Proceedings of the Standing Senate Committee on 
Foreign Affairs

Issue 2 - Evidence, February 4, 2003

OTTAWA, Tuesday, February 4, 2003

The Standing Senate Committee on Foreign Affairs met this day at 5:14 p.m. to examine and report on the Canada- United States of America trade relationship and on the Canada-Mexico trade relationship.

Senator Peter A. Stollery (Chairman) in the Chair.

The Chairman: This evening, honourable senators, we will hear from a panel of witnesses that includes the Honourable Roy MacLaren, who was a member of the other place at the same time I was there. Mr. MacLaren was in the House of Commons from 1979 to 1984 and again from 1988 to 1996. He served in cabinet as the Minister of State for Finance and the Minister for International Trade.

Mr. MacLaren is also a former diplomat who served in Vietnam, Czechoslovakia and in the United Nations. He then worked in the private sector. In 1996, he returned to diplomatic life, serving as High Commissioner for Canada to the United Kingdom of Great Britain and Northern Ireland until 2000. Mr. MacLaren is currently the Canadian co- chair for the Canada-Europe Roundtable for Business.

Our second witness on the panel is Mr. Lawrence Herman, associate counsel at Cassels, Brock & Blackwell LLP. He served in the Canadian Foreign Service in the 1970s in a variety of posts, representing Canada at numerous international conferences and meetings, including the GATT. His law practice concentrates on international trade and international business transactions. He appears as counsel before dispute resolution bodies under the NAFTA as well as before the Canadian International Trade Tribunal. In 1999, he was named by Canada to the dispute settlement roster of panelists at the World Trade Organization in Geneva.

The third member of our panel is Mr. Jon Johnson, a partner at Goodmans LLP in Toronto. He was legal adviser in Canada's trade negotiation office with respect to the automotive provisions of the Canada-U.S. Free Trade Agreement and he advised Canada's office of the trilateral trade negotiations during the negotiation of NAFTA with respect to rules of origin and other issues. He continues to advise the government and various industry associations on matters of international trade arising under NAFTA and the agreement establishing the WTO. Mr. Johnson is also the consul for Iceland, in Toronto.

Please proceed.

Honourable Roy MacLaren, Former Minister for International Trade: Honourable senators, I wish to begin with a commonplace in any discussion about NAFTA. The recent report on North America by the other place is, for example, shot through with the discussion that the principal flaw in the agreement is the application by the United States of its trade remedy practices, however anomalous they are in the free trade area.

I do not intend to say much about Canada-Mexico trade and investment. That relationship is a generally happy one, capable of additional expansion if the Canadian government and the private sector would fully recognize the opportunities, both bilaterally and cooperatively, including in third countries.

With regard to U.S. trade remedy practices, the point is frequently made that elimination of such trade-distorting measures is unlikely or impossible within NAFTA. What should be done? The short answer is that, within NAFTA, very little can be done. Some indirect progress may be possible in a specific sector, however bizarre such agreements are within a comprehensive free trade agreement. Steel may be such a possibility. Overall, however, there is no incentive for the United States to forgo its success in entrenching within the original Canada-U.S. free trade agreement its trade remedy practices.

In connection with trade remedies, and much more, the question is sometimes asked whether Canada could achieve in some sort of ``grand bargain'' what it failed to achieve in the 1989 agreement. My short answer is no. A customs union or common market is not in the cards. Among other things, any deepening or broadening of NAFTA would require the United States to forgo its trade remedy practices. Countervailing and anti-dumping have no place in free trade, yet they are still there.

When Canada first sought a free trade agreement with the United States, it eventually capitulated, on the fundamental question of trade remedies, on being told repeatedly that the United States Congress would never forgo its commercial policy prerogatives, however incompatible with a free trade agreement they might be.

Later, when Canada had to decide whether to move from the bilateral into the trilateral agreement of NAFTA, we repeated the point that trade remedies have no place in a free trade agreement, only to be told again that the United States Congress could not be asked to forgo what it regards as its constitutional right to regulate trade. Take it or leave it. We took. It was rather like the Empress Maria Theresa at the second partition of Poland, of whom it was said, ``She wept, but she took.''

Experience has, however, made us wiser. A grand bargain is not in the cards today. There is no profit in pursuing that particular will-of-the-wisp. Instead, Canada should continue to emphasize its traditional multilateral approach, believing that in trade negotiations, as in much else, there is safety in numbers. In the immediate post-war years, following the rejection by the United States Senate of the proposed international trade organization in the conviction that it would erode U.S. sovereignty, Canada joined a range of other countries in continuing to seek trade liberalization on a multilateral rather than a bilateral basis.

The pursuit of trade liberalization in successive rounds of the GATT has in fact paid off well for Canada as it has, for that matter, for the United States and, more recently, for Mexico.

With the successful conclusion of the Uruguay Round, the completion of the World Trade Organization and, above all, with the implementation of its dispute settlement provisions, the way has been opened, and opened significantly, for trade disputes to be settled in a context that provides more of a level playing than any regional or bilateral free trade agreement can do. The multilateral approach has also proven congruent with the more recent globalization of international commerce and investment. In an electronically borderless world, the response cannot but be global.

That is not, of course, to ignore the fact that Canada has recently joined in regional initiatives such as APEC, free trade of the Americas and, more tangibly, NAFTA. However, it has done so in the conviction that such initiative should be seen as building blocks on the way to a global regime that can match the global imperatives of trade and investment today and at the same time help to meet the wholly legitimate concerns of developing countries.

However, the idea is occasionally advanced that NAFTA is not in fact a WTO-plus agreement, not a building block on the way to global free trade but, rather, a way station on a straight line progression from a vexed free trade area to a harmonious common market, a progression envisaged as somehow paralleling the evolution of the European Economic Community into today's European Union.

This linear thinking, such as it is, overlooks two fundamental considerations. First, the European Union, with originally six and now 15 and more members, has a certain symmetry that, clearly, NAFTA has not. That rough symmetry provides European member states, large or small, the opportunity to strike informal coalitions on particular issues in dispute. No single member is so much larger than the others that it can impose its will. By comparison, in NAFTA, one of the three members is, to state the obvious, incomparably larger than the other two. No coalition between the other two can offset that extraordinary imbalance. NAFTA rules are intended to level the playing field, but, as we have all seen, trade rules remain open to various interpretations. However carefully drafted the rules may be, those interpretations are, in turn, supposed to be subject to dispute settlement procedures, but such procedures are cumbersome and adverse judgments occasionally simply ignored.

