Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue No. 34 - Evidence - February 15, 2018
OTTAWA, Thursday, February 15, 2018
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.m. to study on new and emerging issues for Canadian importers and exporters in North American and global markets.
Senator Douglas Black (Chair) in the chair.
The Chair: Good morning, colleagues and members of the general public who are following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce either here in the room or listening via the web.
My name is Doug Black. I’m a senator from Alberta, and I am chair of this committee. I would ask my colleagues to introduce themselves, please.
Senator Wallin: Pamela Wallin, representing the province of Saskatchewan.
Senator Stewart Olsen: Carolyn Stewart Olsen, New Brunswick.
Senator Day: Joseph Day, New Brunswick.
Senator Wetston: Howard Wetston, Ontario.
Senator Marwah: Sabi Marwah, Ontario.
Senator Dagenais: Jean-Guy Dagenais from Quebec.
Senator Tannas: Scott Tannas, Alberta.
Senator Unger: Betty Unger, Alberta.
Senator Neufeld: Richard Neufeld, British Columbia.
Senator Ringuette: Pierrette Ringuette from New Brunswick.
The Chair: Of course, as you can understand, we are very well serviced by our clerk and the analysts who assist us in the work that we do.
Our committee is continuing today its hearings on new and emerging issues being faced by Canadian importers and exporters in relation to international competitiveness. Some of these issues may include the possible withdrawal of the U.S. from the North American Free Trade Agreement, recent changes to the U.S. federal corporate tax, interest rates, innovation, productivity and skills training. The committee is interested in learning about the potential impacts of these developments on Canadian importers’ and exporters’ competitiveness, as well as the manner in which Canadian importers and exporters and the federal government might respond to these developments.
Today, we will hear from two leaders in Canadian business. May I introduce the Honourable Perrin Beatty, President and Chief Executive Officer of the Canadian Chamber of Commerce; and Brian Kingston, Vice President, Policy, International and Fiscal, Business Council of Canada.
Gentlemen, it’s great to have you with us. I’d ask that you each provide five minutes of introductory remarks and then be available for the senators’ questions. Thank you and welcome.
Hon. Perrin Beatty, P.C., President and Chief Executive Officer, Canadian Chamber of Commerce: Thank you very much Mr. Chair and members of the committee. It is a great pleasure for me to be here with you this morning.
The study that you are undertaking is important for Canadian businesses and for our economy. It is particularly timely for me in that I just returned from Washington yesterday from meetings there in which NAFTA and other issues featured prominently. Certainly, the whole issue of trade was front and centre for all of us at the meetings I was at.
Simply put, trade is the linchpin of our economy. For many businesses to grow, they must have access to international markets. Most of our regional economies are just too small to support businesses trying to scale up. That is why the Canadian Chamber has been so active during the NAFTA negotiations. NAFTA and trade negotiations like it have helped make our businesses more competitive and our country more prosperous.
On NAFTA, our message to the federal government as well as to the U.S. and Mexican representatives has been clear and consistent: Do not jeopardize this vital agreement; modernize it. It’s a message that I repeated directly to U.S. Treasury Secretary Mnuchin in Washington on Tuesday.
However, while preserving and strengthening NAFTA may be our most urgent priority, it is only one of the concerns that are preoccupying Canada’s businesses. As president of the Canadian Chamber of Commerce, I have the opportunity to speak daily with business owners from across the country about the challenges that they face in trying to grow. The insights gained from engaging them informs our own policy priorities.
Recently, the Canadian Chamber released 2018’s 10 Ways to Build a Canada that Wins, and 10 Ways is our blueprint for a policy environment that supports Canadian business growth and builds a more prosperous economy for all Canadians. In it, we recommend making all of Canada an export gateway by building and improving our existing trade infrastructure.
While federal, provincial and territorial governments have made significant investments in the country’s logistics infrastructure, we would benefit from more efficient corridors running through or around our urban centres, as well as from transportation systems linking Canada to global markets. We have recommended a number of measures that will help to achieve this.
First, the federal government should allocate more of its 10-year infrastructure plan investments to initiatives that will modernize and improve Canada’s trade infrastructure.
Second, infrastructure project selection should be merit-based to ensure we are maximizing the value of our investments.
Third, the federal government should implement a one-network approach to investments. This would ensure that national and regional supply chain considerations are factored into all project investment decisions.
Finally, projects should be evaluated and selected based on the role they play in integrated supply chains and their potential to help grow Canada’s share of global trade.
The Canadian Chamber is very much prepared to work with the federal government on these measures to help Canadian businesses grow their share of the global market for goods and services.
The other message we’re hearing consistently from our members is that the cost of doing business in Canada is rising due to the growing burden of fees, taxes and regulations that the private sector is required to bear. This hurts their ability to grow in Canada and their ability to compete for investment and customers internationally.
To help our small businesses grow, we need to review our tax policies to ensure that they reward entrepreneurship investment and growth, we need regulatory policies that recognize the needs of small business and allow them easy and low-cost regulatory compliance and we need programs that connect SMEs to international business opportunities and help them build the capacity to grow.
While it is ultimately up to businesses themselves to figure out how to grow and compete, the international competitiveness of Canadian business starts with the policy environment here at home.
For our part, the Canadian Chamber is prepared to do everything that we can by working with business and with government to create an environment that supports growth and contributes to a more prosperous economy. We’re convinced that, together, we can build a Canada that wins.
Thank you. I would be delighted to answer any of your questions.
Brian Kingston, Vice President, Policy, International and Fiscal, Business Council of Canada: Thank you, Mr. Chair and committee members, for the invitation to take part in your study on new and emerging issues facing Canadian importers and exporters.
I’m going to focus my remarks today primarily on tax policy as we believe that Canadian tax competitiveness is one of the most critical issues right now facing Canadian companies.
In the council’s pre-budget submission, we urged the government to implement a comprehensive strategy to strengthen Canadian competitiveness. Not long after we submitted that letter to the finance minister, Canadian tax competitiveness was delivered a major blow in the form of the U.S.’s sweeping tax reform package. Among other things, the U.S. tax package slashed the federal corporate income tax rate from 35 per cent to 21 per cent, allowed for full expensing of investments in machinery and equipment and introduced new international tax measures. Meanwhile, Canada’s combined statutory corporate tax rate has been creeping higher due to increases at the provincial level. As a result, Canadian companies now pay higher rates than those borne by their competitors in most OECD countries.
Even more concerning than Canada’s comparatively high statutory tax rates is the marginal effective tax rate, the METR, on new business investment. For more than a decade, Canada’s METR has been well below that of the United States, a factor that has encouraged companies to invest and create jobs in Canada rather than across the border. However, with the adoption of the tax reform bill, the United States’ METR has plummeted from 34.6 per cent to just 18.8 per cent, undercutting Canada’s METR of 20.3 per cent.
Honourable senators, the significance of U.S. tax reform and implications for Canadian importers and exporters cannot be understated. Canada must move quickly to shore up its competitiveness.
The combination of U.S. tax reform and elevated uncertainty around trade policy is already having a serious effect on foreign direct investment in Canada. According to the Bank of Canada, greenfield foreign direct investment has declined since mid-2016, especially from Europe but also from the U.S. This is a possible sign of the effects of the uncertainty around the trade policy. Trade policy uncertainty is expected to reduce the level of investment by about 2 per cent by the end of 2019. The bank projects that U.S. tax reform will reinforce this uncertainty and dampen investment growth even further. Firms may decide to redirect some of their planned investment spending from Canada to the U.S. to benefit from the lower corporate tax rates, subtracting a further 0.5 per cent from the level of investment by 2019.
Yesterday, in a letter to Minister Morneau, John Manley, President and CEO of the Business Council of Canada, urged the government take decisive action now to bolster private sector confidence in the Canadian economy, discourage capital flight and increase incentives for new business investments. I brought copies of that letter. I believe you have them in front of you.
The most direct way to accomplish this would be to include in Budget 2018 a temporary tax measure allowing companies to immediately deduct the full amount of capital expenditures rather than amortizing those expenses over several years.
Other options we put forward to the finance minister include announcing an immediate cut to the corporate tax rate, coupled with a commitment to ensuring that Canada’s average combined statutory rate falls below the OECD average over the medium term; eliminating the so-called available-for-use requirement so as to allow companies to deduct the cost of investments as money is spent rather than being forced to wait until projects are complete; and finally, delaying the implementation of new rules on passive investments held by private corporations to allow for a detailed economic analysis of the impact on business investment and growth.
With that, I conclude my remarks and look forward to any questions. Thank you.
