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

Issue 27 - Evidence

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OTTAWA, Wednesday, December 5, 2001

The Standing Senate Committee on Banking, Trade and Commerce met this day at 3:45 p.m. to examine and report upon the present state of the domestic and international financial system (Canada-United States border issues).

Senator E. Leo Kolber (Chairman) in the Chair.

[English]

The Chairman: Honourable senators, since our study will be resumed in the New Year, our plan is to present an interim report in the Senate next Thursday.

Today the committee will hear from three groups of witnesses on the Canada-United States border issues. The first witnesses are Mr. David H. Bradley and Mr. Graham Cooper, from the Canadian Trucking Alliance.

I would apologize for the paucity of senators. Many of our members have been seconded to the Anti-Terrorism Committee to deal with Bill C-36, and they appear to be working on that night and day so that it can be dealt with next week before the Senate rises.

Please proceed.

Mr. David H. Bradley, Chief Executive Officer, Canadian Trucking Alliance: Mr. Chairman, the Canadian Trucking Alliance is a federation of the Canada's provincial trucking associations. In turn, we represent about 4,000 trucking companies across Canada. Our industry is made up of a handful of publicly traded larger companies, but the backbone of our industry is the small and medium-sized establishments that are basically Canadian-owned and Canadian-controlled.

The industry employs about 225,000 truck drivers. That is the major occupation for males in the country and, in total, about one-half million Canadians, overall.

Perhaps what we are most famous for, though, is the fact that 70 per cent of Canada's trade with the United States, which represents about one-third of our GDP, moves by truck. Clearly, the events of recent months and anything that would cause disruptions or impediments for the free flow of goods across the border not only impacts upon our industry directly, but also on the economy overall.

As a nation we are currently in quite a quandary, because our greatest economic advantage, that is, having the best access of any foreign nation to the United States market, is probably also our greatest economic vulnerability. No major industrialized country in the world is as dependent upon trade with the United States as is Canada.

As we all know, trade between Canada and the United States became paralyzed in the immediate aftermath of the terrorist attacks on September 11. This was an unprecedented situation that caused serious problems for industries, manufacturers, retailers, other producers, the agricultural industry and others who depend on just-in-time shipments or trans-border truck shipments to keep their assembly lines running, or to get perishable goods to the grocery stores.

Some people claimed that this signalled the end of just-in-time inventory systems. I would say that is not the case. The cost savings from just-in-time, or what has become quick-response in the retail sector or time-definite service, are simply too enormous for the North American manufacturing sector to walk away from. The key is that it does not mean that the parts and other inputs into business processes have to be sourced in Canada. That, for us as Canadians, should be a major concern.

From day-to-day, the border disruptions have more or less returned to what we would call "normal," and that requires some definition. However, we are still in a fragile state. The border is still on high alert, and we are still subject to ad hoc disruption. It would be a mistake to think that business is back to usual at the border.

In fact, the key factor to explain the reduced delays has been the significant decline in traveller traffic. Car traffic is down about 45 to 50 per cent at the major border crossings, and down a smaller amount, probably 8 to 9 per cent, in terms of commercial truck traffic. We are still in a situation where, if anything disrupts that fragile equilibrium between the resources, particularly on the American side of the border, and traffic volumes, we could easily be in a situation again where we would be choking off some of our vital gateways.

The uncertainty - whether real or apprehended - that surrounds the Canada-U.S. border and border policy in general, is translating into uncertainty of supply for many manufactures. As I indicated earlier, if this is left unchecked, the situation could result in direct investment flowing elsewhere, most notably to the United States. It would be the same for manufacturing capacity, which would also move south.

Since September 11 - and I know you will be hearing from the Canadian Motor Vehicle Manufacturers Association - some manufacturers have reported that they are increasing their inventories of parts by about 5 per cent. We should be under no illusion: there is a tangible cost associated with carrying inventory and that surely will be factored into supply contracts when they come due.

Therefore, the most pressing domestic challenge facing us in the wake of these attacks is how to balance the need for better security, while at the same time ensuring the smooth flow of goods and people across the border.

