Proceedings of the Standing Senate Committee on 
Foreign Affairs

Issue 1 - Evidence, February 17, 2004


OTTAWA, Tuesday, February 17, 2004

The Standing Senate Committee on Foreign Affairs met this day at 5:20 p.m. to examine the Canada-United States of America trade relationship and on the Canada-Mexico trade relationship.

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

[English]

The Chairman: This afternoon we are holding our first meeting on the Canada-U.S-Mexico trade relationship as it pertains to the committee's review of the free trade agreement. We have already tabled our first report, which was on the free trade agreement — or the first chapter of our report. Our second chapter, which we have tabled, is on the exchange rates and the impact of exchange rates on Canada-U.S. trade. This is the third leg, the Canada-U.S. trade relationship and the Canada-Mexico trade relationship, which, in my opinion, gets a bit involved because there is Canada-U.S.-Mexico, Canada-Mexico and U.S.-Mexico. It is not as straightforward as all of that.

The committee will have hearings, I believe, next week, and then we will be moving ourselves, some of us, to Mexico City.

Today, we have witnesses from the Department of Foreign Affairs and International Trade and from Export Development Canada. From DFAIT, we have Mr. Marc Lortie, assistant deputy minister for the Americas, Ms. Andrea Lyon, director general, General Trade Policy Bureau, and Mr. Graeme Clark, director, Mexico Division. Mr. Marvin Hough, regional vice-president, Latin America, is here from Export Development Canada.

Please proceed, Mr. Lortie.

[Translation]

Mr. Marc Lortie, Assistant Deputy Minister (Americas), Department of Foreign Affairs and International Trade: Honourable senators, thank you very much for inviting me to take part in this meeting of your committee in preparation not only for your report, but also for your upcoming visit to Mexico city. I will try to be as brief as possible with my colleagues in painting a picture for you of the dynamic relationship we have been engaged in for some years with Mexico.

Mexico is in full political and economic transformation. Canada is playing a key role in that transformation.

[English]

This is the first statement that I would like to make — the difference that this country, our country, is making in the political and economic transformation of Mexico. It has direct consequences on our trade and our level of investment.

Since the creation of NAFTA, we have tripled our trade with Mexico, and our level of investment is increasing on a yearly basis in a very dynamic fashion. However, what NAFTA has done on the political side is to promote a greater transformation for a transparent business climate in Mexico. They opened up their economy; they are changing the political way of doing things; and they are moving at a very impressive pace at this moment.

The Canadian government is making a difference at this moment — and that has been the case starting with the electoral process. We have been working with some of you, and some of the most eminent senators around this table have been working on democracy for many generations. Most of you have been involved with this issue. In Mexico, we are witnessing the results of a democratic reform opening up and transforming political institutions. Why? Because NAFTA was an incentive for them to carry on with their transformation.

Where do we make a difference? Governance, the electoral process — governance to modernize the way the Mexican government is operating in terms of the professionalization of their public service, in terms of improving their judicial system, in terms of improving decentralization in Mexico through federal state examples. Therefore, we have been working with them also on issues such as e-government, how to ensure that new technologies are the way of doing things in Mexico to change their governmental structure of the last century.

There was a major event that took place in Mexico in early 2004. On January 12 and 13 of this year, the Mexican president hosted a summit in Monterrey where he gathered not only the Prime Minister of Canada but also the 33 other leaders of the hemisphere. We are 34 in the hemisphere, trying to develop this hemispheric cooperation.

We talked at that summit about several issues, including the free trade agreement of the Americas, but one overwhelming issue of political governance was presented by the Mexican government. You will see the change of mentality when I mention it, namely, how to address corruption — what to do to get to the heart of corruptive practices, be it in the corporate world or, more important, in the government world.

The pattern decided at Monterrey — to push all the hemisphere and the Mexicans in the direction of greater transparency, access to information laws, being "accountable," a new term and new practice. Once it is moving forward, what are the immediate consequences? It gives our private sector greater confidence to invest, greater confidence to do business, greater confidence to go for the long term in investing, which is what we have witnessed in Mexico in the last five years. It is increasing, and it has been increasing under President Fox's presidency since August 2000, when he travelled to Canada and raised with then Prime Minister Chrétien the possibility that both countries embark on the modernization of the government.

That is the overall background of where we are with Mexico. Mexico has become, in the last few years, a strategic partner of the Canadian government, and Canada has become the strategic partner of Mexico. When the Mexicans decided to open up their economy to create more prosperity, they decided to create an agreement with the United States. In order to manage politically an agreement of that importance with the United States, they needed a third partner to accompany them, and that partner is Canada.

NAFTA has to be seen not only as a trade instrument, to increase the level of trade, but also it has to be seen as a political instrument, to further strengthen the political transformation in Mexico and to give to the Mexicans a new strategic partnership with us that we are developing and will develop in the years to come.

Ms. Lyon will take over from here. She has some precise figures on trade. In the question and answer period following the presentations, we could give more examples about the type of investments witnessed by the Canadian private sector in Mexico in the last few years.

Ms. Andrea Lyon, Director General, Department of Foreign Affairs and International Trade: With respect to NAFTA, I will talk a little bit about Mexico's approach to NAFTA and how they have dealt with it. I will briefly give you some statistical information with respect to trade and investment, and I will highlight some of the areas where we are trying to pursue further trade liberalization through the existing structures of the North American Free Trade Agreement.

As Mr. Lortie indicated, if you measure the investment and trade flows, NAFTA has been a success for Mexico. They have increased their exports significantly to Canada, and two-way trade between Canada and Mexico is now up around $15 billion, so it has tripled since the outset of the North American Free Trade Agreement in 1994.

Canada has consolidated its position as the largest trading partner of the United States. Canada-U.S. trade was at or around $677 billion in 2002, and Mexico is now Canada's sixth largest export destination and the fourth source of imports worldwide.

The North American Free Trade Agreement, as has been mentioned, has also helped Mexico attract much needed foreign investment from around the world. There has been roughly a three-fold increase in investment from Canada, again in the period since the implementation of NAFTA.

Beyond the statistics, we have seen other impacts in Mexico. Globally, Mexico is now the seventh largest exporter in the world, and has also proceeded to negotiate free trade agreements with bilateral partners. It has 32 free trade partners currently.