This hazard is less evident in wider regional associations, one good reason why Canada has striven for enlarged membership in NAFTA or, yet more difficult, for the achievement of a free trade agreement for the whole of the western hemisphere. Several years ago, this thinking contributed to the eager support of Canada and Mexico for the membership of Chile in NAFTA. I might add parenthetically that when the United States administration was unable to obtain fast-track authority from Congress, Canada and Mexico affirmed bilateral free trade agreement with Chile and, more recently, with Central America.

Canada and Mexico match their determination to make NAFTA work with a commitment to free trade in the western hemisphere, having joined in the agreement of 1994 that we should have hemispheric free trade by the end of 2004, now less than two years hence.

The prospect of free trade of the Americas, however, has receded as major economic difficulties persist, rendering Brazil even more uncertain about the early realization of its ambitions to negotiate a hemispheric agreement from a position of strength, with MERCOSUR being seen as a dynamic player capable of offering an offset, however limited, to the remarkable power of the United States.

A second consideration that should guide Canadian trade policy and also argues for a multilateral approach is that remaining obstacles to trade are no longer to be found principally at borders but internally, within traditional domestic jurisdictions. Trade barriers are less and less external. With the reduction of or removal of tariffs, what remains are the usual suspects: government procurement rules, export incentives, phyto-sanitary regulation, mutual recognition of standards, competition policy, and so on.

These residual obstacles are, not surprisingly, more difficult with which to deal than mere tariffs. Domestic opposition to trade liberalization becomes wonderfully focused when long-standing local interests appear to be threatened by new international commitments. In these circumstances, not only does all politics become local but so does international trade policy. Governments faced with a choice between domestic support or international obligation tend to pander to local priorities. This tendency is, however, more evident in NAFTA and other regional groupings than it was in the GATT or is today in the World Trade Organization. To the degree that it is possible to confront local opposition, it is easier to do so in a multilateral forum where a variety of trade-offs can be sought than in the more limited context of regional or sub-regional groupings, especially one in which a single member, by its sheer size, has significantly greater powers of direct or indirect persuasion at its disposal.

In brief, Canada's trade policy should be to continue to work for the full realization of the benefits of NAFTA, including its labour and environmental side agreements and dispute settlement procedures, while continuing to seek additional trade liberalization in the multilateral World Trade Organization, an institution that has the potential, if nourished and fostered, to provide the site for continuing negotiation of what, presumably, is our common goal of global free trade and investment, benefiting developed and developing countries alike.

Mr. Lawrence Herman, Associate Counsel, Cassels, Brock & Blackwell LLP: Honourable senators, I have sent a brief that you can read at your leisure. I will not read it, but I will speak to a few of the points that I have highlighted in the brief.

I have focused on Canada-U.S. trade, which seems to be, in real terms, what much of this is all about. I have looked specifically at areas of the dispute settlement and institutional regime that is set up under the NAFTA and that Canada has to deal with every day in terms of trade and suggested ways in which we can move the NAFTA one step forward.

Mr. MacLaren has set out the broad policy context. I am only taking a few elements that he touched on for purposes of my comments.

Canada-U.S. relations, particularly trade relations and the settlement of bilateral disputes within the NAFTA, is a very complex issue that is difficult to deal with in a few short moments. However, I will try to raise some key points.

An enormous amount of work has been done in the other place, encapsulated in a report called ``Partners in North America,'' which was issued in December of 2002 by the Standing Committee on Foreign Affairs and International trade. It is an excellent document. It covers many of the issues you will be dealing with during the course of your hearings. I have tried to sharpen some of the points made in the report. I will suggest areas where this committee might help move the discussion one step further.

Let me address some basic propositions. The first — and forgive me, as I am not going to really deal with Canada- Mexico trade — is that most Canada-U.S. trade is trouble-free. We know that; it is a given. The problem is, when difficulties arise, they arise in two respects. They arise because of the application of U.S. trade remedies, whether they are anti-dumping, countervailing duties, safeguards or some other form of remedy. Those are the main three. That is where we encounter difficulties in the trade relationship.

The second point is that given the nature of that relationship, U.S. trade remedies often will impact on broad sectors of the Canadian economy. The obvious example — and I think it a case study — is softwood lumber. We also have impending difficulties now with respect to wheat. Problems in the steel sector arise on a regular basis, although they have been quiet in the last little while. However, in the mid-1980s we had major problems with groundfish, softwood lumber, pork and pork products. U.S. trade remedies, when applied to Canadian imports, can do us a lot of damage. Canadian remedies, which one might expect to counter-balance the situation, do not have the same effect. The answer is simple: We depend a lot more on their market than they do on ours.

What do we do about that? What can we do about it? Where is there room for Canada to move the discussion with our American colleagues one step further, hopefully to the mutual benefit to both countries and perhaps all three NAFTA countries?

Let me outline the limitations in the NAFTA. First, it does nothing to stop the application of trade remedies. The is a major problem with this agreement, but we have it. The second problem is that there are no true permanent institutions at the core. It is an agreement much like a traditional trade agreement. It provides for market access with the reduction of duties. It does have a dispute settlement procedure, but there are really no permanent institutions at the centre of NAFTA that supervise the implementation of the treaty, unlike the Treaty of Rome, where you have the European Commission in Brussels as a central organizing body. There is nothing like that in NAFTA; it is basically an ad hoc trade agreement.

In addition, while the agreement does contain a dispute settlement process, whether it is in the private remedy side under chapter 19 or the state-to-state remedies under chapter 20, those are essentially ad hoc panels. They come together to hear a dispute. After they make their ruling, the members of the panels go back to their callings as lawyers, academics or whatever. There is no true permanent NAFTA arbitration or panel institution. In my view, that is a deficiency.

The big deficiency, though, is the inability of the NAFTA negotiators and the FTA negotiators to get behind U.S. trade remedy laws. I agree with Mr. MacLaren wholeheartedly that the chance of getting the U.S. to agree, realistically speaking, to a common set of antidumping and countervailing duty rules is pretty minimal. The U.S. likes it as it is. They have a vigorous trade remedy process. They regard it as an article of faith that their anti-dumping and countervailing duty laws should be able to deal with what they regard as unfair trade from abroad. It will be impossible to get the U.S. to change that system in a substantive way. The idea of a common set of anti-dump and countervailing duties, or AD/CVD rules in the practice in which I engage, is a non-starter, in my humble opinion. There is little point in trying to push that door because it will not open.

While the other place made some soundings about this as a priority objective of Canada, and I agree that in theory it should be, the practical reality is that our U.S. friends like it the way it is and it is unlikely that they will change it.

