Proceedings of the Standing Senate Committee on 
Foreign Affairs

Issue 5 - Evidence, February 18, 2003 - Morning

VANCOUVER, Tuesday, February 18, 2003

The Standing Senate Committee on Foreign Affairs met this day at 9:07 a.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: Honourable senators, our first witnesses this morning are Mr. Russ Cameron from the Independent Lumber Remanufacturers Association and Mr. Ken Higginbotham from Canfor Corporation.

Mr. Russ Cameron, Independent Lumber Remanufacturers Association: Senators, our forest industry consists of two very distinct sectors. The first sector consists of the tenured companies that have an assured supply of wood fibre. The second sector consists of the non-tenured companies that must try and buy that fibre away from the first sector. I represent the second sector.

Our thanks to Senator Carney for understanding the distinction between the two sectors and inviting us to be here.

I am here today on behalf of 320 of British Columbia's independent non-tenured lumber remanufacturing companies. Together these companies have annual sales of $2 billion, and directly employ approximately 6,000 British Columbians.

In general, our work begins where the big tenured companies' work ends: Their finished product is our raw material. We provide the greatest socio-economic benefit per cubic metre of timber resource harvested. We are the growth opportunity of the forest industry in Canada because we do more with less.

I am not an expert on NAFTA, but I do know that the ``FT'' in NAFTA is supposed to stand for ``Free Trade,'' and we have not seen much of that lately.

Our concern is to restore and maintain access to the U.S. market for value-added wood products. We are currently being injured by the countervailing and anti-dumping duties. In the lower mainland, in less than a year our members have had to layoff 22 per cent of their employees, our shipments are down 30 per cent, and we have suffered five permanent closures. Members in the rest of the province have fared no better.

The unfortunate fact is that we should not be part of this trade dispute. The remanufactured products of independent remanufacturers should be excluded or zero-rated. The petition filed by the U.S. Coalition for Fair Lumber Imports does not contain any allegations of subsidies against non-tenured independent remanufacturers, nor do the current papers of remedy being produced by Undersecretary of Commerce Grant Aldonas.

This dispute concerns renewable tenures, stumpage and forest policies on renewable tenures. The Americans think these factors are subsidies that allow and sometimes even force the tenured companies to ship lumber to the U.S. regardless of market conditions.

What does that have to do with us? We do not have any tenures and we are not subject to any of these policies.

Every day we compete with U.S. remanufacturers for Canadian wood fibre. If we can pay the tenured companies more money for that fibre, we get it, and if the Americans can pay more, they get it. The fact is that we are competing in a world market to buy wood fibre at prices set by that market.

The concept that a tenured company would pass alleged subsidies on to its customers, Canadian or otherwise, is a fantasy. There are U.S. court precedents debunking the concept of the ``pass through of subsidies,'' and the WTO has ruled that the U.S. cannot merely assume that alleged subsidies are being passed on. As for anti-dumping, I would be fascinated to meet the person that could remain in business dumping the wood that has been purchased at market price.

The only reason why we are subject to these punitive duties is that some of the tenured companies produce some of the same products as we do. The U.S. term ``collateral damage'' applies nicely in this instance. The U.S. Department of Commerce knows it and admits it. In the 1992 case the Department of Commerce found:

The department cannot exempt products that we have determined are within the scope of the investigation...that there are many remans that are produced by tenure holders and which therefore benefit directly from stumpage subsidies...the issue then becomes determining which individual companies produce remans as part of a continuous process starting with the felling of subsidized timber, and which produce remans from lumber purchased at arm's length.

That sounds simple and straightforward, and if we could ever get the Department of Commerce to actually determine what they say they need to determine, the result would be that remanufactured products of independent remanufacturers would be excluded. However, we cannot get there because of two words that keep coming up, ``not practical.''

It seems as if everyone understands that we are being unfairly penalized, but because we are too small and too numerous, it is impractical to do anything about it.

To make matters worse, we now have to pay duty on labour, heat, light, insurance, leases, property taxes, interest, on the value of the fibre we buy, and, if there is any, on the profit that we make. They call this paying on the ad valorem price. In other words, the more Canadians we employ and the more value we add, the greater the penalty.

Please understand, this means that our penalties are greater than those of our American competitors who pay on the price of the raw material only. This is commonly referred to as paying on the ``first mill'' price. Because they can usually outbid us for Canadian raw material it is no wonder that more and more B.C. companies are doing their value- added work in the United States.

If our American competitors decide that they want an even greater advantage over us, they can always buy our logs with no duties at all, cut them in American mills, and use the resultant completely duty-free lumber to compete with us.

Please be clear that getting our penalties reduced to ``first mill'' level is not a solution for us. There are at least four other problems that we must deal with.

First, we should not be forced to pay any share of the costs of a tenure-based dispute. Second, we still have to compete with U.S. remanufacturers who are able to use duty-free wood U.S. wood. Third, paying on first mill price would give B.C.'s tenured remanufacturers a competitive advantage. We will pay duty on the prices invoiced from the tenured company, but the tenured companies will also supply their own remans plants. They will pay duty based on an intelligently set inter-divisional transfer price, and that price can either be lower for the same material or the same for better material. The fourth problem is simply that many of us will not survive many months of a ``first mill'' interim border tax. We need exclusion or zero-rating, and we need it quickly.

The question is whether to litigate or to negotiate. And for us the answer is to negotiate. We see negotiating exclusion or zero-rating as the only solution for us. We cannot afford to wait for the litigation process or for the negotiations concerning border taxes. We feel that negotiating an agreement means negotiating the replacement tax.

The simplest replacement tax would be to apply a tax to the non-competitive harvest in the form of a stumpage levy, while at the same time using the selling prices of the competitive harvest to set the base-rate stumpage on the non- competitive harvest. That would lay the problem and the penalty where the problem is, and it would effectively exclude all others.

However, it seems that the route that has been chosen is to negotiate a border tax. We believe that a border tax is too complex to achieve our goal of exclusion. A border tax would require that excluded companies be identified, certified, monitored and policed. It would require a definition of remanufactured products and a chain of custody to track them. Fortunately, the model of such a system exists in the Maritime Lumber Bureau.

We will, nevertheless, support the border tax route only because the position of the Government of British Columbia is that independent remanufacturers be excluded or zero-rated from it. In other words, we will take exclusion or zero-rating any way we can get it and as quickly as we can get it.

We are very grateful to the federal and B.C. governments for their support and hard work on our behalf. Both agree that there is no pass through of any alleged subsidies, and that we should be excluded or never should have been included in the first place.

We fear that our negotiators will consider that lowering our penalty to first mill is a victory. We fear that we will fall off the table and be expected to survive a border tax for many months. The fact is that many of us will not survive.

We ask for your support in making sure that the exclusion or zero-rating of the remanufactured products of independent remanufacturers is a priority for Canada in these negotiations.

Mr. Ken Higginbotham, Vice-President, Forestry and Environment, Canfor Corporation: Honourable senators, I thank you for the opportunity to appear before you on behalf of the Canfor Corporation. David Emerson our CEO is unable to attend today.

Canfor is a member of the B.C. Lumber Trade Council. We are unique among the members of that council, and so we sought the opportunity for our own representation before this committee.

Canfor is a publicly traded Canadian company and is Canada's largest producer of commodity lumber. We have operations in British Columbia and Alberta and have the annual capacity to produce approximately $3 billion board feet of lumber. A large majority of our lumber sales is to the U.S. marketplace. We are, for example, the largest Canadian supplier of the Home Depot and Lowes.

We support the efforts and general direction of Governments of Canada, British Columbia, and Alberta in trying to resolve this matter. Both the Departments of Foreign Affairs and International Trade and Natural Resources Canada are doing an excellent job.

We support the two-pronged approach of pursuing litigation and negotiation in parallel. Both WTO and NAFTA actions should continue to argue the cases concerning subsidy, injury and dumping.

However, if an appropriate negotiated agreement can be concluded, we would be prepared to see the litigation stayed, but only at a time when we have relative certainty of a negotiated result that provides free access to the U.S. market.

One way that Canfor is different from the vast majority of other companies in this dispute is that we filed a Notice of Arbitration and a Statement of Claim under NAFTA chapter 11 in July of 2002. We have asserted that actions of the U.S. government in this matter have amounted to breaches of certain provisions of NAFTA, including a failure to provide Canfor with fair and equitable treatment in accordance with international law. This relates to the fact that we have significant holdings in the United States, associated primarily with the distribution of lumber to the large retailers like Lowes and Home Depot.

The Statement of Claim requests damages of not less than U.S.$250 million as a result of these actions. Canfor and the U.S. have submitted names of proposed panel members to hear this claim. Our panel member is Frank McKenna, the former Premier of New Brunswick. The U.S. has submitted their request. When both members are agreed upon, they will have to agree upon a third member to complete the panel. We intend to maintain this claim regardless of negotiations toward a solution. We might change that position if it becomes necessary to do so, but at this point we feel very strongly about this opportunity.

We support the market-based forest policy changes proposed by British Columbia, which may lead to a policy- based resolution of the countervailing duty portion of this issue. Our understanding of policy changes that might be made in Alberta is less clear.

Given that the policy bulletin/changed circumstances review process underway in the U.S. Department of Commerce has the potential to result in revocation of the CVD order on a province-by-province basis, we support those efforts.