In the last several weeks, there has obviously been an unprecedented amount of attention on the border. For us, I would not want to use the word "encouraging," but it is noteworthy that that is the case because, prior to September 11, it seemed to be the truckers' problem.

Unfortunately, to this date at least, our federal government's response to this crisis seems to have been primarily, but not exclusively, focused on one-half of the equation, namely, security. It is noteworthy, for instance, that the border accord signed this past Monday in Ottawa, did not provide any specific areas for Canada-U.S. collaboration on border facilitation. CTA has, from the outset, held that Canada must address U.S. security concerns first, if it wants to get the Bush Administration and U.S. Congress to talk about facilitation.

Appearing before the House Committee on Industry last month, we said:

We must re-establish a strong and credible partnership on security and border efficiency with the Americans if we are to have any hope of influencing U.S. border policy decisions. Unless concrete steps are taken on both sides of the border to credibly address national security concerns while at the same time ensuring the efficient flow of low-risk commercial freight across the border, both economies - but especially Canada's - will suffer.

In that sense, the announcement of this past Monday could be construed as phase one in a process to redesign the northern border. It is unfortunate, however, that beyond generalities about keeping goods moving between our two countries, not one detail was given about what Canada and the United States were planning so that they could speed up the movement of low-risk cargo and people. No mention was made of an action plan or timetable of joint action to fashion common facilitation policies. It is imperative that the Government of Canada moves quickly now on phase two, and engage the administration on a bilateral strategy to keep our border open for business.

Two weeks ago, during the G20 meetings in Ottawa, Canadian Finance Minister Paul Martin, National Revenue Minister Martin Cauchon and U.S. Treasury Secretary Paul O'Neill announced that they were of like mind in how to achieve efficient border crossing for commercial goods. They professed to understand that problems at the border predated September 11, and that they had agreed on a specific work plan to address these concerns. At the time, we hailed the minister's announcement, and we certainly appreciated the candour but, again, we were not provided with any concrete details.

Like most, we are anticipating, or at least we are hopeful, that next week's federal budget will provide the details and the commitment of funds. The delay would be to run the risk that the American administration and Congress might interpret the security accord as a sign that the border has been fixed. As an aside, I can tell you that I have travelled a great deal in the United States over the last several weeks and spoken to many state and federal legislators, and there is still a fixation on security. Everything south of the border is being seen through the optic of security. In fact, if we simply stop at the security issues, nothing could be further from the truth. The border delays predated 9/11. While Canada Customs has diligently developed innovative approaches to speed up travellers and goods, U.S. Customs has continued to struggle with inadequate funding, outdated computer systems and an enforcement philosophy that belied the existence and mutual benefits of NAFTA.

Our recommendations, therefore, are the following:

The Government of Canada must build on the success of this week and the announcements arising out of the G20 meeting, and ensure that border facilitation be given the same level of priority that led to the signing of the bilateral agreement on border security.

A border facilitation accord should be developed around the following themes: A common bilateral vision of the border; a commitment to adequate long-term funding; pre-screening and pre-approval of low-risk passengers and goods; and joint development of automated technology-based systems. Indeed, we feel that Canada has something to offer the United States in this regard.

An accord designed to make our border more trade efficient should also contain specific provisions for a joint border crisis-management plan. We still do not have one. After September 11, we were entirely in response mode. We interpreted events that happened and we responded to them. If anything were to happen again, I dare say I do not think we would be in much better shape next time around.

We further recommend that there should also be: expedited lanes for low-risk travellers and goods, and that means capital investment; land border pre-clearance, and that means legislative change as well as capital investment; Customs release at plant for low-risk goods; the expansion of risk management systems, such as the Nexus pilot project for passengers and the Customs Self-Assessment Program on the goods-movement side; strategic infrastructure investments, such as access to roads to border crossing, the expansion of Customs plazas, and the expansion of crossing capacity, tunnels and bridges.