Mexico has also diversified its exports. Back in the 1980s, about 70 per cent of Mexican exports were minerals and oils; manufactured goods represented less than 25 percent of exports. In 2002, these figures had changed. Eighty-nine per cent were manufactured goods, and 8 per cent were minerals and oils. There has been a transformation with respect to their exports.

Generally speaking, economic activity and production have increased in Mexico, contributing to the creation of more and better paying jobs.

In Canada, public support for trade liberalization for NAFTA remains relatively high. If you look at polls, they will be anywhere from 60 up to 70 per cent, and you will see some of those figures reflected in Mexico as well.

However, certainly the Fox administration has encountered some resistance and some opposition to the North American Free Trade Agreement, particularly from agricultural producers. The Fox administration has nonetheless remained committed to the full implementation of NAFTA and has committed to honour all of its NAFTA obligations.

The North American Free Trade Agreement, with its structure of 30 or so working groups — the NAFTA commission, NAFTA coordinators and NAFTA deputies — has a full array of tools to keep the agreement a living being, changing with the times and responsive to business needs and market forces. It provides a useful tool for us to pursue and identify barriers that exist to trade and investment. Let me give some examples.

There was a NAFTA trade commission meeting last October. The commission comprises trade ministers from three governments. The ministers instructed us to seek further liberalization of NAFTA rules of origin, which will make it easier for exporters to qualify for NAFTA tariff preferences. Likewise, they instructed us to study the possibility of MFN tariff harmonization and to determine whether or not that would lead to a reduction in transaction costs for exporters. We have launched a public consultation process, all three governments, in an effort to view what sectors could be pursued in this initiative.

On investment, last October, the ministers signed statements and recommendations on procedures regarding submissions for amicus briefs in Chapter 11 disputes, and we also agreed to a standard form for notices of intent, which will help improve the transparency of the Chapter 11 provisions. The ministers welcome the establishment of a North American steel trade committee, which provides a forum in which the three governments can discuss issues of shared concern with respect to this important sector. They also approved the mutual recognition agreement that had been signed by accounting professions of the three countries.

Officials will be looking for other opportunities to continue ongoing liberalization of trade and investment, and in that respect there will be a meeting of NAFTA deputies next month, in March, in Vancouver.

Mr. Marvin K. Hough, Regional Vice-President, Latin America, Export Development Canada: I have just returned from three and a half years in Mexico City, where I was based as the EDC regional director, so I will give you a few comments from the ground. As you know, EDC is a key player in the Team Canada effort. It is a bit like the credit department of a company working with the marketing department. We are working closely with our colleagues to facilitate Canadian exports and investment into Mexico.

The integration of Mexico into the North American economy, the very successful political transition in 2000 and the fact that there has been very sound fiscal management in the government have all propelled Mexico to a new plateau, where there is a lot of confidence in the country and Mexico is considered as an investment-grade country. Despite the struggling economy during the last few years, which has been obviously affected by the U.S. economy, it will not surprise you that 88 per cent of Mexican exports go to the United States. Despite those problems of the U.S. economy and the fact that the country has not really implemented significant structural reform, few people would have said five years ago that Mexico would be faring this well. It is in a position where it is an attractive investment location and, as I will show you, a very attractive destination for Canadian exports.

EDC, again as a key player in Canadian export promotion, considers Mexico to be a priority market. We established an on-the-ground presence in the year 2000 in Mexico City, and we furthered that with a second representation, in Monterrey, because of the growing business in that particular regional area. It may not surprise you that Mexico is the second largest country in terms of business volume for EDC after the United States.

From the financial or credit point of view, we need to see some significant reforms in the area of energy, and particularly in the electricity reform, and in oil and gas, and some fiscal reform in the country.

If you talk to international investors, over and over again they will say there are two significant challenges yet in Mexico that differentiate it from developed countries as an investment location. One of those is the legal system, and the other is labour relations. We can comment on these later, if you like.

From the EDC point of view, all of our services are applicable, that is, we are insuring Canadian companies who are selling into Mexico and offering credit. We are providing political risk cover for Canadian companies who are investing into Mexico. We are helping Canadian companies who set up bonds to complete contracts. We are doing a lot of financing, either directly to the Mexican buyers or through Mexican banks. It is a significant market and represents in itself about 25 per cent of all EDC's emerging market or developing market business.

In the presentation that we have provided for you, you will see that, in the last three years, our EDC business volume in Mexico has essentially doubled from 1999, a volume of about $1.2 billion, to $2.4 billion this last year, 2003.

Also, the number of Canadian companies that we are supporting in the market, as you would expect, is continuing to grow. Last year, we supported approximately 413 different Canadian companies in a wide variety of sectors.

[Translation]

The key sectors include electricity, oil and natural gas, industrial equipment, automotive, telecommunications and agrifood.

[English]

These are probably the most dynamic sectors, but there is an increasing number of Canadian companies and particularly small and medium-sized companies going to Mexico and finding a niche in the area of advanced technology, in environmental applications and plastics and packaging. As a representative in Mexico, it was a pleasure. There was always activity in some sectors and a wide variety of Canadian companies in the market.

I wish to highlight as well that this is rather new for EDC. It is only in the past few years that we have actually established a presence in a market. The benefit of that is starting to be demonstrated. The initial benefit is that we can develop relationships in the market that will make a difference for Canadian companies.

Honourable senators, we are setting up financing agreements with certain Mexican companies and then pulling Canadian companies into those environments and giving them an opportunity to sell that they might not have had otherwise.

Through on-the-ground representation, we are better able to look at the risks in Mexico and assess them to help our colleagues at EDC in Ottawa and throughout the regional offices in Canada complete transactions by facilitating things on the ground. This is a significant step for EDC.

We collaborate closely with the DFAIT. Our offices all over the world are set up at Canadian embassies or consulates.

Finally, in Mexico, we have some joint strategies, and I will just mention a couple of them that are significant. The first strategy is to better help those Canadian companies who actually set up a presence in Mexico. It is important to realize that we keep telling Canadian companies that they must set up a presence in some of these markets and that we need more tools and ways to support them once they do that. I am thinking of the automotive sector in Mexico where smaller Canadian companies are setting up. We are working closely with them to develop new products to help them grow in Mexico.