The policy bulletin in draft form suggests that provinces may employ different policy changes in changed circumstances reviews. We do not oppose this, but feel strongly that the differences should not be allowed to create competitive disparities in different regions of Canada.

We support efforts to develop an interim agreement, including an individual provincial border tax that would be managed by the federal government until changed circumstances reviews are successfully completed.

The federal and provincial governments agree with the U.S. government on the form of such an interim agreement. We feel that there has not been adequate consultation with the leaders of the Canadian forest industry and so disagree with them on this point. This is especially important, as it relates to the levels of a border tax that might be put in place. Any interim agreement should not be put in place without an agreement on the ``off ramp'' or, in other words, a published policy bulletin which clearly indicates how provincial-level forest-policy changes can lead to a revocation of the CVD orders.

It is also critically important that we have an agreement from the British Columbia government to implement policy changes on a timely basis. This would lead to a changed circumstances review and the removal of the border tax as soon as the review is successfully completed. We have been referring to this situation as the ``double jeopardy situation.''

It is critically important that an interim agreement include dropping the anti-dumping case by the U.S. Coalition for Fair Lumber Imports. I remind you that the changed circumstances review process being pursued by the U.S. Department of Commerce deals only with the CVD case and not directly with the anti-dumping case.

Canfor is playing an active role in the current negotiations. We are optimistic that a suitable, fair agreement can be reached. We support any actions that the Senate Standing Committee on Foreign Affairs can take to lead us toward an open and free North American forest products market.

Senator Carney: I would like to thank both of you for coming on relatively short notice. I know that for both of you these are very tense weeks, and for you to take the time is important to us.

Mr. Cameron will you please explain what you make when you refer to ``remans?'' I should point out that this section of the industry was hammered in the 1980s because we didn't know it existed. They have not been very vocal, and it is important that you are here today. This sector has been severely penalized.

Mr. Cameron: I appreciate your point about being vocal.

We make pretty much anything that the primary mills do not make. We are not in the business of producing full- length one-piece framing lumber, but we are in the business of making mouldings, bevel siding, panelling; anything that is made out of wood that is not used to frame a house. Some of us take low-grade material from the primary mills and chop it up into short, usable sections and finger-joint it into framing lumber. Most of that material is within the scope of the countervailing duty and dumping order. I believe the material has to be less than six millimetres thick to be out of scope, or it has to be one of the six items that the Department of Commerce has specifically excluded. The DOC is trying to reverse those exclusions right now.

Senator Carney: The original countervailing duty order specifically named these products, so would it have helped if they just left them out?

Mr. Cameron: Yes. It seems to me, that they have taken the problem of how to define the products that they want and put them into customs classifications terms. The American have investigated companies individually because some major licencees make the same products that we do and they have a subsidy on their tenures and stumpage. This is a problem for us. We are obligated to be investigated and do so when practical, but in this case it is not.

Senator Carney: You mentioned the Maritime Lumber Bureau as a model. How could that model benefit you?

Mr. Cameron: The Maritime Lumber Bureau has been excluded from these duties for a long time due to the high percentage of private land that is owned in the Maritimes. I assume that the Americans have not chosen to include them because the Maritimes look too much like the United States in terms of ratios to public and private land ownership. Therefore, they have always been able to make a deal with them to exclude them. The difficulty then becomes how to tell one piece of wood from another when it is crossing the border.

The Maritimes Lumber Bureau has set up an organizational bureau. Members are obligated to sign a contract stating that they are open to civil litigation if they injure other parties in the industry. The bureau tracks the exported wood. The same system could be used for our products.

Senator Carney: You think that this is a resolvable problem?

Mr. Cameron: Yes. We have spoken to Diana Blenkhorn of the bureau and we will have her cooperation in following their plan. It will not be easy to do, but it is possible.

Senator Carney: Mr. Higginbotham, could you explain the ``double jeopardy'' argument that you mentioned earlier?

Mr. Higginbotham: Yes. If a border tax is put in place to replace the combined countervailing duties and anti- dumping duties and if one of the provincial governments makes a change in policy that may have an equivalent impact on the cost structures of licencees, we will end up paying double during the period of time that those policies are in place.

The concern resides with an expectation that the U.S. may require what we have been fondly calling a ``test drive'' to prove that the policy changes have brought about the market concepts that they are designed to bring about.

Senator Carney: That is the effects test.

Mr. Higginbotham: Yes, that is the effects test.

Senator Carney: Is the effects test a way for them to insist that you show them how the system works? Does it sometimes take years for the test to be complete and during that time you pay twice?

Mr. Higginbotham: That is correct.

Senator Carney: That seems to be an issue of design in the border tax. Is that resolvable?

Mr. Higginbotham: I think that it is resolvable. Mr. Aldonas does not believe an effects test is required. His view is that U.S. trade legislation would always be open for someone to request an investigation if they felt that something inappropriate was happening. The Coalition for Fair Lumber Imports position is to see the results first. I think the negotiations around trying to get the coalition to agree to something that does not include an effects test, is the way to resolve it. How optimistic we should be concerning the outcome is another question.

Senator Carney: Canfor operates in Alberta and B.C.

Mr. Higginbotham: That is correct.

Senator Carney: Are you in any other provinces?

Mr. Higginbotham: No.

Senator Carney: Yesterday we heard testimony from Mr. Les Reed and others that the route that is being pursued by the B.C. government amounts to capitulation. We have been told that among its problems is that it would recognize the American's cross-comparison. I am not sure if I have used the correct term.

Mr. Higginbotham: Cross-border comparisons?

Senator Carney: Yes, cross-border comparisons. That would legalize cross-border comparisons, which is bad for the industry, because there are different circumstances in each jurisdiction. In that case it would legalize or give up the rights that we have already won in NAFTA and WTO. What is your comment?

Mr. Higginbotham: My understanding is that the B.C. proposal would not do that. Instead, the benchmark for establishing stumpage on administered tenures would be through the auctioning of standing timber. The percentage that would be auctioned is still part of the debate, but let us say it might be 20 per cent of the total public land volume. The auction sales then, using kind of a complex regression-statistics methodology, would establish the stumpage on other wood. However, in the draft policy bulletin, Mr. Aldonas has suggested that cross-border comparisons would be the principal mechanism for establishing administered stumpage within Ontario.

Senator Carney: That is in Minnesota, is it?

Mr. Higginbotham: Yes, I think it would be Minnesota. British Columbia is strongly opposed to the cross-border comparisons because Washington State would presumably be the most logical comparator. In coastal Washington there is a high proportion of private land relative to the proportion of private forestland in B.C. and we do not think that there would be sort of an apples-and-oranges type of comparison, if that were to be used. The one area that Mr. Aldonas has suggested that does involve cross-border comparisons is in log exports.

Senator Carney: What is your feeling on log exports? You have private land as well as public land.

Mr. Higginbotham: We have relatively little private land compared to say TimberWest or Weyerhaeuser.

Canfor is a company led by David Emerson, a true free-market leader. Our view is that we have little to fear from log exports. Mr. Cameron might disagree with that. Other coastal companies that produce high-value products like cedar and so forth, are also concerned about log exports. Our company is concerned with market logging as opposed to manufacturing, and we would selfishly like to have a truer marketplace than we believe exists, especially for the lower-grade coastal wood.

Senator Carney: We have had witnesses say that there is no such thing as a suitable, fair agreement with the U.S. because we are always exposed to anti-dumping and other conditions. Are you suggesting that Canfor would support dropping the WTO, and NAFTA, which are our safeguards, and if so what safeguards do you think we would need to ensure that other actions would not be taken against us?

Mr. Higginbotham: First, we would not be in favour of dropping the WTO and NAFTA actions until such time as we were confident that British Columbia particularly, and perhaps Alberta, could be put into a position to successfully carry out a changed circumstances review in order to have the CVD orders revoked. Our view is that we should continue to try to negotiate for the establishment of a binational commission that has the same strength to hear disputes and make decisions. That way the U.S. Department of Commerce or the U.S. trade representatives will not be the sole arbiters of disputes. Of course, the coalition is entirely opposed to that concept, but we think fairness dictates the need for it to be established.

Senator Austin: I want to say, first of all to you, Mr. Cameron, that I do not have any questions for you, because I think your situation is so clear and the treatment of your industry so arbitrary that we can do nothing more than continue to press in the overall settlement for your exemption. The U.S. policy in dealing with the Canadian forest industry has created a great deal of misery in order to establish their leverage. That is their policy, and you are caught up in it. I think you will agree with that.

With respect to your comments, Mr. Higginbotham, I would like to pursue some specific issues. I am interested in the chapter 11 action that Canfor has taken. I am a lawyer, and I have said for quite a long time that the Americans can ignore the decisions of NAFTA panels and they can ignore the decisions of WTO panels, but they cannot ignore the decisions of their own courts, and that is the one steel jaw that we have. Your action under Chapter 11 is one that has promise, but it will take quite a long time. Do you have an idea of how long that action might take to come to trial?