The current focus on border issues in both countries constitutes an historic window of opportunity to achieve progress on an integrated and more rational border crossing system. Failure to seek bilateral solutions in this context could lead to the development of measures detrimental to Canada's interest, including the proliferation of contradictory border practices that will only add to compliance costs for industry - both truckers and the people for whom we haul goods.

Our view of a bilateral border strategy does not involve erasing the 49th parallel from the map; it does not involve an EEU-style Customs union; it does not mean the loss of Canadian sovereignty; and it does not mean that our immigration and refugee laws will be written by the U.S. Congress. Our view of a strategy involves an effective bilateral approach to keeping undesirables and contraband from our country, while allowing for a freer flow of low-risk people and goods across the Canada-U.S. land border.

The real loss of sovereignty will not result from working together on a common border vision, but it will result from the U.S. unilaterally deciding what that border will look like.

We would be pleased to answer your questions.

Senator Meighen: Welcome Mr. Brady and Mr. Cooper. That was a succinct brief. Obviously, you have been at this for a while, and that leads me to my first question.

As you say, September 11 was not the start of all these challenges. It has probably added a whole new element, in terms of the security factor, and it has also added an element of urgency, perhaps, from your perspective.

In respect of the facilitation, which must have been the subject of discussion prior to September 11 on any number of' occasions, what are the differences or similarities in the approaches of Americans and Canadians in dealing with that question? You must have come across some competitive stumbling blocks. Would you elaborate on what those are?

Mr. Bradley: As a starting point, the key, fundamental difference was a philosophical one between the two governments as it related to the recognition of the importance of trade and how best to deal with that. In Canada, there has always been a greater focus on trade facilitation. That is understandable, given that one-third of the gross domestic product is dependent upon trade with one country. You must ensure that you have efficient and facilitated trade. In the United States, the focus has always been on national security. Perhaps some people in Canada wondered why that focus was so strong in the U.S. Well, I think we have our answer to that now. While there were joint discussions and border accords signed, the energy and the mechanism were never really there to bilaterally move forward on these issues. We were talking of two solitudes.

As a result of those different focuses, Canada, through efforts such as the Customs Self-Assessment Program, was able to put the funding towards developing the systems and the automated processes that would be required to help trade move across the border. However, a lot of people do not seem to understand that, even within government, all of those things that Canada has done only go one way. They have done a great job of facilitating U.S. imports into Canada, but that has not been reciprocated on the U.S. side in terms of facilitating Canadian exports into the United States.

For example, the U.S. Customs Service automated systems is 1970s-1980s vintage, and it is subject to brownouts and blackouts. It cannot handle the volume of trade now between the two countries, let alone two, three, four or five years from now. Yet, the Customs service was always stymied by Congress from getting the necessary funding. They calculated that they needed about $1.2 billion to upgrade their systems just to enable them to cope with today's volume of trade. Congress would never give them that money.

We talked to some congressmen in Washington to find out why that was so. They would put forward the prudent response, such as; Customs had not made their case. However, it is a glaring example of what we are up against in terms of winning Congress over on the security side, and, more importantly for us, on the trade facilitation side. Trade is somewhat inconsequential to them, and it always has been. Currently, the optic is entirely security.

We have a challenge before us. I am hopeful that we can leverage what we have done for the security side to bring them to the table on the trade side.

Senator Meighen: Why can you not do that? If one gets an agreement on the security side, that will involve the expenditure of funds, and we have already read announcements about that. Do you not believe that the increased presence of border patrols will allow the Customs officials to concentrate more on trade facilitation?

Mr. Bradley: It is much more than that, but, in the short term, yes. If you listen to U.S. Customs officers and the police at the border on the American side, you will recognize that they are burning out. To inspect everything that comes across the border, you need many people. In the short term, that is probably a positive initiative. However, over the longer term - and this is what we need to guard against - throwing more people at the problem is not the sole response. Throwing more people at the problem does not mean pre-clearance, it only means more inspection.

We still have a major selling job to do in Washington to try to move the U.S. Customs administration more towards the Canadian approach which will allow it to free up resources to deal with the people or the goods that we do not know, or those that, perhaps, have a spotty record. It will also allow those who have gone through the appropriate pre-registration, security checks, et cetera, to move freely, while still being subject to random inspection.

