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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 5 - Evidence - Meeting of June 15, 2006


OTTAWA, Thursday, June 15, 2006

The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:45 a.m. to examine and report on issues dealing with interprovincial barriers to trade.

Senator Jerahmiel S. Grafstein (Chairman) in the chair.

[English]

The Chairman: Ladies and gentlemen, I want to thank our witnesses and the committee for coming this morning. We welcome Canadian and American viewers from coast to coast to coast. We are seen not just on television but also on the World Wide Web. Everything you say has important ripple effects across the globe.

The Standing Senate Committee on Banking, Trade and Commerce today is examining the interprovincial trade barriers in Canada. More particularly, we are examining the extent to which these interprovincial trade barriers limit the growth and profitability of affected sectors, as well as the ability of businesses in affected provinces, jointly and with relevant U.S. states, to form economic regions — what we call the new regional economic engines of growth that can only enhance prosperity.

The topic of internal barriers to trade is critical and important as we seek a prosperous and productive future. The barriers, in my view, and in the view of many members of this committee, often increase costs for businesses and perhaps ultimately for consumers. They may also lead to inefficiencies that reduce competitiveness and productivity.

We do not have a national economy. Because of these interprovincial trade barriers, we have a fragmented economy. We need to focus on actions that will enhance competitiveness and productivity, and remove internal barriers to trade that are harmful to achieving the goal of a strong, vibrant, productive national economy.

We have before us today excellent witnesses. Welcome, gentlemen. I would like you to parse your remarks to three or four minutes. We will table all your fuller statements. I am sure the committee members will have probing questions.

We will start with Mr. McMahon of The Fraser Institute.

Fred McMahon, Director, The Fraser Institute: Thank you for the invitation. I feel honoured to be here, in part, because I have read Robert Knox's remarks and can sum up mine by saying that I agree with Mr. Knox and, as it turns out, I could also sum up by saying I agree with the senator.

I will start with a quick story from about 30 years ago, perhaps to add colour to the proceedings, but also to make an important point.

I come from Atlantic Canada, Nova Scotia. However, I went to McGill University, and in the mid-1970s I represented McGill at a debating tournament at Fordham University. We were lucky it was the same night as the famous Father Shrove party. As it turns out, Father Shrove was not a long-dead dignitary but a very live Jesuit. We found him in the calm centre of an immense party, the most Jesuit-looking Jesuit I have ever met. He was leaning against a wall-long stack of cases of Moosehead beer. At Fordham, in the Bronx, you could buy all the Moosehead beer you wanted. When I went back to Montreal, because of Canada's interprovincial trade barriers, I was not allowed to buy a drop of beer made in Atlantic Canada.

What is astonishing, senators, is that here, 30 years later, we still face internal trade barriers that, as Senator Grafstein said, continue to hobble our productivity and put unnecessary limits on our growth. Much progress has been made during those 30 years, in part because of the efforts of people such as Robert Knox, who have worked hard on the portfolio. We still have these barriers for any number of reasons: special interest groups and the absurd consequences of Canadian's fiscal federalism. For instance in Newfoundland, when the Voisey's Bay project came up, the increased tax revenues from the project were less than the resulting reductions in equalization payments unless the province held out for a smelter in Voisey's Bay. This situation impacts the trade of natural resources and the free flow of labour.

One could call the system of unemployment insurance in Atlantic Canada, which is extraordinarily generous and discourages full-time work, another barrier to trade.

I will not spend time talking about the negative impacts on productivity of barriers to trade, because for an economist that would be like a physicist spending a lot of time explaining that the Earth circles the sun. The debate is pretty much a settled. It damages our productivity and our wealth creation.

In conclusion, however, I want to put an idea on the table. It has always amazed me that the federal Government of Canada is happy to intrude in areas where it does not have constitutional jurisdiction. Health care is a prime example. Yet it fails to fulfill its own constitutional powers. One of those powers is authority over interprovincial trade, written right into the Constitution.

I urge this committee to urge the government to look at those powers and to bring to the fore a federal force, based on its constitutional power, for eliminating interprovincial trade barriers.

Simple things are complicated and this would be complicated, but it is within the federal government's realm to act in this manner. While the government has had plenty of courage in the past to interfere in health care, it has had no courage in the past to do something that would benefit all Canadians.

Robert McKinstry, Senior Policy Analyst, Canadian Chamber of Commerce: Thank you very much. Being from St. John, New Brunswick, I can appreciate Mr. McMahon's story. However, I will go into my own comments here. Things are getting better, but they are not perfect.

I am pleased to have the opportunity today to provide information and recommendations to assist in your examination of interprovincial barriers to trade. The Canadian Chamber of Commerce is Canada's largest and most representative business association. We represent more than 170,000 businesses from every industry and every region of Canada.

Barriers to interprovincial or internal trade exist by the nature of Canadian federalism, which assigns economic and regulatory powers to federal, provincial and territorial jurisdictions. In many cases, barriers are a result of provincial jurisdictions and their autonomy over economic and social policies.

However, internal trade barriers increase the cost to both businesses and consumers and negatively impact the competitiveness of the Canadian economy. Barriers to trade encourage businesses to make strategy decisions based on the shelter provided by these barriers, rather than growing their businesses to compete internationally, creating, in effect, artificially sheltered small economies.

In an age of globalization, Canadian businesses need to operate in a domestic environment where they can grow to a point where they can compete internationally. As you are aware, in 1994 the provincial, territorial and federal governments signed the Agreement on Internal Trade, AIT, which took effect on July 1, 1995. The objective of the AIT is for the federal, provincial and territorial levels of government to work together to reduce and eliminate barriers to trade and the free movement of goods and investments within Canada and to establish an open and efficient stable domestic market.

To assist the efforts of provincial and territorial governments in implementing the AIT, the Canadian Chamber of Commerce conducted an information-gathering exercise to identify barriers to trade through the use of a questionnaire with our members over the summer of 2004. I hope the committee received a copy of our report, entitled Obstacles to Free Trade in Canada: A Study on Internal Trade Barriers.

Based on the questionnaire results, the most common barrier to trade was regulatory differences between federal, provincial and territorial jurisdictions. For many larger firms, regulatory compliance represented an added cost to doing business. For small businesses, regulatory burden was cited as a factor for not expanding their operations into other provincial or territorial jurisdictions. This finding is worrisome given the fact that small businesses represent over 95 per cent of the total businesses in Canada and employ approximately 65 per cent of the Canadian workforce. Through our study we concluded the following:

First, the most common barriers to trade are overlapping regulations between jurisdictions, multiple licensing requirements and local preferences in awarding government contracts.

Second, having to comply with multiple but similar sets of regulations increases the cost of business and represents a barrier for small firms who do not have the capacity to dedicate resources to ensure compliance.

Third, the local preference requirement in awarding contracts creates closed economies, does not ensure that taxpayers receive the best value for their tax dollars and inhibits competitive businesses from expanding their operations.

As such, the Canadian chamber recommended the following in our study:

One, the study recommends that the federal, provincial and territorial governments use our study as a starting point to investigate and identify existing government practices that discourage trade and the efficiency of the Canadian economy.

Two federal, provincial and territorial governments must work together to fully implement the AIT and resolve the identified barriers in trade to ensure an economy where Canadian companies can grow and operate where they choose.

That concludes my comments. I would be happy to answer any questions.

Robert Knox, Senior Fellow, Montreal Economic Institute: I am glad we have come this far that my colleagues can get Moosehead any time they want now. Not so long ago, maybe 16 years, they could not have done that. It is a small triumph, but for some people it is really important.

I would like to introduce myself. I have been concerned and engaged with this issue for about 20 years, first as a public servant and more recently as a consultant. I was the senior federal official who, among other things, was responsible for internal trade policy and federal co-chair of the Federal/Provincial Committee of Officials on Interprovincial Trade from 1986 to 1992. I did other things too but that was one of my favourite things.

From 1993 to 1995 I was Executive Director of the Internal Trade Secretariat and managed the negotiation of the Agreement on Internal Trade.

I retired from the federal public service in 1996 and, since then, have been consulting on internal trade. I have been involved with five of the eight complaints that have been heard by internal trade panels since 1998. Since retirement, I have written a little, farmed a little and made maple syrup. It is not just internal trade that engages me.

I wanted to spend a little time on the history of this issue. Internal trade issues have been around since Confederation and, of course, they are with us still. Our federal structure is the problem. It is the base cause of domestic barriers to trade. The Rowell-Sirois commission identified it as an issue in 1940 as did the Macdonald commission in 1985. I think everyone around the table will recall that the issue of the economic union was the subject of constitutional negotiations in 1980 and1990, and both those negotiations failed to solve the problem. Then, in 1993, we finally had governments around the table and we came up with the Agreement on Internal Trade. That agreement has helped to resolve some issues but it has not been completely effective.

