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Proceedings of the Standing Senate Committee on 
Foreign Affairs

Issue 13 - Evidence


OTTAWA, Tuesday, April 1, 2003

The Standing Senate Committee on Foreign Affairs met this day at 5:04 p.m. to examine and report on the Canada- United States of America trade relationship and on the Canada-Mexico trade relationship.

Senator Consiglio Di Nino (Deputy Chairman) in the Chair.

[English]

The Deputy Chairman: I call the meeting to order, honourable senators.

Before we commence, may I just draw your attention, for those of you who have not had the opportunity to say hello yet, to former SenatorStewart, who is visiting us today. Obviously, SenatorStewart was a long-sitting member and chair of this committee. Welcome, SenatorStewart.

Ladies and gentlemen, colleagues, for your information, the meeting today will continue after we have heard the witnesses present here. We have Perrin Beatty, the CEO of Canadian Manufacturers and Exporters, between 6:15 and 6:30.

Welcome, everyone, to this meeting. It deals with the Canada-United States of America trade relationship and the Canada-Mexico trade relationship.

I would like to welcome, on your behalf, honourable senators, from the United Steelworkers of America, Mr.Dennis Deveau, Government Liaison; from the Canadian Vehicle Manufacturers' Association, David Adams, Vice-President, Policy, and; from the Canadian Chemical Producers' Association, Richard Paton, and David Goffin, Vice-President, Business and Economics.

Welcome, gentlemen.

Senator Carney: On a point of order, I was not aware that the Senate had risen, but I informed the clerk that before we started this meeting, I wanted to formally table the report to the standing Senate committee on the Price Waterhouse Coopers 16th annual global forestry conference on the softwood lumber issue, which I attended on behalf of the Senate last week.

The Deputy Chairman: As I said, we would be happy to do it on your behalf. You brought it to us and I have it here. We will circulate it to all the members of the committee.

SenatorCarney, on behalf of this committee, through SenatorStollery, the chair, and through me, attended this particular conference. We are happy to receive your report. We will deal with it at the appropriate time, rather than today, if you do not mind.

Senator Carney: As long as it is tabled.

The Deputy Chairman: It is now tabled.

Mr. Dennis Deveau, Government Liaison, Legislative Department, United Steelworkers of America: On behalf of the United Steelworkers of America, I want to thank the committee for this opportunity to appear before you today to discuss the issues raised by Canada's participation in and experience with NAFTA.

This discussion is important for two reasons. First, the provisions of NAFTA have had a profound impact on Canada and Canadians, and, second, the Canada-U.S.Free Trade Agreement and then NAFTA have served as models for other, broader agreements, including the failed Multilateral Agreement on Investment, the continuing negotiations at the WTO and the FTAA.

NAFTA is of interest both to Canadians and to people around the world, but not because of the way it dealt with the traditional fare of trade agreements, of movement of good and tariffs. NAFTA is important because of the new ground it broke in areas only indirectly related to trade.

The FTA and NAFTA extended the purview of trade agreements in a number of dimensions. It was comprehensive in its definition of what constituted a ``good'' to be governed by a trade agreement. It expanded the concept of trade to encompass services, thereby putting much of what the public sector traditionally does squarely on the table. It established rights for investors, including intellectual property rights, which had the effect of overriding domestic legislation and granting corporations supra-national rights and requiring governments to pay compensation to corporations whose rights were restricted. It contained specific restrictions on government policies in areas like energy and public procurement. In concrete terms, it created a real-world test of the effectiveness of voluntary measures to deal with labour and environmental rights.

All of these things are novel. Every one has generated controversy, and none has, to date, been subjected to adequate public critical review.

The broad definition of the term ``good'' has brought Canada's water to the trade table, despite numerous government declarations that Canada's water was not for sale.

The inclusion of services has put Canada's system of health care in jeopardy, complicating the process of health care reform and making it extremely difficult to expand the public system. The expansion of intellectual property rights has contributed directly to the rapid escalation in drug prices that Canadians have experienced in the past decade, and which, as a result, has threatened the viability of both public and private drug plans. Our union has its own plans, so we completely understand what is happening in that area.

The requirements for compensation have resulted in governments in Canada, the United States and Mexico being ordered to pay compensation to corporations that have been adversely affected by government regulation in the public interest. Restrictions on Canadian energy policy have left Canada powerless to implement any public policy that might assist Canadian families and businesses to manage the fluctuations in international prices and have contributed indirectly to the instability that plagues electricity markets in much of the country.

Speaking directly from the experience of our union in testing the labour side agreement, the labour and environmental side agreements have been completely useless and a waste of time and energy. At the same time, I think it is important to point out that the original purpose of the FTA and NAFTA, as articulated by the MacDonald commission and the Mulroney government, has not been achieved.

At the time, we were told that an agreement with the United States would protect Canadians from the impact of U.S.trade politics. Softwood lumber and steel were specifically cited as areas that would gain from an agreement. Thirteen years and three months of the FTA/NAFTA later, nothing has changed. Softwood lumber is still hostage to U.S.trade politics. The steel issues, which are dear to our heart, are still resolved at the political level between our two countries and between our two industries.

For Canadians, NAFTA has failed to deliver much of what was promised. It has imposed a set of rules and restrictions that most Canadians never bargained for. Despite the emergence of these important issues, the NAFTA measures have been extremely influential. The investor rights section of NAFTA inspired and spawned the Multilateral Agreement on Investment.

The controversy over the Multilateral Agreement on Investment, MAI, was important because it drew attention to these extraordinary rights that were, in large part, already contained in NAFTA, and because of the political uproar that the leak of the secret draft agreements created. For the first time, non-governmental organizations around the world worked together on an international trade issue and succeeded.

The MAI controversy drew public attention to the sweeping nature of the investor rights sought by international business— rights that are, in large part, already contained in the Free Trade Agreement and NAFTA. Within the MAI, the shift of power from the public to private owners of capital ``arrived at the party naked.'' People noticed, and they were not impressed.

More importantly, it exposed the twisted and inappropriate priorities being followed by governments in international trade negotiations. What offended people about the MAI was that, with all of the real problems with the trading system and its effect on people, our governments chose to devote their time and political energy to negotiating a declaration of independence for owners of capital. That is what I want to focus on today— priorities.

We will not sit here and suggest that trade is not important to Canada or that we do not need agreements to govern our trading arrangements. Indeed, I would suggest that the phasing-out established by NAFTA of tariffs on goods and services is now entrenched and would not be reversed. However, I think the MAI and the public reaction to it signals a need to step back and ask the following fundamental question: Is this really the kind of economic world that we want to create?

Do we really want to create a world in which owners of capital based in foreign countries enjoy greater rights than those of our own citizens? Do we really want to create a world in which democratic regulation of economic activity is replaced by an international regulatory regime driven by the needs of business interests and accountable to no one? Do we really want a world in which the most important decisions about our economy are taken out of the hands of democratically elected governments?

I think the public reaction to the MAI and to the introduction of similar measures for discussion in WTO and FTAA negotiations speaks loudly that Canadians do not want this kind of world. There are warning signals everywhere that the FTA and NAFTA have taken us somewhere we do not want to go. When we cannot change a regulation on the contents of gasoline without paying a premium to a foreign company — compensation to which no Canadian company would ever have been entitled— we know we are in trouble. When it turns out that the protections the government told us we had for cultural policies mean nothing to the country we negotiated them with, we know we are in trouble.

On a topic close to home for many of our members, when a fight over cultural policies takes trade in steel and wood products hostage— just like it did in the old days before so-called free trade— we know we are in trouble.

We are like the coal miners in years past with a dying canary in a cage, except that instead of going to the surface for a breath of fresh air, we are going deeper and deeper into the mine. We need to get our priorities straight.

Perhaps someone thinks it is important to make sure software pirates in China do not cheat Bill Gates out of a few more billion. Perhaps someone thinks it is important to make sure that the banks get bailed out when their high-return speculative investments go bad. Perhaps someone thinks it is important to protect U.S.-based agricultural corporations against ``unfair competition'' from countries that cannot afford the subsidies, even if it destroys the economic base of poor countries. Perhaps someone thinks it is fine to have a regime for trade in goods and services that does nothing to prevent the kind of blackmail on cultural policy that the U.S.is attempting with its linkage to the steel trade.

Are these things more important than fostering economic development in the poorest countries in the world; than ensuring that might cannot override right every time some business in the United States is unhappy; than ensuring that labour rights and environmental standards are protected; and more important than protecting the ability of governments to tax capital to pay for the services their citizens want? We do not think so. That is why we think there should be a completely new set of priorities for international economic negotiations.

Let us take the topic of international investment privileges off the front burner. Let us not even put it on the back burner. Let us take it off the stove, pour the water out of the pot and put the pot back in the cupboard. The last thing we need right now is more privilege and less responsibility for owners of capital. I believe that Canada should give notice to its partners that it intends to suspend investor rights sections of NAFTA, as a first step in moving beyond the investor rights as the only priority on the trade negotiation agenda.

