who has been consulted by Innovation, Science and Economic Development Canada. I also don't know the views precisely on the technical amendments of any other party. I don't have transparency in that regard. It's our sincere hope that at some stage there will be an opportunity for all stakeholders to be able to have access to these regulations.
Senator Downe: Educate me. If CETA is passed by Parliament, you do not know currently if the regulations would just be given to you as completed and done and you have no further input into them and they are the law of the land, and then you have to spend years trying to get them rectified if there's no public or in your case group discussion with your industry. Is that what you're telling us?
Mr. Keon: Yes. I think it was the IMC colleagues who recommended the public consultation to ensure that it happened on the regulations. We have as well. We have signed the non-disclosure agreements. We have been consulted by officials, and we have had extensive discussions, just to be transparent about that.
As far as the regulations having public vetting, we would also support that. I didn't say that in my remarks, but we would support that. These are critically important. It determines when a generic pharmaceutical competitor can come to market; and payors, large payors, provincial governments, are very interested in how that would operate.
Again, I don't know exactly who all has seen the draft amendments. We have as an organization, but I would encourage that as well, yes.
Mr. Hamill: If I may, we have also seen the draft amendments.
Senator Downe: Does the non-disclosure restrict you from saying if you're happy or very displeased?
Mr. Hamill: We can discuss in generalities what we feel, and I think you've heard some concerns expressed by both witnesses.
What is not clear to us, and again this would be a better question probably to officials, is, assuming that Bill C-30 obtains Royal Assent, what kind of gazette process or other consultation will take place following that. This is not something we know about currently.
We know there is a desire to have the treaty implemented as soon as possible, and to some extent we're very sympathetic with that. However, the devil is in the details, and the regulations are important, and all stakeholders who want to have a view on these regulations should be allowed to have access to the regulations while they are still in draft form.
Senator Oh: Thank you, witnesses, for being here.
Does Canada's federal government intend to compensate provinces and territories for possible increases in the cost of pharmaceutical drugs that could result from CETA's intellectual property provision?
Mr. Keon: As I mentioned, there will be extra costs because of the CETA implementation. The average cost of a brand-name prescription medication is about $97. The average cost of a generic prescription is about $22. If you delay the entry of a generic medicine for an extra two years, which CETA will, there clearly will be costs. Saying there won't be is wrong.
As far as we know, the federal government has indicated to the provinces that it would make reimbursement to them for the extra costs, but I'm not privy to any of the details of how that would operate.
Ms. Cox: I would just add that Minister Philpott's ministerial mandate letter does make reference to this, so the committee may wish to hear from Health officials on this point.
Senator Oh: Has there been any discussion within your association?
Mr. Keon: Not about the transfer of funds from the federal government to the provincial governments, no.
During the CETA negotiations, the provinces were very involved. We consulted with the provinces on a regular basis and are quite familiar with the concerns they had expressed about the extra costs to their drug programs. Most drug programs right now are facing very sharp increases in their costs as a result of the introduction of very high-cost new medicines, so a CETA that extends patent protection for two years is of concern to them.
We're not privy to the details of whatever agreement the federal government might have, but we are quite familiar with the concerns the provinces had expressed about this aspect of CETA.
Senator Oh: So will they stop your generic drugs to the EU, will you be phasing out or will you be giving a higher duty to go in?
Mr. Keon: The interesting thing is that trade between Canada and Europe in the generic medicine space is not that great. There aren't a lot of medicines coming from Europe to Canada. Our exports are to 115 countries. We certainly export to Europe, but it's not our major market. The United States is, as are the Far East and Latin America.
The interesting thing is that the CETA, because of the national treatment, affects our ability to export to the United States, to Asia, et cetera. That's why the export clause was so important to us. Even though we're going to extend patents for two years in Canada and increase our costs, at least our companies can, if it's appropriate, develop the product and export it to a market where the patent had already expired and not be blocked by two years.
Senator Oh: Last question. Do they have generic drugs coming into Canada?
Mr. Keon: From Europe?
Senator Oh: Yes.
Mr. Keon: There is not a great deal of export of generic medicines from Europe to Canada, no. That is really not what this was about. The pharmaceutical provisions were about the European negotiators trying to get better protection for European companies headquartered in Europe by extending patent protection in Canada. They were interested in bringing back revenues to Europe for their companies, as you would expect European negotiators would be.