The other strategy is working to support Canadian small and medium-sized exporters. We are developing some cooperative agreements with Mexican banks where we actually share the risk of the end buyer in Mexico. In the past, we may not have lent to these companies or the Mexican banks may not have lent money to them. By sharing the risk, we will be supporting more and more small and medium-sized companies, which represent about 70 per cent of all Canadian companies on the ground.

I would be pleased to answer any questions the committee may have.

The Chairman: I have a brief question. We are dealing with a country whose political system and traditions are very different from our own, and I understand that.

I read and speak Spanish, and have spent a significant amount of time in Spanish-speaking countries over the last 30 or 40 years.

In January, I was in Bogotá reading the papers about the Monterrey conference. I noted a strong note of dissatisfaction with NAFTA in the Spanish papers. Would someone like to enlighten me as to why that might be?

Mr. Lortie: For some commentators, it is fashionable to be negative about NAFTA. There is a movement in the Americas that feels that the free trade agreement and agreements like that mean that they will be opening up their economies and become victim to foreign capital and that more foreigners will embark.

What I find interesting is the reaction of President Fox and what he is saying about NAFTA. His government is saying that if they have grown in the last few years it is because of NAFTA. If they have prospered, even if they wanted to do more, the little they got was because they opened up the economy. That important sentiment emerged from the country that took a big risk 10 years ago.

Therefore, if you were to speak to President Uribe, in Bogotá, to find out what he has uppermost on his mind, it would be to have a free trade agreement with Canada. He says that Mexico grew in the last few years because it geared its economy toward North America, and he would like to do that also.

At the same time, if you were to go to Venezuela, Bolivia or other countries in the area, they would say that the model is perhaps not the model they would like to have. The debate is open, but the results on the ground for NAFTA have been, according to the Mexicans, successful, but with challenges.

The Chairman: I do not wish to open this subject up too far, except to point out that President Fox's term is finished. He will be retiring soon and there will be another president.

The comments that I referred to were not editorial comments. One of them was an article in a financial newspaper; I believe government officials were talking about the difficulties they had with NAFTA. I was not really referring to idle talk. I was referring to comments that seemed to originate with officials of the Mexican government.

Senator Carney: I do not have the advantage of our chair. I do not speak Spanish, nor have I been to Mexico for 30 years. I am talking from a basis of ignorance.

Mr. Clark, in your position as the director for the Mexico division, please feel free to jump in when you can add information.

We could not go to Mexico last year, I believe, because there was expected to be an election and it was considered that we should not participate at that time.

I do understand that the election narrowed the ability of President Fox to move in some of these areas. That is about the extent of my knowledge on this issue.

Could you tell us generally what is the difference in the political and economic climate between last year and now? What will we find now?

How does that enhance the strategic partnership of Canada and Mexico, which I subtitle "against the United States"? What has happened in Mexico since our aborted trip that has improved the Canada-Mexico strategic alliance and made it clearly more necessary? Is it just border issues; is it exchange issues?

These are generic questions, but their respective answers would give some without the chair's experience a little better sense of it.

Mr. Lortie: There was the congressional election in Mexico in July 2003. It was called a mid-term election, being the middle of the six-year term of President Fox, who has a mandate until 2006.

The opposition parties wanted to increase their majority in the congress, therefore making reform by President Fox much more difficult. Fiscal reform, energy reform, labour reform and federalism reform all became more challenging because they could not reach proper compromises between the opposition that dominates congress and the presidency.

At the same time, it is a new fact of life in Mexican political life, because for 75 years Mexican political life was dominated by the PRI, and the PRI dominated both the presidency and congress, as well as governorships, mayorships and so forth. That is part of the big political transformation of Mexico, but in this big political transformation there are checks and balances. Now the Mexicans have to learn to live with checks and balances. With the presidency on one side and the congress on the other side, they need to find the proper compromises to move forward.

The leadership in both the senate and the chamber of deputies in Mexico has said that in the next two and a half years of the Fox presidency they want to find the proper mechanism to move forward on that. It is unlikely that that is the same type of reform that the president and the government would like to obtain, but they agree that they should move on that score.

No one is contesting or questioning the North American "economic space." Everyone has moved in that direction in the last 10 years, and they like that direction. They like the openness of the Mexican economy and they will support it.

Therefore, the strategic alliances or partnerships between Canada and Mexico — I should not say against the United States, but it is easier with three to move together on some of the issues. It could at times be difficult to move as three, but two could move forward and wait for the other a little down the line.

I think that will be with us for the next few years.

Senator Carney: Thank you. I am sure that we will be exploring that in our visit.

With regard to the EDC experience, I am interested in the fact that there have been so many opportunities for Canadian companies in the energy area when the whole energy field is so protected in Mexico that it is a barrier to further integration in North America. The fundamental threshold of Mexican protectionism is probably control over their energy resources.

Why, if they are so protective of their energy resources and structures, are there opportunities for Canadian businesses to expand? I am from Western Canada and am interested in the sectoral impact of that.

Mr. Hough: The best way I can answer that is to say that there is an increasing opportunity for certain Canadian suppliers of oil and gas equipment into the national oil and gas company, Pemex. Similarly, the electricity authority, which is again government owned, is expanding within its own purview and doing projects. There is an increasing number of Canadian suppliers; EDC is facilitating some of that, and that will continue.

There are a lot of Canadian energy companies, particularly from Alberta, that are very interested in the opening of the gas sector and the electricity sector. The answer to your question is that there are different kinds of Canadian companies exploring Mexico and the suppliers of down-hole drilling equipment, et cetera, are finding a way into the national public sector companies.

Companies that would like to participate in gas exploration and would like to be involved in the private generation of electricity are having a problem. They have been visiting Mexico and waiting for the reform which, as Mr. Lortie says, has not come.

Senator Carney: What is the realistic possibility of a significant opening up of the energy sector? That has been spoken of for years, but what is the realistic chance?

Mr. Lortie: The president is firm about transforming the energy sector of his country. That is why, on July 16, 2001, he invited to his ranch the major CEOs of Canadian energy corporations. He discussed with them how he can embark on these energy reforms. However, due to the political situation with his congress, he has not been successful. He is trying to move the agenda forward, but he has not found the proper compromises with his opposition to do so.