Mr. Higginbotham: No, we really do not. The U.S., in its wisdom, has decided to suggest that our appointment of Mr. McKenna as our representative is improper and inappropriate, so there is an appeal pending. We are trying to decide whether a similar appeal concerning their nominee would make sense. I doubt that we will do that, because we would like this to move forward. We assume that they are going to put up as many roadblocks as possible in order to stall this procedure. Their behaviour suggests to us that they must think that there is something to our claim. Therefore, we will do our best to try to push for as rapid a hearing as possible. We expect that it could take at least another year before there is a hearing.

Senator Austin: It is understandable that delay suits them and they hope to wrap you up as part of an overall deal. I think they have much less leverage over you in this action than they have over the industry-to-industry and government-to-government paradigm.

Mr. Higginbotham: I agree with you. And be assured that we are working very hard to try to define what the quid pro quo would be if we were to actually give up this action at some point.

Senator Austin: Could other Canadian companies take action in the same way? Is it the cost of this action that deters other companies from doing so?

Mr. Higginbotham: I think that there are probably several things that deter other companies. One is the legal cost. Second, there are those who question whether or not we really have a case, and therefore I think would prefer to have somebody else out in the lead. The other deterrent is that there is a poor definition of how significant a company's holdings have to be in the U.S. in order to claim that the actions of the U.S. are harmful to those holdings in the U.S. That is going to be the central issue of our claim: whether or not we actually qualify. Our legal counsel believes very strongly that we do. The U.S. delays that I have referred to suggest that they might be concerned that we do have a case in regards to that, but there are many Canadian companies that do not have those kinds of assets in the U.S.

Senator Austin: Assets also include intangibles such as contracts in the United States and issues that are legal rights, rather than just physical assets. Am I correct?

Mr. Higginbotham: That is correct. In our arguments we will include our tangible assets and those contracts and so forth. We have strong moral support from some of our large U.S. customers.

Senator Austin: We are looking at the way dispute-settlement mechanisms work. We are reviewing NAFTA, and trying to focus on how we might gain better dispute-settlement systems with the United States. You can wish us luck in that exercise.

I think the chapter 11 is important in terms of remedies provided by NAFTA, and Canada has paid compensation to U.S. companies in I think three cases. I remember the famous case of the gasoline-additive, which set a number of precedents that I think are useful.

The softwood lumber managed-trade system that the United States is trying to negotiate with Canada suggests that a sliding duty be put in place in terms of the countervail, and that it would be based on market pricing. Is that a proposal that Canfor is favourably considering?

Mr. Higginbotham: We are supportive of the concept of the sliding scale. Based on what our marketing people tell us, we have come to believe that the continuous sliding scale proposed by Weyerhaeuser is probably the easiest way to deal with market considerations. It would also convince the U.S. that there is little one can do to control the market so that you do not step off reductions or increases in taxes, which would happen if you had a step scale system.

We are not subsidized, and we will always take that position. I believe that we are realistic and recognize that some sort of a mechanism that imposes a higher level of tax at the low end of the marketplace is likely what we are going to have to do by way of an interim agreement.

The biggest concern we have is the question of how much of the time we will see lumber trade at that low end, and therefore at the high level of taxes. We think that there is a reasonably high probability that we are not going to see high levels of lumber prices in the next five years.

Senator Austin: We could end up with a kind of trap, where the Americans have a border tax or a tariff that excludes all but our most efficient producers from their markets.

You used the phrase ``interim agreement,'' and the word ``interim'' is important. I thought one of the objectives was a phasing of this tax while the forest policies change. Do you see that as the main concept, and what forest policies are you asking the provincial government to adjust or change in order to meet this U.S. negotiation?

Mr. Higginbotham: We would like to see an agreement that allows an evaluation to be associated with forest policy change that would allow for reduced taxes. When we were in Washington a year ago that seemed possible. It does not seem very possible now. We need to move as quickly as possible to establish the policy change environment and then ask for a changed circumstances review as quickly as possibly. That way the border tax will indeed be interim.

Compared to Mr. Reed or others that you may have heard yesterday, our view is that many of the proposed policy changes that B.C. has suggested produce a clearer market system that also may be good for the industry. The removal of annual cut controls, and the removal of appurtenancy requiring certain mills to continue, will probably be helpful to the primary industry. Mr. Cameron might be able to comment further concerning the secondary industry.

The principal policy matter is the new stumpage system. We can live with it whether it is standing timber auctions or log auctions or whatever the case may be. I think that is the one that is going to make the difference in determining whether or not we can get the CVD order revoked.

In our case, we would prefer this new stumpage system to be based on log auctions rather than standing timber auctions, but, in either case, I think that that stumpage system is going to be the critical factor.

Senator Austin: Following your comment yesterday, I asked questions concerning the cost of the policy changes to those industries and to those communities to which you have referred. I wonder whether you see the necessity of British Columbia and the forest industry providing transitional support while we remove the very long-standing policies on which both commercial and social capital have been invested?

Mr. Higginbotham: There will likely be a need for support of one type or another. We will have to be very cautious that it does not backfire on us in terms of further subsidy allegations. I do think that the B.C. government will actually take away a part of the replaceable tenures that we have within the province and use them to establish community forests, First Nation businesses and so on. That will allow a transition to occur, and the U.S will not see the new businesses as subsidies.

While we are not anxious to have our tenure taken away, I do think that there is some substance to the argument that 80 per cent of a tenure that allows you to have full access to the North American market may be worth as much as the 100 per cent of what we have today.

The Chairman: Mr. Cameron, would you like to make an observation about the question that Senator Austin asked?

Mr. Cameron: Yes. With regard to NAFTA, I would like the American trade attitude of guilty until proven innocent in all trade matters changed. Only then can we have a better system.

Ken said he is not sure how our group would feel about log exports. Yes, there is a big diversity of views within the groups. In general, there are people who are philosophically opposed to log exports, jobs and everything. I am not sure how well they can back that up. Some guys say the major licencees are exporting logs and hopping into the open log market and replacing it. That takes logs away and then there are no jobs. They are surrogate-bidding on small business, forest enterprise sales, which drives the price up. Maybe that is true and maybe it is not.

There is also the view that if Canfor and others are not allowed to export some component of these stands, they will not get harvested. Given that maybe 10 per cent of it might get exported off the coast, 90 per cent of that was going to go onto the open market. Are they buying more than that back to replace the 10 per cent? I do not know. We might find that it is a job contributor. What if it was completely opened up? Does the price of export logs find itself higher than it would be if the restrictions were gone? I think that in general we can say that we do not have a problem with log exports. It is a little higher than we would like to see it. I think the market would fix that if we ever the hemlock issue straightened out. We have issues with some of the mechanisms, TEAC for instance. If we make an offer to buy logs, we have to buy them, but the seller does not have an obligation to sell them to us. These are some of the issues that we have to deal with. So we would like to more control and better management of the situation.

As regards appurtenancy and cut control, we have a variety of feelings. We are generally fine that both appurtenancy and cut control can go. We do not have any issues concerning mill closures. We think that area-based tenures and rotation-age-based leases would be good for the major licencees. That way we could maximize the productivity of the forest and give them the opportunity to do so with some kind of a financial certainty. We would like to see less wood under the control of the licencees. Approximately 87 per cent of the public wood is now under the control of the major licencees and tenures. We would like to see that significantly reduced so that we have access to a much larger volume of market material. We have no problem with some of that being horizontal logs, as opposed to vertical. We would like to see some kind of a mix that works for everyone. In an effective mix First Nations, the truck loggers and Bill 13 could all be added in. The point is this: Less tenure for the major licencees and some kind of a mix of standing and log.

Senator Di Nino: Is your U.S. customer base different than the primary softwood lumber folks?

Mr. Cameron: Yes. Different remanufacturing plants make different value-added products that have unique uses to certain individuals and groups. We do not flood one commodity into a distribution yard. We sell much closer to the end user.

Senator Di Nino: Do you have a different set of stakeholders than the people who sell for the erection of housing or other buildings?

Mr. Cameron: Well, when you say ``stakeholders,'' do you mean in Canada or the United States?

Senator Di Nino: I mean your customers.

Mr. Cameron: We have a different set of customers; they are the people who do the finishing work in the homes.

Senator Di Nino: The finishing carpenters rather than rough carpenters?

Mr. Cameron: Yes, and the yards that cater to their needs. We tend not to put large loads of material into a distribution yard for subdivision out to a work site. We are far more focused. When we sell a product it is usually going pretty close to where it is going to be used.

Senator Di Nino: Do you have stakeholders or organizations that support your position to be exempted?

Mr. Cameron: Not really. We are not well-heeled which is why we have been silent for all these years. We have dug into our pockets and taken contributions from the membership, but we are not wealthy. We received only $150,000 in federal assistance money while the major licencees got $14.85 million. We do not have the funds to build a U.S. lobby base.

We very much appreciate what both the Free Trade Lumber Council and the American Consumers for Affordable Housing have done for us. They have taken a generic approach, but building a lobby down there is good although a bit late. They might not be very strong but it is to have an effective counter-lobby in the U.S.

Senator Di Nino: Mr. Higginbotham, we have heard from witnesses that this problem would more easily solved if there was a united pan-Canada approach.

Mr. Higginbotham: I believe that overall there is a genuine effort being made to have a pan-Canadian approach. The draft policy bulletin that Mr. Aldonas has put out identifies three different examples of how a province might approach developing a policy environment that would get the CVD order revoked.