Then, let's look carefully at the effect of the current model of trade liberalization on working conditions and environmental quality, on human rights, on economic development, on social stability, on democratic accountability and on the ability of governments to deliver the services that their citizens need and deserve; and then, let's get to work on an international agenda that addresses those issues from the perspective of the world's people.

Mr. David C. Adams, Vice-President, Policy, Canadian Vehicle Manufacturers' Association: Honourable senators, thank you for the opportunity to appear before you this evening. We are pleased to be able to provide our input, in addition to the other presenters before you today, on the trading relationship that currently exists between Canada, the United States and Mexico.

I have some extended remarks that are available to you, and information about our association is in the briefing notes that were provided to you. Therefore, I will not spend much time reviewing those issues. There are three main issues that I want to concentrate on today: border transparency, standards harmonization and a rules-based approach to trade relations.

The hearings that you have been participating in for the past few months have been focused on the FTA and NAFTA. I will speak first to the automotive industry.

I would like to refer to the Automotive Products Trade Agreement of 1965, or Auto Pact, which rationalized the automotive industry on a North American basis at that time. That was done through according duty-free treatment to both parts and finished vehicles, and it occurred at a time when the border was essentially transparent, an issue that I will come back to later in my remarks.

It also secured investment in Canada, because the companies that signed on to the Auto Pact were allowed the duty- free treatment on vehicles and parts provided they produced a vehicle in Canada for every vehicle they sold here. I think the results speak for themselves. Canada currently has about 16per cent of North American vehicle production, despite the fact that our sales market is only about 8percent of the North American market.

Automotive-related exports account for 20per cent of all of Canada's exports to the United States and they are Canada's leading exports sector. They also account for about 20per cent of our country's imports from the United States. More importantly for the automotive industry, 97per cent, or virtually all, of Canada's automotive exports are shipped to the United States, and 80per cent of our imports come from the United States. I think that is a testimony to the integration of the industry that has occurred over the last 40 years. Clearly, we need to ensure that the relationship with our major trading partner is nurtured rather than undermined.

Further testimony to the integration of the industry is that 58percent of the U.S.assembly plants are located within 400miles of the Detroit-Windsor crossing and 100per cent of the Canadian assembly plants are similarly located; 92per cent of the tier 1 parts plants are located within 400miles on the Canadian side and 65per cent of the U.S.tier 1 parts plants are located within 400miles of the Detroit-Windsor border.

With respect to the idea of a transparent border, I do not mean to imply that it does not exist. Of course it does. We were all reminded of that fact quite acutely on September 11, 2001. What I mean by ``transparent'' is that it does not factor into the investment decisions being made by businesses. As I indicated earlier, in 1965, this was not an issue. However, the committee is well aware that two-way trade between Canada and the United States has increased 120per cent since the implementation of NAFTA, but there has not been any commensurate increase in cross-border infrastructure, particularly in Southern Ontario, where the Detroit-Windsor and Port Huron-Sarnia corridors together handle 40per cent of Canada's exports to the United States.

Congestion at the border and the associated time delays are issues that have been threatening a seamless border for over a decade.

Why is a seamless border so important? It has to do with the just-in-time logistics that have evolved in the automotive and other industries that have made representations before the committee. Essentially, large portions of the assembly facilities' inventories reside in transport trucks that ensure that the right parts are delivered to the right location at the right time and in the appropriate quantities to accommodate vehicle assembly. If parts are not available at the assembly line, it is forced to shut down. One private sector study has estimated the costs associated with shutting down an assembly line at over $1.5million an hour in lost revenue. If an assembly facility wants to hedge against border delays, the cost of carrying an extra hour's inventory can be anywhere from U.S. $400,000 to U.S. $800,000. Those are not insignificant costs.

The auto industry has actively participated in many initiatives and expended significant financial resources to ensure that access into and out of the United States can be assured to the highest degree possible.

In this regard, our members, DaimlerChrysler, Ford and General Motors were the first companies to engage the Canada Customs and Revenue Agency and sign on to several programs. The Customs Self Assessment Program utilizes registered importers, drivers and carriers to clear customs in a more timely fashion and allows the companies to account for their shipments using a post-audit accounting process. Under the Partners in Protection program, our members committed to enhancing the security procedures throughout their supply chains, including physical facilities and personnel.

Free and Secure Trade, or FAST, is a cooperative program between Canada and the United States under the harmonized commercial processing aspect of the 30-point border accord that Prime Minister Chrétien and President Bush negotiated at the endof 2001. Under this program, Canada and the United States pre-approve low-risk shipments to cross the border. It combines the Customs Self Assessment Program, to which I just referred, and the Partners in Protection program on the Canadian side. On the U.S.side, it involves the National Customs Automation Prototype and the Customs-Trade Partnership Against Terrorism. These allow customs on both sides to pre-screen and identify low-risk shipments, which allows both customs agencies to better focus their resources on high-risk or unknown shipments.

The industry has also been actively involved in, and has monitored the progress of, the 30-point action plan under the Smart Border Accord. We have been vocal advocates of infrastructure improvements at and leading up to key border crossings.

We have also been working with our U.S-affiliated companies and with broader business associations, both here in Canada and in the U.S., to advocate solutions to both governments that promote cross-border trade without compromising security.

We can work on border clearance and infrastructure initiatives within Canada as actively and expeditiously as we would like; however, these initiatives will not bear much fruit unless they are coordinated with the appropriate government agencies in the U.S.

Infrastructure and border clearance procedures are two sides of the same coin. We have made recommendations on how the infrastructure funds that were announced late last year should be spent. By this, I mean the $150million coming from Ontario and $150million from the federal government. We have not seen any tangible evidence of how this money will be spent, despite recommendations going forward from the joint management committee.

It is all well and good to have customs initiatives that streamline trade in place at the border. However, if you cannot get your trucks to the border because of the infrastructure, then expedited processes at the border do not accomplish a lot.

Action must be taken. As I indicated, the status quo is not an option. To do nothing is to risk the border becoming a non-tariff barrier to trade, putting investment in Canada at risk and undermining a lot of the gains that have been secured through the FTA and NAFTA.

We recommend that the government take leadership in implementing infrastructure improvements at the border crossings. There are multiple governments involved and leadership is essential.

We ask that the Government of Canada continue to work cooperatively with the Government of the U.S.to address security issues at border crossings for travellers and commercial shipments. We also ask that the government work to secure from the Government of the United States assurances that low-risk shipments from low-risk shippers who have made the investment in programs such as FAST be afforded beneficial or preferential access to either country.

We would also ask the federal government to ensure that a public-private contingency plan is established that would effectively address an instance where our borders are threatened. This plan would also need to be broadened to include the responsible agencies on the U.S.side.

We also believe that much can be accomplished through public and private stakeholder consultations on the borders. Cross-border cooperative initiatives need to be undertaken to achieve that end. The Canada-U.S.partnership of 1999 was one such program. Ensuring the border is transparent and seamless is crucial for our industry. Some of you may be aware of a recent C.D. Howe Institute commentary entitled ``Risky Business: U.S.Border Security and the Threat to Canadian Exports.'' That commentary noted that the automotive industry represents almost $2.3billion of the total $3.6 billion investment at risk and 113,000 of the 380,000 jobs at risk due to unpredictability and increased security at the border.

Given the current situation in the world, and that only about 3per cent of the U.S.GDP is dependent on exports to Canada while 40per cent of Canada's GDP is dependent on exports to the U.S., it behoves us all to ensure that the borders remain open and secure.

With respect to standards harmonization under trade agreements, we are of the view that true economies of scale will only be realized if a manufacturer can produce a product that is designed to one set of common standards and sold in many different markets, because capital investment, design engineering and R&D testing can be spread across a greater sales volume. On the other hand, unique design requirements add cost and can make designing products particularly expensive for low-volume markets, which the Canadian market is in the context of the North American industry. In our industry, harmonization means the same vehicle hardware and structure design — designed once and certified to one protocol.

One such example of differences in regulatory standards between Canada and the United States is the current Canadian motor vehicle safety standard regarding frontal occupant protection. The Canadian government is looking to put in place a different standard without any real technological or other justification of why Canadian occupant protections should be different from those in the United States. This lack of harmonization could limit the ability of our industry to provide Canadians with the full range of products and the latest advances in vehicle safety and emissions technology at the least possible cost.

Therefore, we recommend that, where possible, standards and regulations among NAFTA countries should be harmonized and mutual recognition agreements adopted, except where a rigorous cost/benefit analysis suggests that unique standards are justified in the public interest.

We would also suggest that it is important, when negotiating with other countries, to ensure that either they are participants in the World Forum for Harmonization of Vehicle Regulations, or make use of mutual recognition agreements to accommodate European and North American standards in their domestic markets. However, we would submit that our focus should be on the North American market as far as harmonization is concerned.

Canada has relied on a solid, rules-based approach to trade relations to address differences in economic might and political power that existed amongst the countries with which it was negotiating. The importance of key sectors of the economy should be noted in trade negotiations moving forward.