Everyone in Mexico now realizes that it does not make sense for Mexico to import 25 to 30 per cent of its natural gas requirements from the United States. They have not invested in exploration of natural gas, yet at the same time they need to produce electricity to supply their growing economy.

They will need to find the proper method. I believe that successful energy reform, albeit perhaps not be as comprehensive as was envisaged in the Fox campaign in the year 2000, will come in the rest of his mandate.

Senator Graham: Mr. Lortie, you have a particular interest in democratic governance in that part of the world. You suggested that NAFTA was a useful instrument in promoting democratic reform in Mexico.

Would those who have a special interest in this field categorize the last election as a free and fair election?

Mr. Lortie: Absolutely.

Senator Graham: Thank you for that. That is great reassurance for someone like myself who has a special interest in this field.

You also said, I believe, that NAFTA has promoted a more transparent business climate in Mexico. What would you say, in that respect, about the condition of labour rights? I am thinking specifically of the right to collective bargaining in Mexico.

Mr. Lortie: I would say two things. First, President Fox has introduced a labour reform in his congress to ensure that Mexico is at par with international obligation, mainly under the International Labour Organization, the ILO Convention. Mexico has entered into signing and ratification of the various labour agreements on the international scene, trying to modernize their approach on that score. They have a very different situation, for example, in the agricultural sector, which is not modern. It is a traditional sector and, therefore, the labour rights in that area are minimum.

Second, there are new kinds of industries coming to Mexico. For example, there are Mexican employees of the Bank of Nova Scotia across the country — there are more than 300 branches. If you were to ask those employees about their labour rights, they would say, "My labour rights are similar to those of Scotiabank employees in Canada."

In the manufacturing sector, where they are embarking on an economy, it is different — labour rights are minimal. The Mexicans realize that they have to improve the equality of the labour rights in the manufacturing sector if they want to carry on with the modernization of their economy.

In respect of labour reforms on the floor of congress, the political will of the president is to modernize this approach. Mexico remains a developing economy. The population is 100 million people, half of whom are considered poor. The Mexican economy is in development; it is an emerging economy.

Senator Graham: Has NAFTA contributed to greater income inequality in Mexico?

Mr. Lortie: That is an important question, senator. NAFTA is an instrument to create growth, not an instrument to reduce inequality. What would reduce inequality in an economy? Fiscal policies, investing more in education and ensuring that the social programming is taking place. NAFTA does not do that; rather, it is the responsibility of the government to do that.

Therefore, to go back to the initial question of the chair, some Mexicans think that the adjustment policies were not strong enough to look after the agricultural sector suddenly faced with new imports from North America. They are not equipped to deal with that. That is an example of where adjustment policies are needed. NAFTA is an instrument to give confidence to the private sector to embark on trade, to open up the economy and to move it forward.

On the question of equity and inequality, which is a major cancer in the Americas, it is the responsibility of fiscal policy to ensure that we have an equalization system between the regions. In Monterrey, which is in the north, the people are rich. However, in Chiapas, the people are poor. The manufacturing sector is in the north. How do you manage that? How do you equilibrate the situation? How do you inject that into a political system? That is what they are looking at in respect of governance and actions to date. It is a long process but an essential one.

Senator Graham: What effect has the rise in the value of the Canadian dollar had on Canada-Mexico trade?

Ms. Lyon: Canada's exports have continued to grow year after year, about 9 per cent on an annual basis. It has not had the same kind of dampening effect that, perhaps, you may have seen in the United States. I know this committee has done a study in that respect. It has not been the same effect.

Senator Poy: Thank you for your presentations. I will address my question to Mr. Hough. Am I correct in saying that EDC started in Mexico in 1998, or was it earlier? I am looking at the table.

Mr. Hough: No. We have supported Canadian exports and investments for 34 years.

Senator Poy: Is that also in Mexico?

Mr. Hough: Yes. In 2000, we set up a presence in Mexico, but many of our financing arrangements have been active for many years.

Senator Graham: I think that is what Senator Poy meant.

Mr. Hough: Yes.

Senator Poy: The largest growth is in political risk insurance. Who is taking the risk?

Mr. Hough: Under political risk insurance, we provide coverage to Canadian companies, or even banks that might lend to projects, against political risks. In fact, I think I understand your question to be this: If Mexico is becoming a bigger economy, is growing and is investment grade, why would your political risk insurance be growing so much?

Senator Poy: Yes.

Mr. Hough: The answer is that Canadian companies have been doing bigger projects in Mexico. In the case of our volume there over the last couple of years, that is in relation to support for some major power projects that are within the current rules, if you will, whereby Canadian companies set up power plants and sell the electricity to the national grid. They are making bigger investments and so they want to have the protection. It is not that Mexico in any respect is becoming a riskier market from EDC, but rather it is because a growing number of Canadian companies are doing major projects.

Senator Poy: In 2003, the total amount of business was $2.4 billion.

Mr. Hough: That is correct.

Senator Poy: What does it cost the Canadian government to do that level of business?

Mr. Hough: EDC operates on a self-sustaining basis, so we are not drawing on the government in a direct way for support. The Canadian government put equity into EDC when we were established; in fact, we have used that equity to support 450 times the original amount of what the Canadian government put in. It is not that you can equate it to a draw on the Canadian government.

We manage our business in such a way that we pay claims when buyers do not pay in the Mexico market. We operate our financing program on a commercial basis. We have the advantage of operating in 150 or 200 markets. We can operate in a self-sustaining way, which allows us to effectively support some of the small companies that are operating in Mexico and in the United States that otherwise it would be difficult for EDC to support.

Senator Poy: The companies actually buy insurance from EDC.

Mr. Hough: That is correct.

Senator Poy: Does the insurance cover the non-payment of bills? When they are not paid, does the insurance actually cover the debt?

Mr. Hough: Yes. We pay the Canadian company that insures with us if there is a non-payment. We pay them 90 per cent of what they would have received, so they are able to recoup their losses.

Similarly, on the financing side, we operate our financing program on a commercially self-sustaining basis. Any profits we make, we reinvest back into EDC Capital.