I offer you a quote from Graham Parsons, who was with the Canada West Foundation. In 1994, he said:

...interprovincial barriers to trade create an interlocking, tangled and expensive web of vested interests. Together they slowly and steadily choke Canada's economic arteries, losing output, incomes and jobs for Canadians

I always found that statement of the problem particularly clear.

Obviously, this situation may have been acceptable before we had such a globalized economy but it is not anymore. The Montreal Economic Institute believes Canadian governments can no longer afford the barriers to trade, investment and labour mobility created by Canadian governments themselves.

As the recent Conference Board of Canada study, Death by a Thousand Paper Cuts — love the title, actually, and it is a good report as well — pointed out, the Canadian federal enterprise cannot tolerate the impact of these barriers on Canada's productivity and competitiveness.

What needs to be done? The Montreal Economic Institute believes that Canada needs an effective agreement on internal trade to ensure an open, predictable and efficient domestic market. As it now stands, the current AIT is not this agreement.

I should have done better in 1993, but I was not alone; there were others.

An agreement on internal trade must be comprehensive. It must cover all trade and investment and labour mobility in Canada — no exclusions or exceptions — unless the government can demonstrate there is no other way to protect public health and safety or the environment in its jurisdiction. A clause in the Agreement on Internal Trade is called the legitimate objective, and that is the purpose of that particular clause. It is a good clause, but not used properly, in my view.

Second, the agreement should establish a single set of trade rules or principles that apply to all trade in Canada. The AIT does that. Unfortunately, having established the rules and principles, it then removes a good portion of the issues it should cover from the application of these rules.

Third, the agreement must be clear and accessible to those affected by barriers to trade, whether individuals or businesses. The reality is that not all barriers are significant. The agreement can and should be used to identify and resolve those that are important. This identification and resolution will happen only if the agreement is easily understood and applied, and governments respect it and use it to solve domestic trade issues.

Barriers need to be self-identifying. Not all barriers that come from regulation are necessarily important. Some of them are. Part of the function of an agreement must be to act in a way that allows those that are important to be identified.

Fourth, the agreement must have dispute resolution procedures that are accessible, quick, inexpensive and enforceable in the courts. Above all, Canadian governments must respect the obligations that they accept when they sign the trade agreement. This has been the biggest failing of the current AIT. For whatever reasons, Canadian governments fail to respect many obligations. If only one government does not respect the principles and obligations of a trade agreement, it fails all together.

On behalf of the Montreal Economic Institute, I would like to say we believe that this committee's consideration of domestic trade issues is timely. Ministers responsible for internal trade from all Canadian governments are looking for ways to improve the effectiveness of the current agreement, and we hope your findings will inform the process positively.

Senator Tkachuk: The provinces of Alberta and B.C. just completed an agreement on trade and harmonization. Mr. Knox, have they met the principles and obligations that you set out in your remarks? Is there something in the agreement that the rest of the country could adopt? I know Saskatchewan was invited to participate and decided not to. Can you help us through that?

Mr. Knox: I have just finished writing an article on it. The agreement addresses the things I just discussed, and I did debate it simply by saying, forget about the AIT: Here is the model for everyone. The agreement is good. It is not perfect. I will explain why. It does three things. It changes the principle. In other words, everything is in unless it is taken out. If you do not have an exception or something like that, then it is covered by the agreement and that is the way it should be. That is where we started with the Agreement on Internal Trade. We established the principles and then we put in a whole lot of exceptions.

Second, it simplifies the agreement, so it is more understandable and easier to use. Again, it is not perfect, but it is a good start.

Third, the agreement establishes one single dispute resolution process for which there are penalties if governments do not exercise it. In contrast, the AIT has consultation processes in every chapter, then a dispute mechanism beyond that. As I have learned from personal experience, after two or three years, you might actually get a decision from a panel and then the governments do not necessarily exercise that or follow the judgment.

There are a few problems, but it is a good start. Part of the problem is that there are still a lot of exceptions to get through. The second problem is that the dispute resolution process probably does not have enough teeth. It needs some more. There is a cap on the penalty for governments, which is $5 million. For a lot of people, the injury that the industry suffers as a result of the barriers is beyond $5 million and it repeats every year as long as that barrier is in place.

It is a good start and they have involved the courts. The other thing, based on my experience, particularly since I retired from the public service, is that even though they have done a good job it is still not as open as it ought to be to the private sector. The private sector is the one experiencing the barriers and it should be involved in identifying or helping with the solution. Again, as with the AIT, the private sector is an extra wheel in the process.

Mr. McMahon: I want to bring some international perspective to this, because in discussions on global trade, there is a big debate on whether regional trade agreements, such as in South America, North America and Asia, are good or bad. The argument is, if you develop these regional agreements, you then can put up barriers between regions. Arguably, the South American Free Trade Agreement is more of a trade protection area for South America than a real free trade agreement that opens them to the world.

I do not know whether there is any danger of that developing in Canada, but I wanted to mention that there is a dangerous side where regional blocks begin to develop. As an example, Alberta and British Columbia start coordinating their regulations, and then the Atlantic Provinces start coordinating their regulations, and they conflict. The result is free trade between Alberta and British Columbia but less free trade between the West and Atlantic Canada. There is a hazard in that regional approach.

Mr. McKinstry: The Canadian Chamber of Commerce wrote a letter to both Premier Klein and Premier Campbell congratulating them on their agreement. We copied their provincial and territorial colleagues, encouraging them to recognize the Agreement on Internal Trade, fully implement the provisions that are laid out within that agreement, and follow the lead that Alberta and British Columbia have set. We are a fairly optimistic bunch at the chamber and we thought that this step is in the right direction. We encourage further participation.

Senator Tkachuk: Mr. Knox, are there major exceptions in that agreement that should not be there?

Mr. Knox: Yes: If you bear with me for a moment, I wanted to add something to what I said before, to help clarify the comments that Mr. McMahon and Mr. McKinstry made.

In the Agreement on Internal Trade, article 1800 reads that there may be bilateral agreements as long as they are more liberalizing than the AIT. It also reads that anyone who likes that agreement may sign on to it. In addition to signing a regional agreement, Alberta and B.C. set up a model that they thought was better than the AIT that people can sign on to. I do not think that will happen, but hopefully, in the discussion taking place under the Council of the Federation, it will provide a model that other people can use.

I will come back to the question now. In the Alberta-B.C. agreement, there are two kinds of exceptions. There are ones that are transitional and ones that have been taken out by one or other of the parties. The transitional ones are interesting because they are things such as financial services, which are excluded from the AIT. The purpose of those exceptions is to give an opportunity to the two governments to bring those things into the agreement before it comes into force. It is a mechanism for eliminating those things.

That is a good step forward. Among the other things, I did not go through a detailed look at those exceptions because I focussed on the mechanism, but there are things about which you are familiar, such as supply management, particularly dairy. If you look at the issues under the Agreement on Internal Trade, four of the eight disputes have been involved directly or indirectly with the dairy supply management system.

Issues such as that need to be dealt with some way or another.

Senator Tkachuk: This problem has existed for a long time.

The Chairman: That is the problem. The problem has been in existence since Confederation. We must direct some political will to solve these problems.

Senator Massicotte: Mr. Knox, it is so obvious that it is in the interest of Canadians in common to resolve these issues and to allow free trade. Free trade has been proven to be consistently in the interests of people, promoting openness and economic well-being. That argument is easy to win. Obviously, when we look at decades of experience, we are not there. B.C. and Alberta have made good progress. Your recommendations on how to get there are good. However, that is not the hard part. We have many experts in Canada who can prepare a summary sheet on how to get there. The obvious problem, in my mind, has been a lack of political will or a lack of pressure from Canadians to get on with the job. It is like cancer: You do not necessarily see it until it is too late.

If that is the issue, how do we get there? How do we make the public system work and arrive at a real solution as opposed to all these private, basically hidden benefits where everyone tries to cheat the system for their own special interests? We will try to solve the issue with this committee, and publicize it, but will it disappear? Why has it lasted so long? Why is political will lacking and how do we expose this issue?

Mr. Knox: That is a 20-year question for me. I have been trying to figure that out.

There are probably several answers, and none of them absolutely clear. Part of the problem is in the issue itself. Many people around this table have more experience in business than I do, but if you operate a business, you do not spend much time on public policy. Your job is to make the business run. When business confronts an issue, it must be really important for them to spend much time trying to resolve it. What happens in many businesses — and both the conference board and the chamber show this — is that the business confronts the problem and says, "What do we do?'' Much of the time they will say, "To heck with it. We will not waste our money and time on that; we have a business to run.''

In the public forum, that means many people experience barriers and they deal with them in their own way: The barriers do not become a political issue. Moosehead became a political issue because it was a political issue. The pressure that should be there from the people experiencing the barriers is subsumed in the commercial process.

Second, and you pointed to the problem yourself, many of these barriers protect local interests. Guess what? Voters in Ontario do not necessarily vote in Nova Scotia or wherever, so the tendency then is to serve the local interests, although not all the time. It is hard to keep the bigger policies in mind.