There were separate streams of negotiations for the automotive industry under both FTA and NAFTA, and we submit that it would be prudent to approach future negotiations through separate streams.

Canada is one of the most open and competitive automotive markets in the world, with more than 25 manufacturers competing in the marketplace, and where consumers enjoy some of the lowest prices in the world.

There are very few restrictions in place. We would suggest that Canada should negotiate further tariff reductions only in the context of multilateral trade discussions and with the assurance that other countries will also eliminate their non-tariff barriers such as import quotas, taxes, registration, licensing and certification criteria along with peculiar national standards and local content requirements, which all serve to constrain trade.

I will end there and let the other participants speak.

Mr. Richard Paton, President, Canadian Chemical Producers' Association: I will make the presentation, but Mr. Goffin is more knowledgeable than I on many issues and will help answer questions.

Thank you, honourable senators, for the opportunity to speak to you on an issue that we regard as extremely important to the future of our industry and to Canada. That issue is strengthening the North American partnership.

We prepared a briefing document for you called ``Strengthening the North American Economic Partnership.'' I will highlight a few points in the brief and leave as much time as possible for questions.

Our association was one of the first in Canada to advocate free trade arrangements with the United States in the early 1980s. We were proponents of more open trade at the time because we were one of the most global capital- intensive industries in the world. Our industry was evolving such that plants were getting more and more expensive and more and more capital intensive, with building costs in the range of $300 million to $1billion. They could only be built for a larger market than Canada's.

We needed to build plants for North America and more global markets. If we could not build those plants for a broader market than Canada, they would not be built in Canada. The FTA and NAFTA agreements have therefore been good for our industry, but not without implementation problems.

To give you an example of the impact of NAFTA on industrial chemical exports to the U.S., our exports to that country have grown from 35percent of output to 66percent. Seventypercent of these exports are now what we call ``intra-company trade.'' That is, one plant is shipping product to another plant across the border and creating a division of labour in terms of the products that they produce.

Most of these companies are highly integrated and managed as part of a North American market.

In the past three years, we have had several billion dollars of investment in Alberta and Central Canada. That investment is based on exports mostly to the United States. Those billions of dollars of investment would not have happened without FTA and NAFTA.

We believe that we can build on NAFTA and make further progress in partnership with the United States, which will, in turn, improve investment and growth in the Canadian economy. We believe that further integration of the North American economy is inevitable. The only question for Canada is whether we will position ourselves to benefit from this integration or be losers in terms of investment and growth. In our view, the Canadian government has not been active enough over the past several years in exploring ways to improve the interface of the Canadian economy with the United States economy.

I will mention seven aspects of that North American relationship that should be addressed. Many of these issues are complex, difficult and controversial. They would require a fair amount of vision and leadership to resolve. Hopefully, this committee could provide stimulation.

The first aspect is regulation. The federal government must recognize that we are a small-market economy and that when we have a separate regime for reviewing something such as new chemicals, it creates a significant competitive disadvantage for Canada. We need to find ways to achieve mutual recognition of chemical assessments and ensure timely introduction and availability of products in Canada.

I will elaborate on this point. We have a different regime from that of the United States in terms of new chemicals being introduced into Canada. One of the consequences of that is that it is costly, cumbersome and slow. As a result, there are many products available in the United States that are simply not available in Canada, including products that are more environmentally friendly than the current products being used.

The second area is corporate tax. To compete with the United States in a small market, we have to recognize that we need not only a level playing field, but we also need a tax advantage. In some elements of our sector, growth will inevitably happen in large centres with established industry and consumer markets unless there is an off-setting advantage for the Canadian location.

Perhaps some honourable senators have been to Houston in the last decade. When you drive by the miles of chemical plants, you understand why, if you are in Houston running one of those plants and someone says, ``Invest in Sarnia,'' the first question would be, ``Why would we want to do that? We are here. We are at the centre of the universe.''

Large chemical investments tend to go to areas where there are huge interdependencies of product, suppliers, engineering firms, technology, universities and researchers. Smaller economies have much more difficulty attracting investment.

We have been fortunate to have a feedstock advantage with the natural gas supply in Alberta. That has helped us to offset some of those disadvantages.

The third area is common external tariffs. We think that there are advantages to a common external tariff for Canada that could be explored, perhaps on a sectoral basis. It would enhance two-way trade. We suggest this principally because it would reduce much of the administrative cost related to the rules of origin; that is, determining the rules of origin for various products. There are considerable administrative paperwork costs that affect border trade.

A fourth area talked about in the press, and in various other institutions, is the Canadian dollar. We are not advocates of integrating our currency with that of the United States. Mr.Goffin's group has done an extensive survey of our members and they do not support currency integration. There are exchange concerns. Many of our companies do work in American dollars and some get paid in American dollars or equivalents. We find the dollar is an advantage in terms of exports and does not hinder our productivity or investments. We feel that the Canadian dollar should be maintained as it is.

A fifth area is energy. We are extremely dependent on what we call ``feedstock,'' which is basically natural gas and oil, particularly natural gas in the West. Feedstock, given natural gas prices, is in short supply and high demand. Prices are going up and that affects our industries dramatically in terms of costs. In fact, it makes it almost impossible for them to expand, and sometimes even to operate the facilities they have. We think a way to resolve that is through the proposed pipelines from the North, particularly if they go through the Alberta hub concept, where we can extract the ethane from natural gas, which allows us to produce products that are the basis for polyethylene and a whole range of plastic products and chemicals. The key thing for us in the future is how we relate to the United States in terms of our energy and our exports, and how we develop an energy policy that works in favour of the development of Canadian industry and to supply the United States, the largest economy in the world.

A sixth area concerns border issues, which Mr. Adams has covered thoroughly. There has been some progress between Mr.Manley and Mr.Ridge, and it is good to see. I remember, a couple of years ago, meeting with senior government officials before 9/11 and saying that the border was an issue. They really could not understand why. It was a non-issue for them. It is now an issue, and you see task forces being set up and a lot of work going on, but a lot of progress needs to be made in this area — for example, infrastructure, rules, processes and modernization using IT. We could have done a lot in the last 10 years that we did not. We are in catch-up mode in recognizing the importance of our trade relationship with the United States and how dependent we are on the border working smoothly.

Seventh, when you are dealing with the kind of economic and trade relationship we have with the United States, and with an integrated economy where our plants are shifting products back and forth across the border or competing with other plants in the same company to supply the north-eastern market, and Canada takes a completely different approach from the U.S. on something like Kyoto, we add a barrier to our economic productivity and ability to export to and trade with the United States. Kyoto raises a potentially serious competitive issue with the United States. I will not dwell on that further, but it is causing great concern within the industry sectors.

We see a lot of room for progress in the critical economic relationship with the United States and, to a lesser extent, with Mexico. Over the last 10 years, Canada has been relatively passive in dealing with the emerging issues that have been identified. There is now an opportunity to re-examine that relationship and look for new opportunities to strengthen that partnership and improve our ability to grow, invest and create jobs for Canadians.

Senator Graham: I was intrigued by everything that you all had to say. I presume, Mr. Deveau, that you are not a fan of NAFTA. Did your industry lose jobs as a result of NAFTA?

Mr. Deveau: First, the Steelworkers are involved in many industries. Obviously, steel is one of the biggest. I cannot talk as eloquently as the steel producers themselves about what goes on in the industry, but if you take a look at Algoma Steel, for example, and the troubles it had and world prices, the steel industry in Canada was more of a domestic industry. Listening to Mr. Paton, I know you were talking about an international industry. The Canadian industry stated that their primary markets are Canadian markets. They have some integration now, obviously, with the United States because of the free trade agreements. Yes, we have had losses, and because of the integration that has taken place, we are getting to a point now where we are losing steel production and may, in the next few years, lose some of the steel companies that we have in Canada right now.

Mr. Adams deals with the auto industry. Because of the Free Trade Agreement and NAFTA, some auto plants have moved to the United States and some have moved to Mexico. Some are now moving from Mexico to China because of the WTO and other agreements. There have been adverse effects over the years.

Senator Graham: Mr. Adams advocates, among other things, improvements to infrastructure. You said, with respect to border crossing improvements— and I presume that includes highways— that there was a proposed infrastructure program to which the Government of the Canada would contribute $150million. When you refer to the ``province,'' would it be the Government of Ontario that would contribute $150 million? That was essential in your mind. Yet, in his written presentation, I believe Mr. Paton said that 70percent of your member companies do not believe they require any transportation infrastructure improvements in order to enhance access to U.S. markets. Is that because most of your products are shipped by rail?