Senator Poy: Do you work with local Mexican banks, as you mentioned before?

Mr. Hough: Yes, we do.

Senator Poy: How stable is their banking system?

Mr. Hough: That is a good question. In summary, the banking sector went through a major catastrophe, as some of you will know, in 1994, when the economy went south. The government essentially had to bail out those banks. It has taken from 1994 until the present for the banks to recover, in a sense. They have been recapitalized. Investments have gone in there from outside Mexico — and in fact from Scotiabank, as Mr. Lortie mentioned. About 85 per cent of the banking sector now is owned by international banks. Gradually, the banking sector has become more stable.

What they are not doing yet and what we are trying to work with them on is lending to the small and medium-sized companies in Mexico. Those are higher risk. I submit that this is important. How can a partner in NAFTA be operating and how can small Mexican companies be competitive if they cannot get credit from their banks? The government is very concerned about that and is trying to stimulate more activity and trying to get the banks to take on the risk of small and medium-sized companies. In a small way, EDC is doing its part.

Senator Poy: Where do the companies get their financing if they cannot get it from their local banks?

Mr. Hough: They get their financing sometimes from their suppliers. Other competitors from Europe who may be bigger companies allow them to pay later. In other cases, they pay cash and they have to manage their business in a way that they can pay their suppliers in cash or receive money from their inputs before they pay. It is a major challenge. The government is very much focused on bringing that sector up through credit from the banks.

Senator Poy: You have a statement here about using Mexico as a market to better prepare Canadian exporters in becoming more global. I thought we were global.

Mr. Hough: Yes, and I would say that it is an opportunity for small and medium-sized companies to, first, launch into Mexico and to get experience and to then grow from there even more.

Senator Di Nino: First, let me add to the chairman's opening comments. In my experience, the concerns — I would call them that, more than criticisms — of NAFTA have come from members of Parliament in Mexico, both the senate and the house. Particularly, about three months ago, Canada was at a Council of Europe assembly where we, as well as Mexico, held observer status. As always, we met with the Mexicans. One area of discussion was their various concerns about NAFTA. I think it was along the lines that, if there were no benefit, would it be finished or would it still go on?

Let me add some information that you probably know about, for the benefit of my colleagues. It appears that one of the main concerns is not necessarily directly related to NAFTA but to the transfer of manufacturing jobs to Asia, particularly to China, and the import of goods primarily through the sieve — to use an expression of one of the members — of uncontrolled imports. Apparently, the market is full of illegal imports, and that has an indirect effect on the value of NAFTA. I thought I would share that they had expressed that concern.

Now I will take a totally different tact because of an issue that has been raised in the last two or three months. One talks about other impacts and the regional disparities, if you wish, between north and south Mexico. One of the very sad situations with the maquiladoras, Juarez being probably the best example, is the fact that many young women from the South, because of the disparity in economic growth, are going up north to work in manufacturing jobs. I understand that hundreds of women have disappeared. Dozens and dozens have been murdered and found as corpses.

That leads me to the question of the labour laws and labour rights. How bad is that situation? Certainly, I should like to follow this up when we get to Mexico in a couple of weeks.

Mr. Lortie: Those are not easy questions. Regarding NAFTA, there is indeed a great concern in Mexico that, suddenly, their investment over the last 10 years in creating a manufacturing sector is competing with China. The jobs are moving out of northern Mexico towards China. They are very worried about that so they want to deepen the North America economic space. This competition was not even on the radar screen five years ago, but now it is a reality. They have to address that. They need to find other competitive niche sectors. They need to invest in education on a fast-track basis. These are tremendous challenges for Mexico and for President Fox or his successor.

However, Mexico recognizes that, without NAFTA, they would be further back and the north would be similar to the south. They are trying to progress, notably, with Partnership for Prosperity. They have created, with the Americans, Partnership for Prosperity about how to invest in infrastructure in the southern part, the underdeveloped parts of Mexico.

Partnership for Prosperity has different dimensions. As a government, Canada is not a partner in the program, but they would very much like us to be observers, to see if, one day, Canada could become a full member in that approach.

We have realized a couple of things about Partnership for Prosperity. Remittances are very important in the Mexican economy and very important for the workers of the south. By "remittances," I refer to money that Mexican workers send back to their families. We discovered that that money amounts to $14 billion per year. What have we done in Monterrey? We have given instructions to bureaucracies in the banking system and in government to reduce, by half, the cost to migrant workers of sending money. If you ask Scotiabank about their remittance system, you will see a prime example of a modern institution helping out migrant workers to send their money to the south of Mexico.

We will need to amplify that because there is too much. On the question of Ciudad Juárez, everyone is upset by the tragedies facing young women in that part of Mexico. Those who are the most upset are the Fox government and the Mexicans themselves. They have tried to address this issue. It has been raised at the level of the commission of human rights and it has been raised on the international level. I would encourage senators to raise it in the context of your contact with the senators, because it is in raising this issue that Mexico will, one day, be able not only to tackle — because they are tackling this issue — but to really resolve this outrageous problem of human rights there.

Senator Di Nino: First, on that statistic on remittances, are these remittances from the maquiladoras to other parts of Mexico or are these remittances from the maquiladoras and other parts of the world?

Mr. Lortie: Other parts of the world. It is it from outside Mexico going mainly to the southern part of Mexico.

Senator Di Nino: By the way, that is nothing new. My family did it when we came to this country in 1951. That happens all over the world.

Do you have the statistic on what the remittances are from the northern part, from the manufacturing areas? How much is going to the poorer parts of Mexico? I suspect that the $14 billion that you are talking about is mainly from outside.

Mr. Lortie: The $14 billion is entirely from outside. From within Mexico, I would not know.

Senator Di Nino: Would it be very little?

Mr. Graeme Clark, Director, Mexico Division, Department of Foreign Affairs and International Trade: I have seen no data on the issue. It is a fascinating question that you raise, that of internal remittances as it were, within the borders of Mexico.

Senator Di Nino: Obviously, if Mexico is to look at this as a benefit to all the country, one of the benefits will be that the father, as happened throughout history, the father or the brothers go to different parts of the world, earn the money and send it back home. I should like to know if this is happening. Do you have that information?