The third reason is that somehow there has been a lack of national leadership on this issue. I say national because, in my experience, it is not all the federal government's problem. It is their problem to a point because they are the national government, and they provided a lot of leadership in the process of the AIT and the ministers involved. Both Michael Wilson and John Manley were effective at providing the leadership that led to the Agreement on Internal Trade. Once the agreement was there, everyone walked away from the issue. I do not know the answer, honestly.

Senator Massicotte: Mr. McKinstry, you represent many Canadian businesses. There are selfish interests and the interest of Canadians to resolve this. How do you elevate the issue to make sure we do not lose it? How do you elevate the issue so it is resolved?

Mr. McKinstry: As Mr. Knox said, that is a good question. From a starting point, we found we could talk to public officials about the problem, and one of their first questions was, what are they? Give us some examples.

Through our questionnaire, we tried our best to collect information to demonstrate that businesses are facing real, live problems. We tried that as a starting point. We have tried to encourage groups such as the Council of the Federation to continue their efforts. However, it is always a challenge to maintain the political will to stay focused on this topic. As Mr. Knox mentioned, there is much local interest. Some of these groups are well organized. It is energy- and time-consuming for governments to address these issues over the long term. The issues may be in public sight for a short period of time, but we have not seen the political will and leadership to sustain the effort required over a long time to resolve these barriers.

As a business community, we take every opportunity presented to us to raise this issue, both at the federal and provincial levels. We have a great deal of work left to do on this file.

Mr. Knox: I should have said, senator, that you could make the agreements easier and more open to the private sector so that the people experiencing problems would actually use the agreement and drive the agreement. That is one way of keeping attention on the issue. Unfortunately, because bureaucrats and politicians make these agreements, they tend to be oriented in that way.

Senator Goldstein: Thank you for your excellent presentations and spending your time to come speak with us.

The AIT contains, as you indicated earlier, a number of exclusions, which are significant. Regional economic expansion is excluded, and financial institutions and others are excluded. Exclusions arise from non-governmental intervenors de facto, such as trade unions, which will not permit mobility of labour where that labour belongs to other unions, as well as professional organizations that insist on certain qualifications to practise within a particular province. The response is not necessarily a federal government legislative response, notwithstanding clear federal jurisdiction in this area, because a government, especially a minority government, cannot, realistically speaking, deal with some of these issues in a way that would be acceptable from a political perspective. We have to be conscious of that.

How can we create a situation where professional organizations and unions specifically work together, or how can we encourage them to work together to reduce trade barriers, especially labour mobility barriers? Can the Council of the Federation play a useful role? Can the current agreement between British Columbia and Saskatchewan be a useful model to encourage others, and who should do the encouraging? Quebec and Ontario this past week reached an understanding — a micro-understanding, but an understanding notwithstanding — about certain labour barriers. Some short time ago, New Brunswick and Quebec reached a similar agreement. Aside from legislation, can any mechanism be used to encourage the easing of these barriers at the trade level and not at the governmental level? I am talking primarily about labour mobility barriers, which seem to me to be the most fundamental. Since the liquor case back in the 1920s, leaving aside beer for obvious reasons, pure shipment of goods and commodities interprovincially does not appear to be a problem. Movement of people appears to be the dominant problem. How can that be attacked and addressed?

Mr. Knox: Obviously, we are all trying to figure out how to answer that question.

Let us try to parse it. You had two parts to your question, one coming out of the union arrangements, which are far more intractable in many ways because they start from local bases. From the professional side of things, my sense is that we have come a long way in terms of resolving most of those issues. Some are still outstanding, but things such as mutual recognition agreements that the governments sponsored under the AIT have solved many of them. Cooperative leadership that is taking place among ministers responsible for labour mobility is still the best way to go, because there is self-interest among the various professions. Some groups will simply try to protect their own local interest, and others would rather see a national standard. Then you have the other case of more than one group in a particular profession, notably the certified general accountants, CGAs, and chartered accountants, CAs, that I know intimately, but there are others. Foot specialists are another. There are intractable problems such as that, but by and large, many professional bodies operate now on a national basis. Even lawyers apparently can move across provincial boundaries. Then there is the red seal, blue seal. It seems to me that labour mobility is one area where progress has been significant, and continues to be. The process of consultation, which is an active one among governments, seems to be working. I will turn to my other colleagues who may have a different view.

Mr. McMahon: Senator, if I understand the question, you are asking us for a solution to having unions act in the public interest.

Senator Goldstein: That is a subset of the question, yes.

Mr. McMahon: I agree with Mr. Knox that progress has been made. There is no one-size-fits-all answer. You referenced the Quebec-Ontario and Quebec-New Brunswick situation. As you recall, in both those situations, the governments of Ontario on one hand and New Brunswick on the other hand basically took out a cudgel and starting beating Quebec and making various threats. The situation required harsh language and sometimes harsh action. In other cases, as Mr. Knox said, professional groups may see a broader interest for themselves in having a cross-national jurisdiction so if you are a lawyer, you can move from Nova Scotia to British Columbia. That is a benefit for the member of that professional association. There is no one-size-fits-all solution. You have to tackle each case on an individual basis, with a cudgel in some cases and sweet reason in others.

Senator Gustafson: Mr. Chairman, I am not a regular member of this committee, but thank you for the opportunity to be here today.

My questions relate to agricultural products. You mentioned marketing boards of course. The truth is that a farmer in Saskatchewan cannot sell wheat in Ontario. The other problem area is that a butcher in Manitoba cannot sell beef into Saskatchewan because regulations are such that in Manitoba butchers need a block building and in Saskatchewan you can have steel two-by-fours with steel walls. Health regulations are not uniform across the country.

Another thing that affects Saskatchewan is foreign ownership of land. People can come in from the United States or another country and have different regulations in different provinces, and that is a serious negative to a problem. For example, we have had a lot of farm sales, as you may have heard, and land prices dropped from $100,000 a quarter to $40,000 on average. The Americans came and bought all the good machinery. They would have bought land, but they could not buy land. As a result, the investment of lifetime farmers plummeted. We have some serious problems to solve.

The Chairman: The question is how to deal with these humungous issues. These issues are important to our farming community. We find it obscene that we cannot sell Canadian wheat into Canada. This situation seems to be an oxymoron. It is startling and people take this for granted, but it is true that we do not have a national economy.

Mr. Knox: Obviously, I do not have an answer to that. We succeeded with Moosehead, but a lot of that success is in the supply management system. That system is not a problem.

However, a good start is to ensure that issues such as grains and meat are covered by the Agreement on Internal Trade. At the moment they are not. They are actually carved out.

The federal government can solve the meat issue because a lot of that deals with provincial inspection. You cannot trade interprovincially unless your meat is federally inspected. I think the best start is to ensure those issues are covered by an agreement.

I will back off from the issue of foreign ownership. It seems to be a different issue, but I understand the harm it causes.

Mr. McMahon: I suppose you could brew up some wheat beer and send it across the border.

More seriously, we have not addressed the federal role in this situation. There have been a number of questions about why we cannot move ahead. I could add public choice to what Mr. Knox and Mr. McKinstry have said. You need an overarching interest to deal with these problems. A clause within the Canadian Constitution gives that overarching interest the ability to move on those things. The federal government has authority over interprovincial trade.

I think it is not politically feasible for the federal government to exercise this power as a huge threat: Do it or we will legislate. However, I do believe, and I think it is one thing this committee could turn its mind to, in finding ways to utilize the federal power in a diplomatic way. In addition, use the federal government's real power in this area to cajole, push and in some cases administer mild threats to move it forward. The puzzle I put before the committee is to find ways to do that.

In one way, this discussion has understated how far we have progressed. People such as Mr. Knox have played a big role in that. Progress is ongoing now. However, to speed that progress up, and to push outside this organic process that is ongoing, the federal government needs to find its leadership role.

The Chairman: I have looked at the interprovincial trade power, the commerce power. Have you addressed whether the federal government could use its powers of disallowance to disallow provincial trade barriers that interfere with the national economy and that power?

Mr. McMahon: I am not a constitutional lawyer, so I hesitate to jump in. My sense is that political obstacles, as opposed to legal ones, are the major problem here. I say that with great hesitation, having no expertise either in the law or in the Constitution.

The Chairman: You have piqued our curiosity. We will take a look at that.

Senator Harb: Thank you for your presentation.

Canada is a signatory member of the World Trade Organization. One would think as such, notwithstanding some of these trade barriers between provinces, all provinces would meet the international test in terms of the World Trade Organization rules as they pertain to trade.

One could take the position that, if these provinces meet the requirements set out by the World Trade Organization, the trade situation cannot be that bad. Perhaps that is why we do not see an outcry of entrepreneurs and business groups knocking on the doors of the federal government or, for that matter, on the doors of provincial governments requesting them to bring down the barriers. Do you think that issue could be at play here?

Mr. McMahon: I think it is accurate to say that the problems created by internal trade barriers, while unfortunate and troublesome, are not bringing down the Canadian economy as a whole. Therefore, we do not have a huge outcry with respect to these problems.