The Chair: Thank you very much, Mr. Kingston.
May we start, please, with the deputy chair of the committee.
Senator Stewart Olsen: Thank you for your very informative presentations.
Mr. Beatty, I’m quite interested in your proposals. It has to do with my own interest in transport. I find that to be one of the key things that we have to address in this country. Number one, do you have uptake on your offer? Number two, governments are political entities, so are they actually going to do merit-based policy planning and the kind of planning that we need in this country to move forward?
Mr. Beatty: Senator, you’ve put your finger on the key question there. I was in Parliament 21 years myself. I know there’s a temptation, when it comes to infrastructure funds, to spread them like peanut butter across the country to ensure there are signs in front of every curling rink and intersection indicating the largesse of the federal government.
We have been spending infrastructure over the last generation as opposed to investing in infrastructure. We’ve seen, particularly in many of our urban areas and in key choke points for our trading system, deterioration of infrastructure and serious clogging up of the system and bottlenecks developing.
At this point, we’re really in the position of doing triage. We simply can’t afford to spread money around evenly everywhere and to treat every project as if it were of equal value. Instead, we need to apply a test, in my view, of what the economic return is that we’re getting from this so it’s genuinely an investment as opposed to simply government spending.
I will stress as well that previously, when we’ve had infrastructure programs, they have tended to be in response to high unemployment, so job creation programs, and the economic benefits in terms of trade or stimulating economic growth are considered secondary. In this environment today, our priority needs to be in investing for the future.
To answer more directly your question: We will see. Certainly, there’s interest on the part of government. I found an openness there. I do believe they’re being strategic in terms of how they’re doing their planning but, at the end of the day, we’re going to need to look back and say: Did we use this money well, or did we lose a once-in-a-lifetime opportunity to make ourselves as a nation much more competitive?
Senator Stewart Olsen: Mr. Kingston, on the tax reform that needs to happen in the country, have you had a meeting with the finance minister? Do you get a sense that they understand how big the problem really is and can be?
Mr. Kingston: We were encouraged by the finance minister’s comments on the margins of Davos, where he did note that Canadian tax competitiveness is critical and the government is looking at responding. That’s about the best indication, frankly, that we’ve had that they’re looking at this. We’ll see what comes down in the budget. We know there’s not a huge amount of fiscal space, but we think that it’s critical that they do something.
Senator Dagenais: Thank you, gentlemen, for your presentations. My first question goes to Mr. Beatty. You are certainly aware that the American corporate tax rate has gone from 30 per cent to 25 per cent. This decrease will have a significant competitive impact on our Canadian companies, which will be definitely be tempted to move their production to the United States.
Mr. Beatty: Absolutely. Indeed, I just came back from Washington yesterday, where I was attending the meeting of the Global Business Coalition. Dramatic changes have taken place in the United States to the tax and regulatory system that were certainly of interest to all of the delegates internationally, but it should be particularly so for Canada because of how deeply integrated we are with the U.S. economy.
I can tell you that long before those changes were made by the current administration, I was hearing from our members, particularly ones who represented either Canadian or international, multinational companies. What they said to me is their toughest competition is not external to the company. It’s internal at budget time, when they have to speak to head office and justify maintaining their investment in Canada, let alone increasing that investment. This was before we saw the most dramatic regulatory and tax changes in our lifetime taking place in Washington.
I wrote, along with my provincial counterparts from provincial chambers, to the Prime Minister and to each of the provincial premiers back in July to say that the growing concern that we were hearing is at a time when our trading competitors were becoming more competitive for investment and trade. Now Canada, already a high-cost jurisdiction, was seeing an accumulation of fees, taxes, charges and other costs, regulations, other costs on top of our business community that was making us less and less competitive. I called upon the Prime Minister to convene his counterparts from other levels of government to, on an urgent basis, look for ways to reduce that burden to keep us competitive.
Again, when I talk to my members, it is less the tax rate or any one individual thing. It is the accumulation of all of those things that is taking the country with its high cost today and making us uncompetitive.
Senator Dagenais: I have a question for Mr. Kingston. An increase in interest rates seems inevitable in the current economic situation. Up to what point will the Canadian economy, companies and public, be able to absorb an increase in interest rates without triggering a crisis? Canada has been fortunate to have relatively low interest rates for several years. Canadian debt levels aside, do you believe that an increase in interest rates could trigger a crisis in Canada?
Mr. Kingston: That’s a fantastic question. As you noted, we’ve been living through a period of historically record low interest rates, and there’s no doubt that there has become somewhat of an adjustment to that and an expectation that would continue for the long term, so there will be an adjustment that has to occur. I’m less worried about the corporate sector’s ability to adjust to interest rates. I’m more concerned about Canadians and high debt levels and the impact on the housing market. So it’s inevitable that rates do need to come up, particularly as you see things like the minimum wage hike that’s come into force in B.C., Alberta and in Ontario. Inevitably, inflation will be driven up and interest rates will have to increase, but I think the biggest area to watch will be on personal debt as opposed to the corporate sector.
Senator Marwah: Thank you for your presentations. I note that neither of you have mentioned in your presentations anything related to IP, which is intellectual property. Given the world of technology and innovation that is going to drive our success and in fact our standard of living for decades to come, I really do believe that management and control of that is crucial. I would welcome your views and what your members are saying in terms of whether our policies are adequate and are we and business doing enough in terms of controlling and managing IP.
Mr. Beatty: Perhaps I can take a stab at that, senator. The answer to both those elements of your question is no. Business is not doing enough and government is not doing enough.
The Canadian Chamber was disappointed with the position that the Government of Canada took in the negotiations with TPP, where they argued that we should not be increasing patent and other IP protection under the agreement. That was essentially put on the shelf. If the Americans enter back into TPP, it’s likely that will come back off the shelf.
Our feeling is that, increasingly, it’s the intellectual property component of products and services which is the single most important value add in there. For Canada to be successful internationally, to draw investment into Canada and for us to be able to grow our economy, we need to do more to protect intellectual property in Canada.
The other half of your question is whether business is doing enough. No, business is not doing enough to generate the intellectual property in Canada. If you look at private sector R&D, compared to our trading competitors, we don’t measure up well, whereas in the area of public sector R&D, Canada ranks quite highly. So we need to do more.
Mr. Kingston: I agree wholeheartedly with what Mr. Beatty has said. The only thing is I think there is more Canada can do in terms of attracting R&D through the tax system. We have a number of multinationals that invest in Canada as part of their R&D strategies. We’ve noted that there’s been a decreasing amount of that investment in some areas, particularly referencing the fact that R&D tax credits are not as generous as in other jurisdictions. I think there’s something that needs to be looked at.
Senator Unger: Thank you very much, gentlemen, for your interesting presentations.
My first question is on the background of the uncertain future of the Canada-U.S. free trade market. Our Library of Parliament briefing notes state that 23 per cent of businesses surveyed feel negatively impacted by this uncertainty. Of those businesses, 26 per cent have indicated they’re considering relocating to the U.S. and another 23 per cent have indicated they may attempt to diversify their exports or investments. With all of these incremental, negative impacts, can you give me an idea of how this affects Canada overall?
Mr. Beatty: Senator, on the area of diversification, it’s something we would encourage. We simply have too many eggs in one basket. It is dangerous for any business or for any country to have 75 cents out of every dollar in business that it is doing with one customer. It leaves you very vulnerable. We have been encouraging our members not to do less in the United States but to do more elsewhere and to diversify.
On the other element of your question, though, which is where am I going to locate my business, you’re absolutely correct that this is the impact that uncertainty creates. I would ask you, if you were looking at investing your money and building a new plant, your customer is in the United States, is ten times the size of our economy, and you’re uncertain about how the border is going to function or what tariff treatment you would be getting, where would you put the money. You would put it as close to your customer as you possibly could. This is why continued uncertainty is affecting investment in Canada, causing people to pull back and ask themselves whether it’s wise to invest here as opposed to going somewhere else.
I’d also flag one of the concerns that I have, and I want choose my words carefully. As you know, periodically it’s mooted that the U.S. administration may choose to abrogate NAFTA. One of the impacts in the short term is that bad behaviour could be rewarded. That is, if there were a signal sent out of Washington that we are doing away with free trade in North America, investors might in the short term look at moving money then into the United States as the only way of getting near their customer and getting to the market that they want to be in, which would feed the protectionists. It would encourage them with the belief that they had done the right thing. In fact, over the longer term, what we would see is very damaging effects on the global economy and on the United States’ economy.