One thing I should mention in this context is the steel sector. Mr. MacLaren mentioned it in his address. There have been some interesting developments. The three NAFTA governments have agreed to open preliminary discussions on a possible set of trade rules to govern the steel sector. The governments made an announcement a couple of weeks ago. Some of this flows from what has been done in the OECD. Because the steel sector exhibits a degree of integration and two-way trade flow that is not apparent in softwood lumber, there does seem to be some movement in that regard. That should be encouraged. If a set of rules could be developed that assist in removing trade irritants and the private law remedies in the steel sector, and that is a big ``if,'' that would be a worthwhile development.

Let me go back to some of NAFTA's other limitations. First, binational panel review is a very limited process. It is not truly a binational dispute settlement process because the panels under the NAFTA are very limited in reviewing trade agency decisions. My brief sets out basically what they are required to do, but it is a very limited procedure. The second defect of the NAFTA is the ad hoc nature of the dispute settlement process. That should be addressed.

I mentioned two things at the outset. One was the political reality of making more than incremental changes to NAFTA. Certainly, the suggestion that we could amend the treaty in any wholesale fashion is ill-conceived. I do not think either Mexico or the United States, particularly the latter, has the appetite to open it up and, if we do, heaven knows where that will take us.

In my paper, I have set out some ideas of moving forward incrementally without encouraging an opening-up or wholesale amendment of the treaty. Rather, these are incremental changes that could help cure some of the problems and be steps, even modest steps, forward in terms of institution-building, which I think is lacking.

Parenthetically, I think institution-building in the Canada-U.S. context is important. If you build an institution and create some permanence at the core as a first step, the next generation can build on that. I am looking at areas where we can talk to our American friends. Perhaps this committee can provide a service in suggesting areas where the government might talk to our American friends that would be manageable and possibly doable.

Here are my suggestions. The first would be to create a permanent NAFTA commission with a permanent NAFTA free trade secretariat. There is a fictional secretariat now. It is a body composed of civil servants from the three countries. They sit in Ottawa, Washington and Mexico City. It has no permanency or juridical status. It is a bifurcated or trifurcated organization. It is not a truly trilateral organization. My suggestion, and it can be done within the current framework of chapter 20 of the NAFTA, would be to create a permanent NAFTA secretariat. Additional duties could be given to that secretariat. For example — without doing any violence to the U.S. trade remedy system, which they seem to love — it could issue reports, collect data and provide service to the three governments. I do not think it would be unduly difficult to do that within the current treaty.

The second step that I set out in my paper would deal with the lack of permanency in another important NAFTA provision, and that is the dispute settlement provisions. I suggest a permanent NAFTA court. It would not change the jurisdiction of the panels as they exist now, but it would provide for a permanent set of judges, if you like. Such a court could be based anywhere, even in Moose Jaw, where the honourable senator, I am sure, would appreciate it.

A permanent roster or court could deal with the chapter 19 and 20 disputes and the investment disputes. We see this daily. There is enough work and enough of a critical mass of disputes that there would be work for that court. The process would be institutionalized instead of having what I think is an unsatisfactory ad hoc panel system.

In parentheses, I do point out in my paper that the panels do work very well. The panel decisions are well written, diligent and well-researched, but it is still an ad hoc system.

My final suggestion is more controversial. I call it ``improving the options for dispute resolution.'' I suggest consideration be given to taking private disputes such as the softwood lumber dispute and off-ramping that for a period of time, taking it out of the private remedial process and elevating it to the level of state-to-state dispute resolution. This process would be perhaps mechanically somewhat tricky, but conceptually it would work this way. Where a countervailing or anti-dumping duty case arises — and it is a private remedy action, driven by the private parties — the private parties come forward with a complaint. That complaint is investigated. It is a private type of remedy. Where certain criteria are met and that action engages broad economic and policy interests of one or another NAFTA government, there should be a way of saying, ``We will suspend the private remedy process and it will become a matter to be resolved by governments.''

Significant technical and legal issues must be addressed. Take softwood lumber as an example. It is a private law action. The U.S. government has come up with proposals for resolving the matter that they say would have to fit within the framework of our anti-dumping and countervailing duty regime. My view is that that is unacceptable. We should settle the matter at the level of governments and sidetrack the private process.

In my paper, I suggest that some thought should be given to doing that so that a broad-based dispute like softwood lumber could be properly settled at the level of governments. If it cannot be resolved through negotiation, then a NAFTA panel could make the determination. In the softwood lumber case, that panel would decide whether provincial stumpage programs are or are not in conformity with the NAFTA.

Those are my simple suggestions. They are narrowly focused on the dispute resolution process, but I believe my suggestions raise some interesting issues. I am happy to discuss them further with honourable senators.

Mr. Jon Johnson, Partner, Goodmans, LLP: Honourable senators, I should like to advise the committee that Mr. Herman comes from about an hour's drive east of Moose Jaw, so you should take the particular recommendation of a court in that city under advisement.

I have also submitted a paper. I will certainly not read it, as it is too long and didactic. However, I will simply run through some of the highlights of the paper. I will touch on dispute resolution, but the paper is simply a linear description of how we got from the FTA to where we are now. Using that flow, I will touch on a number of issues, dispute settlement obviously being one, and issues related to the trade in goods.

The motivation of the Free Trade Agreement was to improve access to the U.S. market. That was accomplished with the creation of a free trade area. Mr. MacLaren described what a free trade area is and what it is not. It is a very flexible arrangement whereby each of the members maintains its own external policies, which is both good and bad. The bad aspect resolves around the retention of the U.S. of the right to pursue trade remedy actions against Canadian goods. The good aspect is that we did not have to harmonize many policies that we have vis-à-vis other countries with U.S. policies. The free trade area was the only thing that was feasible under the circumstances.

On the good side, the FTA basically accomplished tariff elimination. It accomplished a number of positive things. However, it did not address several key disputes that existed at the time between Canada and the United States. The agricultural provisions of the FTA were extremely tentative. Each country had quite restrictive regimes in place with respect to agricultural goods, us with our dairy and poultry and the U.S. with sugar and a number of other things. There were concerns about wheat exports.

As far as softwood lumber is concerned, we were in round two with softwood at the time. The only thing the FTA did about softwood lumber was to sanction an export tax that we agreed to solve what was then Lumber II.

As far as trade remedies are concerned, they can thoroughly disrupt trade. Countervailing duties can be very high. The regime has often been referred to as contingency protection, which is exactly what it is.

The Canadian negotiators had as their objective the elimination of anti-dumping and countervailing duty laws through the harmonization of competition laws in regard to anti-dumping and through an agreement on subsidies to deal with countervail. Serious efforts were made in this regard, but the negotiations broke down, particularly on subsidies. The two sides were nowhere near close.

Canada settled for a binational panel review process. Binational panels review certain final determinations in anti- dumping and countervailing duty cases, but they apply the domestic law of the country in question. They would apply U.S. law in a U.S. anti-dumping and countervailing duty case. The thinking was that they would be more objective. That probably has proven correct. The binational panel process, despite it weaknesses, has been quite useful.