Mr. David W. Goffin, Secretary-Treasurer and Vice-President, Business and Economics, Canadian Chemical Producers' Association: That is a large part of the answer. About 50percent of the value of our product, and a greater percentage by volume, is shipped by rail. It is still interesting to me that, given the amount that we do ship by truck out of the province of Ontario, we have not heard more from our members about border issues. There certainly have been hold-ups there from time to time, but we have not heard about them to the extent I would have expected. What we do hear a great deal about, though, is concern about what is coming down the line. Mr.Adams referred to the need for better consultation processes so that people do understand the situation before they make decisions and we in the industry know what is coming. Forexample, the United States just proposed a requirement that pre-lading information be submitted to U.S. customs 4 hours before a truck is loaded and 24 hours before a rail car is loaded. Proposals like that, coming out of the blue, certainly light up our telephone lines.

Senator Graham: I was impressed again by some other statistics that Mr. Paton revealed in his written presentation that had to do with the Canadian dollar. You said that 93percent of respondents in a survey report that the exchange rate has not been a barrier to productivity-enhancing investment.

Your presentation goes on to say:

This is supported by labour productivity data which shows that CPPA's industrial chemical workers are 33percent more productive than their U.S. counterparts, and the most productive among G-7 nations.

That fascinates me. Mr. Paton or Mr. Goffin, can you explain why that is so?

Mr. Goffin: I am glad that you focused on that. A few years ago, Industry Canada was suggesting that we were not very productive. We did a good joint piece of work with them and it turned out the numbers they used were incorrect. We went through a rigorous process and turned up the numbers to which you just referred. The reason for that, as Mr. Paton mentioned, is that under NAFTA and the FTA, we have seen tremendous investment in our sector here in Canada. We have new plants to work with on the capital side of our productivity base.

On the labour side, our members place a very high priority on having an outstanding labour force. They hire good people and then give them excellent training. One of them said to me: ``Given the complex process we run in our plants, we do not put a worker in charge of it for at least five years after we have hired him. It takes him that long to learn to run the process.'' When you combine those two factors, it helps to explain why our productivity is so good.

Another question has been raised that may be an issue for other sectors. With our lower dollar, are they getting the investment in new capital that they need to improve productivity? We are one sector where the investment has occurred.

Senator Bolduc: When you talk about labour productivity, are you talking about purchasing-power exchange rate or market exchange rate?

Mr. Goffin: The analysis takes the exchange rate out of it. The numbers you see there are not influenced by the exchange rate.

Senator Bolduc: In your brief you mentioned the Rotterdam convention. I am a layman in these matters, so I would like more information about how that convention affects Canada.

Mr. Goffin: As Mr. Paton mentioned, one of the areas where we need to be careful is in how we proceed on the regulatory basis. We want to ensure we are competitive. The Rotterdam convention provides for what is called ``prior informed consent'' before certain hazardous chemicals are exported. Before you export those chemicals to another location, to your trading partner, you are required to ensure that they know what is coming, that they are willing to accept it and that they can deal with it appropriately.

When that convention was negotiated, the intent was to focus on a narrow group of highly dangerous chemicals. Of course, after that, it goes to various countries to be implemented.

When the convention was implemented by our trading partners, like the United States, or European countries a year or so ago, we found that they stuck much closer to the original target of the convention— that is, a narrow group of chemicals— whereas Canada used wording that could easily expand it to cover a broader group of chemicals. In our view, that goes beyond the original intent of the convention.

That change has the potential to put us at a disadvantage with our trading partners, who are all supposed to be implementing the same convention.

Senator Bolduc: You said you were concerned about the impact of Kyoto because the United States took a different position. Would you give us a few of those concerns in a little more detail?

Mr. Paton: Sure. This will require a long answer, but I will try to give a snapshot of how our industries are coping. The United States has developed a challenge program with the chemical industry. I believe they have come up with a tentative agreement. They are moving toward a reduction of about 18percent in greenhouse gases for the chemical industry from 1990 to 2010.

That is a fairly reasonable approach. If we had that approach in Canada, our industry would be relatively comfortable. However, the Canadian government has not taken that approach. It has worked up an approach that sets a target for the large emitters of a 55-megaton reduction. It does not count anything done between 1990 and 2002. Realistically, the better you did between 1990 and 2002, the worse off you are in dealing with the next phase. It is as if you have insulated your house and made all the energy-saving changes that you can, and then your government comes along and says, ``It is nice that you did all of that and you are a really good person, but we want another 15percent.''

You say, ``The person next door who did not do anything needs only to plug three holes in his windows and he has his 15percent.''

The government replies, ``It does not matter. If you cannot do it, we will charge you more on your tax bill.''

That, essentially, is how the federal government is approaching Kyoto.

Take the example of a plant in Brockville and a plant in Atlanta, both producing the same product, both selling the product to the northeastern market. In our business, there is usually only a small difference, only cents per pound, between those two plants. We both have taxes and labour costs. Fortunately, we are more productive in terms of labour, as Mr. Goffin mentioned. Now we will add extra costs for greenhouse gas reduction or perhaps to purchase a credit. Let's say that adds 10 cents a pound. That additional 10 cents can make the difference between selling the product and not selling it, and the plant existing or not existing.

Here is a good example of where we should look for approaches. I do not say necessarily that we have to harmonize everything with the U.S., but we cannot ignore that reality. We should look for approaches and at least try to achieve the same objectives in ways that balance economic and environmental priorities. In the case of Kyoto, we do not believe the government tried to balance those priorities. It took one objective or concern and ran with it and put everything else aside. Now we are left with what might nicely be called ``a very big mess.''

Senator Bolduc: It seems that you have lost people in terms of employment. Did you lose them in the steel industry because of the FTA or NAFTA, or because of the European or Japanese competition?

Mr. Deveau: It was a combination. Obviously, in international trade we are seeing a lot of steel dumping now. That has affected the United States to a tremendous degree.

With the free trade agreements and the movement of steel back and forth between Canada and the United States, there is a lot of integration now. I would say it is a combination of factors.

Senator Bolduc: Would you say it is more because of Southeast Asia, Korea, or North America? The impression I got is that the effect comes mostly from outside our continent.

Mr. Deveau: The steel industry could probably give you the facts and figures on that. I do know that recently, particularly in the last two or three years, there has been more emphasis on dumped steel, particularly when some countries are building steel plants for export only. If you look at the progression over the last number of years, there have been the effects of the trade agreements. You are right that, most recently, it is because of the influx of imported steel.

Senator Bolduc: The American reaction was against that?

Mr. Deveau: Yes.

Senator Austin: Thank you for your presentations, gentlemen. I am trying to decide which line of questioning to pursue, because so many questions were raised by what you said.

As a committee, we are trying to examine the experience of the Free Trade Agreement over 15 years and NAFTA over 10 years. In various ways, all of you have addressed those questions. Of course, the implied premise of our examination is where should we go from here? In that context, one of the suggestions made in the presentation by the chemical sector people concerns moving towards a common external tariff on a sector-by-sector basis.

I would like to ask all of you whether, to the extent you support it, the need for it comes from the objective of reducing costs and administrative rules; whether, in your perception, it gives you an economic advantage in the U.S.market; and whether you think that your U.S.counterparts would be interested at this stage in talking to us about this.

Mr. Goffin: As you pointed out, we have raised a possible sectoral approach to a customs union. At the time that our paper was originally developed, the C.D. Howe Institute, and others, had been looking at various options for how we might progress. They had looked at a common market, trying to strike a more limited bargain or, as a middle-way approach, perhaps, a customs union. After talking to our members, it seemed to be perhaps the more feasible approach to take, at least for our sector.

Actually, that was a good part of what stimulated us to produce our paper in the first place, because over the last decade or so, for example, our international trade people in the Lester Pearson Building have been suggesting that the chemical industry might be a good sector with which to experiment, if you will, or to move in this direction, because our tariffs are already mostly harmonized with those of our U.S.counterparts. We have both signed what is called the Chemical Tariffs Harmonization Agreement through the World Trade Organization, so most of our tariffs are 5.5 to 6.5per cent now. In this current round of WTO negotiations, we are working for the global elimination of tariffs. If we could achieve that, perhaps this would largely become a moot point, but that is unlikely.

We would be seeking both aspects to which you referred. One is to reduce costs, as Mr.Paton explained. Rules of origin for chemicals to ensure that your production qualifies for treatment under NAFTA are fairly complex, and not only that, we also have one set of rules for NAFTA and a separate set of rules under the WTO. Under Canada's individual free trade agreements with other nations, we have slightly different rules of origin, so it becomes a very complex system for companies to manage. Approximately 57per cent of our members said that would be a key cost factor for them that could be eliminated with a customs union.

At the same time, if we were to sit down at the table to talk about that, we would also like to talk about some of the specific border issues that we have, largely to do with the movement of people, that existed before 9/11 and have been a problem. For example, you got a sense from Mr.Paton's comments of how integrated we are with our U.S.companies. Under NAFTA today, you cannot circulate a trainee engineer through a series of plants, some in Canada and some in the United States. You have to go through quite a bureaucratic process with the Immigration people to even try. Those are things that we would look at from a cost point of view.