The Chair: Just a clarification: You say there are not that many.
Mr. Keon: From Europe to Canada? I don't have a precise number, chair, but it is small.
The Chair: It's the principle they were after?
Mr. Keon: The principle, again, from our perspective, was not driven by the generic pharmaceutical industry; it was driven by the brand-name pharmaceutical industry, which was looking for greater protection in Canada for its European companies.
The Chair: Any comments, Mr. Hamill?
Mr. Hamill: There's a lot to comment on there, subject to the length of time you're willing to give me.
First of all, I would appreciate commenting on the issue of drug costs. As people have said before, there have been studies done that suggest that the actual impact of these changes will be minimal.
With respect to whatever agreement or commitment has been made by this current federal government to the provinces with respect to any future drug cost increases, I can't comment on that. Again, that would probably be for government witnesses. However, I would mention the testimony of Trade Minister Champagne who was before you recently. He spoke on the two-year issue of the Certificates of Supplementary Protection, saying there would not be a correlation between increased costs and this protection.
He said that, and the chief negotiator for Canada, Steve Verheul, has made similar comments. We would therefore question whether there is an inevitability of future costs.
The other aspect about these cost discussions is that they always assume that IP changes take place in a vacuum and that there are no other policy measures available to provinces or other payers in order to address costs. That's simply not the case. Provinces and territorial governments are taking very aggressive measures in the form of product listing agreements with individual companies and also through the PCPA, the Pan-Canadian Pharmaceutical Alliance, to address cost issues with both innovative drugs and generic drugs.
None of the cost mechanisms currently available to Canadian governments are impacted by CETA in any way.
Senator Woo: I would like to dig a bit deeper into the changes in regulation around the patent linkage system. I understand the NDAs that bind your ability to say too much, but I'm trying to get to the nub of the issue. At the heart of it, it's the extension of two years, but what is it you are actually disagreeing on? Let me put it differently: What would be an ideal outcome for the generic producers, and what would be an ideal outcome for the innovative pharmaceutical industry? I ask without wanting you to disclose any of your NDAs.
And then the key to the question: What would it mean for new investment in Canada in life sciences research and in the manufacturing of pharmaceutical products?
Mr. Keon: The patent linkage system imposes an automatic two-year stay or block against any follow-on or generic company trying to get an approval. If there are patents on this patent list that Health Canada maintains — and the innovator company can list patents with Health Canada, and typically, on these major products, there are many patents on different aspects of the product — if that is the case, then you cannot get your approval until you wait for all those patents to expire, or you challenge them. You say, "I'm going to wait for the basic patent on the chemical structure. However, these patents on the codings and the new uses — I don't think I'm going to infringe, or I think they may be invalid. I'm going to challenge those patents.''
Senator Woo: Got it.
Mr. Keon: Why would you do that as a generic drug company? You want to enter the market. You can't otherwise, and the patents all expire at different dates. Absent challenging patents, you're waiting sometimes decades to get on the market, beyond the initial patent expiry. So you challenge the patents with the expectation that you can do the litigation and bring your product to market if you're successful.
The problem with the current system is that the regulations have a set of litigation issues with them. Even after you're successful as a generic company, you could be sued for patent infringement, and that occurs very regularly.
The difficulty with that, as I said earlier, is that we're selling our products at 15 cents on the dollar. You're going to go to market at 15 cents, but you are liable at 100 if you are found to be infringing. So even if you're 80 or 90 per cent certain that you're not infringing, it is a very difficult decision.
Our overall objective with these changes to the regulations was to increase the level of business certainty before we came to market. That's the whole purpose of the regulations. Why else would you have a two-year block? You want to have the litigation settled.
We are concerned that with the new system, there will be only one litigation process. It will still require and force generic pharmaceutical companies into an impossible situation regarding whether to enter the market and face massive liability or to stay off the market and risk not being compensated for any of your own costs and lost market share.
We have been insisting on these comments with the officials at Innovation, Science and Economic Development Canada, and so far, we don't feel that we have reached a situation where we're satisfied.
Senator Woo: Quickly, the impact on new investment in manufacturing.