The other area that the FTA touched upon was the issue of safeguards. Article 19 of the GATT sanctions safeguards. The anti-dumping and countervailing duties are levied against unfair trade practices. With the safeguard, you do not need an unfair trade practice. You can levy a safeguard in the form of a tariff or a quota if surges of imports are damaging the domestic industry. The FTA approached it by saying that if you had a U.S. safeguard against goods from all over, that is, a global safeguard, as they say, against goods from all over, the Canadian goods would be exempted unless they were contributing to the serious injury.

On services, the FTA agreement was tentative, but it was much heralded at the time because there was no agreement on services anywhere. It was more or less the first of its kind.

As far as dispute resolution is concerned, the NAFTA process is modelled on the FTA process. At the time, what we had with the GATT was a quantum leap forward. The FTA set out procedures for the establishment of panels, time limits for the panel to come to a resolution and certain consequences in the event of non-compliance. The critical thing at the time was that under the GATT, no dispute settlement procedure was set out in any agreement. The GATT did not provide it. It was supposed to be provided in the international trade organization that Mr. MacLaren referred to, but that never happened. An ad hoc process built up over the years. The most significant thing about the GATT process is the losing party could block the adoption of the report. Under the FTA system, that could not happen. If we compare what the FTA did compared to the GATT, it was a substantial step forward.

Moving on to NAFTA with respect to goods, the free trade model was kept and expanded to include Mexico. A number of technical things were done. Automotive trade was a big issue at the time because of fights over rules of origin. Essentially, that problem was solved in the NAFTA through the establishment of immensely complicated rules of origin, but somehow it defused the trade fight. That matter has not flared up again, although the industry is not terribly happy with the rules. Sometimes you get what you wish for and it is not really what you like. That has become a non-issue.

As far as textiles are concerned, the bad aspect of NAFTA was to tighten up the rules of origin to be stricter. The good aspect of NAFTA from the standpoint of Canadian exporters to the United States is that certain provisions in those rules permitted producers of garments in Canada from imported fabric to export to the United States duty free.

Probably the biggest single and most dramatic change actually occurred in Mexico with the agreement with Mexico. Mexican policy was quite restrictive, particularly in the auto sector. There was an immensely complicated agreement called the Mexican Automotive Decree. It was not an agreement; it was a unilaterally imposed system. Its provisions had the sigma signs in it, which always makes me nervous. NAFTA achieved the dismantling of that process, which should create a significant opportunity for the Canadian automotive industry. I do not know whether it has, but it should.

On the negative side with respect to goods, the Canada-U.S. agreement on agricultural goods was carried forward with the same deficiencies. Those issues all remain pretty much unresolved. As far as softwood lumber is concerned, the NAFTA did not address it. However, a NAFTA binational panel achieved a victory of that in the third iteration of softwood lumber, Lumber III.

As far as trade remedies are concerned, NAFTA maintained the FTA status quo. The binational panel process was carried forward. No attempt was made at the negotiation of a subsidies code. Clearly, that was not on.

As far as safeguards are concerned, the FTA safeguard process was carried forward into NAFTA, which has been quite useful. Canadian goods have been shielded from U.S. safeguard actions on several instances. Wheat gluten is one; steel one is another. As Mr. Herman pointed out in his paper, Canadian exports are subject to surge reviews, so it is a sword hanging over our heads on steel. However, it is better than being caught up with it. One other problem with the safeguard exemption is that both the panel and the appellate body in the WTO case in that particular safeguard have taken exception to it.

As far as services are concerned, the NAFTA services regime was far more robust than that created by the FTA. The obligations were general; it was a top down approach. I do not know that the services regime has been that terribly important between Canada and the U.S. Marine services are restricted on both sides. That seems to be a natural fact of life. Air services are very restrictive in the NAFTA, but they are generally dealt with a whole different system of treaties. They have been substantially liberalized, not because of NAFTA but for other reasons. Land transportation between Canada and the United States has not been an issue. The big issue on services there was between the United States and Mexico. The Americans had promised liberalization and they did not deliver. They refused to issue permits to Mexican trucking firms. There has been a NAFTA chapter 20 case on that. The Mexicans won, but it is still a problem.

With respect to financial services, the NAFTA regime is quite comprehensive but, again, it is not a big thing as between Canada and the United States. The United States has never been particularly restrictive as regards foreign financial services. The problems there were more internal. Their banking system, in particular, is very restrictive as far as interstate branching. Those various problems solved themselves. Canadian banks have been the beneficiaries, but that had nothing to do with NAFTA.

However, there was significant liberalization of the Mexican banking regime under NAFTA. It is not totally liberalized. In 1982, there was a nationalized banking system in Mexico; in 1990, they started privatizing with severe ownership restrictions. NAFTA has opened a large window of opportunity for U.S. and Canadian financial institutions, but I do not know the extent to which they have taken advantage of that.

As far as dispute resolution is concerned, the NAFTA chapter 20 carried forward the FTA process virtually unchanged. The FTA process was quite extensively used. We did not think it was extensive at the time, but there were five cases in five years. Two of the cases could have been brought under the GATT as well. One was a U.S. case and the other was a Canadian case. They chose the FTA process.

NAFTA chapter 20 has hardly been used at all. There have only been three cases and they have all been NAFTA- specific. One involved dairy tariffs, which we won. I will not go into the details I touch on in my brief. The other cases involve specific NAFTA provisions as between Mexico and the United States.

After NAFTA came into effect, the WTO came into effect. The WTO agreement incorporated the original GATT, but it covers a whole host of other areas. As far as the trade remedy and dispute resolution is concerned, the trade remedy side included a improved anti-dumping code. There was one under the Tokyo Round agreement but the WTO is a significant improvement. More important, it included an agreement called the Agreement on Subsidies and Countervailing Measures, which defined ``subsidy'' for the first time. That did not exist under the GATT. NAFTA never made a stab at it. The FTA negotiators tried but could not do it. However, we now end up with a definition of ``subsidy.''

As far as dispute settlement procedures, the WTO represented a quantum leap from the GATT because it eliminated the concept of a losing party being able to block the adoption of a report, and it set out a formal procedure. It has many analogies to the NAFTA procedure. There are a couple of significant advantages, though. First, panel selection in a WTO case proceeds expeditiously. The Director General of the World Trade Organization chooses the panellists in consultation with a member, but if a panel does not emerge in several weeks, you end up with a panel.

Second, Mr. Herman talked about the lack of institutional support in NAFTA. The WTO panels have a secretariat to drawn on and they get a lot of institutional support. Some panels say too much support sometimes, but NAFTA panels of any description are pretty much on their own.