Senator Meighen: Do I understand you correctly to say that we have, to some extent at least, developed systems and procedures that facilitate trade, but primarily for trade coming our way?

Mr. Bradley: Yes.

Senator Meighen: It sounds like a wonderful opportunity to make a sale in the United States, because the Americans are great free traders.

Mr. Bradley: They are when they win.

Senator Meighen: Exactly. You said it.

Mr. Graham Cooper, Senior Vice-President, Canadian Trucking Alliance: Mr. Brady referred to the congressional stance pre-September 11 in terms of the funding of automated commercial systems. It is interesting that several bills, including appropriations bills, almost immediately thereafter gave theU.S. Customs Service in excess of $300 million per year for these automated systems that had not been available before.

While there is no question that, in terms of automation and the facilitation of trade flow, a Canadian system such as the Customs self-assessment system, which we talked about, would not take a back seat to any of the American systems. The key now is to take those systems and make them bilaterally workable within an overall security context, which is how we must view these things. Once security problems are taken care of, then trade facilitation problems can be considered, but they must be considered bilaterally. It does not make sense to have a system for north-bound freight that does interface with the system for south-bound freight.

Senator Meighen: Have you had conferences about that? Are you meeting resistance?

Mr. Bradley: We have not met with any particular resistance. However, we have not seen any detail, and that is why we are awaiting the budget.

In the United States, you will find legislators and business groups that are equally concerned. We must rely on them to deal with Congress. At the same time, though, even amongst the business community there, I sense somewhat of a hesitation to push the facilitation envelope too far lest one be seen to be soft on terrorism. We have a sell job.

Senator Meighen: Leaving cost aside, are there advantages from security or from facilitation points of view to shipping by air as opposed to by truck? I am not asking you to talk against your industry. I am simply asking about the difficulties that you face that, perhaps, they do not?

Mr. Bradley: I would let the Air Transport Association of Canada speak to that.

Presently, the fastest growing sector in inter-modal freight transportation is air because it is able to provide just-in-time service more than marine or rail. However, that is really at an embryonic stage. The just-in-time inventory systems have been built around the truck. Distribution centres have been located based on how far a truck can travel in a certain period of time, and that kind of consideration.

While all of the modes have a role to play, I do not think there is any prospect, nor have I heard very much talk about modal shift being a solution here. I do not see that. We will have to fix the truck problem. If the others can help out, that is great, too.

Senator Meighen: Perhaps I did not make myself clear. Is it a simpler procedure to clear Customs if a shipper ships by air as opposed to by truck?

Mr. Bradley: I cannot answer that question. My sense is that it is not a whole lot different. Perhaps if you have a situation where you are backed up 30 miles at the border like we were on September 14, then air is a better way to go. Are you referring to any laxity in enforcement or inspection?

Senator Meighen: No, I am talking about customs procedures vis-à-vis the goods that are being shipped by air as opposed to by truck.

Mr. Bradley: To my knowledge, there is no difference. However, perhaps it would be best to put that question to your witnesses from the Air Transport Association of Canada.

Senator Setlakwe: Thank you for a clear presentation, Mr. Bradley.

You mentioned certain amendments to the Canada Customs and Revenue Act that were adopted recently. Should there be further amendments to that act? As well, do you think that pressure should be put on the Americans to pass legislation that accords with our legislation?

If I remember correctly, we could not have had the Nexus pilot project, biometrics, or the CANPASS without their concurrence. To what extent do we need further legislation in Canada? To what extent could our legislation be put forward to the Americans?

Mr. Bradley: There is one key area in respect of which we would seek legislation. It may be imperative in the weeks ahead. There will need to be some tweaking and changes made to the Customs Self-Assessment Program and the legislation if we are to be successful in achieving a bilateral approach to these issues.

The key area would be to get some legislation allowing pre-clearance and the reverse pre-clearance. By that I mean to have the ability to have U.S. inspection agents on Canadian soil checking truck shipments prior to reaching the border just as it is allowed at some airports now. My understanding is that would require legislation in Canada.