One of the points that I made when I was in Washington this week, and we met with the government sherpa to the G20, was that much of the rhetoric that we hear is very similar to what was heard back in 1930 at the time of the Smoot-Hawley Tariff Act, the belief that the rest of the world was taking advantage of the United States, that the United States could prosper by building walls around their market. In fact, when Smoot-Hawley was passed, the first country to retaliate was Canada. Other countries followed suit. The Smoot-Hawley Tariff Act did not cause the Great Depression, but it deepened it and lengthened it, and the net impact of policies being followed in Washington is to damage global trade and, as part of that, they will damage the economy in the United States as well, but that may not be the focus of politicians who are focused on the short term.
Sorry, that’s a very long answer to a short question.
Mr. Kingston: I want to share with you a couple of numbers from a survey of our members that we took in the summer regarding the Canadian investment environment. I thought they were quite shocking.
We asked CEOs whether or not the business environment in Canada has improved, worsened or stayed the same over the past five years. Two thirds said it had worsened, so that’s a pretty significant number. NAFTA renegotiation was already under way, of course, but it had yet to reach some of the rocky lows it’s been at, so it was before that. It was before the private corporations tax reform package was introduced, and it was before U.S. tax reform. If we did that survey again now, I expect we would see a far worse outlook from CEOs.
We also track CEO sentiment. This is something just to get a gauge of how they view the Canadian economy as opposed to the global economy. Both trackers had shown increasing sentiment over the past four occasions that we had surveyed CEOs. The last survey in January showed the global economic sentiment is still up. It’s actually reaching record highs, given some of the growth we are seeing around the world. Canadian sentiment has taken a nose dive. That’s very, very concerning.
I was looking at the FDI inflow numbers yesterday for 2017. We only have the first three quarters, but if the fourth quarter is also a poor performance, we could actually witness the lowest FDI inflow since the financial crisis into Canada. So this is already happening. I think decisions are already being made to put investment in the U.S. and elsewhere, given all the uncertainty in the economy.
Senator Wetston: I have a general question about tax reform. I haven’t seen much since the Carter commission. What I mean by that is I’ve seen a lot of incrementalism. Every government comes in, and there’s always tax reform of one sort or another. Is it your opinion that the government needs to step back — I know we need to do some things now — and really take a look at our entire tax system, from top to bottom, to determine whether or not it indeed has kept up with what’s necessary for Canada, both for consumers as well as business, both with respect to globalization and all of the changes that we’ve seen in our economy and not necessarily just directed to trade agreements and NAFTA? Any thoughts about that?
Mr. Beatty: The answer is yes. Absolutely, we need to. As you know, the Canadian Chamber was very much engaged in a battle with the government during the summer over changes to the taxation of private corporations. A resolution passed at our AGM, and I think it was 98 per cent voted in favour of a full royal commission to re-examine the tax system of Canada. We can’t get 98 per cent on a vote to appoint the auditor. This gives you some idea of the intensity of feeling that there is, certainly within our network.
I can say to you that, as a former minister of national revenue between 1984 and 1985, the tax system was complex then and a major concern to me. Complexity breeds unfairness. If people don’t understand what the law is, it creates unfairness. There’s something fundamentally wrong when a company, instead of hiring engineers, is hiring accountants and lawyers to fit the company in somewhere between a comma and a semicolon in the Income Tax Act.
We need to have a full, comprehensive review. It is critical for us to do that. The Americans had the most massive tax reform in over a generation. We need to look back at our system instead of cutting and pasting the way we’ve done for the last 40 years.
Mr. Kingston: We share the exact same view. We’ve been supporting and calling for comprehensive tax reform for years. We think with U.S. reform now, there’s no better time to do this. I think while we supported the government doing a review, for example, of tax expenditures, I think it was a good exercise in showing that when you try to make targeted changes to one element of the tax system without looking at it in its entirety, it’s extremely difficult. Again, with the private corporations consultation, they tried to focus on one area to address perceived problems. Of course, the pushback was significant given the way that they approached it.
Why not step back? This could take a number of years to do correctly, but step back, look at the system in its entirety. Look at the balance between corporate, personal and consumption taxes, and really do this the right way. We’re absolutely supportive of that. Of course, in the short-term, we recommend that they take immediate action to respond to the problem we have.
Senator Ringuette: I’m intrigued by your comments and the intensity of your comments with regard to business taxes because, yesterday, we had economists in front of us indicating that the marginal difference would not be significant between what, at the end of the day, will be put in place in the U.S. for business compared to Canada.
Mr. Beatty, thank you very much for your activities with regard to NAFTA. You said to us, and you’re saying to the people that you’re meeting, to modernize it. When you say modernize it, for me, the first item that needs to be modernized is an efficient dispute mechanism. I’d like to have your comments on that, and I’d also like to hear what the other key elements are that you include in modernization.
Mr. Beatty: Senator, would you permit me just to make a comment with regard to what you were saying on taxation? For the Canadian Chamber, it is not the level of taxation, at this point, that’s the single greatest priority. The single greatest priority we have is the accumulation of all the fees, the taxes, the minimum wages and the other regulations. Yes, the tax system itself, at this point, even with the American reductions, will be more or less competitive, depending on what jurisdiction you’re in, because state and provincial taxes vary, but our governments in Canada are moving to add more regulations, more fees, more cost, more taxes and so on. At the same time as the Americans are bringing down the regulatory and tax burden, we’re moving in exactly the other direction. Those are the elements that, more than the general tax rate itself, are of the greatest concern to us.
On modernization of NAFTA, just to cite another example, many of the professions that are listed for people to be able to move across the border in NAFTA were drawn up at the time that NAFTA was drawn up. Some of them are irrelevant today, and many occupations that people have today, where you may need to move experts, skilled people, across the border are jobs that simply didn’t exist at that time. Now, that list of occupations is absolutely critical as one example where we can modernize.
IP is another example. At the time that NAFTA was negotiated, we didn’t have Internet commerce the way that we have it today. The simple fact is that NAFTA wasn’t created to deal with that. We could be building in a modernized system that would provide a better environment to encourage e-commerce.
There are a number of other areas where modernization would make sense, but the principle that the business communities in the three countries have taken is that politicians in the three countries should take a Hippocratic Oath. First, do no harm. Then, beyond that, be ambitious. Take what we have that is good today and build upon that. Modernize it. Look for ways to improve.
The other pitch that I would make is this: Unfortunately, we’re very focused today on saving the furniture. How do we make sure that damage isn’t done to what we’ve built? Where we should be, in this country and in the United States and Mexico, is sitting down and saying, in the first quarter of the 21st century, for three countries sharing the same land mass who are deeply integrated in terms of their economies, where does it make sense to work with each other? This committee could, in the course of half an hour, draw up a list — pandemic planning, security, transportation planning, skills, IP, robotics, a whole range of other areas where it would make sense for us to work together. We have to move away from a defensive game to one that is more visionary and that holds out the promise of something that is much brighter than we have today.
Mr. Kingston: Just as a comment on your point around taxation, you’re absolutely right that, when you look at the combined statutory rate, the U.S. is now only one point below Canada, so we’re close to being on par. But we think it’s more effective to look at the marginal effective tax rate on new investment because that’s what business really looks at when they’re making an investment decision. We’ve had an over 10-point advantage for almost two decades over the U.S. That advantage is gone now, and the U.S. is actually more competitive. That is a real problem. Canada is a small market, and, if you’re thinking about investing here, we have to have something that draws people. Traditionally, that’s been that we had a tax advantage and had access to the U.S. market. Both of those are in jeopardy now, and I think that fundamentally changes the investment landscape.
Senator Ringuette: Maybe we need to undertake what Mr. Beatty was just saying. Instead of looking at the old furniture that we have in the house, maybe we should renovate the house and look at new items to make us more competitive.
Mr. Kingston: Yes. I totally agree, and, on NAFTA, we think that there’s huge room to improve the agreement. Labour mobility, as Mr. Beatty mentioned, is critical, although I think U.S. appetite for that is minimal. Second is government procurement. Those are two areas where we could cooperate and dramatically improve the trade agreement.
Senator Marwah: Gentlemen, I think one of the few things we would all agree on in this room is that we are over-regulated as a country, and there are interprovincial barriers to trade. It’s probably unfair for you to really say, and I know the general response is, “Yes, we are,” so that’s not what I’m looking for, but are there any other major areas in the regulations, or the top three, and the interprovincial barriers to trade? I know the government has done a lot recently to eliminate many of the interprovincial barriers, but I keep hearing from small business that many others still exist. I’d be interested in your views, maybe after the fact as well. What you would consider the top three in either, in regulation as well as the existing interprovincial barriers to trade?