The third feature is a standing appellate body. There are criticisms of the appellate body, but essentially they have brought a great deal of consistency to WTO law.

The WTO process is very popular. We are up to almost 300 disputes, and there have been many cases decided with the WTO process, so it is well understood.

It, of course, is up for negotiation and renegotiation. Numerous suggestions have been made by Canada, the U.S., the EC and a whole host of other countries. There are many pages of suggestions on the WTO Web site, but the sense one gets is there is no real dispute with the fundamental structure of the system. Most of the suggestions deal with the technical operation of the system.

The one difficulty with the system of dispute settlement understanding, DSU, which is inherent in NAFTA or any dispute settlement system in a trade agreement, is that these procedures are designed to settle disputes between sovereign states. At the end of the day, a sovereign state does not have to comply. In particular, you cannot make the United States comply. If they comply, great. If they do not comply, you are left with the concept of compensation; in other words, the losing party says, ``I will not comply, but I will do some trade liberalizing in some other sector.'' That is a poor second best, but the worst option is retaliation. Retaliation is often meaningless, particularly when you have a small country that has won a case against a large country. That is an inherent difficulty.

As far as dispute resolution in NAFTA versus the WTO, as I indicated, there have been only been three NAFTA cases. That would suggest the WTO is the forum of choice.

That is probably correct. I think when you look at the cases, there is an explanation for each one. For example, the U.S. brought its periodicals case under the WTO because there is a cultural exemption under NAFTA. They could have taken measures of equivalent economic effect. However, they wanted to have a panel say, ``Canada, you are wrong and you have to fix this.'' In the patent term case, they would have lost under NAFTA, because we comply fully with the NAFTA patent rules. It was the WTO one that was problematic. In any event, there is probably a preference for bringing cases before the WTO.

I want to wrap up with a description of the Canada-U.S. situation and the two biggest issues. There is a trade remedy issue, anti-dumping and countervail. We will have face this with softwood lumber. With softwood lumber or any case — but softwood lumber comes to the fore — we have a NAFTA binational panel process and a WTO process, each of which is half a solution. The NAFTA process is great because if we win, we get all our money back. From the standpoint of implementation, it is wonderful. On the other hand, it has to apply U.S. law.

The WTO process applies WTO law, and we can win on that. However, the problem is implementation. The issue of implementing these WTO decisions on anti-dumping and countervailing duty cases is up in the air. Panels have tended to duck the issue. How this will play out is important, and we do not know how it will work.

The other thing I raised in the paper is the issue of security. Obviously, security issues are a concern, at least with respect to Canadian access to the U.S. market. I raise it because it brings out the spectre of the customs union. Customs union has been proposed as a solution. I need not dwell on what has already been said by Mr. MacLaren and Mr. Herman. It is a difficult proposition for Canada and the United States and it is a solution that is not on. Concerns about border checking and the rest of it will have to be resolved in some other way.

The Chairman: When we went through the FTA debate, we were told that the sectoral concept was a non-starter. The argument was whether we should have a free trade agreement or sectoral agreements. The proposers of the FTA were opposed to sectoral agreements. It is interesting to see how the discussion has evolved in that we now have both.

Mr. Herman, when you mentioned the government-to-government concept, the way I understood it, I thought that the softwood affair had gone to the WTO. We seem to have lost half of it at the WTO, in the sense that the stumpage system has been declared a financial benefit to the companies, but the case has not been made that it is actually a subsidy. I thought it had gone a step up, that it was now between the Government of Canada and the President. Is that what you mean, or is it more?

Mr. Herman: It is partly what I mean.

Part of the softwood case has been put to the WTO, and it will be resolved at a broad state-to-state level. Notwithstanding that, the U.S. anti-dumping and countervailing duty process is still running its course.

It becomes complicated when you try to mesh the results of the WTO process and the results of the NAFTA process and the U.S. trade remedy process. I am suggesting that instead of private remedies continuing to run while governments are trying to resolve this through consultation or dispute settlement, is there not a way in which we could off-ramp the private remedy process or put it in suspension? If governments or a panel resolves it at a government-to- government level, that would end the private remedy process.

That is controversial. Whether the Americans would even consider it is another matter.

The Americans are facing about eight Canadian challenges in one fom or another. They may find this vexing. The complexity of disputes overlain with disputes could mean that another way of dealing with a problem of this nature in a comprehensive way might find some resonance in Washington.

Mr. Johnson: I would like to briefly describe the ongoing processes mechanically. Mr. Herman talked about the domestic process continuing in the United States. That is correct. There have been final determinations of dumping, subsidy and injury. All those have been challenged, and the binational panels are deciding U.S. law and will ultimately come to a conclusion. If Canada wins, we get our money back. If we do not win, we will not get our money back. That matter is ongoing.

Parallel to that, Canada has launched three challenges. I am referring to the WTO. There is a challenge on the final determination of ``subsidy.'' We had an earlier challenge on the preliminary determination of ``subsidy.'' Essentially, the panel decided that stumpage was a financial contribution; therefore, a provision of goods. It was not so much that the panel did not confer a benefit, but the calculation of benefit was wrong. They used a cross-border analysis that they had no business doing. That was the essence of what was decided in that case. The decision was moot because for technical reasons under U.S. law, the provisional duties were refunded. That matter went away.

There is a final determination case before the WTO. Canada has also challenged the final determination of ``dumping.'' There is a third challenge underway where Canada has challenged the final determination of ``injury.''

Again, if we win the binational panel cases, we get our money back. If we lose or only win in part on the binational panel side, the U.S. system, but we win on the WTO side, then the question is about implementation. There is a question there; there are two parallel tracks.

The Chairman: It seems that the entire business has departed from the situation of 15 years ago. All of the challenges you speak about are at the WTO. The dispute settlement mechanism did not exist at the WTO, as I understand it, when the FTA was agreed upon. Therefore, the process has evolved significantly.

When a matter goes to the WTO, I would have thought, and I do not know, that at the WTO, one may challenge. A panel of representatives from other countries is chosen. It is not a national panel. The strength of that process would be that other countries with similar disputes might agree with you or with whomever you are challenging. You have taken the matter into a bigger arena. The price that the country that loses the case would pay would be the risk of some form of retaliation, not just by you, but by the other 120 members of the WTO, or whatever the numbers are.

Mr. Herman: Just the one country.

The Chairman: The WTO has now become a body of international trade law, has it not? If the decision of the panel is disputed, there is a precedent. Could that precedent work against you if you were in a dispute?

Mr. Herman: Yes, you are absolutely right. My point is that while all of this is happening, the private remedy process runs its course, and anti-dumping and countervailing duties are still being collected when Canadian products cross the border.