Mr. Keon: Very importantly, again, the majority of our products are made here. Our companies are located here. If they do not see a potential for a risk — not risk-free but a risk-reduced environment to come to market — they are going to be late to market, and probably what we'll see is products coming, much greater, from offshore once patents expire, because they won't have been made in Canada. We are very concerned this will have a major negative effect for investment among our Canadian companies.
Mr. Hamill: I'm going to tag team that question with my colleague. I'll address some of the legal concerns. It's a difficult situation because the area is highly complex and there is a non-disclosure agreement. I'll do what I can.
With respect to the two sets of regulations, I'll start with the two-year patent restoration period, the Certificates of Supplementary Protection. Our concern there is that based on the regulations, as we understand them, there are going to be many limitations on what patents indeed do qualify for the eligibility for this protection. Some of these we view as being arbitrary and unreasonable. We don't think that was in the spirit of what was negotiated as part of the CETA agreement.
There needs to be some clarification. Again, it's technical, but there is only eligibility for one patent per product to have such protection. There are further limitations depending on the type of patent and type of medicinal ingredient, and also relative to when the product is filed in Canada versus other jurisdictions. There are a lot of hoops to jump through.
The assumption that every innovative medicine is going to receive this protection is simply incorrect. Our concern is there will be unreasonable and arbitrary limitations placed on what was negotiated. That's on the Supplementary Certificate of Protection side.
On the Patented Medicines (Notice of Compliance) Regulations side, as Mr. Keon said, we currently have a system where there is a regulatory 24-month stay whereby the innovator and the generic litigate the outcome of an invalidity action.
This is public knowledge so I'm not saying anything out of turn, but what is being proposed is that there be a single track system so there can only be one track for suing, not a separate track under the Patent Act and under the regulations. In principle, this is not a terrible idea. We are also, by the way, interested in business stability and certainty. We are the people who are getting sued. Because we are on the receiving end of this litigation, having a system which is stable and fair is something that we are on board with.
Our concern is that under our current system, it's an abbreviated proceeding. There are no live witnesses. There are no cross-examinations. If you have a new one-track system that incorporates a lot of additional legal proceedings, this is shoehorning a lot of legal process into our current system. With respect to the stay period currently in effect, we're deeply concerned about that.
To be honest with you, our court system has its pluses and minuses, but our ability to deal with highly complex, technical patent litigation in an abbreviated time frame with live witnesses, with cross-examinations, with all of the bells and whistles of a full legal proceeding is, in our view, very dubious. We are concerned about how the system is structured. The idea in principle of having one track is not one which we are opposed to.
With respect to the investment issue, I will turn it over to my colleague.
Ms. Babiak: I'll comment on the early loss of patent right of appeal, the issue that we have been facing. As a company, we have faced a number of those; they are devastating. One example is a drug for ADHD, a very specialized drug. We were to have patent through to about 2017 or 2018. It took us years to secure market access, that is, reimbursement by provinces. It took us years to secure the pricing for the product. Just as we were starting to get revenues for the product, we lost the patent several years in advance of 2017-18 due to a challenge by the generics. It was devastating. That was about $150 million of revenue. I'm not sure how many high-paying jobs went with that and investments associated with that product. There has been some real devastation on our side.
In terms of your questions on what CETA means in terms of investments for research, it's made a huge difference. Since CETA was signed, Johnson & Johnson has invested over a billion dollars in Canada.
Our major research centre is in Europe, and globally our R&D site is headed by Dr. Paul Stoffels, who is based in Beerse in Belgium. The decision to invest in Canada at a greater level is definitely based on the great science coming out of Canada. The federal government in particular has invested heavily over decades into basic research, and some fantastic science is coming forward. CETA was a signal that the climate was changing for the innovative sector — over a billion dollars.
I'll just mention some of them. From British Columbia, as an example, Aquinox Pharmaceuticals based in B.C. is an early-stage development investment that J&J has made. B.C. Personalized Medicine Initiative is something we have also invested in B.C. The Centre for Drug Research and Development, we have had ventures that we have collaborated with them, as we have with the B.C. Centre for Excellence in HIV/AIDS.
There has been a real difference that I can speak to from Johnson & Johnson, and there are a number of others who can speak to the same impact.