Mr. Beatty: Senator, can I take advantage of your question to cite just one? It may not be what you were looking for, but it’s certainly topical. Pipeline. It is stunning to me that, in Canada, in 2018, we should be building walls along the Rocky Mountains between our provinces. The message that we’re sending to foreign investors is that investors looking to do a major project in Canada, which is a nation-building project in my view, once they’ve gone through all of the regulatory process, spent millions of dollars to do so, have had the project approved with all sorts of conditions attached, which they’ve accepted, had the federal government say, “This is something that’s in the public interest,” suddenly find a provincial government using tools designed to literally talk a project to death. The federal government has an obligation to define the national interest, and what this particular controversy has demonstrated is that you can’t leave it to provincial governments to put the national interest ahead of local interests.
If foreign investors are looking at coming to this country, they need to know that they’re dealing with one market, that the rule of law applies and that there’s coherence to our regulatory system. Without that, we drive investment out of our country, both Canadian and foreign. If we are looking for something that is very topical today, that would be a good example, but there are many other instances as well where we put barriers in place in Canada that make no sense whatsoever, that might very well be illegal in Europe. But we partition our country. The great irony was that, at the very same time as the Prime Minister was doing very good work on behalf of Canada in the United States to talk about how we keep the border between the United States and Canada open, we had provincial premiers putting up barriers within Canada. That’s just plain wrong.
Senator Marwah: I’d love to hear your views on any others that you can think of that we should attack, but I think that is an issue. Not just that, but overregulation is an issue too. We always seem to add incrementally; we never take anything away.
Mr. Beatty: You’re absolutely right. The Americans now have a two-for-one system, where they’re taking two regulations off for every one they’re bringing in. I’ve always been very sceptical about that because you get game playing. Something trivial comes off, and something major comes on. But everything I’m hearing from the business community in the United States is that the U.S. government is very serious about this and that they’re finding that the regulatory burden on American business is being lifted at a dramatic rate. We’re going in the other direction and simply adding regulation after regulation.
One of the areas that I was discussing with my counterparts when I was in Washington was if it is possible for us to make progress with the Americans. There are a number of areas where we will have real difficulties as a result of the approach being taken by the administration, but given their commitment to deregulation and regulatory reform, this may be an opportunity for us. We have a project in place with the United States in terms of regulatory coordination and cooperation, standardization. This may be an opportunity for us to make significant progress in doing away with the tyranny of small differences between Canada and the U.S. We should also be looking at regulatory reform within Canada so that, as much as possible, we can have one system. Try driving a big truck across Canada if you ever want to know about the differences between jurisdictions. When companies say to me that it’s easier to loop down into the United States and drive through the United States than it is to cross provincial boundaries, then we know we’ve done something wrong.
Mr. Kingston: Regarding the regulatory burden and what we hear from our members, I cited some results from a survey we took last summer on the business investment environment. The number one issue that was cited as a detriment to Canadian investment attractiveness was the regulatory environment. Sixty-one per cent of CEOs said that it’s an inefficient regulatory environment and it’s a real problem.
I would be happy to send you examples of very specific regulations, but one thing we’ve recommended that the government do in this budget is to move from — and this would mostly be through the Treasury Board Secretariat — a situation where you have episodic consultation with business on regulations to a co-development approach on regulation. We have seen world-class regulators in other jurisdictions do this. It’s very possible, and we think there is merit to it.
Just yesterday, I was speaking with some trade negotiators about the regulatory cooperation mechanism in CETA, our trade agreement with Europe. This is a fantastic development. It allows Canada to engage with Europe to address regulatory issues, but I couldn’t help but think how challenging it will be to engage with Europe on regulatory cooperation when we currently don’t have a common set of regulations and a simple regulatory standard here in Canada. I think we need to get our own house in order first before we start working on regulatory cooperation with others.
The Chair: Those general comments are extremely helpful, but it would be helpful to the committee if, in response to Senator Marwah’s question, you could provide what you view to be the top three regulatory challenges in Canada. Make it six if you want. Second, what do you think the greatest impediments to interprovincial trade are? This committee has studied that issue, and we are alert to that, so that would be helpful as we do follow-up.
Mr. Beatty: I will be pleased to do that in a letter, Mr. Chair.
The Chair: Just to the clerk would be great.
Senator Neufeld: Thank you, gentlemen, for being here today. It’s very interesting. Just a little bit ahead of time, when you talk about regulations and two for one, I worked for a premier in British Columbia who actually ordered every minister to reduce by 30 per cent all regulations, and if you want to bring in a new one, you have to take away an old one after that. It worked quite well. I’m not saying it worked perfectly all the time, but it did work quite well.
I’m interested in your discussions with the finance minister. I’m on the Finance Committee and we did a trip around the country in regard to the taxation this summer. We found that he was very unwilling to even look at some of those things about passive investment, about a different way to tax things. We were in Calgary, and there was a company there that was going to open an operation in Ontario that would have employed 300 to 500 people, and with the passive investment thing, they said goodbye, bought land in the U.S., and that’s where they’re going. That’s even before NAFTA. It had nothing to do with that. It was, “We’re going there.” I wonder what your thoughts were about the minister. He’s going to come out with a budget here soon. Did he really listen to those things about the jobs that would be lost and the negative things that would happen?
The second part of my question to Mr. Beatty is in regard to movement of product in Canada. I totally agree with what you say about the pipeline, and we’re dealing with that issue in the Senate as best we can, but with the present federal government, what did they do? They came up with a bill that says we’re going to eliminate tankers from the north of Vancouver Island all the way up to the U.S. border. That eliminates Kitimat for tankers, and that eliminates Prince Rupert for tankers. Here we have a federal government throwing in a whole bunch more. It’s not just provincial premiers. It’s also the federal government. What is your thought process on that? I see you have a line that says “transportation systems linking Canada to global markets.” There are now tankers that come from Valdez all the way down to the southern part of Vancouver Island up a very narrow way into Bellingham, Washington, and unload their crude only a daily basis, but yet the federal government says you can’t come into Prince Rupert, which is one of the deepest ports closest to Asia that we have in North America. Help me a little bit here.
Mr. Beatty: You’re trying to draw me into trouble, senator.
Senator Neufeld: That’s what you’re supposed to do.
Mr. Beatty: I wanted to stay as far away from partisan considerations as possible, but let me try and respond to your questions.
I have a great deal of admiration for the Minister of Finance. I think he is a very good and decent person. I don’t believe it was his goal to destroy hundreds of thousands of small businesses in Canada. I believe the government made a very serious error with the legislative package that it drew up, the net impact of which could have been to do exactly what the minister didn’t want to do. There was a failure there to fully understand what the government was putting forward.
Was I satisfied with the consultative process? No, not at all. It was a very truncated process. It was one that denied Canadians a chance to be heard on an issue that was absolutely fundamental. Do I believe the changes that were made by the government address all of the issues and concerns we had? No. It is better, certainly, than the initial package, but we still have concerns.
On passive income, I’ve never fully understood what the issue is in some people’s minds with passive income. If I were an entrepreneur looking for investment capital, I would be very grateful for people who had passive capital to invest in my operation. The net impact of cutting back on that may be to make it much harder for Canadian entrepreneurs to get started or grow their businesses.
On the issue of tankers and getting our resources to the world, our view at the Canadian Chamber is different from that of the Government of Canada in terms of the restrictions that have been put on. I think it’s important for us to understand that the opponents of taking Canadian resources to the world cite pipelines or other reasons, but the goal that they have stated explicitly is to keep the resource in the ground and never to allow it to be brought to market.
This is a very Canadian debate. Nowhere else in the world would you have a country as resource rich as Canada where we would be going through existential angst about whether or not we should leave the resource in the ground or bring it responsibly to global markets. I believe that the Government of Canada needs to be abundantly clear that our commitment in Canada should be that we will take our resources to the world, to global markets, and we will do so in a way that is responsible from an environmental point of view and that respects community rights. The debate in Canada needs to shift away from whether to how. We can debate as much as we want about how we can improve standards and ensure adequate consultation, how we can ensure the environment is protected and enhanced, but the starting point needs to be that we need to get to yes. The Government of Canada has to have a clear vision that that is our goal.
Mr. Kingston: Senator, to respond to your question around tax and the government’s response to some of the concerns, we weren’t satisfied with the response. First and foremost, the consultation period was too short and we thought it should have been extended.
Second, and we’ve asked for this again, is an economic impact study. We don’t think that is an unreasonable ask. As you know, companies are making decisions to not open plants in Canada as a result, so let’s do a study and really take time to look at this and determine what the impacts will be.