The second point that Mr. Johnson raised is that the implementation process at the WTO is fraught with many uncertainties. What you have said, in essence, is correct. I am saying that it is not a perfect system.

The Chairman: I wanted to clear my mind. I was on this committee when we dealt with the FTA originally. I am seeing quite a jump. I remember the arguments in Washington with Congressman Gibbons over the dispute settlement mechanisms and how they would not work. It seems that you are saying that there is a certain change going on in that more and more these issues are going to the WTO.

Mr. Herman: You are right, and the WTO process is a good one. It is about as good as we have had in international law in centuries. It is a multilateral, rules-based dispute settlement process.

The challenge for Canada, though, is that not withstanding the WTO, which is a multilateral process and a long one, there is an appellate and implementation process that prolongs the matter.

How does Canada approach bilateral trade where we have a potential threat of U.S. trade remedies with which we cannot really deal? If we have to go to the WTO to resolve the problem, that is fine. In theory, that is fine and it works and we may succeed. In the meantime, many people are out of work in British Columbia and Quebec. How do we deal with that issue? That is what I am trying to address.

Mr. Johnson: On the subject of anti-dumping and countervailing duties, the big advantage that the WTO offers is a code. There are pretty stringent rules with respect to conducting an anti-dumping action. There are stringent rules with respect to conducting a countervailing duty action.

When the FTA was negotiated, we had the GATT, which included some rules about dumping. It included minimal rules about countervailing duty actions, no definition of ``subsidy'' and a dispute settlement process that the loser could block. Now we move to the WTO, where there are firm and strict rules with respect to both anti-dumping and countervailing duty actions and a dispute settlement system that the loser cannot block. We will see a shift to the WTO process. Until something else happens, that process is probably our best hope for dealing with U.S. trade remedy laws.

The Chairman: I see Mr. MacLaren nodding his head as well.

Senator Graham: It would be interesting to ask all the members of the panel if they agree with everything that has been said today, or whether we would require a dispute settlement mechanism that would be binding on all of them.

It is a real treat to welcome back my friend the Honourable Roy MacLaren to Parliament Hill. He has had a distinguished career here, in the diplomatic corps and in the business community. He has represented us very well in many spheres of activity.

With respect to what Mr. MacLaren had to say and the papers that have been presented to us by Mr. Herman and Mr. Johnson, that information will be invaluable to us in our deliberations.

I wish to turn to the subject of the customs union or the possibility of a customs union. One of our witnesses yesterday proposed a customs union. Mr. MacLaren said today that this is not in the cards. Mr. Johnson said that it is not on. In your conclusion, if I remember correctly, Mr. Herman, you said that it is politically unrealistic. Will there ever be a day when a customs union would be realistic? What are the impediments, apart from size, that might be in the way of a full customs union or a free market?

Mr. MacLaren: A customs union, as you know, would require that the three countries of NAFTA have a common external tariff. That, in turn, would require that NAFTA negotiate in international trade negotiations as a single unit.

I cannot think that such a structure meets Canada's international trade needs or priorities. In effect, the harmonization that is foreseen by the advocates of a customs union would in fact be Canada and Mexico adopting U.S. trade practices. You can be certain that the United States would not adopt Mexican trade practices or Canadian trade practices. There would be a one-way street. Let me repeat that I cannot see in what circumstances today it would be in Canada's interest either to accept a common external tariff, which would be the U.S. tariff in effect; or, second, to have the United States lead trade negotiations on behalf of Canada and Mexico as well as itself.

Your second point is hypothetical. Senator Graham will know from the other place how wary one should be about hypothetical questions. I do not want to speculate on whether there would eventually be circumstances in which some form of customs union or, indeed, a common market would be in Canada's interest. I cannot today foresee in what circumstances that would arise. I would only suggest that the question is necessarily a static question, whereas the trade world is a dynamic trade world. In five years' time, we may see a global trade world in which, God willing, tariffs have been virtually eliminated and that non-tariff barriers have been reduced or eliminated. In such circumstances, a customs union in North America itself would make less and less sense, even less sense than it does today.

Mr. Herman: I agree entirely with what Mr. MacLaren said.

Mr. Johnson: I want to describe a few things you would have to do for a customs union. Remember why we talked about free trade areas and customs unions. Essentially, if you are part of either, you are according to more favourable trade of goods to your fellow members. We give duty-free treatment to U.S. goods that we do not give to goods of Japan. That is a breach of the MFN obligation, unless we are doing it as part of a customs union or free trade area. You start off with that proposition. Similarly, England gives duty-free treatment, perhaps, of goods from France that it does not give to Canada. Two recognized exceptions to that most favoured nation requirement are a customs union and a free trade area.

With a customs union, not only do you have to eliminate the restrictions among yourselves, but you also have to adopt substantially the same restrictions of commerce with respect to goods of all non-member countries. We talk about a common tariff, but that is only the beginning. We also have to harmonize our anti-dumping and countervailing duty regimes. It would not be difficult to harmonize the laws, but it would be very difficult to reach an agreement that we will not do these things against each other.

Further, you would have to harmonize your policies with respect to certain countries. We give liberal treatment to Cuba, whereas Cuba is a pariah to the U.S. We could not construct a customs union without a harmonizing policy, and I think we know what it would be. Other countries are the same. We would have to harmonize textile quotas and other things. All of this requires a lot of decision making. The one thing about the NAFTA is that it does not have much of an institutional structure. You do not have to make a lot of common decisions. We make our decision and the U.S. makes its decisions. With a customs union, you have a common tariff, how do you deal with Cuba, et cetera. Who makes the decision? I think we know who that would be. I suspect that U.S. constitutional law would have huge difficulty with delegating any of those decisions to a non-U.S. body.

Senator Graham: That point has not been raised. I want the record to indicate that I am not advocating a customs union. I raised the point simply because it was advanced yesterday by one of our witnesses.

Senator De Bané: I have a supplementary question to the two points emphasized by our two witnesses, Mr. MacLaren and Mr. Johnson. You explained to us why a customs union would cause a lot of problems, unless we accept being in the back seat and the United States would do the negotiations with foreign countries.

On the other hand, would you agree that there is some downside to the formation of different regional blocks? We are talking about one in North America; tomorrow there will be one for the Americas. Asia will have its own and so will Europe. If all these blocks have regimes of free trade among them, do you agree that down the road regional blocks are not the way to go?

The Chairman: I do not know that that is a supplementary question, senator.

Senator De Bané: We were told why custom unions have negative implications. They are very complex, and that is true. On the other hand, does it make sense to have regional blocks all over when customs unions are so complex?