We would see this as another step toward eliminating the border in a business sense. We realize that in a political sense, and in terms of our own sovereignty, the border will continue to be there, and so it should. I saw Minister Pettigrew's outline of where he hopes to go in the next while, which is not as far as a customs union, I might say. One of his key points was eliminating the border as an impediment to trade, investment and business development. For us, the further we can go with that, the better. As Mr.Paton said, when investors look at Canada and the United States and see, in many respects from a business sense, the same country, that helps us.

Senator Austin: To have a better understanding of your industry, I will pursue this. What share of the U.S.chemical market do Canadian producers have today?

Mr. Goffin: Of the U.S.markets? I would need to find that. That is not a figure that we look at closely.

Senator Austin: You do not have the U.S. producers' share of the Canadian market? Do you have in dollar terms the Canadian share of the U.S.markets and how much the Americans sell to us of similar products?

Mr. Goffin: I do not have that off the top of my head. We can come back to the clerk with our market shares in each country.

Senator Austin: How much of the border trade is intra-corporate, again?

Mr. Goffin: Seventyper cent.

Senator Austin: We are really dealing with a relatively small independent trade in chemicals. Can you locate by province the origin of Canada-U.S.trade in chemical products? Percentage-wise, Ontario is how much, and Quebec is how much?

Mr. Goffin: Ontario is about 50per cent. Quebec is still in second place, at about 30percent. Alberta is where the growth is, and it has come up to about 20per cent now.

Senator Austin: Finally, are feedstocks for the Canadian industry largely Canadian-sourced, or are some U.S.- sourced?

Mr. Goffin: Our industry in Alberta is natural gas based, and it is Canadian sourced. Our industry in the East is a mixture. Our Montreal industry is based on imported feedstocks from the North Sea and some from United States refineries. Similarly, in Sarnia, they are running off North Sea oil and some feedstocks brought in from the United States.

Senator Austin: From what you have said and what Iunderstand, this would appear to be a relatively non- contentious sector in which to achieve a common external tariff. I wonder if thiswould be acceptable to the U.S.industry, and no doubt you have had that discussion. Would it be? What have been the constraints in moving ahead with your recommendation?

Mr. Goffin: We have not heard any objections from the United States chemical industry. On the other hand, the United States is not chomping at the bit to move in this direction. Although Canada is a fairly important market for them, their domestic market is still huge in comparison. It has not been an area of focus for them. We have not heard objections, and it is something we are talking to them about to create some interest.

Mr.Paton referred to the early days, pre-FTA. At that time, we were very interested, if the FTA did not go ahead, in exploring a sectoral agreement on chemicals. Our U.S.industry was very interested in doing that with us. A number of meetings were held, and Mr.Chrétien was leading that initiative. We would expect, over time, to see that kind of support from our U.S.industry.

Senator Austin: In one area, at least, the U.S.is interested in further integration, and that is in the energy sector. To the extent that you are part of that sector, it may be an interesting area in which to recommend initiatives.

My last observation would be that you must be jealous of the auto sector, because effectively, they have a sectoral free trade arrangement today. Are there commonalities that would allow you to argue for a common external trade system?

Mr. Adams: There was sectoral free trade under the Auto Pact. The auto industry is no different from any other under the FTA or NAFTA. As to some of the points made by Mr.Goffin and Mr.Paton, the rules-of-origin tracing challenges exist as much for the auto industry as they do for others. From our perspective, the elimination of the tracing requirements would be helpful, or at least dealing with them in a more constructive way.

Senator Bolduc: I understand that about 20per cent of the chemical industry is a little concerned about the possibility of a customs union. I suspect that that is not coming from DuPont or Dow Chemicals, but probably from smaller businesses. Am I right?

Mr. Goffin: Yes, by and large, it would be the smaller companies and the Canadian-owned firms. Of our 70 member companies, we probably have a little over 20 that are Canadian-owned. Those types of firms would have the greater concerns.

Senator Chaput: Gentlemen, you have said, and I agree, that for the future of the industry in Canada, we need to strengthen our partnerships. You also said that Canada has to position itself. On the other hand, when Canada takes a different position from the United States, it sometimes causes problems. You have made quite a few recommendations. I was wondering, of those recommendations, which will be the hardest to negotiate with the United States and which will be the easiest?

Mr.Paton: I would point to one example. On the regulatory issues, we have argued for mutual recognition and some degree of agreement on testing criteria approaches. I think there is some interest in the United States on that. However, as Mr.Goffin mentioned earlier, we are a small country with a small market. We may have a problem because we are different and, perhaps, not able to sell into their market. However, they do not regard it as that big a problem if they cannot sell into our market; we are comparable to Illinois in terms of economic significance.

To mobilize a department in the United States to find some way to do the same testing as we do would need a fair amount of emphasis and a lot of work. It might even need some political support at the top levels to get them interested.

To make a more generic point, one problem we have as a country is to think that the United States should be concerned about our problems, or think of us as a key economic partner. The fact is we are a very small player vis-à-vis their domestic market. They can pretty well live without us. We cannot live without them.

Mr. Adams: To reiterate what Mr.Paton has said, the same situation exists in the auto industry with respect to regulatory harmonization. You are building vehicles in the U.S.that are for sale in the U.S.and Canadian markets. It is essentially the same vehicle, although there are still some minor differences in those standards that are required by each government.

It is the same on the Canadian side of the border. Production facilities in Canada are building vehicles for the Canadian and U.S. markets. It is far easier, cheaper and more beneficial for the consumer in both markets if they can purchase the lowest-cost vehicle that includes the highest standards as far as occupant protection and emission controls are concerned, to name two.

Mr. Deveau: I want to make a couple of points. First, I know SenatorGraham commented earlier that I am against NAFTA. Perhaps I can clarify that. We are against some of the aspects of the Free Trade Agreement and NAFTA. One of the problems we see— and I am speaking as a Steelworker, but also as part of the labour movement— is chapter11, that part of NAFTA that says companies can sue governments.

That will be really difficult to negotiate. We find that it is difficult to convince our government that that is wrong. When we sit down and say, ``The things we have pointed out have to be dealt with to have fair trade,'' that does not necessarily mean that trade agreements have to be thrown away. However, you have to deal with those things.

Particular issues, such as Canada's water being a good or Canada's health care system being a service, are tough to negotiate with the United States. It will be tough to change any trade agreement. The first problem we have is to convince your committee, the Senate of Canada, the House of Commons and the government that those are priorities that Canadians want resolved. I have my work cut out for me; and perhaps I will be around to talk to you individually at some time.

The Deputy Chairman: When we talk about mutual recognition agreements or harmonization, are we talking about accepting the American standards or do we have any room to influence those decisions?

Mr. Paton: That is a very important issue for us right now. I think we could take a variety of approaches. The most important thing, as a first step, is to agree on a testing approach, whether it is a drug, a veterinary product or whatever. What are the scientific rules of the game? If you get this information, then you do this analysis and this is the result.

A great deal of work goes on in many countries, not just in Canada and the U.S. The Europeans are heavily involved in this, such that you could come up with some agreements on the data and what the data would mean. You could even do that independently of the decision. An agreement could at least be reached to put the data together, share them, make them equivalent and transparent, et cetera, and then make separate decisions. That possibility exists.

Another approach you could take would be to agree on the lower-risk areas. We would have the same agreements or approach on the higher-risk issues and then we would separate out our decision-making. Unfortunately, there is a lot of history here. Most of these countries have come up with quite different ways of analyzing data. In some countries, the analyses are done by the company and then given to the government. In other countries, such as Japan, the government does it all. Some countries use models, and in other countries, every specific drug or chemical is analyzed separately and there are no models or generalizations.

There is a great deal of work to be done to determine what the data mean in one regime versus another regime. That is why it is complex and difficult to change.

Senator Bolduc: That plays against us because we are a small outfit in the area of research. For example, many people in the pharmaceutical industry criticize the way bureaucrats in Ottawa work on the acceptance of products because it takes three years. Some members of the pharmaceutical industry in Montreal have told me that they are planning to move elsewhere, where it takes one year instead of three for approvals. I suspect that it is the same in the chemical industry.

Senator Graham: I will confine myself to asking one general question, but I do want to tell Mr.Deveau that I have some sympathy for his position, particularly because I come from what was a coal mining and steel making area — Cape Breton. I have been down the mines many times, where the canaries used to be. Our steel plant in Sydney was closed, as you know, and our mines have been closed. Perhaps there will be a future for some other mining industry, but we do not know.

However, they were not closed as a result of NAFTA. As a matter of interest, Mr.Chairman, there has been a complete attitudinal change in that part of the country. The unemployment rate has gone from about 30per cent down to 14per cent. That figure is still too high. However, we are working on attracting new industries in the information technology area, et cetera.

I have a general question, and perhaps Mr.Deveau would be the first to disagree with such a proposition, but from time to time, the possibility of a customs union has arisen among the many witnesses from whom we have heard. There are those who say that we could work toward a customs union and that we should not lose sight of it because it is down the road.

Others have said an emphatic no to the idea, and some say that it is unrealistic.

Would any of your organizations support the establishment of a customs union, whether sectoral or economy-wide, with the U.S.? We may put that question to Mr.Beatty, as well.