And third, the response, for example, to lower the small business tax rate just made absolutely no sense to us. Small business tax rates are already extremely low. There is already a huge amount of evidence that shows you need a tax system that encourages growth. We need more companies to become global champions. So suddenly reducing the small business rate at great cost to the federal government made absolutely no sense in that context.
We don’t think that they’ve responded adequately. We’re looking forward to the passive investment legislation when it’s tabled, and we’ll get a chance to see what they’ve come up with.
Just on resources, I don’t have a great deal to add other than, as my CEO says, natural resources in Canada are a family business. It’s 16 per cent of GDP, 2 million Canadians employed, and 38 per cent of capex in Canada is done by the natural resource industry. I was speaking earlier about our serious concern about investment in Canada. If we have a situation where natural resource companies don’t feel as though this is an environment where they can expand and we lose 38 per cent of our capex, where is investment going to come from? It’s a pretty dire situation.
Senator Day: Gentlemen, I have a couple of points that I’m going to ask you to expand and clarify for those watching. For the record, it would be helpful to have an explanation.
Mr. Beatty, I appreciate you letting us know about 10 Ways to Build a Canada that Wins. I haven’t seen it yet, but I assume it’s on your website.
Mr. Beatty: It’s just been released.
Senator Day: I look forward to seeing that.
You talk about trade or gateway corridors. This committee did some very good work on an across-Canada corridor, an initiative of the University of Calgary, and we got good feedback from our report a year or so ago. Of the points you make with respect to the investment, you talk about three of the points in relation to the corridor. Ours was an across-Canada corridor as opposed to yours through or around urban areas. We didn’t look at that.
The point I hoped you would expand on for us is the third point you’re emphasizing, that the federal government should implement a “one network” approach to investment. Can you expand on that?
Mr. Beatty: I would be glad to, senator. What we would like to see is for governments to take a look at the whole of the value chain that we’re looking at, to look at the flow of products and people associated with trade and to say, okay, when we’re looking at products, where do they start? How do we get raw materials to where they need to be processed and where they need to be turned into manufactured projects? Where do they end up going from there? How is our transportation system going to the border? But take a much more integrated approach toward infrastructure planning as opposed to looking at a series of one-offs and projects that are often disconnected.
Again, I would stress we want to see all of Canada exporting from all areas. That means from the Atlantic as well as from the Pacific. It means directly through the United States. It means that we have to look at our infrastructure in a coherent and integrated way to say, where are the bottlenecks? How can we speed it up? And how can we reinforce our capacity to create in Canada?
Senator Day: Many of us, particularly in the East, were very saddened by the Energy East pipeline project and the way more and more hurdles were being put in front of that. That was a terrible example of planning and the lack of support by the federal government.
Mr. Beatty: I referred earlier to an attempt to talk the Kinder Morgan project to death. That’s exactly what happened in the case of Energy East. It is very much in our interest that we be able to serve Eastern Canada with Canadian oil rather than imported oil, and, second, that we be able to export from the East Coast as well as the West Coast. This is an instance where you get a decision by delay, and that’s very worrisome.
Senator, in Canada we need a regulatory system that is open, transparent, consultative, evidence-based and that can make decisions at the end of the day that can be enforced and implemented.
We have seen so many instances where projects are simply talked to death. We’re a country of builders that can’t get anything built. It was the commitment to build the CPR that was essential to bringing British Columbia into Canada. That’s the great irony today about the suggestion that a wall should be built along the Rocky Mountains to disconnect British Columbia from the resources in Alberta and Saskatchewan.
Could you build the CPR today? Could you build the St. Lawrence Seaway today where whole communities had to be moved? Could you engage in any major nation-building project with the regulatory system we have today? Are we reduced in Canada to being a nation of 13 satrapies where each has its own standards and each looks at it and says, “What’s in it for me?” as opposed to, “What’s in it for us?”
We need to take a much more holistic approach and one that defines the national interest in a confident and modern way and is engaging with the rest of the world and ensuring that we assist Canadians in being able to succeed in the global economy.
Senator Day: I couldn’t agree more.
This is just an expansion of your comment, and you’ve already spoken to my colleague Senator Ringuette on this. After the U.S. change, there is only a spread of about 1 per cent for the marginal effective tax rate. This is not the statutory because you had indicated in your comment that there’s a statutory tax rate difference. Can you tell us why 1 per cent in the marginal effective tax rate for investment would be a concern to you?
Mr. Kingston: Absolutely, senator. The reason that is a concern is because we’ve enjoyed an advantage of nearly 15 per cent in marginal effective tax rates over the past two decades. To see that eliminated completely and have the U.S. — yes, it’s only a 1 per cent advantage, but we needed that advantage to attract investment given the small domestic market that we have. That’s where we think the real problem will be.
There is something I didn’t mention. I haven’t talked about the personal tax side of things, but the U.S. is also far more competitive than Canada on personal tax rates. When a business is looking to invest, they consider the whole waterfront of issues from the regulatory environment, cost of doing business, what the personal tax regime looks like, and we’re also uncompetitive there. Marginal effective tax rate to me is the key, but there’s a whole range of other tax issues that have been introduced that make Canada far more uncompetitive.
Senator Wetston: Mr. Beatty, I wanted to understand whether or not you appreciate — and I know you do — the difference between economic regulation and what economic regulators have done in approving projects and including conditions, and the impediments to implementing those decisions, which is clearly not that of the regulators? As you know, I spent a fair bit of time in this area. To realize that more governments are taking on the decision-making responsibilities and that sometimes regulators are in advisory roles, and, of course, provinces get in the way, which occurred on Energy East and other projects. I just want to clarify, if I may, that I don’t think the source of the problem necessarily is the regulatory system as much as the government overseeing the regulatory system in the way we’ve seen that develop more recently.
Mr. Beatty: Yes, sir. I agree with you on that. I’ve participated in a number of different ways, both as minister responsible for regulatory agencies and as president of a Crown corporation that was heavily regulated. I’ve seen it from both ends of the telescope.
Let us just go back to pipelines. We’re in the process of making major changes to how we regulate the transportation of energy in Canada. There’s a belief by some that you will build public support and that people who oppose the shipment of Canada’s energy to global markets will be persuaded that if you make a system that is more complex, more lengthy, more comprehensive, that at the end of the day people who have been intractably opposed to the export of Canadian energy will say, “I am persuaded that we now have a system that is delivering the results that I want.”
I think that’s an overly optimistic view. It’s important to understand that the opponents of the export of Canadian energy are not interested in the structure of the regulatory system; they’re interested in the results of the regulatory system. As long as a decision is made at the end of the day that permits export, they will be opposed to the structure and to the results.
It becomes a political question, as you say, that has to be managed by politicians. You don’t blame the regulator for that. The issue is the political leadership and what we’re doing to ensure that we can define national goals, achieve those goals and that once evidence-based decisions are made, that they can be implemented.
Senator Wetston: And that there’s a benefit to Canada.
Mr. Beatty: And that there’s a benefit to Canada. Today, we’re seeing an enormous loss from Canada — a hemorrhaging of tens of billions of dollars. We saw in 2017 tens of billions of dollars of investments that had been planned be pulled back from Canada in our resources sector. That’s job loss, tax loss and opportunity for our kids that is lost.
Senator Wallin: I have a quick, final point as we get close to wrapping up here. I’m looking for your thoughts from both of you on where we are on NAFTA. We have had lots of conversations in the last couple of days. We’re caught in the political cycles of U.S. and Mexico, and pretty soon our own. You get the sense from a lot of American politicians that there’s a deal there. They may even overrule with a thumbs up or thumbs down, if the president does something, because there are big proponents in Congress. Yesterday, we heard references — and these have been disputed — as to would we revert to FTA or WTO with most favoured nation, et cetera. Where do you assess all of those possible scenarios?
Mr. Beatty: I’ll take a stab at this.
Senator, I’m more optimistic than I was prior to the Montreal round. I was quite pessimistic going into that, and there was a very real concern prior to it that the president would announce a decision to abrogate. Sufficient progress was made in Montreal that it appears as if we’re moving ahead. Montreal was not the make-or-break ground. It was the make-it-to-the-next-round-of-negotiations-or-break round.
I am concerned that I’m hearing out of U.S. is a good deal of frustration aimed at Canada. When the USTR and the President of the United States single out Canada, that’s certainly a major concern. I was concerned as well that we’ve got a superb lead negotiator. I read reports of comments he made that were quite pessimistic. I take what he said very seriously, if he was correctly quoted, because he’s a superb negotiator as well as a very honest and straightforward person. So we need to take that very seriously.