Senator Gold: My question, which was about drug prices and what contributes to them, was asked better than I could have asked and certainly answered more comprehensively.
The Chair: You could ask another question.
Senator Gold: We have heard testimony and representations that the cost of drugs to the consumer in Canada is a function of many factors, not simply the actual price of the pill. Is there anything in addition any of you would like to comment on vis-à-vis how Canadian consumers might possibly benefit or conversely be somewhat negatively affected by these changes, and how much has to do with CETA and how much has to do with provincial and other big buyers of your products?
Mr. Keon: It's important to make a distinction between prices and costs. We have never said CETA is going to increase the prices of originator products. What CETA is going to do is delay the entry of much lower-priced competitive generic medicines. That means increased costs. If you were buying a medication at $100, you will probably still continue to buy it for $100. The problem with CETA is you will buy it for $100 for two more years and you will not get it at $20. That's where the extra costs come in.
The federal government in the past has released studies on the potential impact of the cost. They wouldn't have had discussions with the provinces about reimbursing them if everyone didn't expect costs are going to go up. That is a reality.
The value of the generic drug industry is we provide headroom. We always talk about headroom. You can get the same medication. It's approved by Health Canada as being bioequivalent, a safe, efficacious medicine. When patents expire or are shown to be invalid, you can get it at much lower prices. You're getting the same health care. I mentioned earlier, you can buy five or six medications for the price of one. That's headroom.
If we extend protection for older mature medicines, how in the world will we ever afford the new breakthrough medicines? Everyone wants their medicine protected, absolutely, and we have a strong patent system. But when patents have been on the market for a long time, when they are mature, that's when the value of the generic industry should come to the fore and we should be able to provide that headroom. That's what we are all about as an industry.
We favour innovative medicines. Part of what Lesia mentioned about Johnson & Johnson taking a long time to get approval for their products is about slow provincial processes. We agree with that. They can be slow, both for brand- name medicines and generics, and we would like to see that happen faster. But on the overall system, we need to provide savings on mature products so we can have the headroom to afford new medications or other expenses in the health care system.
Ms. Babiak: Jim and I go a long way back. I worked in the provincial government in Ontario, where I was the payer, if you will. We did a lot to speed up generic approvals at the time. I should have focused more on the innovative medicines, but I didn't know where I was going next. What was I thinking?
To answer your question, Senator Gold, I'm not a pricing expert, but in terms of the various considerations that go into the research and development and manufacturing costs of developing medicines, all the other costs that go with bringing a product to market, regulatory and legal costs, there is a whole slew of costs and investments that need to be made to bring a product to market.
One cost that is also factored in is failures. There is a cost that is related to funding the failures. I think our industry has gotten a lot better at finding and heading those off early on, and focusing on truly innovative medicines that are addressing an unmet need. I think we're getting better at reducing those costs of failures, but that is there as well. It's a risky venture, if you will.
I also just want to address the issue of prices of innovative medicines. There are a lot of misconceptions that have been bred around that one. Despite messaging to the contrary, the Patented Medicine Prices Review Board — I'm not sure if the committee is aware of PMPRB — has itself demonstrated the prices of patented medicines in Canada are consistently below the median of the international comparisons. They have also indicated that patented medicine prices have increased at less than the rate of inflation for 20 years.
In fact, when you look at and examine the basket of patented products that have no generic in the marketplace, that is, those characterized by PMPRB as having monopoly power, the prices are, in fact, the third-lowest of the PMPRB benchmark countries. So prices in Canada for patented medicines are very much at the lower end, rather than the higher end, and PMPRB reports speak to that.
Mr. Hamill: I would add that the correlation between intellectual property changes, whether they're IP dilutions or IP being strengthened, and additional drug costs is quite dubious. You only have to look outside of Canada to see that, because you have jurisdictions, such as the 28 members of the European Union, Japan and other countries, where there are more robust intellectual property protections in place than there are in Canada. So relatively speaking, we don't have a strong IP system compared to a lot of other developed economies. Yet, in those states, and, of course, it's on average, so I'm making a generalization, costs of innovative medicines and generic medicines tend to be cheaper than in Canada.