There is considerable economic research on how small special interest groups can damage the overall economy and gain the political power to do so.

While I agree with one part of your question, we are not all $10,000 a year poorer as a result of this issue. It is true that we are all poorer in general as a result of it. Because it is not a huge problem does not mean it is not a significant problem.

With regard to public choice theory, to back up what has been said by Mr. Knox and Mr. McKinstry, it has been well demonstrated that a small group with a heavy stake in something has all too often the political clout necessary to overcome the larger group with a smaller stake.

If I am a dairy farmer, I will spend a lot of time protecting, and finding ways to protect, the barriers that keep me rich. If I am a milk consumer, I will not spend a lot of time saving myself $10 to $20 a year on lower milk prices.

Again, I think you are right, but that is no reason for not moving ahead and doing so aggressively.

Senator Harb: With respect to post-secondary education, when a student from British Columbia or Newfoundland wants to transfer to a university in Ontario, it is a nightmare trying to get accreditation for courses they have taken in their home provinces. I think one of you gentlemen alluded to that earlier.

The professions have a role to play as well as the educational institutions. We cannot go after only one. I think we are collectively guilty in that sense.

I want to be a contrarian and take the position that perhaps some barriers might be productive and progressive. For example, let us take a national agency that deals with regulations and a provincial agency dealing with the same thing. In some provinces regulations may be more stringent, and rightly so; for example, in the transportation sector or the environmental sector.

While this situation may come across as a protective measure by other provinces, in essence, the measure is probably strongly supported by the people of that province. It would be in the public interest to have discriminatory measures to those outside the province when it is in the public interest.

Have you gentlemen looked at this possibility in depth? I support national standards. Do not misunderstand me. However, what I think happens is, once you set the standard, people will claim to have met it but do not want to go further. If you open it up for competition, people will go beyond the standard.

Mr. Knox: In effect, the current agreement, as well as the Alberta and B.C. agreements, recognizes exactly that point. It establishes a standard that the agreements call legitimate objective, which says if a province can show it must have that measure in that form to protect the health and safety of people and the environment, it will then come into effect. However, the onus —

The Chairman: The onus must be on —

Mr. Knox: That is right, and you must have a system in which that rigour comes into play. The problem is that there is no mechanism in the current structure that says we really need that regulation for particular purposes, and therefore it is okay. In a sense, that is what you need to do.

Mr. McMahon: Senator, I am 180 degrees away from you. I think free trade agreements bring appropriate discipline to regulations for exactly the reasons that Mr. Knox said. If you can prove this regulation is necessary, if you can prove it is important to health or whatever, you can keep the regulation. Under free trade agreements, if you cannot prove the benefit, if it does not benefit anyone other than a special interest group, you need to get rid of that regulation. Although the leaders never say so, many Third World countries are immensely grateful to sign on to international trade agreements because they can get rid of a whole lot of stupid policies they would not be able to get rid of otherwise. I believe that free trade does exactly the opposite of what you said; it improves regulations rather than worsens them.

Senator Eyton: I believe your message and the thesis behind it is self-evident to all of us at this table. We are all singing from the same hymn book and we agree with the same message. It seems to me that the difficulty is not the wording or understanding the problem. The difficulty is obtaining the right political support to make the necessary changes.

We are dealing with a whole lot of inhibitions, restrictions, practices or preferences that inhabit dark corners to accommodate selected people or interest groups, and the public generally is not aware of them.

I was, happily, part of the winning side of the free trade and the NAFTA discussions and ultimate resolution. While the agreement is not perfect, it is a meaningful document that has made a significant positive difference.

The AIT is a weasel document that has all kinds of exceptions and has had almost no effect at all in more than 10 years. It was cobbled together with all the signatories pretending to agree to make things better, but not much has been achieved.

How can we engender the same kind of awareness and debate so there is public understanding and political will? The three of you have constituencies and members. The Canadian Chamber of Commerce has approximately 180,000 members. It seems to me we need a public cry from the hilltop saying that these costs affect us all and make us less competitive.

How can we engender general public awareness; not the kind of awareness we have in this room but a truly better understanding so that politically the several governments involved can do the right thing?

Mr. Knox: I will try not to take it personally that the AIT did not work, since I was there trying to negotiate.

Senator Angus: You were out of the room.

Mr. Knox: As soon as I left the room, they changed it.

Senator Campbell: Yours was not the "weasel'' part.

Mr. Knox: It felt that way at the time.

I do not know the answer. We tried hard in the AIT negotiation for that public profile, and we received a lot of help from the Canadian Chamber of Commerce and other organizations, including the Canadian Manufacturers Association, as it then was, and the Canadian Council of Chief Executive Officers, but somehow it did not last.

I do not know the answer. You can go back to Prime Minister Mulroney complaining about not being able to buy Moosehead, and that getting the public profile it did, but that is not good enough and it does not sustain awareness.

I personally believe that the agreement is too bureaucratic. You must have an agreement that lets the private sector in so they can participate in identifying and resolving issues more effectively. That agreement would be a very unusual one for governments to sign on to, as you know.

Mr. McMahon: The difficulty is illustrated by the fact that people in the political realm are asking economists how to communicate with the public.

Senator Campbell: I am not a member of this committee; I am here representing another senator. This area is certainly not an area of expertise of mine. Some would say I have no areas of expertise, but that is another problem.

What happens in the United States? How do the states treat each other? Are there barriers there as well?

Mr. Knox: There are three parts to the answer. Yes, they have barriers as well. The second part is that it does not matter so much in a state such as New York with 30 million people. In that case, the barrier has less impact. The third part of the answer, although I cannot be too specific because I have not looked at it for a long time, is that the federal government has much more authority to deal with issues. We do not have such a thing in Canada.

Senator Campbell: We have been able to sustain NAFTA front and centre for Canadians. It is a rare day that NAFTA is not discussed in some way, shape or form. How can we do that when we cannot do something that to me seems so obvious? It makes no sense that Canadians are "zooming'' other Canadians. It is totally protectionist.

If we can figure out how we have kept NAFTA alive in public consciousness, perhaps we can do that with interprovincial trade.

I do not think the average Canadian has any idea of this situation. It does not come onto their radar screens, unless they are a butcher in Manitoba and they want to trade back and forth. It is ridiculous.

Mr. Knox: Part of the answer is in what Mr. McMahon said: There is small pain as opposed to really bad pain. However, I want to go in a slightly different direction. This answer will not be very helpful, so I will try to make it short.

If you look at the trade statistics after NAFTA and after the Agreement on Internal Trade, you will see that trade with the United States and offshore increased remarkably. Trade between provinces did not fall off, but it did not increase to the same degree. The reality is that much of the trading that goes on in Canada goes north-south. Sometimes it is easier to go north-south than east-west. If you are in Eastern Canada, is easier to start your business with New England than with British Columbia.

I suspect that part of the problem lies in the nature of our country, yet it is a really important part. If all our trade goes north-south rather than east-west, that is a problem for federal enterprise because in the long run it will be difficult.

Senator Angus: I want to explore the process.

As Senator Eyton said, these truths are self-evident. Canada is swimming against the tide in that globally, the trend is to freer trade. The federation has a problem in that we have fiscal imbalance and various problems within the federation. Suggesting that we open up and amend the Constitution has become almost taboo. Everyone is afraid to do that. Federal and provincial governments are afraid of the words "7/50'' in the various concepts of an amending formula.

I want to be on your side, Mr. Knox, and I am a big supporter of the Montreal Economic Institute and other such organizations. You have first-hand experience as manager of the implementation of the Agreement on Internal Trade. I have read through the annual report and it seems that a specific process made that happen. It was not the Rowell- Sirois commission or the Macdonald commission but something else that happened to bring together the players to make an agreement. As you said, it was an imperfect exercise but the framework was created. It has a secretariat and issues an annual report. I noticed that the ministers of trade of each province are on the main committee, As well, senior civil servants from every province sit on the operations committee. We have the starting place already. We do not need to convene a federal-provincial conference or create another Macdonald commission to do a big study. We know we are impeding our economic well-being and our productivity in this country because we cannot buy yellow margarine in Quebec, and we cannot buy Newman's Port or Moosehead beer in Toronto. These are little irritants and we need a pure and strong free trade across the country. Is the process there? How can we fix the problem? Is there a way to do that?

Mr. Knox: Let us answer your first point: What was that moment in time or what caused it? It was caused by the failure of the constitutional discussions around the economic union. That happened literally months before ministers came together and said they needed to do something about it. The outcome was the Agreement on Internal Trade.