I still believe it’s achievable. When I’m in the United States, I’m seeing that players, particularly agriculture, are weighing in now in ways they weren’t before. Agriculture punches above its weight in the U.S. Congress. That’s good. U.S. governors are weighing in. That’s good. Also, the president himself has tempered his comments somewhat. It is somewhat positive.
What was the second half of your question?
Senator Wallin: What is being considered as fallback positions?
Mr. Beatty: I would caution any Canadian about being complacent about this. You often hear people say, “If NAFTA is abrogated, we’ll fall back on the Canada-U.S. FTA, and if the Canada-U.S. FTA is abrogated we’ll fall back on ’most favoured nation’ under the WTO.”
It took a conscious governmental act, both in the United States and in Canada, to take the Canada-U.S. Free Trade Agreement and put it on the shelf at the time when NAFTA was put into force. It wasn’t simply dropped on top of the FTA. My best understanding is that the FTA doesn’t automatically snap back into place if you take NAFTA away.
The question we would then have to ask ourselves is: If the president were fundamentally opposed to NAFTA, why would he like the Canada-U.S. FTA more? Also, if he is wanting to plant poison pills in NAFTA, why would he not do the same thing with the Canada-U.S. FTA?
The Canada-U.S. FTA also has a five-year sunset clause on the dispute settlement, so we might have it today, but it could be gone within five years.
Then the question becomes, “Well, so you don’t have NAFTA, and you don’t have the Canada-U.S. FTA. Do you go back to the WTO?” At the conference I was at in Washington this week, the concern expressed by many of us around the table was that the administration is attacking the WTO as well. The lack of regard they have for multilateral institutions is a real concern.
I’ll be more cautious than I was about to be: We could see considerable disorder in the global trading system unless there is a more positive internationalist approach taken by the administration in Washington.
Senator Wallin: Very diplomatic.
Mr. Kingston: I have a couple of points.
I’d just like to note that we’re slightly more optimistic now because there was some progress made at round six, which was good. Canadian proposals weren’t rejected outright. But also, importantly, the U.S. business community has become far more engaged, and that’s mostly because tax reform is done. We noted that there was a huge amount of focus among the U.S. business community on tax reform. With that out of way, they’re going to pay more attention to NAFTA and making sure that message gets through to Congress.
We also think with TPP going forward now, you’re seeing the agriculture lobby in the U.S. suddenly realizing that the Canadian farm sector is going to have preferential access into Japan, and we’re talking about NAFTA potentially being torn up. That’s got their attention, and I think Congress is hearing it from the farm sector.
The most likely situation is that negotiations continue for quite some time. That’s not good for attracting investment to Canada, but I think that’s a realistic outcome. If we’re going to get a deal, the U.S. needs to show some flexibility on procurement. As you saw, our chief trade negotiator said on Tuesday that the U.S. proposal was the worst government procurement proposal ever tabled in any FTA in the history of the world. It’s just not something you can even start talking about. Then, of course, there’s the sunset clause. No one can agree to a trade agreement that expires every five years, so we’ll have to see some flexibility there. If there is some flexibility, I think a modernized NAFTA is a real possibility. The fallback for now is negotiations continuing for some time.
The Chair: Senators, unfortunately, we’re not going to be able to go to second round because we have gone over time, but we’ve gone over time because this panel has been of tremendous support and assistance to the work we’re undertaking.
I want to thank you both. Before closing, Mr. Beatty, I do want to say, on my behalf and on behalf of this committee, thank you for the service you have given to this country for, I would suggest, decades now. It doesn’t feel like it, I’m sure.
Mr. Beatty: Thank you very much for your kindness, senator. I expect that one day a paleontologist in Alberta will dig up my bones along with those of dinosaurs.
The Chair: I will now introduce the witnesses in our second panel. We have with us Ms. Joy Nott, President and CEO, Canadian Association of Importers and Exporters; and Mr. Mike Holden, Chief Economist, Canadian Manufacturers and Exporters.
As you know, we’re looking for an opening statement from you both. We’re looking forward to that. Then we’ll have questions from the senators. Please proceed in whichever order.
Mike Holden, Chief Economist, Canadian Manufacturers and Exporters: Good morning to you and members of the committee.
Thanks for the invitation to speak to you today on behalf of Canada’s 90,000 manufacturers and exporters and our association’s 2,500 direct members.
CME believes that market access, business competitiveness and Canada’s investment attractiveness are among the most important challenges facing the Canadian economy today. We are glad to see this committee take an interest in these issues.
Our position on trade generally is this: We support free and fair trade for Canadian manufacturers, which is to say that we believe in securing trade agreements that eliminate all market access barriers and, more importantly, result in increased value-added exports through domestic production.
While we assume that free trade will generate new export growth, too often we end up disappointed with the results. Not including NAFTA, which has been unambiguously positive for all three countries, Canada has signed 12 free trade agreements that cover 42 countries around the world. Since each of those 12 agreements came into effect, Canadian value-added exports to those 42 countries have increased by just 1.3 per cent total. Meanwhile, imports have risen by 15.6 per cent.
Our failure to make meaningful market access gains from free trade speaks to a number of overlapping challenges that we think need to be addressed. I want to highlight three of those in my opening statement.
The first is that we need to ensure that our trade agreements provide reciprocal market access and level the playing field for Canadian manufactured goods. Non-tariff barriers like discriminatory regulations, direct export subsidies, procurement exemptions and currency manipulation can all impede market access, and we need our trade agreements to provide strong protection against these practices.
Second, governments need to do a better job of demystifying their export support programs. In our most recent biannual survey of Canadian businesses, we asked companies about their experience with a wide range of programs or services like EDC, the Trade Commissioner’s Service, the CanExport program and so on. The good news is that companies that used these programs found them to be helpful. The bad news was that most had never even heard of them or didn’t know they existed.
Finally, and most importantly, we need to take a long, hard look at business tax competitiveness in Canada. If we want to succeed abroad, we need to be competitive at home. However, recent trends suggest a major looming problem, which is that businesses are not investing in Canada.
New greenfield foreign direct investment in this country has fallen by 40 per cent since the prefinancial crisis period. Meanwhile, in the U.S. it has increased by 41 per cent. Business capital investment in Canadian manufacturing has fallen by 15.3 per cent over the last three years. Our businesses now invest less as a percentage of GDP than any other country in the OECD except for Greece. The thing is that these figures all predate NAFTA renegotiation and they predate U.S. tax reform.
Companies weren’t investing in Canada when we had a business tax advantage over the U.S. Now that advantage is gone. Not only are U.S. taxes falling, but the cost of doing business in Canada is heading full steam in the opposite direction.
We are deeply concerned that this widening cost gap will mean even less investment in Canada and more companies either moving to the U.S. or making their next big investment in that country, and that is to say nothing about the fact that Canada is sending the message loud and clear around the world that we are not interested in developing our natural resources and we cannot approve major projects in this country.
Uncertainty around NAFTA will only magnify this problem. Canada’s chief selling point as an investment destination is our access to the North American economic space. The issue isn’t even about what happens if NAFTA is terminated or if a new deal is worse than the one we have now. The real issue is the business uncertainty that has already been created.
As I mentioned in November to your colleagues on the National Finance Committee, why would a business invest in Canada and expose itself to that uncertainty when it could just invest in the U.S. and avoid it altogether? We need to have a very good answer to that question and, at present, we have no answer to it at all.
To conclude, we urgently recommend that the federal government work with the business community to adopt an outcomes-based approach to trade and tax policy. That starts with a comprehensive review and modernization of our business tax and regulatory environment. We need a tax system that is simple, transparent and fair. It must make our businesses more globally competitive, and it must be structured to reward companies for growing. Right now, our tax structure rewards companies for staying small.
We also recommend that future trade agreements be negotiated with an eye to achieving free and reciprocal market access that generates meaningful growth for Canadian value-added exports.
Finally, we recommend that the government re-examine its existing trade support programs and services. This includes additional funding and support for the trade commissioner service; enhanced corporate funding for trade missions, research and export promotion; developing a simple, business-friendly approach to deliver and increase awareness of existing trade support programs; expanding and improving the national export accelerator program to improve SMEs’ export readiness; and, lastly, to introduce an export tax credit for companies who are actively increasing their exports.
The Canadian Manufacturers and Exporters is willing to work closely with the federal government to advance these goals. I look forward to any questions you might have.
The Chair: That was very helpful; thank you very much.
Joy Nott, President and CEO, Canadian Association of Importers and Exporter: First, on behalf of IE Canada members, thank you for the invitation to be here today.