We do not have a problem with different provinces handling it in different ways. We do have a concern that it is really not up to the Department of Commerce to try to assure us that we have an equal footing or a level playing field across the country in terms of competitiveness.

We hold the position that, while we need to try to maintain a pan-Canadian approach, we need to have the various provinces put their proposals on the table so that an economic analysis can be done to determine whether or not there is relative equality in the cost to the industries in the various parts of the country.

We prefer a pan-Canadian approach, but the details, as always, may have some influence on whether or not we are able to maintain it.

Senator Di Nino: Can you point out the differences between the Ontario's position and the cross-border compromise and B.C.'s position?

Are you concerned about the concept of divide and conquer?

Mr. Higginbotham: I am very much concerned about the divide and conquer approach.

As a B.C. industry we have tried to help our government understand the importance of taking a leadership role that is appropriate. We account for more than 50 per cent of the lumber produced in the country. We do not want to appear to be ready for a deal at any cost. We do not want the U.S. government, through the influence of the coalition, to be able to produce different deals for different regions of the country. That situation is a concern to us.

The countervailing duty order is at the same level countrywide. It is based on a cross-border comparison methodology for the four provinces that were part of the investigation. Washington State, Minnesota, Maine and possibly New York are impacted with respect to Quebec.

We have argued, for reasons that I spoke to earlier, that it was inappropriate. We feel that each province should be able to argue its own benchmark. If the Government of British Columbia has its way, we will see a benchmark that is based on standing timber auctions, and the stumpage of all wood not sold in those auctions will be based on the sales of those timber auctions. In the case of Ontario's proposal, it will be based on Minnesota sales. As a result, we will end up with two very different benchmarks.

Quebec, argues that it ought to be based on log sales from private land, land that is primarily along the St. Lawrence River. We are not opposed to that, even though it produces quite a different benchmark than what we have. Alberta does not have enough of what in B.C. we call the ``small business sales'' to qualify, so they are going to propose some other answers and will likely end up with a mixture.

We are not particularly concerned about the possibility of different mechanisms, but we are concerned about different answers.

Senator De Bané: Mr. Reed's suggested that we put this whole issue into historical perspective. He pointed out that this debate has been going on for 200 years and no trade issue between the two countries has been more intense than this issue of softwood lumber. Since 1789 there have been more than 30 protective tariff barriers raised against Canadian softwood. He said that the reason has nothing to do with the rational argument, but is centred on the market-share and value of the American properties. I wonder if you are going to put an end to that long history.

As you are the largest Canadian company in that field and you are publicly traded, would you please tell what impact the latest round of tariff barriers has had on employment, sales, profits, stock market share, and stock prices?

Mr. Higginbotham: There are a number of economic parameters that may be looked at.

Our share price took a declined immediately after the imposition of the combined duties. The marketplace has been relatively kind to us in that we have gained back probably two-thirds of what we lost in share price. We are sitting in a position at around $9.35 or $9.50 per share, having come down from $11.00 and we will stay there while the marketplace waits to see what happens.

Our 2002 fourth-quarter results came out last Friday; we had a net income of $11 million on sales of close to $3 billion. That is a very low return on capital employed. It is important to point out that we had a fairly significant loss in the third-and-fourth quarters. Most of that $11 million net income came from returned deposits from the final countervailing duty order. In other words, there was no retroactive requirement, and so we got about $50 million back as a result of the return of those dollars, or at least those accruals that we had put in place.

As a result of the situation we find ourselves in, we cost-cutting. We have committed to our board and to our shareholders that by the fourth-quarter of 2003 we will have reduced our costs by $150 million, and we will have reduced employees by at least 300. We are going to use the 2002 third-quarter figures as a baseline.

The Chairman: Three hundred out of how many?

Mr. Higginbotham: Three hundred out of about 5,000. The board has approved some capital dollars to allow that cost reduction to be accomplished, but we have to achieve it.

I should also indicate that our production has not decreased during the period that the duties have been in place. We are no different than anyone else. The way of managing the anti-dumping duty, given the U.S. methodology, is to reduce your unit costs. And the way we reduce unit costs in producing commodity lumber is to produce more lumber.

Senator De Bané: Why is it that the Maritime provinces have been exempted and your group, which has to buy its raw material in competition with the American buyers, has not? You are essentially in an open bidding system.

I really do not understand how your group and your members are still in business.

Mr. Cameron: First of all, some of us have gone out of business. We have had failures and there are a lot of weak companies. When you see employment down 22 per cent, and sales volumes down 30 per cent, you know which way the employment is going. At some point those two numbers are going to meet.

I think the answer is that the Americans do things to the advantage of the Americans. In the case of the Maritimes I feel that given the close proximity to their borders they have just let that particular issue go. I believe that they take into account the stumpage issue and forest policies and the amount of land that is privately owned.

I fully believe that, in our case, they understand we should not be there, but the more harassment they can throw, and the more people that they threaten, the higher the probability that these people will call for negotiations.

We would love to sit there and litigate this thing right through, because the accusations and allegations, do not apply to us. If we had enough time and money we would go to court. We cannot do that. They put us in because they want us to call for the negotiations, because they want a negotiated settlement. I do not think they would fair very well at litigation. They have not done well in the past.

I have in my possession a notice that was put on an employee notice board at a mill called Alberni Pacific. The tone of the notice is that due to current efforts of U.S. legislators in Washington to impose duties against Canadian lumber, we may find that there are going to be layoffs or perhaps a wage rollback. It is dated May 18, 1932. The same situation exists today.

Senator Lawson: Any fair-minded tribunal would agree that you make a compelling case and would simply say that you should be exempt. However, I have had the fortunate experience of spending many years in the U.S. on U.S. negotiating teams and I know from experience that they approach their negotiations a little differently than we do.

The first thing they list is ``casualties''; everything is a war, maybe an economic war, but war nevertheless. A percentage is assigned to the opponent; a higher percentage than they assign for themselves. Now, when a fair-minded person like me insists that these people do not belong and that they should be exempt, the American's see that as a sign of weakness. That is their approach in dealing with these things, and they proceed on that basis.

I agree that you should be exempt, but I think all the committee can do is make a strong recommendation that fairness cries out that you should be excluded. It is just that simple.

Senator Carney: Can you give us a case study of how this works with a piece of moulding? Do you have figures to show how the price increase of a piece of moulding increases because of the way the duty is verified? That would make Senator Lawson's point.

Mr. Cameron: I will try to use some make-believe numbers that I can handle better.

Both my American competitor and I purchase a 1,000 ft. board of lumber valued at $100. He buys it for $100 and takes it across the border. Let us assume that the duty is 20 per cent, so he pays $120, and it is delivered to his business in Ferndale. He proceeds to make the board into a product worth $200 by adding $100 with the value added. Now he is into that product for $220.

Meanwhile, I buy the other the other 1,000 feet for $100, and I take it to my plant and I put $100 worth of value added into it as well. I plan to ship it to the United States. At the border it is considered a $200 product and I have to pay $40 in duty. My competitor is ahead of me by $20 because of the difference between first mill and ad valorem. There are those that will say ``Well, that is okay, we will just make you both first mill, and then you are the same and you will both land at 220.'' The problem is that my competitor has the option of buying American wood. We can also buy American wood but then we have got to make two border crossings and figure in the cost of transportation and so on. He also has the option of buying the U.S. wood that is duty free. Our Canadian product is not.

The whole idea is that they want Americans to buy from American mills. They want to keep our supply out of their market.

Senator Lawson: When we had Weyerhaeuser here yesterday, I must confess I was somewhat troubled by the ease with which they said they were willing to withdraw the WTO action and the NAFTA action. They said that they wanted to totally disarm and go into negotiations. I suppose that attitude is realistic because they operate on both sides of the border.

We have a bird they call a mugwump, and it is famous because it sits on the fence with its head on one side and its tail on the other, and whichever way it falls, it is in pretty good shape. I was thinking of that while they were making their presentation.

I am very pleased to hear Canfor's position. Those of us in B.C. know Canfor as an outstanding Canadian company that has good labour relations, good corporate citizens and a company that stands up for issues for others and for themselves. I am very pleased to hear your position on your Chapter 11 suit and on your position to maintain the WTO and the NAFTA actions. They are strong bargaining chips, and why would you surrender them voluntarily?

The other issue is the Byrd amendment. I do not know what your position is concerning that amendment. I am troubled by the fact that if it is allowed to stand they are talking about $1 billion being paid in duties and penalties. Depending on how long it takes to settle this, that figure might be a couple of billion dollars in duties and penalties. The coalition, suffering now as a result of their own action that is kind of a self-inflicted injury, and good on them, are going to be sitting back there, and there will be a distribution of funds if that is allowed to go through, to share with those companies.

Someone has made an opinion or decision that the Byrd amendment is illegal. However, those of us that understand those kind of amendments know that it obviously got hooked onto another piece of legislation and it is indeed on the books. It will not just disappear. Someone is going to have to take it back to Congress or the Senate, where it came from, and hook another piece of legislation on it and knock it out.

Does the Byrd amendment still stand, and could it apply to this issue?

Mr. Higginbotham: The B.C. Lumber Trade Council has hired a very expensive Washington lawyer who was President Clinton's U.S. trade representative, Charlene Barshefsky, who also represented B.C. in one of the previous countervail issues.