Senator Setlakwe: Was that not included in the self-assessment part of the act?

Mr. Bradley: No.

Mr. Cooper: You also mentioned biometrics. Obviously, this is a critical area. Biometrics was a vague notion only nine weeks or ten weeks ago, but now we hear about it almost daily.

Our government, our American colleagues and the trucking industry are currently looking into how biometric identifiers might be used, the legal complications, and so on. As the Customs Self-Assessment Program attempts to identify and expedite the movement of low risk freight, we also must find a way of identifying and expediting low risk people. We are in the thick of developments in this area. I expect we will see rapid progress on this over the next weeks and months.

Senator Setlakwe: Would you suggest that these be used by truck drivers as well as passengers?

Mr. Cooper: Absolutely.

Senator Angus: I am quite intrigued by the volume of traffic by truck across our borders. You either said, or I read in some of the documents that were provided to us, that every 2.8 seconds, 24 hours a day, seven days a week, a truck crosses the border with goods in trade between Canada and the U.S. Is that correct?

Mr. Bradley: It is once every 2.4 seconds.

Senator Angus: That leads to an obvious question: Where are the big bottlenecks at the border? I have a list of border points. Which is the worst one?

Mr. Bradley: About 65 per cent of Canada's trade with the U.S. moves through the four major Ontario border crossings, but they are not the only major ones. Windsor-Detroit is the major one. In fact, more trade crosses the Ambassador Bridge than any other trade gateway on the planet. The other three are, Sarnia-Port Huron, Fort Erie-Buffalo and Niagara Falls. You also have the Pacific Highway, south of Vancouver.

Senator Angus: I am told that the Pacific Highway is the biggest bottleneck with the longest waits and the longest line-ups. If that is correct, why is that so?

Mr. Bradley: I cannot say that it is the worst, but it is up there. I think the truckers crossing at Windsor might disagree with me if I were to say that it was the worst.

Those major crossings and Lacolle south of Montreal are the major choke points. During the period immediately following September 11, each and every one of those border crossings were facing multi-hour delays. I do not think you could say that one was worse than the other.

The sheer volume of trade points to a specific problem at Windsor. For the economy of British Columbia, clearly thePac. Highway is extremely important.

Senator Angus: Even though we are here to examine the presumably negative economic impacts of 9/11, we have come to the bizarre situation that September 11 has brought focus to the border issue. It is an issue that you folks, your counterparts and Customs have all been focusing on irrespective of the terrible events of September 11. Am I right? In other words, this has created an opportunity to have public awareness about this issue like you have never had before.

Mr. Bradley: Yes. I have said many times over the last several weeks that, while there can be no silver lining in what happened on September 11, clearly, people are now aware that there is a border, that Canada's economic livelihood crosses that border, and that most of that is moved by truck. Before September 11, as I said in my preliminary remarks, if people were even aware of the situation, they considered it a truckers' problems. It is every one's problem now.

Senator Angus: Senators Banks and Setlakwe and I met earlier this year with the witnesses from the CCRA to discuss phase two. We thought that they were making substantially good moves. I am on record as noting that they did not go far enough. As I recall, representatives of your association did not come here and testify. If you did, I missed your presentation, and I apologize. I do not recall seeing you and the other witnesses who appeared before us last week.

You now recognize that this was an opportunity to get our message out.

Mr. Bradley: Absolutely.

Senator Angus: In that respect, today I had an opportunity to speak to someone with some ability, perhaps, to do something about these things from the U.S. side. I mentioned that I had read your brief, so I knew that every 2.4 seconds a truck would cross the border. My efficient staff made sure that I had all that information at my fingertips. I suggested that it must be an impossible problem to resolve and I asked if those truck drivers were under suspicion.

The person to whom I was speaking told me that, no, I had it all wrong. I was told that, basically, it is a simple problem to fix with biometric ID cards for the drivers, with a pre-clearance of the goods and with a whole host of things employing the latest state-of-the-art automated devices.