I do not know how to recreate that moment. You are also right in saying that one of the good things about the agreement is that it creates a structure that theoretically can carry it forward. We all thought that the agreement we signed in 1994 was not the end but only the beginning because it would cause things to change. That was the point of having the Committee on Internal Trade and the secretariat. What has happened since, of course, is that the Committee on Internal Trade spent their time bickering about small stuff when they should have focussed on the big stuff. If you look at the agreement, the mechanism is in place for an annual report that not only looks at internal trade but also at the domestic market. How is it functioning? Where are the issues? How do we get at them? Drafting regulations in this country is more than simply having an Agreement on Internal Trade. You have to pick out the issues that are important, review them and try to reconcile the differences to make them work.

I am speaking simply of my background but the structure in the agreement is in place and is there to be built on. Since 1995, the secretariat has been emasculated. It has no power that I can see, but perhaps I was the problem. We saw the secretariat as the catalyst, the element with the ability to look at broader issues. However, governments have said, no, you do not move unless we let you. Of course governments do not let up because they hate the so-called "loose cannon'' or anything they cannot control, which is what such a secretariat could be.

The Committee on Internal Trade looked inward and started dealing with small things rather than the big picture.

Senator Angus: What would it take, then? It sounds like this emasculation was not self-inflicted but inflicted by the provincial and federal governments, let us assume, and not by the players who are trying to make the thing work. I was optimistic in thinking we had a framework in place that could solve the problem — if it got into gear — in a structure that has already been created. I think that is the great genius of the thing you participated in. What would it take to get it back on track?

Mr. Knox: You would need to go back to 1995 and look at the role of the Committee on Internal Trade, the ministers and the secretariat, and expand the role of the Committee on Internal Trade. In other words, give the committee the role I just described because that role is not clear in the agreement. State in the agreement that we need a body concerned with the domestic market, and the committee is it. The job of the committee is not simply to oversee problems of complaints but to deal with that market. That would be a good first step.

Senator Angus: I noticed the incumbent chair is Benoît Pelletier, who is the minister from Quebec. The success or failure of many of these organizations is a function of the dynamism of the chair of the day. Is it possible to succeed if we put a chairman in place who possessed real moxie? I understand that the chair is chosen by rotating selection. Could someone with moxie be part of the solution?

Mr. Knox: It could be. There used to be informally a federal and provincial co-chair but for some reason we did not fight hard enough for it. It is logical to have a federal co-chair in organizations such as this one because it provides continuity and national leadership. About two or three years ago, they changed that and the revolving chairmanship is not written into the agreement. The committee could do two things. Instead of having one-year terms, they could allow ministers to get into it and spend a little time: not so much the minister but the provincial bureaucrats. Put them in for two or three years, with a federal co-chair, because that position would provide a different kind of continuity and overview.

Senator Angus: Process is key to these issues.

Mr. Knox: Thank you, senator, because I agree. If you do not have the process, then you do not have the mechanism to solve the problem. Revisiting that structure and changing the mandate requires a group of officials to support that kind of process: not the secretariat you have now but the secretariat I thought would be there but never arrived. You have a secretariat that does secretariat functions and looks after the panels. It is a narrow and bureaucratic role and there needs to be some creativity in the process.

Senator Angus: The driving reason we convened these hearings is to try to be part of that process. We want to be part of getting the process back on track so this will not be a three-year study. The committee wants to put out a robust report with the muscle, if I may use that expression, to motivate the provincial and federal players to get the process moving again. Would that be helpful?

Mr. McMahon: There is a big difference between our legal set-up and the U.S. one with the interstate commerce rule, which has been used for just about everything, including much criminal activity. The commerce rule is used in the United States and therefore has political precedent; ours is not used in Canada. It is something, again, that the federal government should think of getting into. Unused limbs wither away but you can exercise them again.

The Chairman: Let me suggest something that tantalized me when I first looked at this question well over 30 years ago, and more recently — the economics of it. I think one of the answers to the positions of Senator Massicotte, Senator Eyton and Senator Angus is this frustration that we do not have political will. One reason is because we have not brought to the public's attention the cost in terms of real wealth for the lack of productivity in the economy.

I am surprised, frankly, that we did not hear about that this morning. Maybe our other panel of witnesses might give us this, but I was looking for the economic costs of a fragmented economy with interprovincial trade barriers. A study was done, based on the research in 1998, which estimated a loss of 1 per cent of the GDP — this estimate was by the Canada Alliance of Exporters and Manufacturers in 1991. That number is serious, if you compare the fact that in the last 20 years, real incomes in households have not risen. If we do not make our economy more productive, we reduce the wealth for each Canadian family. This issue, to my mind, has an impact on the spending power of each Canadian family.

Can you give us up-to-date statistics that demonstrate what the current costs to the economy are — based on whatever model you choose to suggest? What does it cost every family in the country because of this laggard political will not to address these issues? Can you help us with that? Can you cite statistical information that will support our contentions that this issue hurts the Canadian economy?

Senator Massicotte: How much is one per cent of GDP, chair? How much money are Canadians losing?

The Chairman: I cannot estimate it. Mr. McMahon, can you help us?

Mr. McMahon: It would be $10 billion to $15 billion.

The Chairman: My estimate is between $10 and $25 billion. That amount of money is huge. It impacts the family. I thank Senator Massicotte for that.

We have to demonstrate — and you have to help us, that the problem is not just political — it hurts the growth and productivity of our country, and it is getting worse; it is not getting any better.

Can you direct us to statistics that support this position? The latest statistics we have are from 1998, based on estimates in 1991 and things like that. We know the situation is worse.

Mr. Knox: I will avoid that question, chair, because I have a long history, going back 20 years, of trying to find out the number, as did the Macdonald commission. All I can do is to tell you that sad history, where we never did come to a number — the closest was the one in 1991.

The Conference Board report is useful and instructive, but it never comes to a bottom line. They show that there is loss, but they never come to the number.

The Chairman: Perhaps we should direct the federal government to find out, or the central bank, the Bank of Canada.

Mr. Knox: The one thing I found is that there was an argument about whether one per cent was significant or not, going back.

The Chairman: We think it is significant.

Mr. Knox: I thought it was significant, too.

The Chairman: Let me turn to the next item. I want to canvass two topics with you briefly. I do not necessarily agree with the comments that we do not have the power federally to deal with these issues. Section 121 of the Constitution, 1982, prohibits explicit barriers to trade and commerce between provinces. More recently, section 6 of the Canadian Charter of Rights and Freedoms supports labour mobility by ensuring that Canadians have a right to move and earn a living anywhere in Canada.

If you take a look at the clogs to productivity, we have labour mobility, where we have some good news because British Columbia and Alberta have entered into an agreement, and Ontario and Quebec have entered into a limited mobility agreement. We have huge procurement restrictions, transportation issues, energy issues, financial services, agriculture, as Senator Gustafson said, and alcoholic beverages. This is just a random sample. Wherever you look in the economy, there are clogs to productivity.

This committee considers itself a committee directed to the national economy, so these clogs disturb us. We looked at it in our report. We are issuing another report today about the demographic time bomb, but it all gets back to one issue: productivity.

If we have a real desire to improve the productivity and the wealth of each family in Canada, this issue is fundamental. Somehow, we have to lift awareness to help us achieve the numbers to support the case that everyone thinks is now conventional wisdom, but no one is moving on.

How can you help on the numbers side?

Mr. McMahon: You and I are on the same page. I think the federal government should explore its leadership role. If it can intrude as freely into provincial jurisdiction as it does, why can it not fulfill its responsibilities?

I want to endorse your call to have this done by the federal government — or maybe a suggestion to the Bank of Canada. The Government of Canada cannot order the Bank of Canada to do this sort of thing.

The Chairman: They are concerned with the economic union.

Mr. McMahon: The problem is that these studies are expensive. What business or association will spend tens or hundreds of thousands of dollars to complete a study like this? They are expensive. What up-and-coming economist will go over well-trodden material and say trade is good again? You need the support.

If that important study is to be done, I think it will need to come from the federal government. I think that would be something you and I agree on — the federal government taking a leadership role in its own area of responsibility.

The Chairman: We raise these issues because we have another day and a half or two of hearings. We want other witnesses, who were cancelled yesterday because of an adjournment of Parliament, to address some of these issues when they come back. We are trying to put them on the record now for them to address in their comments when they come back to us.

I want to read section 121 of the Constitution, 1867, to suggest that the federal government has the power, if it chooses to exercise it. It says this:

All Articles of the Growth, Produce or Manufacture that any one of the Provinces shall, from and after the Union, be admitted free into each of the other Provinces.

It is clearly a free trade agreement. Frankly, we have not used the constitutional muscle that is available to us to deal with some of these issues. To my mind, it is an artful cudgel if you believe in the rule of law.

I want to thank the witnesses for this portion, to be continued. If you have anything else to add to your comments — and I hope you will watch us when we have the hearings later — anything on the financial side, the fiscal side, this would be useful to the committee. This committee is geared to deal with this issue in an active and proactive way. We want to thank you this morning for your evidence and your time.

Ladies and gentlemen, we continue our study on interprovincial barriers in Canada, and more particularly, the extent to which interprovincial trade barriers limit the growth, profitability and productivity, as well as the ability of businesses in affected provinces jointly and with their relevant U.S. states to form economic regions to enhance economic prosperity.