Do you see any benefits for your industry if Canada were to enter into such a new bilateral trade arrangement? I throw that out to everybody.

Mr. Goffin: We talked about where chemical production is today, but we hope chemical production in the future will be in Nova Scotia, using East Coast gas. There is certainly potential for a couple of multi-billion dollar investments in Nova Scotia.

We would favour movement toward a sectoral customs union. That is because we just do not have the ability to fully evaluate it for all sectors of the Canadian economy. However, we have looked at it with our member companies and we have had some talks with our U.S.counterparts. From our point of view, as I said earlier, for both administrative reasons and in a business sense, obliterate borders as much as possible. In that way, when investors from within or without North America view either the United States or Canada, the border would be a much smaller factor in a business sense than it is today.

Mr. Adams: From the automotive industry's perspective, one consideration would be the MFN tariff on finished vehicles coming into Canada, which currently sits at 6.1per cent, versus 2.5per cent going into the United States. If you were to take the sectoral approach to the automotive industry, how would you deal with a common external tariff? There is an argument for only negotiating a new tariff reduction in the context of multilateral trade discussions, as opposed to discussions with the U.S.and with Mexico, for instance.

One theory is that one might consider investing in a facility in a country that had the higher tariff and be able to move the product into the lower tariff area, in the U.S, as opposed to a vice-versa process. Our thought was that it might be at least something of an anchor for investment if you were to have the situation that currently exists, with a higher tariff coming into Canada. From our perspective, that higher tariff has not limited automotive imports into Canada and has not limited trade in any way, shape or form. There might be some resistance from the automotive industry to moving toward a customs union.

Mr. Deveau: SenatorGraham, it may surprise you that the United Steelworkers of America and the steel industry were together in discussions on steel imports, which probably proved to be the greatest education about the steel industry in the number of days of hearings before the CITT that I have attended in the last several months. Under NAFTA, there is a particular level of steel that comes back and forth across the border. At those hearings before the CITT, both the industry and the union were arguing that the steel should not be subject to any kind of tariffs; and that we should deal differently with any steel from outside the shores of North America. The discussions we have had with the industry and with some MPs have been centred on the integration of the steel industry in North America.

In fact, the industry is integrated. As I said earlier, when a reduction in tariffs comes into effect, you will not try to re-establish those tariffs. I am not sure about some of the other industries that we represent. However, we are looking at that in those particular discussions with the industry. The United Steelworkers of America is on both sides of the border— we represent steelworkers in the United States as well as in Canada. We have the same interest on both sides of the border — to ensure that foreign steel does not disrupt the North American steel industry.

We are looking at that area closely with the industry. I cannot say that we will agree, but we understand the implications.

The Deputy Chairman: Thank you, gentlemen. You have been helpful and informative.

The Chairman: Honourable senators, our next witness is the HonourablePerrin Beatty, one of my colleagues from some time back.

Mr. Perrin Beatty, President and Chief Executive Officer, Canadian Manufacturers and Exporters: There is probably no issue of greater importance than our economic and political relationships with the United States and Mexico. As honourable senators are aware, Canadian Manufacturers and Exporters was formed in 1996 through the merger of the Canadian Manufacturers Association, founded in 1871, and the Canadian Exporters Association, founded in 1943. Our membership accounts for 75percent of Canada's manufacturing output and about 90percent of our exports. While we represent some of the country's largest companies, 85percent of our members would be considered small or medium-sized enterprises. In the fall of 2001, CME spearheaded the formation of the Coalition for Secure and Trade- Efficient Borders to provide a common voice for industry on the issues of security and border management in the wake of the tragic events of 9/11. The coalition acted swiftly to press governments on both sides of the border to take action.

The ambition was not to return to the situation at 8 a.m. on September11, 2001, but to address longstanding issues at the border that existed well before that time.

At the same time, CME built on its alliances with counterpart organizations in the United States and Mexico. We continue to work with them to influence business and governments in those two countries.

At the heart of the coalition's recommendations is a risk-based approach to border management based on three lines of security. First is offshore interception to ensure that problems are detected before they hit Canadian or American shores. Second is security at the first point of entry, where people and goods are processed once when they enter North America. The third line of security is the Canada-U.S. border, where smart infrastructure would permit pre-cleared, low-risk goods and travellers to be fast tracked to ease congestion and allow border authorities to concentrate on high- risk movements.

Whether you call this a perimeter approach or a zone of confidence, it does not mean the elimination of the Canada- U.S. border. Nor does it mean full adoption of the same policies by each country. Rather, it is a collaborative and integrated approach that better coordinates and manages existing practices and establishes new steps to ensure the protection of all North American citizens by focusing security resources on higher-risk areas.

Pre-clearance mechanisms, identification technologies and data-sharing methods are used to effectively identify and track low-risk, legitimate goods and travellers, allowing their expedient processing, while security sources are targeted at areas of greater risk. In other words, our borders would become smarter and we would identify risks earlier.

We often hear there is a choice to be made between physical security and economic security. There is no choice. They are two sides of the same coin, and we will not have one without the other. It has been encouraging to see our governments working together to ensure that we will have a border with the United States that is both more permeable to legitimate commerce and travel as well as more secure against people who pose a threat to the citizens of either country.

We are pleased to see these principles as the basis for the Smart Border Accord. We are pleased as well that the agreement included most of industry's recommendations. While industry still has some concerns, particularly around the new initiatives that threaten the progress that we have made to date, it is safe to say that what we have achieved has surpassed anyone's expectations.

Great credit should be given to Canadian Deputy Prime Minister, John Manley, and Governor Tom Ridge, Director of the new U.S. Homeland Security Office, for their quick action and continued commitment to border efficiency.

Over the past three weeks, we have seen proof of our progress. When the United States moved to alert status orange and brought in Operation Liberty Shield, there was great concern on the part of industry that the borders would be shut down, causing the same kind of economic spiral that we witnessed a year and half ago. Certainly there were some challenges in the first few days, with delays at our busiest crossings in excess of two hours. By Wednesday, most of the borders were flowing smoothly, and by the end of week, the situation at the borders had been normalized, despite the outbreak of hostilities in Iraq.

This is impressive, given that 200 million people cross the 49th parallel each year. Two-way merchandise trade across the Canada-U.S. border exceeds US$1 million per minute, 365 days a year. It is the world's most important trading relationship. A truck crosses the Canada-U.S. border about every two and a half seconds. The key to success was having the systems in place to quickly process known travellers and the open, direct communications lines developed between the two governments from the top down.

Moving forward, industry's concerns fall into four key areas. The first is infrastructure. It is impossible to fast track pre-approved travel if you still only have two lanes of traffic.

Second is data sharing. We must ensure that commercially sensitive data do not get used for competitive purposes. As a result of concerns over security, industry is being expected to supply a greater level of information than ever before.

It is important that our governments ensure the information being requested is required strictly for security purposes. It is also important that commercially sensitive Canadian information, once it leaves Canada, is not used for other than strict security purposes. It is important that our two governments work together to give the assurance to industry that when the information is supplied, it is being used for the intended purpose.

The third area is advance notification and the need to ensure that the time required is realistic, given the nature of the business and the types of goods being shipped. There have been concerns about the U.S. government's ``straw man'' proposal, which has been largely pulled back.

There have also been concerns in the food industry about pre-notification requirements that are often impossible to meet, as Senator Graham will tell you. A sea captain fishing for lobster cannot say 24 hours in advance what his catch will be. Yet, he knows that that catch has to be on the stands in the United States within 24 hours. We need regulations that make sense and recognize the realities with which we are faced.

Finally, there is the potential that the proposed entry-exit registry being considered in the United States will eliminate the benefits that come from smart technology. Most of our key border crossings are at choke point and there are physical problems at these locations. Simply adding new lanes at the border might easily create a bottleneck. It is important to ensure that the entry-exit system being discussed by the United States does not have the effect of blocking up the bottlenecks.

In addition, there will not be sufficient comfort on the part of security agencies to adequately reduce costly and time- consuming inspections at the Canada-U.S. border until security measures offshore and at the North American frontier are in place. The ultimate goal must be to focus security on catching threats before they arrive in North America. Our internal border will only be ``smart'' if our external perimeter is secure.

The biggest worry for business currently is the potential for the commitment and the sense of urgency to be lost, and for governments to lose sight of the importance of our relationship and the link between physical and economic security. No one can dispute that we are managing our border with the United States well, but can we say that we are managing our broader relationship with the United States equally well.

The Smart Border Accord clearly demonstrated how, with leadership and a vision of where we want to be, our two nations can work together and achieve mutually beneficial goals.

What is our vision for taking our North American partnership to the next step? Who in Canada is, or should be, managing this important relationship? What should be the model forengagement with the United States and Mexico, and shouldthat model be different from the one we have for other, non-NAFTA countries?

We believe that it should. We believe that the unique nature of arrangements under NAFTA and the importance of the United States marketplace, not only in North America but also in the world as a whole, dictate a specific strategy for engagement and for this important relationship.