It was suggested to me that in next Monday's budget there will be some provision for this from the Canadian side. Money could make these things happen. Measures will be required from the U.S. side, as well, the measures Mr. O'Neill mentioned. Am I correct that it is a matter of money now; that there is a focus that trade and security are interrelated between Canada and the U.S.? In other words, it is not a logistically nightmarish situation that cannot be fixed.

Mr. Bradley: In principle it is not a nightmarishly difficult to fix. Again, the solution must be bilateral. If the Secretary of the Treasury is brought into some bilateral arrangement, a major hurdle will be overcome. Once that is achieved, to a great extent it would be working with systems types to get things to work, and some people will tell you that is a nightmarish situation, but in reality, it is not. As always, there will be bugs in the technology. However, if we are moving in the same direction we can let the technocrats deal with that. It does not involve great policy issues and whatnot.

Senator Banks: Some of the difficulties about which you have talked at the border are not merely bureaucratic but cultural. They have a different mindset on the other side of the border. That leads me to the question: What is the nature of your relationship with your American counterpart organization or organizations? Is there one?

Mr. Bradley: There are several. Our relations are very good. In fact, if we get out of here on time, we will be going to Washington tonight to meet with our counterparts in the United States. The head of the U.S. Chamber of Commerce is the former lead of the American Trucking Association. I was in Detroit the day before yesterday talking to the state legislature there. We have good contacts there. Getting everyone mobilized and moving in the same direction is the key.

Senator Banks: I have the impression, and I think my colleagues do, too, that we are a jump ahead in terms of being more efficient in processing at the border. Is that a fair statement?

Mr. Bradley: I would say that that is true. Again, it comes from a different focus.

Senator Banks: If your relationship with your American counterpart organizations are good, that is a powerful political force in the United States. In your view, are they exerting the kind of pressure of which they are capable upon the American government to make things move in the right direction? Specifically, are they moving in what you consider to be the right direction in placing American inspection sites on our side of the border to relieve the pressure at the border?

Mr. Bradley: I will be getting a further update tomorrow. I do not sense any opposition to that from our colleagues in the United States. I do not want to overstate their case, but it is important to recognize that the business community in the United States is being cautious about what they are saying about these issues and how hard they are pushing in some quarters. That is because the focus is still on security. No one wants to be seen to be soft on the security issue. I do not think we are out of the woods.

Clearly, we, as Canadian business, can muster no political influence in Washington. We do not vote for or spend money on congressmen. We must rely upon our U.S. counterparts.

We are affiliated with an organization called Americans for Better Borders that fought tooth and nail against the U.S. Illegal Immigration Act, specifically section 110. However, the U.S.A. Patriot Act, which was passed a few weeks ago, looks very much like section 110. That had massive support from the business community and the public at large in the United States.

Senator Banks: Out of curiosity, how many of your members have access to or use as a matter of daily business, the piggy back concept?

Mr. Bradley: It is a growing part of the business but it is still a small part of the business and will continue to be small. While the railways have improved their service to some extent in that regard, one must recognize that you still require a truck at the railhead, to and from. That makes it difficult to use that kind of service in a just-in-time scenario. It is being used in certain corridors now. There is more cooperation than there has ever been.

However, if you are asking me if it is a viable alternative and a way to avoid the border problems, I would say not. The just-in-time systems are built around trucks because of the flexible service that trucks can provide.

Senator Banks: They go from point to point?

Mr. Bradley: That is right.

Senator Banks: Do the inspection processes in the piggyback mode work about the same way? In other words, does a train come to the border and does someone inspect all the cars?

Mr. Bradley: My understanding is that it is a combination of things. There are railway police, and I have no doubt that the officials would reserve the right to conduct the same sort of inspections. However, I am not very familiar with the situation.

Mr. Cooper: In the days immediately following the attacks, there was a perception that trains were getting across the border quicker. I had reports from Alberta last week to the effect that the U.S. Customs service was inspecting every single rail car. It was creating some problems on the Canadian side because the trains were backing up and blocking municipal roads.

My suspicion would be that the U.S. Customs service is on level 1 alert for all modes, not just trucks.