Ms Barshefsky has indicated to us that Canada does not have an awful lot of chips to play in this, and therefore I am surprised Weyerhaeuser is interested in giving up. Ms Barshefsky has indicated that is one of the chips we have to play.

In the case of the Byrd amendment, her view is that the U.S. government, when the final decision comes out of WTO, will almost certainly indicate that the Byrd amendment is not legal, and will say accept it. However, nothing will be done about it as long as Senator Byrd is either in the Senate or alive. There are apparently a number of similar kinds of situations where they have accepted the findings of WTO or of NAFTA, but nothing happens as long as the instigator is still around.

We think that it would be an awful thing to have that billion dollars or any additional money flow directly back to those companies. Our position should be that they do not belong to any government, they belong to the Canadian companies that have put those cash deposits in place, and they should come back to us if we get an agreement. That will continue to be our position.

In the situation that I act as a witness, I think that it will cost us something to get a deal. For example, we have talked about Canada perhaps funding the binational panel or some sort of a North American lumber marketing association that we might put together to build a wood market to defend ourselves against European imports and to defend ourselves against steel studs and so on. We might use some of those funds to fund some of those kinds of activities, but at this point in time, we would be very reticent to say that the Byrd amendment should have any influence on how those funds are distributed.

The Chairman: The role of trade representatives is interesting. I ran into Mr. Clayton Yeutter in Geneva, who is on the board of Weyerhaeuser. I cannot recall if he was the trade representative for President Regan.

Senator Carney: He was my counterpart.

The Chairman: Was he? He was the on the board of Weyerhaeuser.

The Chairman: I want to thank our witnesses to appearing this morning. It has been a very interesting morning.

I would like to introduce our next two witnesses, Professor Helliwell from the Department of Economics at the University of British Columbia, and Professor Cohn from the Department of Political Science at Simon Fraser University.

Please proceed.

Professor John Helliwell, Department of Economics, University of British Columbia: Senators, I tried to trick the committee into getting everyone a copy of my very short and new book on this topic, arguing that it is timely for the issues facing this committee.

The Chairman: What is the name of it?

Mr. Helliwell: The book is called Globalization and Well-Being. I gather that it is not possible for the committee to acquire things as extensive as even very short books, so I would be honoured to leave a copy with you if you wish to consult it further.

Senator Lawson: What is the retail price?

Mr. Helliwell: Unfortunately the retail price at the moment, because it is still in hard cover, is $40, which is ridiculous, but it will be $20 in a couple of months in paperback. I for one do not object to the use of a photocopy machine, but I shall try in five minutes to give you a highlight or two that focus directly on the issues before this committee. The book itself reflects a confluence of three main strands of research. I will focus on U.S.-Canadian relations.

One has to do with the discoveries others have made, and I have found to be accurate, over the last decade that show that economic and social activity is much more local, much more regional, and much more national than anyone thinks it is in the face of, and in spite of, and in the context of a global reach that exceeds that of previous generations. The implications of this are only now being fully understood. It is forcing us to re-think international economics, what governs trade, what governs the distribution of economic activity, and so on.

The second strand of research relates to social capital and how communities operate, what is required to make them successful, and what glues them together. The research looks at their notions such as bridging social capital that bonds people with different interests, and bonding social capital where it has sometimes has an us-versus-them characteristic.

The third body of research has to do with subjective ``well-being.'' When studying social capital and national societies and trying to figure out some way of linking economic outcomes and things like social capital and how they influence people, where they live and how they should impact on government decisions, I discovered there was a large body of data on people's own self-assessments about how good their lives were. These data are now available from 60 countries and it is possible to put them together to find out what kind of policies and societies work. We can find out how important the subjects of income, education, employment, the quality of the government, and individual human connections at community level measures of quality of life are to the people of these 60 countries. The data has been taken for the last 20 years and as it turns out all of those things are important.

How have those three strands of research come together? They have come together because I have discovered that, while nations are still very distinct economically and locally, the effect of distance on diminishing trade and economic activity is way more than justified by transport costs. The effect of national borders on trade densities more important than would be explicable in terms of any barriers that are intentionally put to that trade.

It turns out that local people know local tastes and can meet them. It turns out that economies of scale are much less important than are previously thought by many to be. Global reach often means reaching further in order to destroy the whole operation. It is very easy to go further than your competence will permit. It is very easy for locals to see opportunities and to exploit them in an efficient way to operate within the current institutional and social environment. They can see what locals want and they can produce it. I am not saying that it should be more local than it is, I am saying it is more local than people think it is, and I am trying to help you see, as I have struggled to see why that is the case.

Now, it is also true that these local communities and national communities differ enormously in how well they satisfy their citizens. And it is also true that the well-being research shows that increasing levels of income per capita have lower and lower payoffs and quickly become negative, or at least zero, indistinguishably different from zero, and that level of income per capita is a level beyond past which Canada has already moved. Even within societies, the improvements of subjective well-being as incomes rise are quite sharp over the first part of the income distribution, half-way up for countries like ours, the whole way up in poorest countries, and beyond that is there is very little in it. A lot of the other determinates of subjective well-being show no signs of diminishing returns as things get better.

Let me now focus this quite directly on the U.S.-Canada relationship. There is, in Ottawa and some place elsewhere in the country, this idea of whether Canada should be focusing on a North American agenda more than a more balanced multilateral agenda. All of the research tells me that that is almost surely a negative-return operation. Now, why is this the case? It is the case on both sides of the equation. In fact the economic returns from further integration have essentially been fully exploited such as they were.

Let me explain a little bit why I am sure that is the case. Remember the locality research, ``the borders research,'' as I call it, shows us that countries are much more trade intensive within their borders than across borders. This is true with countries within the E.U., it is true of Canada, and it is true of any pair of countries that you can think of. If there were huge new gains available from expanding trade intensities across borders, then you would find small countries to be poorer than rich countries, because rich countries already have within their own borders a much bigger set of markets. Systematically that is not true. In fact, the higher-income countries tend to be not the larger countries across the industrial countries. So once you have got trade possibilities as rich as they already are among the industrial countries, there is nothing further to be gained in income per capita by raising those intensities. And, of course, that is the only argument, as I understand it that is given for getting more under the U.S. umbrella. That is to chiefly get more income per capita closer to the U.S. regime. Well-being research shows that there is not well-being effects in that, and secondly, the extra-trade relationships are not likely to produce that, even though, this research shows, that cross-border trade is still much less intense than interprovincial trade.

The well-being research shows quite clearly that GDP per capita is highest in the U.S., and Canada and a bunch of other countries are not far off the pace, but definitely below the U.S. per capita. When you get the measures of subjective well-being, the reverse is true. The world leaders are the countries of northern Europe, with Canada just behind, and the U.S. more behind Canada than Canada is behind the leaders of northern Europe. When we put together the equations and models and ask why that is, it turns out that there are a range of things from higher levels of social capital in terms of cohesion and mutual trust existing in Canada, education levels, health levels that are determinates of subjective well-being that are higher in Canada than they are in the United States and still higher in most of the Nordic countries than they are in Canada. The World Bank's average of quality of government measures probably give Switzerland the top and then some of the other Nordic countries very close behind, Canada very close behind that, the U.S. further behind on that measure. A whole range of these measures depend on Canada's existing separateness and independence action being maintained are in fact continuing to produce higher levels of subjective well-being for Canadians than Americans, and the ability to keep doing so is obviously pretty fundamental.

If you switch to the global aspect, the third element of this, there is a lot of reason for keeping independence on all these other policies, simply because they are the ones that continue to produce higher levels of subjective well-being when the magic is gone from income per capita. There is not from the tighter linkages between the two still untapped to get in terms of incomes per capita anyway.

The third key point I would like to leave with you is that, seen on the world stage, Canada's influence for the good, all these factors that have influenced the quality of life, is surely better as an independent contributor to and builder to the multilateral system than as a second-class member of the group under the U.S. umbrella. Those who think that they will acquire more influence on world policy by getting a seat on the U.S. team will never have an equal seat. Rather than trying to use what independence Canada has as a member of not-power-heavy players in the building of the world system and the transfer at the bilateral basis as well as on a multilateral basis of the tools to other countries to allow them to acquire the stability and quality of life that we are fortunate enough to have in Canada. Canada is one of a relatively small number of countries that is in a position where they have resources, and I am now talking about human, institutional, educational resources, trust resources, to offer other countries unhindered by the taint of power or geopolitical power interests. It is much easier for us to give and it is much easier for other countries to receive what we have to contribute, and it is this lower level peer-to-peer contacts that are the long runway of building well-being at the world level in the four-fifths of the world that is currently well behind.

The Chairman: Thank you very much.

Professor Theodore Cohn, Department of Political Science, Simon Fraser University: When I was first asked to appear before the committee, I wondered whether I would be an appropriate person to do so, because in the last about ten years I have been focusing on more global trade, monetary relations, politics of issues than on Canada-U.S.- Mexico, but as I thought about it, I felt that, in a more general sense, I could provide something relevant.

For many years I did focus on U.S.-Mexico-Canada trade issues, mainly related to agriculture, and I shifted to more general concerns, and I would like to discuss that briefly. Because of the change, my discussion is more involved with some personal reminiscing than I usually do when I discuss these issues.