Mr. Clark: I do not have the information. In all the literature I have seen on remittances, I have seen no study or no analysis of that particular issue.

Senator Di Nino: I will make a note to ask when we get down there.

Mr. Clark: Mr. Chairman, we would be happy to try to find some information about that and pass that on to you prior to your visit.

The Chairman: I guess the idea of NAFTA was that the remittances were supposed to drop because fewer Mexicans would go to the United States to work, they would remain in Mexico working and the real question is: Have the remittances and the number of Mexicans going to the U.S. become fewer, as was promoted when NAFTA was started?

Mr. Clark: No.

The Chairman: I did not mean to interrupt, but I think that is your question, Senator Di Nino.

Senator Di Nino: Yes, that is part of it.

I have other questions. One deals with the tragedies in Juárez and other parts. I do not think it is restricted to that. Are the labour rights, in effect, not good enough to protect some of these people? They are mainly young women, I understand. I do not think that there are many young men being killed. It seems to me that the manufacturing entities that go down there to establish themselves are not taking into consideration the safety of the workers, particularly those in transit from their residences to the manufacturing jobs. Maybe it is silly, but I would think by providing some safe transportation it would not be overly expensive. Would anyone like to comment on that?

Mr. Clark: Briefly, on Juárez, frankly, I think it is a question that goes beyond the issue of labour standards and labour rights. I believe it is a question of policing, as well as a question of the explosive conditions that you see in a border town where the maquila sector has been devastated. There is a sort of culture of lawlessness in that part of Mexico.

I would draw the honourable senator's attention to an exercise that was recently done by the Office of the United Nations High Commissioner for Human Rights, an office that was opened at the invitation of President Fox in Mexico City and which has recently done a diagnostic of the human rights situation in Mexico, a sort of complete picture of the human rights challenges facing Mexico. Anders Kompas, who is a Swedish diplomat who runs this office, may be one of your interlocutors on your fact-finding mission, or may be someone worth talking to, to get an international perspective on some of the systemic problems that have caused some of the situations that you have been describing in Ciudad Juárez, senator.

Senator Di Nino: I want to ask Mr. Hough a question with regard to how the judiciary is working, in his opinion, particularly when he is dealing with having to act on some delinquencies or non-payments, et cetera. Is there a judiciary that has improved in the last 10 years?

Mr. Hough: We have had significant issues in trying to recover funds on claims. I would still characterize the legal system as inconsistent, and it is a question of different states having more successful cases. In other words, we do not find, from a general point of view, that there is consistency amongst the states, and many cases are actually appealed to the federal level, but it takes three and four years sometimes for that to happen. It is inconsistent, unreliable and time- consuming.

Again, this is part of the government's program, and many steps are being taken. It is just hard to see in a general way. People only can relate to it if they can say, "Okay, I realized my recovery in a year and a half this time, whereas it used to take three or four years."

Senator Di Nino: Has there been an improvement then?

Mr. Hough: Yes.

Senator Graham: I have a quick supplementary question. I am interested in the judicial system as raised by the senator. Mr. Lortie said that one of the consequences of NAFTA, whether it was major or minor, was an improved judicial system in Mexico. Am I correct in remembering that you said that?

Mr. Lortie: That is true, but to embark on the rule of law system takes time. What we have witnessed is that the trend in Mexico is going in the right direction on that score. It has changed because NAFTA forced the Mexicans to be more open, more transparent and engaged in the rule of law-based system. We have witnessed it there and it is moving forward. However, there is a certain distance to go. We all agree with that. We need to encourage them. That is the profound political transformation that Mexico is going through.

Senator Mahovlich: My last visit to Mexico was about 30 years ago. There were some mining companies down there that were Canadian. I happened to go south in Mexico, I cannot remember the town, but it was a silver mine and it was Canadian owned at that particular time. Do we have, today, as many mines as we had, say, 30 years ago that are Canadian sponsored, Canadian-invested mines?

Mr. Lortie: We have a few mining companies, but in modern times our mining company went further south than Mexico. You find them in Chile, in Argentina, in Peru, in Brazil, in the Dominican Republic and then Mexico comes up on the list. Thirty years ago, Mexico was on top. Now I would say, as far as mining companies, Mexico remains a rather small market, and not in silver any more. They are looking more for gold than anything else.

In terms of the overall portfolio of our mining corporations, it is rather small. Therefore, there is a major evolution of our mining corporations. If the committee were to travel south to South America some day, you would see a major investment by Canadian corporations in the mining sector.

Senator Mahovlich: In your presentation, you mentioned the word "corruption." I was wondering to which government you were referring. Is there a lot of corruption in Mexico? Does President Fox have three more years to serve in his term?

Mr. Lortie: That is correct.

With regard to corruption, I should like to tell you two things. First, six years ago, Canada lost an ambassador who denounced corruption in Mexico. He did this because he felt that Canadian corporations and the Canadian private sector were not getting the type of transparency that is respected in Canada. He denounced corruption and he left Mexico.

It was perceived in Mexico as one of the most important political gestures by a foreigner in the last six years. As a result, the Mexicans have decided to address and attack corrupt practices in a very serious way. However, that will take time. That is why I referred to Monterrey and addressing properly corrupt practices, from the baksheesh in the street to obtain a permit for something, to the customs officers, to judges. The Mexicans have embarked on combating and eradicating corruption, which is why President Fox made mention of it in his Monterrey declaration of last month. What is there to do about it? It should not be hidden, but highlighted.

Senator Carney: When we go to Mexico, we will go as representatives of Canada. My question is this: What can we do for you? What are the issues that we can raise at the political level or other levels that will help you do your work?

If you wish to think about that and send a letter to the chair, that is fine. I should very much like to know what issues you would like us to advance. We should ensure that we are be well briefed on those issues.

Mr. Lortie: We in the Department of Foreign Affairs consider your visit of prime importance to reach out to Mexican legislators. It is important to develop a relationship with Mexican legislators, be they senators or deputados. It is important because they are embarked on something new. When you embark on a big adventure like that, you need friends. They will look to you for that.

How will they look at you, Senator Carney, especially since you were a founder of NAFTA? They will look at you in terms of energy — you mentioned energy earlier. They are not sure if they will embark on energy reform, if the Americans are to take over their resources as they did before 1938. That is the bottom line.