As I said earlier, this committee is focusing on actions to enhance competitiveness and productivity, and to remove interprovincial trade barriers that are harmful in one way or another.

We are delighted to focus on what we consider to be a new regional economic model of growth that straddles the U.S.-Canada border. I am pleased today to have two witnesses, Mr. Jim Phillips, President and CEO of the Canadian/ American Border Trade Alliance, and Mr. Pat Whalen, Trade Consultant to the Buffalo World Trade Center, Buffalo, New York.

You have heard about the problems of economic trade barriers in Canada between provinces. We will listen to your evidence to tantalize Canadian policy-makers hopefully with the benefits of these new engines of growth.

I am delighted that Jim Phillips is here. He is a great friend of mine and has been a pioneer in the last decade in these economic engines of growth that straddle the border.

Jim Phillips, President and CEO, Canadian/American Border Trade Alliance: We appreciate being here. For all the senators today, I brought as a reference point a map that shows all the highway connections, the major railway connections, and, most important, the major regional, binational, economic areas from the United States to Canada identified at the top.

The Chairman: It may not be evident to the audience, but there is the Cascadian Pacific, which is the northwest, the Rocky Mountain West, the Mid-Continent, the Great Lakes Frontier, the Niagara Frontier, the New York-Quebec region, and the New England-Eastern Canada region. We are talking about essentially six economic regions.

Mr. Phillips: There are seven. The Niagara is separate from the Quebec. That one region is split from Ontario. There are seven that we will talk about.

I will give an overview. I have also submitted for the record, which I will not articulate, suggestions on cooperation and coordination to make these economic engines operate in the most effective and efficient manner. We have listed strengths and weaknesses to look at, challenges to development, trends that are underway, best practices, if you will, in various regions, and the priorities that we have.

The Canadian/American Border Trade Alliance has put together a council that includes all seven of these economic regions from the Pacific to the Atlantic, plus the 21 major trade corridors, as well as the border gateways.

The Chairman: Mr. Phillips, please slow down a little bit. We have ample time. We want to make sure that the interpreters have an opportunity to catch up.

Mr. Phillips: The Canadian/American Border Trade Alliance has a council that is formalized. It involves the seven economic binational regions that span the Pacific to the Atlantic, coupled with the 21 major trade corridors, north- south and east-west, and the border gateways, bridges and tunnels that connect the two countries. The alliance has a single council with a unified focus to exchange best practices ideas and to lead the way forward.

This analysis was presented to the policy research initiative for the Privy Council Office in early March. Senator Grafstein was a host under the Canada-U.S. Interparliamentary Group that hosted this event. We spent a day and a half presenting this information. We will give you some highlights today of that initiative.

We will start west to east. The Pacific Northwest Economic Region, PNWER, represents the most westerly economic region. It is made up of Alaska, Alberta, British Columbia, Idaho, Oregon, Montana, Washington and the Yukon. It was formally organized since 1991 by statute.

It is primarily a public-sector, elected-official and private-sector effort. I also must mention that this effort is layered. Underneath or within the PNWER region of those areas is the Cascadia Center of Discovery Institute, which does a lot of the analysis work. The third group under this umbrella is the International Mobility and Trade Corridor. That is the Interstate 5 highway down the West Coast from British Columbia to California.

The second slide is a look at the cross-border industry cluster. Senator Grafstein asked that we show you the development of the cooperative effort from nanotechnology, biotechnology and aerospace. You can see B.C., Alberta, Washington state and Oregon have unified to form an aerospace initiative under the PNWER banner. It is an excellent organization that operates on the West Coast. Canadian/American Border Trade Alliance does their border issue initiatives for them, so we work together as a team.

Rocky Mountain West is the next economic —

The Chairman: Mr. Phillips, do you have the slide that we saw in the PNWER that shows the co-operation between the universities in the border states?

Mr. Phillips: I will have to submit that to you, senator. I apologize.

The Chairman: Please.

Mr. Phillips: I should back up. The universities between the United States and Canada under that economic region are unified. They coordinate and co-operate openly without deference to border — either state, provincial or the national border. The effort is co-operative. I think if that region was an economic force or a country, it would be the tenth biggest economy in the world.

The second region is the Rocky Mountain West region. It is in the area of PNWER, but I wanted to show you the economic mapping. This slide shows a chart of the movement of people in the United States, by state and by county. In the 1980 decade and the 1990 decade, you can see the move to the west and the black areas.

This mapping is of the western regions within the internal United States as opposed to Rocky Mountain West in terms of each of those regions and the population growth, the personal income growth and the employment growth.

I thought you would find this one interesting. This slide shows Canada: the Canadian population province growth movements in the last ten years, 1991 to 2001, the income growth and the province growth of labour force. You can see Alberta and the western side growth is tremendously high, as you might expect. That kind of economic mapping is what this particular economic, binational region does.

The next slide is the western mid-continent region, northern Great Plains. This region is essentially the centre of the continent, Winnipeg to Mexico, down the middle of the continent.

I call your attention to this slide particularly because it is the essence of what you are about. From 1992 to 1997, U.S.-Canada trade doubled: entering the region and leaving the region from the United States to Canada, and Canada to the United States. It doubled in that period of time. The flow of goods from east to west across Canada and the United States in those regions four-tupled, from $1 billion to almost $4 billion. The number that is lost to everyone is the circulation of economic growth within those two provinces and five states that has occurred. It has seven-tupled in that same period. It went from $56 million to $376 million. That is the essence of what is going on in these economic engines within the region. That is North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Manitoba and Saskatchewan. That number is lost in all the national efforts. Everyone talks about the U.S.-Canada trade, but a seven- tuple increase is impactive for that region.

The next slide shows you a look at the Great Lakes economic region, primarily Ontario, Illinois, Indiana, Ohio and Pennsylvania. To the right side is Ontario to New York and then Ontario and Quebec to New York. That gives you a look at the Great Lakes economics.

The Chairman: We did some numbers on that, and we concluded that if this region was put together properly by the authorities on both sides, then it would be the second-largest economy in the world. Is that confirmed by your numbers?

Mr. Phillips: Yes, sir.

I thought you would be interested in this slide, which was done by the Federal Reserve Bank of Chicago, who represents the Great Lakes corridor on our council. This slide shows you the three categories. This is the auto plants. The black dots are the suppliers to the auto industry. The blue squares are manufacturing, and the yellow circles are fabrication plants for the U.S.-Canadian auto industry. This industry is highly centralized in the Great Lakes region.

The Chairman: Not to interrupt, but that graph is another important one. It came from the Federal Reserve Bank in the West. They have done some important regional studies on economic growth. This information is important and fresh for the Canadian and American publics; is that correct?

Mr. Phillips: Yes, senator. These slides, by the way, are on the www.canambta.org website — the full presentations. It took approximately six and a half hours for these seven regions to present to the Privy Council Office. There are about seven hours of economic slides in great detail on all seven economic regions on that website. PCO and The Policy Research Initiative, PRI, have a copy if the committee would like to have them.

The Chairman: You are talking about the Privy Council Office in Canada, and the PRI is their research arm.

Mr. Phillips: Yes, now I think it is in the industry ministry with the new government.

The next slide is the Ontario-New York or the Buffalo-Niagara frontier. This slide shows the linkages that have occurred for years between the U.S. and Canada in that region.

This is the economic region of Quebec-New York, which is one of the most active and functional. Plattsburgh, New York, now calls itself the southern suburb of Montreal, and it is proud to say so. The key here is that there is no more nation-to-nation trade. It is block-to-block within the global agreements, but these seven regions function independently of one another, positively and do not compete with one another. The internal realignment is important. Trade will go where trade will go. It is in the corridors, and we are evolving a whole new binational economic region. They are really the engines of growth in the future.

The next slide shows what goes on in New York and Quebec. Notice that nanotechnology was big in PNWER and is big here. There are big investments on both the U.S. and Canadian side. Aerospace is another high-level priority in the New York-Quebec area.

The last economic region is the Atlantica region. Ten of us were to come today, but we had a conflict. We had a terrible time to get everyone here in Ottawa. Brian Lee Crowley has chastised me not to say "New England:'' It is the Eastern United States. This is the connection of the Atlantic region and the Maritimes to the new Atlantic triangle, which is Connecticut, Rhode Island, New York, Pennsylvania, and Appalachia — direct contact — and then the direct contact with Windsor through the Canadian side of the connection, and also recently the connection of Halifax to Buffalo, the hub and spoke distribution from Buffalo. Atlantica is well-positioned for future connections.

This slide is an economic mapping of the distress picture of your Maritime provinces. Thus slide must be taken to heart, because we have to figure out ways to eliminate those heavy distress areas in that region. The offshore oil and gas finds will help a great deal.