Quickly, IE Canada is an 86-year old, not-for-profit trade association that represents members from coast to coast in every industry, including support service to importers and exporters such as transportation companies, freight forwarders and customs brokers.
IE Canada works in cooperation with the other trade associations who have testified here today and fully supports and endorses their viewpoints, statements and concerns. I can say that before I have even heard them speak because we work very closely together and we’ve discussed these points in the past. I didn’t have to hear them testify. I know where they stand and I endorse everything they have said. As opposed to just piling on to their comments, I’d like to find a creative way to put some concrete, actionable suggestions on the table today.
IE Canada has a unique viewpoint that we’d like you to consider. Like the other trade associations who have testified here today, our members are corporations. But unlike the other trade associations who have testified here today, the touch point that we have within those corporations is very rarely the C-suite executives. We tend to deal more with middle management and logistics — that is, the people who actually make the operational decisions for international trade in the way of logistics, trade compliance and supply chain decisions. That makes us a little bit unique. We are known as the trade association that accompanies our members right down into the weeds of daily international trade as it’s executed. That gives us a bit of a different vantage point to some of the comments that were made here today and which is why we work hand in glove with a lot of other trade associations.
To be quite frank, I’m not the best person to ask about income tax legislation and that sort of thing. That’s not where we focus. I would defer to my colleague for those kinds of questions.
Given the detailed level in which we play, we like to say we’re often looking at the bug on the weed down in the grass. Often the picture that we see, from a policy, legislative and bureaucracy perspective, is not all that pretty. My comments here today are meant to be constructive and not critical, but I think that the Senate has opportunities to take concrete actionable steps on what it can do to help Canadian companies moving forward. Those are broad concepts to think about today.
Ottawa and how government operates is somewhat mysterious to those who don’t daily interact with the workings of Ottawa. What seems normal and logical to politicians and bureaucrats is often confusing, frustrating and stifling to business. I’m sure that’s not something you haven’t heard before. I’m glad you agree.
My comments today and the suggestions that I’m making are based on three main pillars: money, trade policy and health, safety and security of Canadians. I think any business person, any politician and any bureaucrat would agree those are three fundamental pillars when we’re talking about international trade. We do it for money, but we also do it for the health, safety and security of Canadian citizens.
I have what I think are four concrete, actionable suggestions for you to consider.
The first one may seem somewhat trivial and almost comical, but it’s in the changing of the names of government agencies and departments every time there’s an election. It causes confusion. A true story is that after the last election, when the Department of Foreign Affairs and Trade Development changed their name to Global Affairs Canada, I actually had a member call me up and ask, “DFATD is gone? That’s great. I don’t have to do export permits anymore?” Exactly. That seems almost comical, except he was actually very excited and was going down the wrong path from a business planning standpoint because of a government department change.
When you look at other countries, like the United States, administrations come and go but their agencies stand the test of time beyond particular administrations. I would strongly suggest that we are creating confusion for ourselves at home. That’s a relatively easy thing to fix if we had the political willingness to do that.
The next three suggestions all sort of build upon each other.
If you’re building a company and you’re trying to collect money, you’re going to have one accounting department. Yet, within Canada, we have two main tax collectors: we have CRA, obviously — and I just said I wasn’t going to talk about tax — but it is obviously the agency that most people deal with for the majority of taxes. Then you have CBSA, which collects duties and GST owing, and, in effect, those are taxes. In this modern day of software and whatever else, why do we have border agents in the money collection business, period? Why don’t we look at aligning ourselves more with the way business runs to prevent confusion?
If you’re talking about money, I’m suggesting that all money matters be handled by CRA. It doesn’t matter what kind of money you’re talking about or what kind of tax you’ring talking about. Cut through the confusion. If you’re talking money, it’s that government department.
Then, let’s talk about Global Affairs. Aside from the fact that name changes cause confusion in the marketplace, Global Affairs is the government department that we send to global tables around the world to negotiate our free trade agreements.
I have to stop here to say I strongly agree with Mr. Beatty’s comments about our having fantastic negotiators right now for NAFTA. I can attest to the fact that they are superb. We are lucky, as Canadians.
But Global Affairs are the ones that we send to the table to negotiate things like NAFTA, and then the deals end and day-to-day life starts, and now we’ve got agencies, for example, like CBSA issuing policy decisions on tariff classification and whatever else that directly impact how that free trade agreement is operationalized.
Then I have to explain to companies that the Minister of International Trade does not oversee imports. The Minister of International Trade is only responsible for exports. If you want to talk about imports, you have to go to the Minister of Public Safety, Mr. Goodale. People get confused: “What? How can that be?”
What I’m suggesting is there’s an opportunity here to actually streamline and make government less confusing.
My final point is CBSA: health, safety and security. In a post-9/11 world, I think that health, safety and security have taken on a meaning like never before. I, as a Canadian, would like to say two things about CBSA. I would like to see them stay focused on health, safety and security — Is that box ticking? Is that product going to be dangerous if my child eats it? — and not worry about revenue collection or whether the import policy decisions that they render are actually aligned with Global Affairs down the street and around the corner. Let them stay focused.
On an unrelated comment, given the fact that they are an agency that I deal with very closely and frequently, they’re being asked to do a lot with very few resources. Everything that they do is so important to our trade environment as a country. They are the operational arm of International Trade. So all the policies we come up with, they operationalize them. If they’re not efficient and they’re not focused, what are we all talking about?
Finally, would all of the changes I’m suggesting here today require legislative changes? Yes. Would they require that ministers shift power from one portfolio to another? For example, would Mr. Goodale give up imports and those go to Global Affairs, to Mr. Champagne? Yes. It’s a paradigm shift that I’m suggesting.
With that, I guess one more statement that I’ll make is that given the times that we’re in, companies are being asked to flip them themselves upside and inside out and recreate who they are and how they are going to create in this time. I don’t think it is unreasonable that government ask itself whether it should be doing the same thing.
With that, I welcome your questions.
The Chair: Thank you very much, Ms. Nott.
Senator Stewart Olsen: Thank you for your presentations. I’m always interested in people like you, Ms. Nott, who get right down to how to make it work. It’s really good.
Mr. Holden, yesterday we had a really good presentation from our witnesses on exporters and identifying the new needs or growing trends for where the Canadian government could invest and promote. Do you have some ideas on that? One of the things that came up yesterday was food. These are the areas. I wonder if perhaps both of you can you add to that.
Mr. Holden: I would say that for sure food and food products is an area in which I think Canada has significant export potential. It’s something that is underdeveloped. We’ve got some member companies of ours that have told me that Chinese companies, for example, are interested in Canada not just as a source of food products but specifically what they’re interested in is Canada’s sterling reputation for food safety. The plan we had heard some companies were considering was a Chinese company would come and invest in a food processing facility in Canada because they could just import or re-export the final product back to China with a made-in-Canada label. That made-in-Canada label was huge selling point.
For industries other than that, the most important thing we need to do is make sure that we first pay attention to what it is that we do well in Canada, the kind of activities we’re engaged and, in our case, the kind of manufacturing we do. A lot of the manufacturing activity that takes place in Canada, food notwithstanding, tends to be in industrial processes. We’re part of an integrated supply chain within North America, so a lot of what we produce are parts: parts of things that are made from other things that are put into final products.
I think that we need to reflect the nature of what Canada’s existing trade is and grow based on the strengths that we have now — food, the energy sector — and look for opportunities where we can leverage those strengths and grow off of those bases.
Ms. Nott: I would concur with Mr. Holden’s statements.
I would also add that we’ve all heard stories about how many times a car part crosses the border before it finally ends up in the automobile. I would suggest the same is true for Canada’s agricultural sector. We’re so heavily integrated but we don’t hear that story as much. We grow the wheat; they make the flour; we make the noodle; they make the lasagna; they ship it back up to us and we eat it. But you don’t hear about that as much as you hear about the car part.
I would concur there’s absolutely an opportunity for food exports, and I would also concur that not only does Canada have a sterling reputation for food safety, it’s also perceived, rightly or wrongly and whether this is well deserved or not, that we have healthier food. So there’s food safety, which is not adulteration, but that we eat healthier than maybe Americans or others. I don’t know that we deserve that reputation, but that’s the impression. When it comes from Canada, we have clean air and crystal water and it’s all very healthy, and it’s safe because we have high manufacturing standards.
Senator Wetston: You might not be able to answer this question. I’m interested in Mexico, and it’s not because I spent a couple of weeks there on holiday recently. We talk about the decline in foreign direct investment in Canada, certainly as a result, probably, of NAFTA uncertainty and tax reform in the U.S., but would you have any idea whether or not it’s also affecting foreign direct investment in Mexico, which has seen a huge amount of investment in recent years?