If you share the Canadian rules, regulations and approach to managing the energy sector and the development of natural resources, you will go a long way to reassuring the Mexican congress that things could be done without entering into an exploitative or chaotic situation.

They need to understand that there is another way to manage natural resources in 2004 than the way they were managed in 1936. Therefore, you need to help them with what you have done in terms of legislation and regulation to manage the natural resources sector. That is one example.

The other example has to do with labour law. Do not hesitate to raise your concerns. If you want to become a strategic Canadian partner, what is taking place in Ciudad Juárez is not acceptable.

Senator Carney: That is very helpful. We have similar concerns in those areas with Mexico as they concern our labour laws and our energy strategy.

Mr. Lortie: On the trade side, senator, I would say that the issue of mad cow disease could be addressed. The mad cow issue concerns a North American-integrated industry in which the Mexicans are involved. Therefore, you need to push the mad cow issue and the importance of addressing this issue in the North American context.

The Chairman: The witnesses will be in touch with me. We will ensure that committee members are made aware of what we should be pursuing. There is no question about that.

Senator Corbin: I should like to know more about the tensions with the U.S. Today, Senator Di Nino, and others in previous meetings, alluded to this question that the Mexicans appreciate our presence in NAFTA. I should like to get a little more elaboration here. It seems to me that that is indicative of stress, whether superficial or deep, I do not know. Could you enlighten me in that respect? Or is it just a matter of political ideology that the Mexicans tend to view things more the way we perceive them in our relationship with the United States of America? This has been touched on before. However, I do not think we have got to the bottom of the issue. Could you add something to that?

Mr. Lortie: The history of the relationship between the United States and Mexico has always been a very tense relationship, and that is an understatement. This relationship has been profoundly transformed in the last 10 years because of NAFTA. The symbol of that transformation is, in fact, NAFTA.

We must remember that there are 22 million Mexicans who live in the United States. Five million of those are considered illegal migrants, illegal workers. Therefore, the relationship that you have between the two countries is a very delicate one. Before arriving in Monterrey last month, President Bush announced his proclamation concerning embarking upon a new approach to migration. They were given the possibility of obtaining a driver's licence, a green card and the possibility of opening a bank account. That is for 5 million illegal workers, all of whom are Mexican. Therefore, in the context of the United States, it will improve the lot of the illegals because they are Mexicans.

President Bush is going to host President Fox on March 4 and 5 at his ranch in Texas. It is the third time that that visit has been cancelled. Why? One day it was because of the water problem. The Rio Grande starts up north; therefore, the water problem. How do you share the water under the treaty of 1934 between Mexico and the United States? A set amount of water is supposed to go to Mexico; suddenly, however, the water does not arrive in Mexico because it is used in the northern part for farming, agriculture and irrigation, and for urban dwellings. Therefore, water has been a problem. He cancelled the visit there.

Then there was the question of the death penalty of a Mexican worker in Texas.

Thus, the relationship between the two is always a delicate balance to manage. President Fox has to manage that relationship. In saying, "Where would I find my prosperity for the next 10 years? Where are the young Mexicans going to work in the next 10 years?", he is looking at North America. However, public opinion in Mexico is saying "cuidado cuidado" — we have a long, historical relationship with the United States where we have always been on the losing side. However, if Canada comes in with us as a partner, to improve things, to invest in the banking system, to invest in the energy sector, to invest in modern industry, factories, technologies and telecommunications, as we see, Mexico will improve its overall relationship with the United States of America.

The prosperity of the future of Mexico is there. It is not with South America and not with Europe, although they have not closed their doors, but that is where the prosperity will be. That is the big challenge for President Fox.

Therefore, the relationship will always be with the Americans. If they refuse an energy reform, it is because of the Americans. If they refuse to embark on some of the major issues, it is because of the Americans. The Americans are always present in their political life and that is where we could make a difference.

Senator Sparrow: Tell us what problems Canadian companies would face when they go into Mexico. Is there a problem getting in there? Are they having problems while they are there? Is bribery and corruption affecting the Canadian industries that are there, and how can we assist in that area?

The labour unions in Mexico are really government-organized, unless you tell me different. Regular free, organized labour does not really exist in Mexico of any consequence. That must affect our industries that would move in there.

Next we are talking about litigation. The lawyers in Mexico — unless you tell me something different — are all paid by the government. They are all litigation government lawyers as such. Lawyers that are independent do not have access to the judicial system and the courts. They can look after divorce laws and so on. Unless they are appointed by the government as legal counsel, they have not much provision to protect individuals or industries that are there.

Can you comment on those questions?

Mr. Lortie: With regard to bribery and corruption, Canadian corporations do not embark on such practices entering the Mexican market. This era is gone, as far as I know.

It is interesting to see, however, the level of new Canadian companies entering the Mexican markets. We have now over 1,000 companies established throughout Mexico, in the tourism and other sectors. It is amazing to see the booming expansion of Canadian corporations. If they are there, it is because these corruptive practices are something of the past.

Now, why are they going to Mexico? They are going to Mexico because they want to accompany the development of the middle class in Mexico. The Bank of Nova Scotia developed a strategy, and I could say the same thing for Quebecor, Transcontinental, Magna, Dofasco and Bombardier. The companies that are there are saying, "This is a country on the move. We need to be there to accompany the development of that middle class that 10 or 20 years ago did not exist." Now it is moving in that direction. They feel comfortable about doing it. It is part of their overall business strategy to be in Mexico. I think it is important.

Labour reform is on the books. It is really on the books because it is a system that is of the past and it has to be modernized. Do we have in Mexico an equivalent to the major trade unions? That is not the case. Perhaps Mr. Hough could speak on that subject.

Mr. Hough: Sometimes, we forget how bureaucratic Mexico is in terms of documentation. We have 10 years of NAFTA. We recently conducted some seminars where we brought Mexican buyers to Canada. We put on a seminar where we explained to the Canadian companies the mechanisms of how they will get their products through, the customs rules, the packaging. Sometimes, I think it is a little bit too easy to say we have a NAFTA partner; some people think that business is done as easily in Mexico as it is in the United States.