The next slide is an exciting new initiative that is being seriously looked at called shortsea shipping, where you have these post-Panamax ships that will bring 12,000 containers from the east and west around the world, and perhaps then offload with smaller vessels delivering them to numerous ports. Again, it is a hub and spoke approach to maritime shipping, which is a new technique. The Atlantica region with the Halifax port has done a lot of work in studying those things. That is a quick overview of the seven binational regions.

As was said in the last panel, the United States does not have the interprovincial problems that Canada has. The state-to-state trade is exciting and it is pushed. It is a positive thing in terms of the federal view and the state views. There are some different regulations and safety issues, but they are not major. They are on the minor side.

Every one of these seven binational economic regions is functioning. None of them is a model for everybody else. They are all examples. They all have different approaches. They all have strengths and weaknesses, but we get together and say, let us take the best of the best and make it work.

One last thing before I turn the presentation over to Mr. Whalen, you mentioned factors that might help identify the real impact of the interprovincial barriers in Canada. I offer three factors worth looking at.

One is the productivity lag of Canada versus the United States. You are usually 20 per cent, 30 per cent or 40 per cent below the U.S. in the last two to five years. Canada is low. You might calculate the impact on your economy if you were to achieve the same productivity gain as the U.S. There is no reason why Canadian creativity and ingenuity should be different from the United States.

There are two factors: First, Canadian companies were originally made to be small. They are smaller and serve a smaller geography rather than serving a global market. Second, the interprovincial barriers cause productivity to lower.

There is also the impact of the Canadian dollar. You are not too concerned nationally when the Canadian dollar is at 65 cents to 70 cents. Now that it is at 90 cents to 91 cents, you will see a squeeze on the manufacturing sector in Canada that will be pronounced.

The criticality of Canada is that 87 per cent of exports go to the U.S. With any kind of slowdown or change in both the dollar value exchange and the economic level of U.S. activity, you must look at the sectors of Canadian business that are in export and those that are in non-export. You will find that the export sector does a heck of a lot better with respect to productivity than the non-export sector because it is not protective and it is in that global area.

Those three areas might enlighten the real impact of interprovincial problems.

The Chairman: Before I turn to Mr. Whalen, can you give us another minute or two about why Halifax is crucial to the new containers compared to New York or Boston harbours? Why does Halifax have the comparative advantage?

Mr. Phillips: Halifax is a natural deepwater port, so dredging is not a problem. Big post-Panamax ships require dredging because we are now talking about going down 50 feet. We are not talking about only dredging the harbour. For instance, in Montreal you have to dredge all the way up to the approaches in some areas.

The biggest concern is the turning radius. If you go to New York Harbor, I am not a maritime expert, but I think it takes three miles to make a turn. A big ship needs a big area to turn. Even with a tugboat assisting, the radius is wide.

The issues comprise turning radius, dredging depth of keel clearance and the actual dockside capacity of these bigger ships.

Halifax is a natural deepwater port. As far as distance is concerned, it is a short distance. If Mr. Crowley was here, as I will tell you on his behalf, the post-Panamax ships on the Panama Canal are tending to look at the Suez passage, although the Panama Canal is doing lock work and widening.

If you look at the maps and charts in the decks, the ships from the Far East can come through the Suez and reach the East Coast as readily as they can reach Vancouver or California.

Distance and the size of the ships cause Halifax to be in a very positive position. The other aspect is that Halifax has a well-developed auto yard, container yard and bulk yard. It is an exciting opportunity.

Of course, a huge amount of the population is in the eastern United States. Therefore, if goods and materials can reach the eastern United States and be dispersed on a hub-and-spoke basis, goods and materials reach their end-users more readily than coming across land from the west side.

The Chairman: Thank you for that quick encyclopedic run at this.

Pat Whalen, Trade Consultant, Buffalo World Trade Center: I will bring a different perspective to the committee. I am an entrepreneur. In 1985, I started a cross-border logistics business. It was located in Buffalo, and we served Canadians doing business in the United States. As that business grew, we opened in Burlington, Vermont; and Hamilton, Ontario. In Hamilton, we served U.S. companies doing business in Canada.

In 1996, our Canadian customers asked us to help them in Europe. At that point I went to Belgium to look for a distribution centre in Europe. While I was there, I learned about binational regions and the strengths thereof.

We ended up in Ghent, Belgium, but the region was sold to us as the region of Flanders. Flanders is part of the Netherlands, Belgium and a little part of Germany. It started as an area of common language. People there spoke Flemish. However, as steel, coal mining and other heavy industries died in that part of the world, they realized they had strength in logistics. They were a good distribution centre for all of Europe. They have developed it as a niche and as a region, not as individual countries.

In 2000, UPS bought my company. I worked for UPS Supply Chain Solutions for two years. During that two-year time, with UPS money I bought five other businesses along the northern border of the United States with Canada and rolled those six businesses into a business unit.

Therefore, I have had firsthand experience in all corridors: Blaine, Washington; Vancouver; Sweetgrass, Montana; Calgary; Pembina, North Dakota; Winnipeg; Montreal; Champlain; as well as Toronto and Buffalo.

During that time, I learned that the strength of cross-border regions is powerful. I also learned that all those regions are different. As Mr. Phillips said, one size does not fit all.

Today, as we look at the world, we realize that it is a different place than it was during the times I was growing my business and worked for UPS. Today, North America is in a battle for economic survival against places such as India, China and even the European Union. They are big powerful forces in the world. It is not the United States versus Canada anymore but North America versus other parts of the world. We need to stand out. One way North America stands out is with binational regions, the way Flanders did for me in 1996.

In the part of the world I am from, we have Buffalo and Hamilton. When I travel to Asia or Europe and I tell people that, they do not understand where Buffalo or Hamilton is. However, if I say I am from Niagara, everyone in the world understands that.

From our part of the world, one asset we have is a name. However, binational regions generally have more to them. We saw in some of these slides a grouping of assets that makes a region strong. In B.C. there is nanotechnology in aerospace. In the Niagara region right now, we are focused on logistics much the way Flanders has done.

Going back to the point about Halifax, there are natural rail linkages between Halifax and Buffalo. CN Rail serves Buffalo and Halifax. CN Rail and CP Rail serve Vancouver and Buffalo. Buffalo and Niagara are great places for distribution in North America to offshore firms. We are using our strengths in our region to grow that region worldwide as a logistics centre.

I think there are more licenses customs brokers in Fort Erie than anywhere else in Canada. I know there are more licensed customs brokers in Buffalo, New York, than anywhere else in the United States.

We are using human capital that we have grown in our region because of cross-border trade to expand our cross- border region. The grouping of those assets in a region creates strengths.

As I said, binational regions have a lot to offer, but they are different. We found that out in UPS. We had to sell differently in different regions. We sold differently in British Columbia from how we sold in Ontario. At the end of the day, it is a global world and we need to focus on job creation. That is the key right now, especially in a battle with China and India. Trade creates jobs. As Mr. Phillips said, trade flows where it is easiest. Like water, it will go where it is most efficient. The grassroots efforts in regions need to be fostered and helped, but we do not need or want any heavy-handed interference by government. We encourage groups such as PNWER and groups in the Montreal-New York corridor. The key is to help them but not over-regulate them.

Senator Angus: Thank you, gentlemen, and welcome. We value your input in these matters we are wrestling with.

I believe that you gentlemen were both in the room during the testimony of the previous three witnesses. There is a slight difference of emphasis between your approaches. If I understand the economic model you folks are talking about, the corridors of trade in the current world have evolved because of the interprovincial barriers that exist here in Canada. Are we better to break down the in-house Canadian interprovincial trade barriers to facilitate pure free trade among the provinces or to advocate this different model, because that reality has existed since 1867 and the agreement of 1993-94 is not working because it has too many exceptions? Should we build on these corridors?

Mr. Phillips: I would not leave that model alone. Job creation is the critical essence. Trade is critical to job creation; job creation is critical to quality of life; and quality of life is critical to us having choices about how to live and play, if you will.

I have spent a lot of time in Canada so I am aware of the old Quebec-New York problem with construction workers. In the United States, construction unions have agreements. Many New York and Montana constructions workers have been in Louisiana since Hurricane Katrina. It is not that big issue to move from state to state.

It is true that in some cases north-south trade may have been improved because it is harder to go east-west in Canada in certain areas. On the other hand, the trade corridors are not mutually exclusive. The real interest of Canada is to create jobs in Canada. The interest in United States is in the United States, and the binational regional interest is to create jobs in Canada and the United States within those binational regions utilizing the strengths of each piece. If any one of the three is out of sync with the others, you will not maximize your strength. You are looking for the difference between what could be and what is.

Things have been good in Canada recently and in the United States as well, but we are riding a wave together and you will see the impact on a downturn. That is when you see what could have been if we positioned ourselves differently. I urge you to do that by trying to eliminate these barriers and not letting politics get into it. It is not them or us; it is what is good for the U.S.-Canada relationship.

Senator Angus: You are right, and I want to hear from Mr. Whalen. However, Mr. Phillips, you talked about the 91- cent dollar we are experiencing this week and how tough that is on the manufacturing industries in Canada.