If there was a direct correlation between IP changes, whether under CETA or elsewhere, and drug costs, you would expect that to be borne out in other markets. It's simply not the case. The reason is because of the other measures that those nations have put in place with respect to their health care systems.
The Chair: We have run out of time, but I'm curious: Both of you have said that you are in negotiations on regulations and that there would be some benefit to a public awareness of what those regulations are before they are put in place. I take it you know what is going to go into them, more or less. They may not accept everything you want, so there is that window of opportunity where you want to make your case. You're doing it privately, and you want to do it more publicly.
Playing the devil's advocate, putting this out to the public, other than, say, non-governmental organizations, tracking systems or consumer groups who might have knowledge about everything you have told us today, what input would the public have into the regulatory system? You almost have to have a PhD in drugs to be able to add value to it, save and except there should be some parliamentary input. You have been educating us through this process. Is that a role for Parliament? That's part of what our trade agreement is. There should be a role for Parliament. I keep going back to our pre-work as valid for our assessments now.
Mr. Keon: Well, we support the regulations being put out. The typical manner would be that in Canada Gazette 1, it would be put out for comment, and then there is a period of time for everyone to comment, including parliamentarians.
In terms of expert commentary, again, I'll come back and say the provinces, I think, run drug programs for seniors and people on social assistance. They pay for about half the medications in Canada, and they have been very interested in the CETA negotiations throughout all sectors, but certainly on pharmaceuticals, and the health ministers have been interested. We think they could make good comments.
You're absolutely right that the wording is very technical. When we have met with ISED, we have lawyers there from our companies as well as from outside law firms who are expert, and wherever the regulations are going to go, we have made terrific suggestions to ISED. I just don't know if they will accept them all.
Ms. Babiak: Just to add to that, from the Johnson & Johnson perspective, I haven't seen the regulations, not that I would know what to do with them because I'm not a lawyer. Not all member companies of IMC have had a chance to see the regulations, so at the very least, it's important to have affected parties have a direct chance to have their lawyers look at them. God forbid that I would be the one to look at them, because I would be putting us at risk there.
So there needs to be some process that allows for our lawyers to have a thorough look at it and that in-depth examination by people who really can tease through things and really understand if, in fact, those regs will introduce an environment that is in the spirit of what the negotiators had agreed to.
Mr. Hamill: We have 45 member companies. Some of them have been deeply involved in this process from the start, others are dimly aware of the process, and the NDAs that we sign are to the individual. We almost have a governance issue, to some extent.
With respect to this matter, it tends to be the larger companies who tend to be the most involved. Some of our smaller members or medium-sized members who may be impacted by these changes have very limited visibility into what is going to happen. I don't know what the remedy per se to this is. As Jim said, the usual process is the Canada Gazette process, but nevertheless, I think there is a need for additional transparency.
The Chair: With the indulgence of the senators and our witnesses, Senator Downe, you wanted to follow up. We're over time.
Senator Downe: I'll be very brief. I think what we heard today was quite significant. To me it was quite new, and I think the steering committee should consider inviting in the departmental people who are doing these regulations. We are agreeing to a trade deal, but as I said earlier, the devil is in the details. What are they doing, particularly in transparency and openness? We know what the Prime Minister promised in the last election. The default position of public service is secrecy and privacy and confidentiality agreements. They always, in my experience, take that to an extreme. We should have them before this committee to explain what the plan is to consult those that will be directly affected.
The Chair: We have indicated to the minister that we may need more department officials. You have pointed out some special ones. We will get back, as a steering committee, to determine just where we go on these regulations. This is about regulations for pharmaceuticals, but there are regulations elsewhere. I think we may wish to have the chief negotiator, or whoever is in charge of this transition implementation strategy, so that's done, but you now have it on the record. Thank you.
You have obviously not only given us a lot of information that we need for the Bill C-30 study that we're doing, but I must say I have learned a lot about the pharmaceutical industry, regarding the generics and the others. I think it has been very helpful. I hope that by having it on the record, it will be helpful for Canadians, also, to begin to understand is the complexity of a system that serves them, and that is the whole issue of drugs that benefit us. Thank you for your time and your indulgence with our questions here.
Senators, we are adjourned until tomorrow.
(The committee adjourned.)