Canada's trade within North America is more structural than export-oriented. That is an issue that I was interested to see the committee raise with some of my colleagues appearing here earlier.

The FTA and NAFTA opened significant market opportunities for Canadian businesses across North America. They also opened the Canadian market to intense competition that continues to drive down prices and requires Canadian companies to restructure to remain profitable and secure competitive advantage in a larger marketplace.

Increasingly, companies view North America as a single market, both for labour and sales. Leveraging the strengths of each country has been a critical aspect of their strategic planning and competitive realities for some time. Few companies today produce products to be sold only in the Canadian market. Formany manufacturers who operate based on principles of just-in-time inventory management, the Canada-U.S. border crosses the middle of their production line.

CME estimates that some 60percent of Canada-U.S. trade is intra-corporate. It was one of the issues raised by my colleagues from the chemical industry earlier. The flows of goods and services across the border are within the same company. This type of commerce, which Canada's ambassador to the United States refers to as ``intermestic'' trade, is an outward extension of the domestic trade of both countries.

A typical example would be the components produced by North American automobile manufacturers. They may cross the border several times before a car is assembled and sold to a customer.

North America is a continent in transition and this is new ground for all of us. There is no compelling vision of North America, which remains more of an accident of history than a goal. Much of the integration that has taken place thus far has been informal and, where it has been instructed, piecemeal and pragmatic. For the foreseeable future the driver will be economic. The question is: How do we build on the success of NAFTA and on the Smart Border Accord?

Canada's integration with the United States is being driven by the opportunities in restructuring that continue to reshape Canadian industry under the North American Free Trade Agreement. Even with the dramatic growth in three- way trade since the agreement came into effect, the potential remains untapped. We are only scratching the surface. From this perspective, and at the risk of being simplistic, it is tempting to define the North American integration ideal in terms of NAFTA-plus — the achievement of a seamless market governed by a single set of rules implemented and administered by the three governments to achieve their common interests in a well-functioning and secure North American economy.

At the very least, NAFTA provides a framework for expanded negotiations that have the potential to forge a relationship that is much stronger and more sustainable than one determined through a series of disconnected negotiations. The broader and more rewarding strategy would be to develop a vision of how Canadians and Americans can participate fully and as true partners in a North American community. As a first step, the new round of discussions could break down barriers that continue to distort investment and trade. There are many unfinished issues from the FTA and NAFTA, including anti-dumping, countervailing duties, agriculture and softwood lumber. Similarly, current initiatives being considered by the government to revise rules of origin and enhance regulatory cooperation will go a long way toward supporting the competitiveness of Canadian industry.

We cannot move forward without mechanisms that both parties consider impartial and fair. As well, our third NAFTA partner, Mexico, must ultimately be included. Additional non-tariff barriers, including different standards in health and safety, packaging, electrical standards, emission controls, food testing and language, among others, must be addressed, whether through mutual recognition, harmonization or common policies, an issue that you raised with my colleagues who were here earlier.

Other areas for intergovernmental cooperation include a shared approach to preventing terrorists from entering North America, planning continental trade corridors to speed products to their markets and protecting the continental environment. Our goal must be to take the North American partnership to the next level, with respect for the sovereignty and cultural and political distinctiveness of each of our three countries and with increased prosperity and security for all of our citizens.

Honourable senators, if I could add a personal plea here, my judgment is that now is the time for us to begin that discussion in all seriousness. If you were to ask whether I see a great appetite south of the border at this point to talk about a significant change to the relationship, a dramatically restructured relationship, I would say no. The American agenda today is overloaded and a new relationship with Canada is not part of it, notwithstanding our temptation from time to time as Canadians to think that Americans are sitting south of the 49th parallel desperate for the opportunity to remake the relationship. It is not high on their agenda these days, but that is not a bad thing.

My guess is that our next opportunity to put it on the agenda will be sometime after the next presidential election, when the slate is wiped clean and, whether it is President Bush or a different president, a new agenda is being set. This gives us an opportunity in Canada to use the intervening period to decide what it is that we want. That is a critical discussion that we need to have.

I did not spell out here in my presentation tonight a vision that dotted all the T's or crossed all the I's and I have not said that a North American partnership must take one particular form or another. My plea is that it is time for us to engage in the discussion. There are things that we share and ways to develop the relationship to the benefit of all three countries in North America. Where we have been successful in the past, with the Smart Border Accord and the Free Trade Agreement, it has been a Canadian proposal. It has been Canadians knowing what they wanted and going to their partners to say that this is a win-win proposal that makes sense. I see the hiatus between now and the time when there is a potential to get this on the U.S. agenda as an opportunity for Canada to start a discussion about what we want from the relationship. The only thing I know for sure is that if we do not know what we want, we will not get it.

What is also clear is that we are seeing integration taking place on a day-to-day basis at an enormous pace, perhaps faster than any of us realize. The forces of commerce, security and so on, bring us closer each day. A stronger North American alliance is inevitable. It will come either by default, as the forces of technology, commerce and common security bind the three countries closely together, or it will come by design, if politicians and leadership from the business community create a compelling vision of a true North American community. Canada cannot take its economic and political relationship with the United States for granted. The significance of our relationship must be better communicated to the Canadian and American public as well as to the political leaders of both countries.

I thank you for the measures you are taking today to stimulate that debate and I would welcome a dialogue with you.

Senator Austin: Thank you for an articulate and broad discussion of the issues with which this committee is dealing.

There is a choice of approaches and you have outlined them to us. One is a top-down approach, starting with the strategies and working your way down into the implementation program; there is the bottom-up approach — in other words, let each industry work on the issues, close the gaps and deal with the problems; and then there is the sectoral approach. I believe I have covered all the ways that you mentioned. I presume from your discussion, but I wish you to confirm, that you are advocating all three at the same time?

Mr. Beatty: You understand me well.

Senator Austin: We used to say that if you do not put a line in the water, you do not catch fish. Unfortunately, there are not too many fish left to catch. However, there is still a lot in the trade and investment field, as Mr. Beatty said.

I would like to go to the right-up-close level. We have heard Ambassador Celluci say in the last few weeks that security trumps economics. I think the message is getting through to Canadians, and from what you said, to your group, namely, that we must address security issues in order to either open the door wider or prevent it from being closed in some areas of our trade with the United States.

Could you address, in a little more detail, how the business community you represent is dealing with the current emphasis on security? We have the 30-point plan, but how concerned or how involved is the business community in the security issue as a priority?

Mr. Beatty: It is a key concern, senator. We have been investing a tremendous amount of time and energy in the whole issue. Clearly, governments alone cannot achieve security, particularly in the international cargo handling system. Dr. Flynn, the U.S. Coast Guard Commander, who is, perhaps, the international expert on international cargo security will be in Ottawa later this week. He has pointed out the potential threat to the security of North America from the very low level of inspection in the international cargo handling system, and that a weapon of mass destruction can enter North America in a 40-foot cargo container. It will require that business invest in devices that provide for the security of cargo containers. It will require that we invest in record keeping and physical security through improved security levels and better background vetting of people involved in sensitive positions, and working closely with governments.

The biggest challenge at this point, senator, is what the bill will be and who will pay it at the end of the day.

Senator Austin: That was my next question: What will it cost you and how can you transfer the cost?

Mr. Beatty: It is a major concern. Some would argue that we should push the burden of security as much as possible onto an individual industry or business as a whole. To cite an example, anyone who had family in the World Trade Center on September 11 would say that airline security is an issue not only for airlines but one that affects public security as a whole. As a result, it is a public policy issue of concern to every citizen. We would make the argument that enhancing the security of North America requires a common effort, that all of us as citizens carry our fair share of the burden and that it not simply be foisted onto one sector or another.

In instances where there is a concrete, discernible benefit as a result of an investment, industry will not complain about the cost of participating in, for example, the NEXUS program, which will fast track pre-approved travellers. It makes sense to do that. It is optional for industry and they receive a benefit as a result. However, there would be a concern if all the costs were being piled onto the shoulders of industry.

The other key area where there are concerns is among SMEs in particular, who say to us: ``What are best practices? What is expected of us? You say to us that we have to upgrade our security, but what does it mean?'' In the past, our idea of security was ensuring that no one steals a pallet off a loading dock. We have not been dealing with al-Qaeda. What we need is a concerted effort by organizations like CME, working with government, to establish those best practices and, in turn, communicate them to industry, to SMEs in particular. They are quite prepared to do their share, but they want to know exactly what is expected of them.

Senator Austin: Let me pick up on one aspect of what you said. We heard from Mr. Jim Phillips, with whom I think you are familiar. We chatted with him about the technology required, for example, for 20- or 40-foot containers. Remarkable technology is being developed. He described to us how these containers would be loaded under inspection and sealed. A geophysical tracking device would indicate exactly where they were and whether the seal was broken. As well, they would be painted inside. If a hole was made in the container, that would be known instantly through electronic means. That costs a great deal of money. However, there are two users running this system.