Mr. MacLaren: Senator De Bané well learned the practice of supplementary questions in the House of Commons. I recognize the technique.

I do not fear regional groupings. I do not fear regional trade liberalization, as long as it is open ended; that is to say, as long as the terms are available to other countries if they wish to accede to such terms.

There is, of course, as the senator knows, a corpus of thinking that is opposed to regional arrangements because they see them as some way in conflict with the multilateral organization, the World Trade Organization. I do not. I would rather view all regional groupings and bilateral and trilateral groupings, of which there are now well over 150 in existence, as building blocks toward an eventual global free trade arrangement. That stepping stone process is enhanced by regional groupings as long as they meet the conditions of the old GATT article 24 and now the World Trade Organization. They must be trade enhancing rather than trade restrictive.

Mr. Johnson: I remember that ``hub and spoke'' was a popular metaphor during the NAFTA negotiations with the U.S. being the hub and Mexico, Canada and all these other places being the spokes. Jules Katz made the comment about regional groupings, saying that the better metaphor was ``spaghetti,'' given all the different groupings that existed at that time, and there are more now.

I agree with Mr. MacLaren. The one caveat is this: You have an intellectual property chapter in NAFTA as well as in the WTO. They are not quite the same. There are slightly different rules. I do not think we need a third intellectual property agreement, say, in a free trade agreement of the Americas. I think that the regional agreements are fine if they stick to creating free trade areas and liberalizing trade in goods. I think if they try to parallel what the WTO is doing with respect to services, intellectual property, sanitary and phyto-sanitary measures and so on, they can be counterproductive.

Senator Di Nino: An enormous trade volume has been created through NAFTA, and there is no question there will be disputes. The bigger it gets, the more disputes there will be. A lot of people will be employed in trying to sell these things.

I would like to focus on something else and direct my question particularly to Mr. MacLaren whose expertise and experience are of long standing and quite useful. A couple of the witnesses have talked to us about wasting too much of our energy and our resources in Washington. They have suggested that we should be looking at enlarging our influence or strengthening our relationships outside of Washington, particularly when we consider that more than half of the U.S. states — I think that yesterday the minister referred to 38 — count Canada as their number one trading partner. I wonder if that is an opinion that any of you, and particularly Mr. MacLaren, would share.

Mr. MacLaren: I am pleased the honourable senator raised the question because, with a rare display of self- discipline, I cut off my own statement in the interests of brevity before I dealt with that question of trade diversification. Perhaps if I give my notes to the clerk of the committee, it can be recorded.

In any event, trade diversification is essentially part of the answer to the question we are considering today. In my view, Canada will not achieve much more process improvement from NAFTA. Although I would be the first to argue that Canada has benefited economically from the Free Trade Agreement, and I would in no way want to jeopardize the benefits that flow from that remarkable degree of trade with the United States, I urge very strongly that Canada diversify its trade interests. There are a variety of ways of doing so. Senator De Bané spoke of regional and bilateral groupings, but in my view, in the first instance Canada should address the European Union as the most promising of partners in the diversification of our trade. I have to say, and it is perhaps a digression, that this view does not seem to exist in Brussels itself. However, I think with perseverance and energy in Ottawa, we could more vigorously pursue our interests in achieving a free trade agreement with the European Union. I salute the initiatives taken to create free trade with other countries; I did so myself with Chile. I am pleased that we have made progress with Central America, although less happy that our protectionist and accordingly futile shipbuilding subsidy program has disrupted our negotiations with Norway and Singapore. That aside, the fact remains that the central target should be the European Union. I hope the government will pursue the Prime Minister's proposal, repeated over several years, that Canada seek a free trade agreement with the European Union.

Senator Di Nino: I guess I did not articulate my question appropriately. You will find no argument around this table to your comments with regard to diversification outside of the NAFTA. My question was directly related to the restricted nature of this inquiry, which is NAFTA. We were informed that we have reduced our efforts around the NAFTA regions, particularly in the U.S. We closed offices in the 1990s; we have not put as many of our resources to work, in other parts of the U.S. as an example, where we could do a lot better in increasing trade. That is the area I was focusing on, and I did not express it correctly.

I will ask my second question now to allow my colleagues a little time as well. Through the lens of September 11, what has changed in NAFTA?

Mr. MacLaren: I simply pursued in my earlier response the old House of Commons practice of answering the question I wanted to answer, rather than answering your question. I wanted to place on the record a statement that I am an advocate of trade diversification, especially with the European Union. I think I might leave the question of September 11 to my two colleagues.

The idea that we as a government and the Canadian people should invest more money in trade promotion and presumably investment promotion in the United States, seems to me the reverse of the priority we should have. I would argue, to the contrary, that we should be investing in every other area of the world, again, particularly the European Union in the way of trade and investment promotion. In the case of the Free Trade Agreement with the United States, the private sector can be relied upon to identify and exploit the opportunities without much help from the Trade Commissioner Service or other promotion activities of the government.

Mr. Herman: I agree with what Mr. MacLaren said entirely. We have to recognize the attraction of the United States as a large market where they pay in cash and in dollars to boot. That is a great pull and it makes business a lot easier. However, if you look at the exposure it creates, it is quite profound, and we have to be concerned about that as a country.

In the case of softwood lumber, almost 100 per cent of our exports go to the U.S. market, so there is a huge exposure.

I mentioned the Canadian Wheat Board. It is now undergoing a countervailing duty investigation by the U.S. Department of Commerce. In the case of the Canadian Wheat Board, however, the Wheat Board only sells about 20 per cent of its exports to the United States. Eighty per cent of its other exports go to other countries. The exposure is reduced. That is an important factor to keep in mind.

Senator, you mentioned September 11. I think it is one of the key issues that we, as Canadians, have to deal with. The United States views the world from a completely different perspective after that attack. I think a lot of their policies, whether it is in the trade policy area or in other areas, are driven by the effects of September 11. My impression is that the U.S. very much sees itself as a country under siege. They are not certain how to deal with that. Many of their policies, whether at the level of the House of Representatives or the Senate, are being driven by the events of September 11. As Canadians, we must try to place ourselves in that optic. I know that we are not addressing that particular issue today.

My view is that our ability to deal with the United States on bilateral trade issues requires some thinking about what has changed since September 11. Much has changed in the United States. That means that there is a linkage between defence, security, trade and other issues. That may not be articulated as a direct linkage, but there is one and we must recognize it.

Mr. Johnson: I agree with Mr. Herman. These matters must be solved through negotiation and diplomacy. NAFTA is not much help. The national security exception in both the NAFTA and various WTO agreements is fulsome. The U.S. could do pretty much approach any trade restrictive matter that they wanted to on the strength of that and given the events of September 11.