Mr. Holden: You’re talking specifically about the impact of NAFTA uncertainty on investment decisions in Mexico?
Senator Wetston: Yes.
Mr. Holden: I honestly don’t have the answer to that question. I do know that in Canada, it was mentioned in the previous panel about the risk of companies uprooting and moving to the United States.
A bigger but also more subtle issue from the Canadian perspective is where is the next investment going to happen? If a company has operations in Canada and the U.S. and they’re looking to expand, where are they going to put that expansion? The risk that we run, in Canada at least, is that that next investment is going to be in the U.S.
I’m an economist, and one of the challenges that we have in communicating the urgency of those problems is the fact that an investment foregone doesn’t show up on any economic growth balance sheet. A failure to grow does not count as a loss, in some senses. It’s hard to signal what it is that you’re giving up because there’s no visible impact on the bottom line. You’re just failing to grow as fast as you could.
That’s a tangent from your initial question. I’m sorry, I don’t know the answer about Mexico.
Senator Wetston: I’m sorry to be on this track a bit, but I would like to understand it more. NAFTA does include Mexico, and we tend to ignore it completely, obviously, or we seem to, in our discussions. Given your associations in the work that you do, do you see opportunities in that particular trade relationship? We think about China, Europe and all these things, but it’s a growing economy with a lot of potential. I recognize transportation and distance are issues, but any thoughts about that?
Ms. Nott: I’m actually seeing some very tangible activity around exactly that concept, which is why I’m chomping at the bit to say something. We actually have members that are running through the exercise from both a transportation and a market access perspective to say, “If we can no longer access the U.S. market because of the demise of NAFTA, whatever that means, and for whatever reason we can’t access the American market the way we used to, how could we transport goods back and forth to Mexico and continue the supply chains between Canada and the United States with potentially having to eliminate the United States from that formula?”
There is a lot of investment that Canadians have made in Mexico over the years, and they’re not quite willing yet to just toss that out just because something might happen with NAFTA overall and something negative may happen. I’m not seeing signs that they’re willing to give up on Mexico. They’re looking to salvage investments that they’ve made, and there are tangible conversations happening right now around exactly that.
Senator Marwah: Mr. Holden, one of the questions I posed to one of the witnesses yesterday was: What are the issues? Like you, every time I’ve looked at a free trade agreement rolled forward five years, our trade deficit, in fact, has grown, which I take it is the same point you made whereby exports increased by 1 and imports increased by 15. Obviously, there are some issues that are causing that.
You go on to say that there are non-tariff barriers such as discriminatory regulation, export subsidies, procurement exemptions, et cetera, and yet you tell me that our trade negotiators are very good. I do share your opinion there. They are very good. What is it that’s causing this problem? Are they naive in the agreements that they signed? Is it a problem of moving from theory to execution? Is it a problem that these issues arise after agreements are signed? Surely they must know that these things are going to occur. Is it a lack of a dispute resolution process that would bring these issues to an end and get them resolved? What is causing this?
Mr. Holden: I think that the main issue is how hard many of these things are to pin down. I was talking to a colleague of mine on my way over to this meeting, looking for a specific example of the kind of non-tariff barrier we’re talking about. An example of the kinds of things that happen is there will be an agreement to sell vehicles in Japan. They ship them over. They sit in a cargo container, arrive at a port in Japan, and then they open the door and somebody says, “We’ve changed the regulations on door handles, and we won’t be able to sell these,” and they just sit on a ship. It’s things like that that become a problem.
The trick is that they’re difficult to pin down in a lot of cases. We try to deal with non-tariff barriers, but they’re nebulous by definition. It requires a commitment to not necessarily harmonize regulations but, certainly, consistently apply or change a country’s regulatory environment in order for the two countries to be able to deal with a number of these issues. So that’s one of them.
Ms. Nott: I would suggest that part of the reason for it is that when you’re negotiating a free trade agreement and you finally get an agreement and everybody agrees and it’s signed, that’s a snapshot in time, yet the regulatory environment in which the ongoing business transactions continue to be executed over a period of time, which is outside of the free trade agreement, continues to evolve, and that is where you get those non-tariff trade barriers from.
Often when unintended results are happening, one party may say, “This is not what we thought was going to happen when we signed this free trade agreement, but we don’t necessarily want to back away from that big deal. However, we can change our regulation on door handles,” and suddenly we solve the problem without reopening a free trade agreement.
Senator Marwah: Are you suggesting that these are issues that arise after the agreement has been signed?
Ms. Nott: Yes, I am.
Senator Wallin: Ms. Nott, when you explained that imports and exports are handled by two separate ministries, has that always been the case, even before name changes? Presumably you’ve raised this issue with them. What did they say? I think we’ll be raising it with them as well.
Ms. Nott: It has always been that way. Traditionally, exports have been seen as being good for the economy while imports have been seen as being bad for the economy. In the 21st century, when you’re talking integrated supply chains, that’s not necessarily true anymore. You might need imports in order to be able to execute your exports, so that pure thinking of importing and exporting is no longer true.
When you look at how governments are structured, they’ve been structured like this for a very long time. CBSA haven’t always been called CBSA, but they’ve been around for a hundred years. A hundred years ago, it was all about collecting the tax at the border. It was not about health, safety and security as much as it is today. It certainly wasn’t about trade negotiations and the complexity around global trade that we have today.
In answer to your question, yes, it’s always been like that. Yes, I’ve brought it up before. I have to be fair — I have not brought it up to Minister Champagne and Minister Goodale. I brought it up to their predecessors. To be honest, it was a point of amusement.
Senator Wallin: That was it?
Ms. Nott: That was it.
Senator Ringuette: Mr. Holden, when you talked earlier about Canadian investment, future investment, if NAFTA is not agreed upon or the competition in taxing would be different, you are presuming — I’m assuming that you have an economic equation to analyze that data — that Canadian investors would be going to the U.S. or foreign investors with a potential to invest in Canada would rather go to the U.S. Did I understand that correctly?
Mr. Holden: It would be a complimentary exaggeration to say there was a massive, complex equation behind those statements. That would not be true.
The point I was trying to make was that the recent trends up until about last year were declining investment in Canada in new investment. I don’t mean a foreign takeover, but the actual construction of a new plant of any kind was falling in Canada while it was rising in the United States, and that was our status quo. After that we have NAFTA uncertainty, and then after that we have U.S. tax reform.
The point was that even with the tax advantage that Canada had and even with NAFTA in place, it was not enough to attract new investment into Canada. Now those advantages are gone and we’re left in a situation where we no longer have the tax advantage, companies don’t know what is going to happen with NAFTA, so what are they going to do?
I believe it was Mr. Beatty who mentioned in the previous panel that if you had a hundred dollars to invest in your company and your main market was in the U.S., where would you go? I completely agree with that statement, and that reflects our concerns.
Senator Ringuette: In your not massive equation, how much does the political environment weigh into that equation?
Mr. Holden: It depends to some degree on the industry, but I think it absolutely plays a role. Where we see that best is in natural resource development and pipelines. I live in Alberta. We’ve seen the amount of capital investment that is happening in the oil sands; pipeline investment, oil sands investment, B.C. LNG industry that they’re trying to build up. Those are all industries where we’ve seen tens if not hundreds of billions of dollars of investment pull out of the country because of exactly that kind of political uncertainty. In this case, it manifests itself in the uncertainty regarding the regulatory and approval process and whether or not that approval actually means anything when it comes to actually building the thing that you want to build at the end of the day. In that sense, that’s where the political part comes in.
Senator Ringuette: In order for you to ascertain that investing in the U.S. is a more likely alternative, I was referring to the political situation in the U.S. in your equation. In a major investment firm, I would think it would be quite a factor.
Mr. Holden: Are you referring to the uncertainty with the inherent unpredictability, shall we say, of the U.S. administration?
Senator Ringuette: Yes.
Mr. Holden: I wonder that myself. I keep looking to see what’s going to happen. I remember not long after the presidential election in the U.S., there was a lot of talk about whether or not that would result in a reverse flow of investment and people into Canada. There is often a lot of talk about things like that in the U.S. when things happen politically that they’re unhappy with. It seldom seems to actually happen.
The Chair: I want to thank you both for your presentations. This is a very important piece of work that we’re undertaking, and we cannot get to the result that we hope we can get to without the input of organizations and people from organizations like you who are so knowledgeable and articulate. We very much appreciate that you made the effort to come here today and share your insights.