In 1982 for six months I was visited El Colegio de Mexico in Mexico City. At that time I developed some distinct impressions about Canada-U.S.-Mexico relations. The first impression I developed was that no one was terribly excited that I was from Canada. In fact, the Mexican word for Norge Mexicano did not even include Canadians. Whether they were praising or criticizing Canadians were not part of their vision. When they talked about gringos, they were not talking about Canadians. So in the same way, when I came back, I became more aware of how most Canadians view North America as bilateral, and I feel, despite NAFTA and all the nice-sounding statements, we still tend to view North America as bilateral; Canada and the U.S.

I think the only ones who have a more trilateral vision in North America are Americans, and even a lot of them do not, if you compare southern U.S. Members of Congress with northern U.S. Members of Congress, but at least they have a more trilateral vision.

I think this is a big disadvantage to us. I am speaking to academics as well as policy makers in their research. I think this a more trilateral view would give us many more points of comparison. While listening to the software discussion it brought back memories of looking at issues concerning U.S.-Mexico relations. Those memories included countervailing duties and anti-dumping duties that were brought against Mexican tomato exports to the U.S I think we are missing a great opportunity in our persistence with the bilateral vision.

The second impression I had in my 1982 visit was how much Mexican scholars were doing in-depth studies of the United States. In fact, there was even a separate centre for the study of the U.S. presidency. I have been in a few Canadian universities and found them to be lacking in the study of the United States.

I feel this is for two reasons. First, Canadians incorrectly assume that we are very knowledgeable about the U.S. I can go into that more. Second, because Canadians often believe we have a special relationship with the United States, and again I think that is still part of our vision, we have been less interested in studying U.S. policy in general, and we focus primarily on U.S. policy as it relates to Canada.

A key element of this special relationship has been Canada's request for exemptions from injurious U.S. policies. One could go back to the 1960s and earlier, but in the 1980s we again sought an exemption via the Canada-U.S. Free Trade Agreement from U.S. countervailing and anti-dumping duties.

The current issues related to softwood lumber exports, and not far behind are issues related to other western Canadian issues, like the Canadian Wheat Board, indicate that we cannot count on being exempt from various injurious U.S. policies. I think it is therefore necessary for Canadians to study, not only U.S. policy as it relates to Canada, but also U.S. trade policies in general.

In 1999 I wrote a book, UBC Press, entitled The International Politics of Agricultural Trade, Canadian American Relations in a Global Agricultural Context. Considering that agriculture has been so important to both Canada and the U.S., I tried to figure out why a book had never been written on the subject. I came to the conclusion that Canada-U.S. agricultural trade relations is not Canada exporting pork to the United States, the U.S. exporting dairy products to Canada, et cetera. A very big part of Canada and U.S. agricultural trade relations are the issues that are stirring up now again related to the Canadian Wheat Board. The issue of third countries, that if you do not look at third countries, you miss 80 per cent of Canada-U.S. agricultural trade relations. It involves our cooperating with the U.S. against Japan and the European Union sometimes. Other times it involves us in direct collision with the U.S. over wheat exports to third countries, and this is part of Canada-U.S. agricultural trade relations.

Let me just end with a couple of recommendations. What should Canada's policy be in response to what I discuss as U.S. changes?

There is so much in the paper right now about the U.S. being the only super power in the world. If we try to talk about trade no one will listen. In my book I mention governing global trade. I use a pyramid drawing to show that the European Union is at the same level as the U.S. on trade issues, and I trace how the European Union got to that level. The U.S. has been declining as a trade power. That, in my view, has made the U.S. more aggressive towards trading partners like Canada and that aggression brings about the issues such as countervailing and anti-dumping duties.

What should Canada's policies be in response to the U.S. changes? Canada should emphasize trade multilateralism in its relations with the U.S. for two reasons. Trade multilateralism emphasizes the rule of law and therefore limits the ability of larger partners to seek side payments. I discussed side payments in my submission. Secondly, the U.S. will alter some of its policies that affect us only in a multilateral setting. Agricultural export subsidies, contingent trade measures, such as countervailing duties and anti-dumping duties are included in that list. This is a multilateral issue that concerns many countries, not only Canada, and if we were to get real U.S. change there, it is going to be multilaterally.

Second, Canada benefits from the existence of a range of plurilateral groups. I mentioned in my that book I had the privilege of getting access to documents on the quadrilateral ministers, group of trade ministers from the U.S.-Canada- European Union and Japan Foreign Affairs, and it was a fascinating experience going through those documents, and it changed a lot of my views about the values of a lot of these plurilateral groups.

I agree with Mr. Helliwell that upgrading NAFTA to a customs union would not be in our interests for a variety of reasons.

Senator Carney: I am entranced by both of your arguments. It is refreshing to hear economists talk about emotions and feelings and sentiment and, you know, seat-of-the-pants thinking, because that is what politicians have to do.

Yesterday, Mr. Harris while discussing the U.S. and Canada argued that we experience a reversal of economic integration trends. When I suggested that some people think that that might be a good thing, I think he thought that I was being facetious and he dismissed the argument.

Are you saying the same thing? Do you believe that the reversal of economic integration trends between Canada and the U.S. might be a good thing?

Mr. Helliwell: That may be carrying my point a little further than I would like to make it. What I was suggesting was that, in terms of policies devoted to increasing the intensity of the bilateral linkage relative to other linkages, there is no gain. In fact, there is almost surely to be net costs.

If you were thinking of decreasing the intensity of north-south linkages, I would say it was only if that was a by- product of making them equal multilaterally. You could imagine that there have been some bilateral preferences. If we went multilateral it would lead to a lowering of the north-south intensity, and it should. Many of the people who argued that the FTA was simply a first step in a more multilateral operation have disappeared. That always to me was the case for the FTA. So to make it more multilateral might mean that some of the trade that has been shut out with the rest of the world by the preference to north-south would in fact increase. Some of the gains in north-south trade have been at the expense of trade with the rest of the world, and that is bad news; there is no gain from that. So, yes, it is possible.

It is also possible that the behaviour of private traders and investors may be to pull back from a view that if you are not in the U.S. you are nothing. The thinking was that the U.S. was the only place to set up operations.

A lot of people have lost a lot of money on very false assumptions about the ability to operate in the U.S. market and vice versa. Because these markets are so separated, people who operate in their own home market have an advantage and still have an advantage, and that has been long misunderstood. If people increasingly understand it and it leads more people to be masters at home and experts close at hand, then that may lead to, not a decline in trade intensity, but it would probably be economically efficient.

Senator Carney: Professor Cohn, you make a similar argument, but you are talking in terms of how we benefit from the remains of plurilateral as well as multilateral groupings. When you talk about some of them, like the Quad or the Cairns groups, the creation of these groups came from a feeling of being excluded from the club.

The Aussies and the New Zealanders started the Cairns Group, because they felt the Europeans and the Americans were a bunch of pommy bastards, to quote Mike Moore, later head of the WTO.

We formed the Cairns Group, because we were outsiders, and we got all of the rest of the agricultural countries affected in the agriculture trade together. The Quad Group was essentially the same type of organization. APEC is another example. You cannot form an institution by decree. How do you create these plurilateral institutions?

Mr. Cohn: First, I have to say that I am a political scientist, not an economist. My main area is international political economy. When the Quad was set up in 1981-82, there was a Group of Seven meeting in Ottawa, and the trade ministers of the U.S., European Community and Japan met without Canada; Canada was not included. The group thought it would be a trilateral group rather than a quad. However Canada complained bitterly and was eventually included.

These groups are very important to Canada. The U.S. has been following a go-it-alone policy and a bilateral policy lately, even going so far as to form bilateral free trade agreements with Latin America. When the Quad has met Canada has been at the table, and this participation has given us the opportunity for form crosscutting alliances. When the World Trade Organization was formed Canada joined with the European Union. The U.S. did not want in at first, nor did Japan. That situation illustrates the importance of these groups.

I agree with you they are difficult to institutionalize, but until recently the Quad has been very active.

Senator Carney: I was involved with the Quad. All of my negotiating team was made up of women.

While listening to Richard Harris yesterday it occurred to me that we need some sort of mechanism to explore these thoughts that are not on the immediate horizon of finance or foreign affairs. We are very much focussed on the short- term and neither have the capacity nor the institutions to do medium to long-term.

Do you think we would benefit from having an economic-council-type institution reinstated in the country where we could explore some of these mid-to- long-term views?

Mr. Helliwell: I think the economic council was on balance a net contributor to economic thought in the country. It had some tendency to get overly bureaucratized, in a sense an administration relative to research, and the opinion focus took a bigger share than it does in most more fly-by-night or academic operations.

Senator Carney: They are not oxymorons?

Mr. Helliwell: Which?

Senator Carney: ``Fly-by-night'' and ``academic''?

Mr. Helliwell: To combine them or to separate them?

Senator Carney: Your choice.

Mr. Helliwell: An academic operation does not change very quickly, whereas the fly-by-night operation does. I was using ``fly-by-night'' in a complimentary rather than a derogatory sense, in that purpose-built task forces can be very important, and can deal with longer-term issues as well as shorter.