Senator Andreychuk: This has been a good refresher course on NAFTA and the WTO and a good reminder for us, as well as Canadians, that problems have arisen not because of the shortcomings of the NAFTA, as NAFTA has improved the situation, as has the WTO. We tend to talk about the current situation without knowing how we might have had to deal with matters had we not had a NAFTA or WTO. Your updates are very helpful.

Mr. Herman, you say that you would like to offload the private process in favour of a government-to-government process. It seems that from a political point of view that would be rather impossible because it would put both governments in the position of having to solve the question. Sometimes these issues are more complex than can be easily and swiftly dealt with.

There must be some political will and understanding. In light of the relative position of Canada and the United States, would it not be better to have, particularly in Canada, a process that involves the governments in broader issues before they become trade irritants? That would then maximize the political will as well as the diplomatic will. Softwood lumber and grain are not new issues. Understanding the complexity of the American issue may be new to younger politicians, but those of us who have been tracking the situation for years, as has Mr. MacLaren, will not see this issue as new. We know that issues such as these are likely to recur. Is seems that a trade or broader foreign policy needs to take this into account at an earlier stage, rather than offloading, which seems to be impractical from a political viewpoint.

Mr. Herman: You have raised some good and valid points, senator. The issue is that there are some kinds of disputes that require governments to resolve. The issue is muddied when governments become embroiled in private remedies. How that is dealt with is complex and raises constitutional questions and issues about private remedies.

We are on the same wavelength. I am saying that certain disputes must be resolved at the level of governments. In my humble submission, whether stumpage by the Canadian provinces is or is not an illegal subsidy under international trade rules must ultimately be resolved by a state-to-state dispute mechanism, not through an audit by the Department of Commerce running a countervailing duty investigation. That was my point. In my paper, I said that conceptually that makes sense. It is not easy to deal with, but I believe we are saying the same thing, if not slightly differently.

Senator Setlakwe: I could not let the opportunity of having the Hon. Mr. MacLaren before us pass without asking him a question about the influence of the European Community with regard to our relationship with the Americans. I should like to hear his views in regard to the European Community's free trade agreement with Mexico, the discussions with the United States and Mercosur and their apparent lack of discussion with Canada.

Knowing what you have done and your views about the increased necessity of trade relations with the European Community, to what extent should we treat the Europeans and influence the Americans in our trade disputes?

Mr. MacLaren: Several decades ago, Prime Minister Lester Pearson warned the Canadian people that having 60 per cent of their merchandise trade with the most powerful country in the world was a major problem. Today, that figure is 85 per cent. That gives me concern in broad geopolitical terms as well as in more narrow trade terms.

The resolution of that concern seemed to exist to a degree in Europe, in the free trade with the European Union. However, I am baffled by response from Brussels. I do not know why we have received such a rebuff, such a negative response from the commission.

I was in Brussels not many weeks ago talking about this issue with the Commissioner of Trade for the European Union, Pascal Lamy, and, in effect, he said that they are not interested in a free trade agreement with Canada; it is ``unavailable'' was his word. I asked him by what Cartesian logic does Brussels seek a free trade agreement with one NAFTA partner and reject the idea out of hand with another NAFTA partner. It seems to follow that if you can have free trade with one of two NAFTA partners, and each of those two have free trade with each other, then it should follow that the third part of the triangle should be completed. That logic does not seem to prevail in Brussels at the moment.

The Chairman: What was the response of Mr. Lamy?

Mr. MacLaren: His answer was that they want to put their emphasis and resources into the Doha Round of the World Trade Organization, about which I might say tangentially I have some real doubts as to whether it will take place as scheduled. Be that as it may, Mr. Lamy said that that is where the European Union wishes to put all its eggs.

Honourable senators, candidly, I was bewildered at the response we received in Brussels. I do not know whether the unspoken reason for the view of at least the commission, if not some European countries, is that Canada is seen as having become a mere appendage of the United States. They no longer regard us as a sovereign entity with our own policies and values. Instead, in looking upon us as an appendage of the United States, they are not willing to negotiate free trade with Canada because any concession they make with us they would then have to make to the United States.

Why negotiate with the small tail of the large dog? Why not negotiate with the dog itself? Therefore, the negative reaction may arise from that. That is speculation on my part. I cannot substantiate that; it is an impression that I have. Ostensibly, the reason is this one of ``We cannot negotiate with you when we are putting all our efforts into the Doha Round of the World Trade Organization.'' I said, ``Yes, but you are initiating free trade negotiations with Chile.'' They say, ``That is different. We are thinking about that, but we cannot do Canada. Thank you.''

I left with what I believe the French call a flee in my ear, somewhat abashed at my own temerity at having even raised the question.

Senator Setlakwe: You have said that rather than talk to Brussels, Canada should talk on a nation-to-nation basis. Is there any chance of ever doing something positive in that respect?

Mr. MacLaren: I should not take more of the committee's time on this subject, although it remains dear to my heart.

Our failure to induce the commission in Brussels to take seriously the Prime Minister's repeated proposals for a free trade agreement either transatlantically between NAFTA and the EU or, failing that, between Canada and the EU meant that we should go to the 15 member states individually, among whom we have friends — the northern tier is notably liberal — and seek their individual help in convincing the commission in Brussels, which is, presumably, the agent of the member states, to take a more positive approach to free trade with Canada.

I am not privy to the response, if any, from member states, other than what I have understood in informal ways, but I believe that approach has been made. Whether with sufficient vigour or determination, I am no judge. However, I do not know that we need to concede defeat merely on the basis of one effort to involve the 15 member states.

After all, when Prime Minister Mulroney sought free trade with the United States, there were many in the corridors of power in Washington who were opposed or indifferent. It took a great deal of resolution on the part of the Government of Canada of the day to induce the United States to engage in that negotiation. If we showed a fraction of that determination in the case of Europe, I think we could make real progress.

Senator Graham: When Mr. MacLaren talks about the flea in the ear after he was leaving Brussels, do you suppose there was a bug planted in Brussels by the United States?

Mr. MacLaren: No, I do not think so. I do know that the United States itself has had, whether it does currently or not, reservations for a variety of reasons about transatlantic free trade. I would not think that the United States would take any position on Canada-EU free trade. It is possible, I suppose, but I would not think so. The United States not having had fast-track authority to negotiate free trade with Chile as a fourth member of NAFTA, I told the Americans, Mickey Kantor, the U.S. Trade Representative of the day, that we would do so bilaterally. He shrugged his shoulders and said, ``That is your affair.'' I would think that same attitude would prevail with regard to your question.

The Chairman: I want to thank our witnesses on behalf of the committee. It has been an interesting meeting.

The committee adjourned.