Other things come to mind. One of the biggest problems we are having, on the credit side, concerns financial statements. You want to be able to have reliable financial statements and Mexico still does not have reliable information; for example, the disclosure issue. If you are going in as a Canadian company looking to partner with a Mexican partner and you have two or three different balance sheets to look at, it presents a problem.

We find in some cases that Canadian companies are using an agent and they need to understand the market better. There is no question that they cannot do that from Canada. They have to take their time to set up a presence on the ground themselves. There is a host of problems. I think the numbers speak to the fact that there are more people who can facilitate trade with Mexico now than ever before. There are specialists to get the product through the border. Even shipping into Mexico, you have to offload the shipment onto another freight forwarder. In fact, my personal goods arriving in Mexico took three and a half months. I asked, "How is this possible?" It is because the network does not work that fast. It has to improve.

The numbers are there — 1,200 Canadian companies with some form of presence. They are finding their way through. I think the good thing is that the information is becoming known. How do you deal with these problems?

Even in labour relations, I have talked to many Canadian companies who tell me they are pulling their hair out. "I do not know how to fire this employee who is not performing because there are antiquated labour laws," for example, "and some of them are, in fact, in favour of the employee." In a modern economy, these companies have to compete and they should be able to make their employment decisions.

Overall, it is improving. Overall, Canadian companies are finding their way in and through all the things we mentioned; the cultural exchanges and the education exchanges are leading to better understanding. However, my main point is that you should not assume that because Mexico has been in NAFTA for 10 years all those channels are smooth and allow for quick shipments and quick resolution of problems. The legal system will take some time yet before we are at a stage where people have the confidence to actually take legal action through the court system and receive their decision in a timely fashion.

Senator Sparrow: The government-controlled labour unions normally set the salary ranges. They are not negotiated by the employee and the company. Those rates are established. Is that not correct?

Mr. Lortie: To tell you the truth, I do not know. I will check that.

I was going to answer, and to plead ignorance also, on the questions of the lawyers. I had the impression it was not the case, because most of our Canadian business corporations there are using Mexican lawyers, and they are not on the government payroll the way I sometimes see them. Is that right, Mr. Hough?

Mr. Hough: That is correct.

Ms. Lyon: I was going to add that Canadian lawyers can be accredited to practise law in Mexico.

Senator Sparrow: It depends on what laws they can practice.

The Chairman: I suppose they use notaries as they do in Colombia and places like that? So it is a little different.

Senator Di Nino: Mr. Chairman, the reason we need to explore the judicial, regulatory, banking and accounting areas is because it is directly related to doing business. We must continue to ask those questions and educate ourselves as to what the standards are.

I wish to echo what my colleague Senator Carney said, if you have some thoughts or information that you think would be useful to us — we are all in the same boat trying to improve the situation. You are not witnesses from the other side; this is the same family. You know more about this than we do and we would appreciate whatever you can give us.

There is an area where I have a question, and you may want to reply with a letter. The Carnegie Endowment for World Peace came out with a report. When the report deals with NAFTA and Mexico — I am going a little bit by memory here — it talks about the fact that wages really have not gone up. I wonder if anybody would like to comment on that.

More specifically, there is an article there that talks about the expected increase in jobs that may have occurred in the manufacturing sector, but that the agricultural sector has been devastated with huge losses of jobs.

I am going by their statistics. This is bound to be an issue that will come up as it has in our private discussions with some of the Mexicans.

Is there any light that any of you can shed on that? It has been a very serious problem for them, particularly in the southern part of Mexico, as I understand it — and I am not experienced there. Any information on that would be helpful in our discussions.

The Chairman: Who would like to answer that question?

Ms. Lyon: You can get a case of competing economic studies all the time. While Carnegie may have come out with a certain set of findings, the World Bank has come out with a different set of findings. They have indicated that, in the absence of the North American Free Trade Agreement, the Mexican global exports would have been about 25 per cent lower, that foreign direct investment would have been around 40 per cent less and that Mexico's per capita income would have been about 4 to 5 per cent lower. We can certainly give you some other studies that have shown different sorts of findings.

Senator Di Nino: How about comparison from 10 years ago to today? Was there a spike and then downwards, or has it been constant, or has it now flattened out? Do we have any of that information?

Ms. Lyon: Some of them have done economic modelling over the period since the implementation of the agreement. It is very difficult to isolate impacts of the North American Free Trade Agreement on the economy and divorce it from various other effects that may be happening at the same time, particularly given the peso crisis that occurred as the agreement was being implemented. In fact, that is what some of the observers have noted — that had there not been the North American Free Trade Agreement at the time, the impacts in Mexico would have been a lot worse, and it served to cushion the Mexican economy somewhat.

The Chairman: Thank you. Honourable senators, we have had a good opening to our study. I repeat: We are dealing with certain dynamics that we are not as familiar with as if we were dealing with Western Europe or the U.S., for example. I know Senator De Bané would like to say one word, and then I will adjourn the meeting.

Senator De Bané: I should like to express my appreciation to the four officials from Trade, from EDC and from Foreign Affairs that have briefed us on the occasion of our working visit to Mexico.

For those of my colleagues who are not aware of it, I should like to tell them that you understand now why Mr. Lortie is not only responsible for managing the relationship with our most important trading partner, the United States of America, but has also been awarded the most prestigious award by the Department of Foreign Affairs, the Award of Excellence, which is given to the diplomat who has made the most significant contribution to the department.

I should like to take this occasion also to pay tribute to his wife, who is also a senior diplomat from the department. To see someone from Quebec City married to a girl from Victoria, both of whom have achieved so much for our country, many, many thanks. I wish also to express my appreciation to the representative of the EDC for the Americas, Ms. Lyon, director general, and also Mr. Clark. Thank you very much.

Senator Graham: I endorse what our colleague has said. When Mr. Lortie was the Canadian ambassador to Chile, I spoke at a conference there, organized by the then president Eduardo Frei. I was invited to meet with the president and cabinet in the south of the country — this is just by the way — and Ambassador Lortie asked me, "Did you bring an overcoat?" It was winter down there, and I replied to him that I did not have an overcoat with me. He gave me the coat off his back. When I came home, Prime Minister Chrétien asked me how our ambassador there treated me? I said, "Treat me? He gave me the coat off his back."

The committee adjourned.