I understand that the royal commission has been devalued by overuse and sometimes has been expensive relative to what it has been able to produce. However, the model, of a focused, purpose-built group, may focus on specific issues more efficiently than simply setting up an independent body whose job is to think of everything in the long term. When it does that it may not end up being as focused or as fast moving as you might wish it to be.

Mr. Cohn: I agree with Professor Helliwell. I feel that there are major advantages, and it is absolutely critical to get beyond the moment and look more broadly. I found it interesting that Professor Helliwell said to ``look locally,'' while I suggested to ``look globally.'' I agree that it has to be linked to policy so that it is not up there somewhere and the linkages cannot be drawn.

Senator Setlakwe: Professor Helliwell, you said that a multilateral agenda is better than an economic integration with the United States. We have been trying for many years without success to do something with the Europeans. However, Mexico has been successful in establishing a free trade agreement with the Europeans and is in negotiations with Japan. The Americans are in talks with both the Europeans, and Mercosur. We are left out as if we were just the tail of the dog. I feel very strongly that we must do something to broaden our trade relations multilaterally, yet we do not seem to have been very successful with the attempts we have made. How do we go about doing this?

Professor Cohn, you spoke about agriculture and to the American current-account deficit and the subsequent rise of protectionism within the United States. We have had wheat conflicts with the Americans and over the next ten years they will be imposing $80 billion of extra agricultural duties. The Europeans do not seem to be seeking anything at all with regard to their agricultural subsidies. Where do we stand in regards to that situation?

Professor Helliwell, you mentioned that interprovincial trade is much more intense than cross-border trade. We are not doing very much to eliminate interprovincial trade barriers within Canada, are we?

Mr. Helliwell: I have spent some time trying to see if there is evidence of interprovincial border effects. Most of the evidence suggests that there is not much. Although there are some irritating barriers to mobility and skills in some local near-border markets, the volume involved is very small. Those people who argue that interprovincial barriers are higher than those between countries, either legally or in effect are way, way off the mark. I did sit on one of the relatively few panels set up under the agreement on internal trade relating to milk distribution in the Maritimes, and there are no teeth in that agreement. Our report was lodged and is now public, but it is the force of public opinion that will make it best if anything does, and that is not a very strong force when these local pressures are big.

I think it is worthwhile improving the quality of the interprovincial trade network, but I would say it is on a basis of where it is already very rich and deep and, in fact, much more intense than the network of interstate trade in the United States, for example.

I think that the WTO is probably the arena to deal with most multilateral operations. However, to expect WTO to deal with our own particular problems quickly is probably unrealistic.

Senator Setlakwe: Are you are aware that there are meetings scheduled in Greece between the European Community and Canada in March or April and another one in December to discuss trade enhancement opportunities between the two?

Do you know they are not going to discuss trade liberalization, or the removal of the trade barriers, but they are going to discuss investment regulations, movement of people and professions, et cetera.

Mr. Helliwell: That is exactly the sort of place where discussions could be very fruitful. Indeed, you might say that in some dimension it is simply moving to the inter-multilateral agenda. Those are the kinds of discussions that have been going on for much longer between Canada and the United States. In those discussions they look at places in the trade and mobility agenda and decide where there seemed to be limitations that can easily be dealt with that would lead to mutual advantage if they were removed. That is precisely where such discussions should be focused.

Mr. Cohn: Your questions are very good, yet difficult to answer. The issue of Canada's trade relations with Europe goes back to the Trudeau 1970s. Trudeau attempted to relate to Europe and Japan, yet all we ended up with in 1976 was a contractual link agreement with Europe, which didn't mean much of anything.

Part of the problem is that we are not a third world country and not European. It is possible to have an associate agreement with the European Union if you're European or if you are a third world country. I do not believe that a special link with the EU is going to happen for us. If the U.S. signs a free trade agreement with Europe, then maybe we will be involved too.

However, as far as trade enhancement goes, even back in the 1970s, when they talked about the contractual link agreement, it was stated that it depended on business attitudes and a willingness of business to be more creative and diversified in the way it looked and went beyond just the U.S. It is difficult to legislate everything. I think that that is a critical factor, and if these meetings contribute to that, I think it would be helpful.

We have to become more diversified. We have to look to other countries other than America and Europe while we are in negotiations for free trade. Our findings show that when we attempted closer ties with Europe and Japan in the '70s they were more interested in our natural resources than they were in our processed products. We have to get beyond the European focus and start looking at Latin America, which is an obvious area for us.

Part of the agricultural problem is that every country is hypocritical in their agricultural trade. In our dairy and poultry products sectors we are protectionist, while we are more free trade oriented in terms of wheat, where we are more competitive. Interestingly enough, both of these issues have been discussed in The Globe and Mail these days.

In dealing with the main U.S. problems over agricultural export subsidies on products like wheat, I believe we must work with plurilateral groups like the Cairns Group, and multilateral groups like the WTO,

Senator Di Nino: Professor Cohn, I have been told that we have been ``marginalized'' by the European Community. I understand that the Mexicans have been very persistent at the talks while Canada has not. Do you agree with me or not?

Mr. Cohn: I cannot think of an economically developed country, outside of Europe that has a free trade agreement with the European Union. The U.S. has been highly critical of the associate agreements because these agreements are not totally reciprocal. The EU has justified these agreements, ``free trade agreements,'' either because they are with Europeans and they could be on their way into the market, or they are from developing countries. The U.S. would not accept Canada having a free trade agreement with the European Union.

We have to look at the political economy and the economics of the agreement and realize that the countries involved are indeed either third world countries or European countries soon to join the European Union.

The Chairman: Ambassador Phillips of Mexico told me that their deal with the U.S is a very comprehensive free trade agreement. I had been under the impression that their deal would be one of those free trade agreements that covers a limited range of areas.

People do not seem to realize that the very expression ``Latin America'' is a French expression. It is not a Spanish expression. The French have played a unique part in Latin America's history.

Senator Austin: Well, the French had quite a role in Mexico and one or two other places at one time or another, but what I would like to do is pursue two very different lines.

I would like to look at the issue of NAFTA and establish some ground rules. What was your position on the NAFTA negotiations when they were proposed? Did you believe that this would lead to undesirable integration in the U.S. economy? What were your starting positions, because our study here is on NAFTA 15 years after it was incepted? What was your starting point 15 years ago? Professor Helliwell.

Mr. Helliwell: The Department of Finance set up the general equilibrium modelling based I think on Richard Harris' path-breaking modelling work. I took the view that the modelling overstated the likely benefits. Within the adjustment period, GDP per capita was to rise by eight per cent and that would have more than halfway closed the gap between Canada and the United States with an expansion of north-south trade of approximately 30 per cent average.

I am an empiricist, so I do not tend to take positions independently of what I can convince myself or other people can convince me the evidence shows. I went back and did a study that was published by Industry Canada a year or two ago, which is the effects of the free trade agreement on interprovincial trade and north-south trade. I was able, without going through the Official Secrets Act, to actually get out of the Department of Finance the study that was done at the time about the effects on specific industries. They held that very close to their chests at the time, because the whole idea was there is bound to be some losers, and if you let that out, then the politics would become more difficult. Now, for an academic like me, that is not the way we think of things. We say research is research and you get all the detail, and if there are trade-offs you accept them and discuss them.

The study showed that the actual trade increases relative to the baseline and were roughly twice as much as were forecast in the modelling, but the income per capita increases were not what they had been expected to be. The modelling had large assumed economies of scale. In fact, what ended up happening was a lot of the U.S.-based operations dropped their Canadian ones in order to simplify.

Some of the industries that were worried about being hurt by the FTA have been great winners, the textile and clothing industries, for example.

The Chairman: And the furniture industry. I remember the furniture people saying they were all going to go broke.

Mr. Helliwell: Exactly. Three come to my mind: the wine, furniture and textile industries. It is difficult to predict which industries are going to succeed once they have adapted to the new conditions. Some found out that they were pretty good when they we forced to try to be.

I never thought the gains would be as big as they were forecast. I thought they would be bigger than they have subsequently been seen to be. I was surprised on the gain side; lower than expected, and I was surprised on the trade- creation side; higher than expected.

If someone was to come along with an economic modelling that showed big gains from a new expansion, I would be much more sceptical than I was the last time, and that is in part because the evidence is now much clearer and the experiment has indeed been run.

Senator Austin: Was NAFTA the right step to take for the Canadian polity?

Mr. Helliwell: I would have preferred then, and even more so now, that we had become more multilateral than bilateral. I think that would have put us in a stronger economic and political position. I had that opinion even before I learned about the well-being data and the research.

Senator Austin: Is there any way we could calculate in economic terms how much of the economic result would have taken place without NAFTA, and compare that to the benefits of the NAFTA agreement?

Mr. Helliwell: People have attempted studies of that kind. There are some models that show huge gains from further trade in terms of welfare, not just GPD per capita. That model is based on the notion that you are much better off to have 90 per cent of your products produced in the United States and 10 per cent in Canada than to have it all produced in Canada. That is a theoretical model.

The model that I am drawn to employs the notion that preference is really quite local and is better understood by local people. The evidence in favour of the view that there are big welfare gains from more creation is simply not there.