I wondered whether you thought some integration of cost was possible, because one user, of course, is the security services of the U.S. and Canada, who want to know these things when they want to know them. The other is the industry. For example, it is of benefit to the container industry to know exactly where each unit is. It is a benefit for both the shipper and the receiver to know where their cargos are.

Who pays? Do you see governments carrying some of the cost of the information creation and delivery; or, in your experience so far, will that be an industry cost?

Mr. Beatty: I would see it being shared. Clearly, if we do it right there is a potential benefit for industry as well. If you talk to anyone involved in logistics, increasingly, for their own good reasons, companies want to know exactly where their goods are at any one time. They are putting in far more intelligent systems than ever before to track that.

In the design of the security requirements that are being developed by government, the first thing is to ensure that it complements what industry itself would be doing as their own corporate needs roll out, rather than having parallel competitive systems piled one top of the other.

Senator Austin: Or non-compatible systems.

Mr. Beatty: Absolutely. The strong message I get from colleagues who are members of the Coalition for Secure and Trade Efficient Borders is to ensure that what we are doing is integrated and the product of close collaboration. Industry is pleased to collaborate with government on this. As well, we must establish a win-win system at the end of the day. To go back to SenatorGraham'scomment, or yours, Senator Austin, does it make sense that when a ship is unloaded at Vancouver or Halifax, the cargo is admitted into North America, put on a train and subject to a second inspection a few hours later when crossing the Canada-U.S.border? Why do we not develop systems that are not based on how to correct 9/11, but how to correct issues that were outstanding well before 9/11 and that can actually drive our industry to a new level that will allow us to operate far more efficiently than ever before? I think we can achieve that through industry working closely with government. That is the best answer that we can give to the terrorists.

Senator Austin: Mr.Beatty, over 40per cent of our GDP is in trade with the United States. We are talking about adding a costto that that will be a disadvantage, I presume, to the total intra-U.S.economic system with which we may be competing. Do you have a comment on that asymmetrical result?

Mr. Beatty: If we do it well, there should not be a heavier burden on Canadian industry than on U.S.industry. The U.S.industry will also have to look at how to improve their standards. Indeed, with the U.S.being the primary target, one could argue that it is more likely that we will see a heavier burden being put on them to upgrade their security standards even further.

The issue is this: Do we work in a coordinated way and ensure that we do not put an unfair burden on industry anywhere along the line? We have seen since 9/11 an unprecedented degree of collaboration between industry and government. We need to take the momentum we have built and drive it further.

Senator Graham: Welcome, Mr.Beatty. Thank you for an articulate presentation. Are you concerned about the prospect of additional U.S.protectionist action against Canada?

Mr. Beatty: Are you referring to security or the political arena?

Senator Graham: Political, mainly.

Mr. Beatty: Senator, we are always concerned, yes. We are always watching for it carefully. There are a number of outstanding issues where we believe the United States has been too protectionist, whether in softwood, agricultural subsidies or a whole range of other areas.

If your question is, do I anticipate, as a result of the events of the last couple of weeks, punitive action on the part of the U.S.Administration, that is not my concern. I do not anticipate that, barring some other incident cropping up. I am more concerned about whether we have invested enough on both sides of the border to create the goodwill necessary to cut the thousand and one Gordian knots that exist even in the best relationship. Is there the willingness to invest the political capital to settlesoftwood? Is there the political will to resolve the issue of entry-exit? We are concerned about entry-exit and its potential for slowing down the border. We believe that Canada should be exempt from that. Is there the political will in the United States to make that happen?

I had a conversation earlier today with some of my colleagues at the National Association of Manufacturers in Washington, our sister organization there. They tell me there is still a tremendous amount of goodwill in the United States toward Canada. We have had a bump in the relationship this last couple of weeks that I think we can overcome. The important thing is to focus on the relationship and improve it.

I think it was SenatorAustin who mentioned the percentage of our GDP that comes from international sales. Today, Canadian manufacturers sell more of what they produce in the United States than they do here in Canada. We are our own second-best customers. That gives you some idea of the importance of this relationship.

Senator Graham: You said that our goal should be to take NAFTA to the next level. Would that include a customs union?

Mr. Beatty: A customs union may be the result of our discussions. I am not sure it should be the goal. Our goal should be finding where it makes sense for the two of us to work together and how to remove barriers to trade on a win-win basis. There are many measures we can take to remove encumbrances to doing business with one another and reduce the cost of the border. It may well be that in time, we will decide that our approach on these issues is so similar and the number on which we differ so small, that it makes sense for us to look at something tighter and go to a customs union.

I do not think we have to decide that at this point, however. There are many steps we can take to make the system better before deciding what the end point will be.

Senator Bolduc: The people from the Bank of Canada always say, in defending their monetary policy, that the Canadian dollar is good for Canada because the exchange rate will absorb the shocks. In your view, has our sovereignty, in terms of monetary policy, been an incentive to productivity so far, or is the contrary true?

Mr. Beatty: The dollar has been a two-edged sword for Canadian industry. When people look at it initially, it seems that a lower dollar means Canadian exports are cheaper and it is therefore beneficial for Canadian industry. However, the vast majority of manufacturers are also importers. They import the equipment, the machinery, to make their goods and the raw materials and components. As a result, they see those costs driven up if the Canadian dollar falls.

I would also say that I do not know of any country that has ever devalued its way to prosperity. We focus a great deal on the exchange rate between the Canadian and American dollars, but our focus should be on the productivity rate relative to the United States. If the Canadian dollar tracks Canadian productivity upward relative to the U.S.,that will not pose a problem for Canadian exporters as long as our productivity continues to grow. If, on the other hand, our productivity continues to lag behind that of the United States, if the gap continues to grow, I do not think that a cheap dollar will be our salvation. We need to focus on the main event, which is raising our productivity.

Senator Bolduc: That productivity lag with the U.S.varies considerably among manufacturing sectors. Some are quite productive — as productive as the Americans, I suppose — and some are much less so. Is it because the imports of high-tech equipment have been hurt by the lower Canadian dollar, because the market is imperfect in some way, or because our labour conditions in Canada mean that people work less than in the United States?

One thing that struck me is that in the United States, people work about 2,000 hours a year. Here we work about 1,500. That is a major consideration.

Mr. Beatty: Senator, you have put your finger on a question to which we at CME are giving much attention. I cannot pretend that there is some quick and easy answer. There is no one answer. You are absolutely right, senator, the level of productivity varies tremendously from industry to industry and from company to company.

I would make a few points. First, while as a whole our SMEs lag in productivity relative to the United States, it is not axiomatic that being a small-to-medium-sized company makes you inefficient. There are all sorts of suppliers to the automotive sector that are world class. You cannot sell to GM, Ford or DaimlerChrysler unless you meet their world- class standards. These companies meet those standards. Also, there are plenty of advantages.

Nor is geography necessarily a criterion. You can look at a company like Garrison Guitars in Newfoundland, which is a winner of the Canadian Innovation Awards and a stellar example of a company in a remote area of the country that is a world leader in its offerings. It requires then that we look not for the silver bullet, but for a nuanced response that looks at specific issues and how we can improve.

How do we improve the training and skills of our people? A company cannot innovate unless its workers can. What can we do to capture the low-hanging fruit, the fairly inexpensive measures that we can take to make small and medium-sized businesses more efficient? One of the things that CME is involved in — and this would perhaps be of particular interest to Senator Austin because my chair is a member of the one in Vancouver— is the creation of manufacturing consortia that bring together 12 or 15non-competing companies where the senior management can meet to benchmark themselves against world-class standards, pool their resources to bring in experts that none could afford individually, simply share advice than they cannot get anywhere else on how to deal with problems, and promote the principles of lean manufacturing. We have seen dramatic improvements in productivity as a result of these simple, low-cost measures. We have proposed to Industry Canada that we partner with them in rolling out these consortia across the country.

It is important to understand innovation. Often, we think of innovation as a giant machine into which we stuff lots of money at the top, and when you turn the crank, innovation comes out the bottom. I do not think that is so. It is much more a question of culture, state of mind and organization in using the money and resources that we have. There is a great deal we could be doing, particularly with SMEs, to make them more innovative.

Often, it is innovation within the company. How do you adopt world-class best principles, as opposed to having to develop Nobel-Prize-winning research that breaks through to some new technological level? There is a whole range of areas and you have put your finger on a number.

The investment in machinery is a key part. Because of the low Canadian dollar, the average machinery in Canadian SMEs, according to the House of Commons Industry Committee a couple of years ago, is older than the average machinery in American plants. Consequently, it is less efficient. We could look at things like eliminating capital taxes as a means of encouraging the replacement of inefficient equipment. We can take measures in a whole range of areas to make our industry more competitive.

The Deputy Chairman: Thank you, Mr.Beatty. Once again, you continue to add value that is useful and informative for our deliberations. We look forward to the next time that you appear before our committee. In the meantime, please accept our gratitude for taking the time to join us this evening.

The committee adjourned.