In the minds at this committee, this issue is all about productivity in Canada. The low dollar masked low productivity. We were able to lie in the weeds and not upgrade machinery and various other means of production, and productivity has lagged in Canada. As a result, we lag behind the United States. We greatly value our relationships with the United States. I believe that we are free traders. We like the free trade agreement and wish it went much further. However, the reality is that the primary interest of the Banking Committee is what is good here in Canada. I worry about our productivity. The witnesses tell us that interprovincial trade barriers are a huge factor in terms of keeping productivity down.

I do not know whether I buy into the 1 per cent of GDP number. I think it is much higher. Let us say it is 3 per cent, 4 per cent or 5 per cent. These numbers are huge. Senator Grafstein estimated $10 billion to $25 billion. It may be $50 billion. It is a hugely significant problem affecting the standard of life of all Canadians. We have to improve productivity.

I love the north-south corridors model. Mr. Whalen, is it the line of least resistance?

Mr. Whalen: The evidence is indisputable that where there are fewer restrictions there is more trade. NAFTA proves that.

Senator Angus: It is like water.

Mr. Whalen: An example I am currently working on is weight restrictions on roads and highways in the United States, which are different all across the country. We are trying to woo a company that sells stone to New York State. The company will probably go to Ontario or Michigan where the weight limits are higher and they can distribute their stone more efficiently and productively by hauling larger loads than New York roads allow.

We have restrictions in the United States as well between industries. Weight limits on trucking is one. There are many restrictions in banking. Our banks typically are not as big as others around the world. Wherever there are restrictions on trade, growth is retarded. I absolutely agree that you should not let the model stay the way it is. You need to free up trade between the provinces for sure.

Mr. Phillips: Most regions are driven by the reality of the everyday private sector understanding where it is really at. I will use Montana and Alberta as an example.

Until this BSE situation arose — that border should never have been closed and I say that as an American — the feedlots were in one place, and the harvesting of the cattle in another and it worked best for the region to do that. The boundaries began to interrupt.

Let us consider Saskatchewan and Manitoba, for instance. The Northern Great Plains area has shown tremendous leadership in getting value-added agricultural efforts into Canada. Rather than harvesting the commodity crops in the field and shipping them somewhere else for freeze drying, canning or processing, they brought the facilities to that region. This area is even working with France on certain food products and others around the world. The ingenuity was in the region. In some cases, technology was on the state's side, in other cases the knowledge was on the province's side. There was no "we'' or "them.'' We are in this together.

I submit that Canada has this "we are in this together'' attitude but it needs to identify that one per cent to four per cent of GDP and try to identify it by province. Let each province know what is in it for them. It is like the east-west disconnect. You have to tell the man on the street what it means to him. The impact is many hundreds of thousands of jobs that are not here.

When the original entry-exit program came in, in 1996, you remember we were going to check everyone. It was worse than the Western Hemisphere Travel Initiative, WHTI, and that is bad enough. I wrote to every one of the 50 state governors and said that Statistics Canada was kind enough to give me the statistics of the jobs created by trade between Canada and the U.S. trade in every state. I was able to write a governor with the number of jobs, imports and exports that go into and out of the state in the Canadian relation. Many did not know that. That is what you have to do with the provincial governments. Everybody has a stake in this; some more than others, but everybody has a stake. The stakes must be identified, and then it must be determined how best to combine the efforts to satisfy everyone. Perhaps, then some headway might be made. You need a benevolent king, though. You have some good people; somebody has to take charge. The secretariat has to go in there. I do not know how the federal government was ousted of a co-chair. I do not know too much about the agreement. You need to look into it.

The Chairman: We will explore that.

Mr. Phillips: You need somebody with the ability to say that I believe in this and we will do something about it.

Senator Angus: An earlier panel asked if the States was the same, and we talked about the International Chamber of Commerce, ICC. However, I think the States is even worse because of powerful special interest groups. The whole softwood lumber problem, which was the biggest trade irritant between our two great countries, was a result of several powerful regional interests in the northwestern part of the U.S., and those interests nearly ground the whole interaction between our countries to a halt.

The Chairman: It was not just in the northwest.

Mr. Phillips: You can name two: the Ranchers-Cattlemen Action Legal Fund, R-CALF for beef, and softwood lumber, self-interest. That is about this much of the total trade. You are right. It is worse down there, with self-interest, in those two instances. I admit that, as an American. There is no question about it.

Senator Angus: There is also the Jones Act. I know a lot about maritime transportation.

Mr. Phillips: The key here is that 94 per cent of our trade is dispute-free and we are in this together; powerful interests have made that happen. Whether it is manufacturing or service providers, they say, "This is the lifeblood of our economic security.'' You are not a power in the world until you have economic security underpinning your country. That is what it is about.

Senator Angus: You are right.

Senator Tkachuk: I sympathize with the frustration of Canadians trying to get rid of our own trade barriers and the Balkanization that can occur. I like what Alberta and B.C. did because at least it gives us a model. I know it will scare the heck out of the rest of the provinces. What if Ontario and Quebec enter into an agreement? We will be on the outside looking in. That may give some impetus to the Maritimes.

I think that was a good start and, of course, free trade took so much political capital and political will that people forget how difficult that whole process was, and how long it took. We have not even scraped the surface in Canada as far as interprovincial trade goes and developing a political campaign to solve the problem.

When Alberta and B.C. make an agreement like that, does that agreement have an effect on the region? I cannot recall the name of that region for Alberta-B.C.

Mr. Phillips: It is called PNWER, Pacific-Northwest Western Economic Region, and it was applauded.

Senator Tkachuk: It was a positive thing — because there were negatives associated with it?

Mr. Phillips: Yes.

Senator Tkachuk: Why would someone not be part of that agreement?

Mr. Phillips: I have not been in Saskatchewan since the agreement was formed. We have participants there. I could ask them why they chose not to join. I am sure they have reasons, but I do not know exactly what they are. Obviously, it depends on the realities, as you say. We are all victims of misconceptions, misperceptions and misinformation. You have to get the facts.

Senator Tkachuk: It is a strange country when a bureaucrat chooses what kind of wine to sell in your area. That is how ridiculous it all is. We do that in Ontario and Saskatchewan. Some bureaucrat sits there with a list, deciding what wine will be sold in a store, and it has nothing to do with the market.

Senator Angus: The senator is from Saskatchewan.

The Chairman: Mr. Phillips, we agree that we will have another day's hearings on this topic. We will have people from PNWER and Atlantica come, and perhaps you could come back as well. However, I have a couple of questions before we close.

We have heard about the various models. You have indicated that each of the seven regions has a different model in a different state of progress. I have looked carefully at the New York-Ontario-Great Lakes model. If you have looked at all the models, which one do you think is the most advanced, even though it is different? Which model is the one that seems to work the best and is the most advanced in terms of cooperation, whether in trade, tourism, manufacturing or research?

Mr. Phillips: Two stand out as exceptionally high. The Quebec-New York model is probably the most effective one, with 2,500 organizations in Quebec and New York participating. However, it is a focused territory. It does not have the impact of a PNWER.

The second one that is probably least understood is the Northern Great Plains model, which is the best organized binational organization.

PNWER is unique in that it is by statute, legislators and senators from the United States and members of legislative assemblies, MLAs, from Canada. The secret to PNWER is that while it has a high profile and is effective in getting governmental agreement, with it is the Discovery Institute and the International Mobility and Trade Corridor Project, IMTC, which preceded PNWER and which focuses strictly on the border.

The Chairman: The emphasis on PNWER is that it was private-public. The private interest drove the public relationships. Is that correct?

Mr. Phillips: It started as a public relationship, and then in 1994 they added private interests. Now, public and private interests work close together. We do their border issues work. They are extremely good. They have the ability to do table-top exercises. They work critically in energy, environment and water. The Great Lakes area works on water, too, but they work in non-commercial, non-economic areas that are critical. The Pacific Northwest is extremely interested in the green issue and the economy. "We have to proceed with this, but not affect that.'' I respect them. They are a high-profile area.

The Great Lakes area is the strength of the centre of the country, not organized as a binational region. A lot of players and turf are involved. Buffalo-Niagara is coming together. Some personalities also affect it.

Brian Lee Crowley has been a guiding light in the Atlantica area. The area is emerging now. The oil and gas off Newfoundland will change the dynamics of the east from the past. Things are changing. We have to keep an eye on all of them because the mix of dynamics is changing.

The Chairman: I want each senator to understand that we represent the regions of the country, and some regions work better than others. My own region of Ontario and New York State, on paper, is well advanced. There was an agreement between the governor and the premier in 2001. When we tried to find out what happened, on paper it was fantastic, but nothing was happening. We will address this issue when we come back to this.

I want to thank both of you, and you, Mr. Phillips, for your pioneering work. I know this has been one of your babies, in effect. If we have the Fathers of Confederation, you were certainly a godfather of these regions. Mr. Whalen, thank you very much.

The committee adjourned.