Mr. Cohn: I would like to address your question in a more general sense. You began with NAFTA rather than the Canada-U.S. Free Trade Agreement. I feel that once we had committed to the Canada-U.S. Free Trade Agreement that NAFTA became a different issue. We still would have had a free trade agreement with the U.S.

Senator Austin: I really meant the entire process from 1988 to the present date.

Mr. Cohn: To know what would have happened without NAFTA is difficult. In the 1970s I did a study on the cheese trade and I conducted interviews at the Department of Commerce. At that time Britain was just entering the European Community. Britain had to compensate Canada for the loss of cheddar cheese trade. I pointed out the third option policy to the Department of Industry Trade and Commerce, and I found that the policy meant nothing to them.

Despite the third option policy, in the 1970s our trade with the U.S. kept going up, while at the same time trade with the European Community declined. We had few choices as to how to react when the U.S. started to become protectionist in the early 1980s. Did I think it was a good thing? Not necessarily. I am not sure what our options were.

Senator Austin: Professor Helliwell, how does the U.S. hard-currency policy the strong-dollar policy, affect Canadian trade? Have we experienced a positive advantage by the decline of the Canadian currency against the U.S. dollar? Has that given us a trade advantage in the U.S. market, or has the strong-dollar policy affected capacity in Canada?

Mr. Helliwell: The strong-dollar policy accepted by the administration has been the single most important factor leading to the increase of exports from Canada into the United States. It has been quite extraordinarily important, and any evaluation of the FTA has to account for that. During the pre-FTA period, 77 per cent of Canada's exports went to the United States; that figure is now 87 per cent.

On the import side, Canada's imports to the United States were two-thirds before NAFTA. What do you think they are now? Two-thirds. What we see is a huge gap between exports and imports, and that has nothing to do with the symmetric effects of the FTA, it has everything to do with the currency. So if you want to know the effects of the FTA on trade, you then have to look at exports and imports together.

The Chairman: That is very interesting and very important.

Senator Carney: I want to make the point that the increases we driven by auto production and have more to do with the Auto Pact than it did with the FTA. I would like you to explore that. The point that you have made about the 77 per cent to the 80 per cent increase reflected the increases in auto production.

Senator Austin: But it was driven by the currency differences, and therefore the productivity differences between Canada and the United States.

Senator Lawson: We have not discussed Mexico. In my former life as a labour official in the U.S., I represented many Californian companies including Jolly Green Giant. We had them under contract. Many of those companies went to Mexico and made use of the maquiladoras and other advantages offered to them.

We sent a university study team to follow the product down to Mexico to see what happened after it got there. In those days we had contracts and the workers were being paid between $12 and $15 an hour. What did we learn from the study? We learned that the workers were getting 50 cents an hour.

We also learned from some of the employees that were interviewed that quite a number of children were working in the plant. Mexican officials had assured us that children were protected through labour laws, but we found out otherwise. Some of these 14- and 15-year-old children had worked in the factory for a number of years.

In a film that the study team had taken we saw the workers preparing strawberries. They were washing the strawberries, and as we expected, the water ran red. They were getting the water from a stream running behind the plant. What we found out was that the water was coming from a killing plant 100 yards up the stream.

That video caused some concern when this was shown in the United States, and particularly in California and so on. As a result they demanded and obtained federal legislation to have better controls. The Mexican companies had been sending the strawberries to California and other states and identifying them with the names of American companies.

I have to touch on the issue of corruption. Last Christmas President Fox stood at customs and immigration and watched over 500 illegal workers return home from California to Mexico. He had been notified that customs officials had been searching the workers' cars and stealing the food that they were bringing home to their families. It was quite courageous of President Fox. He had put all the customs and immigration people on notice that they would be fired if that corruption was repeated. The president was there at the border and personally welcomed them back to try to put a stop to this kind of corruption.

Rudolph Giuliani of New York fame is an advisor to the New York police department. He advised the Mexicans to put up video cameras to catch corruption on film. The tapes caught 100 policemen taking payoffs for parking tickets. The standard rate, by the way, for a payoff is 100 pesos. Acting on this information the authorities called in the senior police officers to deal with the problem. Fourteen of them showed up driving stolen cars. That kind of corruption can weaken your confidence in the system.

In my last example of corruption one of our B.C. executives went to Mexico City, took a cab to his hotel, stepped out of the cab in front of the hotel, and encountered four would-be robbers. He was 25 feet from the front door of the hotel.

He said when he looked at these robbers he knew that they were amateurs, because the way they held their guns, and so on. He told them to take his watch, wallet and suitcase but not to shoot him. When he checked in the front desk employee commented that robberies happen all of the time. When he was asked for his luggage and he recounted the story of the robbery he was told that the cab driver was an off-duty police officer. The police officer likely had rented the car, so instead of having to go look for the victims, the victim came to him.

The point I am making is that the corruption is so bad and so unbelievable, that I do not want buy products that come out of sweat shops filled with child labourers and so much corruption. Is there any hope, or how long does it take to turn that system around?

Mr. Cohn: I have to agree with you that issues such as sanitation, pollution and corruption are big problems for Mexico. Mexico is a developing society and I hope that, as the society develops, that those problems will be resolved. Many third world countries think that we have the luxury to think about things such as sanitation and pollution but forget that they were major issues in our early stages of development. We forget about the British industrial period in North America and all of the problems that it involved. During that period the pollution was deadly, they had child labour, and corruption et cetera.

I am not an expert on societal issues. It is a very complex issue, but I believe that as development moves on the whole society benefit's from it. When a society is without a social welfare system of some kind there are always problems. I have also seen the poverty. I have seen neighbourhoods in Mexico City where they were without indoor plumbing. I have seen the garbage dumps where people have to live.

When a country is without a social welfare system and you lose a job, you can really lose everything. I believe that situation contributes, in no small part, to corruption. It is easier to be less corrupt when you know if you lose a job you can get welfare or EI et cetera. I can only hope that the system will get better.

Senator Lawson: I hope so, too. My experience with the Senate hearings on the Mexico-Canada free trade agreement was remarkable. When I asked the Mexican representative some of these questions, he became concerned and inquired who I was. One of our officials pointed out that I was a former labour leader. The representative went on to tell me about free trade unions and so on. I challenged him and brought up the Coca-Cola plant strike. During that strike police officers killed four workers, and surprise, surprise, they happened to be the four union leaders. Why were they killed, because they did not take the Pepsi test?

Mr. Cohn: You are correct in raising these issues but I do believe that there are also many positive aspects of this society. It is a different culture in many ways, and I think more understanding and communication is what is needed to realize the desired changes in some problem areas.

Senator Lawson: Forgive me, Mr. Chairman, for raising it, but the debate was at such a high level, I thought I would lower it a notch.

Senator Carney: This follows on Senator Austin's earlier discussion of NAFTA, the FTA. In your book you have suggested that Canada has pretty well shot its bolt on the benefit to be gained from these bilateral agreements such as NAFTA or trilateral agreements such as NAFTA and FTA. In the future will we see a situation where we have collected most of the benefits, but we have yet to pay most of the costs?

Mr. Helliwell: The intent was to buy easier access to and less danger from countervailing duties and so on, and that has not happened. So that is one extra dimension where the payoffs were not what they were promised to be. The FTA has not made those risks worse than they were otherwise. It simply did not deal with them. I do not see that we have gone so far down that road that we need feel we have to carry on. That is simply false by all the evidence that I have seen. It all relates to common currency, customs union and so on. I am convinced that the biggest danger is to think that because the road has not got you to where you want to go, that you are on the right road and you need to go further.

Senator Austin: This concerns the average age of the labour forces in Canada, the U.S. and Mexico. I wonder whether in our trade relationship in North America we are going to need, and in particular the U.S. is going to need, the Mexican labour force to take the place of the declining birth rate. The U.S. has also to deal with the declining immigration from other parts of the world to maintain their economic viability. Please give us your view of whether this is a salient issue for this committee to deal with in looking at the overall trade relationship at the trilateral level.

Mr. Cohn: I think the whole labour issue is a very important issue to deal with, and not only the issue of relying more on immigration for an adequate labour force, but also for retraining of workers. I do not think there has been enough emphasis placed on that issue. We have to deal with loss of competitiveness in older industries, whether it is textiles or whatever, and retraining, so that we can become more technologically competitive.

Senator Austin: How important is Mexico in the trilateral relationship in terms of the mobility of its people given the age dimension, which is so different from Canada and the U.S.?

Mr. Cohn: Well, certainly immigration is going to be important to both Canada and the U.S. in terms of an adequate labour force, and Mexico would be one possible source, without a doubt. There are also a lot of, as you know, border restrictions, and so Mexico would be one possible source, yes.

The Chairman: I want to thank our wonderful witnesses.

I have often wondered what would happen if the U.S. actually did close its Mexican border to illegal Mexican labour. What would happen to the California horticultural industry? Would it not simply move to Mexico, which seems to me is what is going to happen? But that is just an observation, not a question.

Mr. Helliwell: One thing you might want to think about is that by the time California eventually gets into sensible price for its water, that will also reform its agriculture in a way that is parallel with what you are suggesting.

Mr. Cohn: I think illegal immigration, while it is useful, will continue.

The Chairman: On behalf of my colleagues, I want to again thank our two witnesses, who have been extremely interesting.

The committee adjourned.