Senator Banks: Have your members run into armed service men at the border as of today or yesterday?

Mr. Bradley: Yes. Absolutely. We run into them every day.

Senator Banks: I mean soldiers, not border guards.

Mr. Cooper: The National Guard.

Mr. Bradley: Yes. The National Guard have been there for a few weeks, and more are being brought in. We are quite used to seeing people in battle fatigues. It is not only at the border.State police and state troopers are pulling Canadian trucks over. Drivers have been charged because a trooper felt that he could not speak English well enough. It is an offence under the law in the United States if you cannot speak the language well enough to communicate with a law enforcement officer. Those kinds of things are occurring.

I am sure I do not have to tell you what is going on. You are hearing from certain senators or congressmen who have a certain economic interest in saying, "We should buy American," and those kinds of comments. To me, the threat is related to where the direct investment will go in the future. The border is perceived to be a problem. Even if we fix the problems, if someone down there still thinks that there is a problem, it will be our major concern. You will not need trucks if there is nothing to ship.

Senator Kroft: Just about everything we have heard relates to public sector infrastructure investment or regulation making. Is there an investment implication for the trucking industry in responding to this? If so, could you make a general comment about the degree to which the trucking industry is ready, willing and able to meet that responsibility?

Mr. Bradley: We have had a problem in the industry for the last five or so years with the Russian mafia, with trailer and load theft, and so on. We have been investing in better security systems over the last number of years. The industry is now doubling that effort. Private security consultants work with us to set up programs and the like. Of course, capital and other costs are associated with that.

While public investment is required to build the systems and get them going, you can rest assured that the truckers will be paying for them. We will have to pay for these biometric cards and we will have to pay tolls every time we cross a bridge, and those kinds of things.

Our position is that, as long as it is mandatory for every carrier that is crossing that border to be part of the system and, therefore, sharing in the costs, so be it. We would not support a situation where some companies, whether they think they are too small or do not do enough business in the United States, push for rules so that they can opt out of the system. That is not the way to go. Every one who crosses that border must be involved. The cost is then shared equally and fairly. Ultimately, we will try to pass that on to our customers.

The Chairman: Thank you for coming here this afternoon. It was a good presentation.

The second group of witnesses is from the Air Transport Association of Canada.

Mr. J. Clifford Mackay, President, Air Transport Association of Canada: I will ask Mr. Everson to say a few words before we go to questions.

Mr. Warren Everson, Vice-President, Policy and Strategic Planning, Air Transport Association of Canada: Thank you for the invitation to appear before your committee.

Our association represents commercial aviation in Canada, including virtually all passenger and cargo airlines, as well as many flight schools and associated aviation industries. We also number among our associate members most of the majorU.S. carriers, as well as a number of European carriers.

Our trans-border market represents about 35 per cent of passenger volumes for the airline industry in Canada, which is about 20 million passengers a year. This is one of the fastest growing markets and it is also one of the most profitable. Canadian-U.S. business traffic, a high yield traffic, rose 5.3 per cent a year from 1990 to 1999.

More broadly, you will have heard from many witnesses that $1 million of trade takes place between our two countries every minute, and 200 million people cross our common border every year. The security and economic health of this country requires us to be attendant to our border and to embrace new approaches to managing this relationship. For airlines, that is certainly true.

I want to stress that, before September 11, the situation was not okay. It was not okay for the airline industry. We have been growing at rates above the rate of inflation for virtually the entire 1990s decade. During the 1990s, our traffic was growing as a result of the signing of the Open Skies Agreement. In four years we saw a 46 per cent increase in passenger enplanments on the transborder routes. However, the resources available to agencies such as Canada Customs and United States Customs did not grow at all. In some years, they declined.

Last year, our concerns were vividly brought into focus during the negotiations of the Preclearance Agreement between Canada and the United States. At a certain point in our negotiations, the U.S. Customs Service suddenly insisted that the text of the agreement would have to acknowledge that from time to time they would not have enough resources to meet growing demand on the Canadian side.

I thought then, and think now, that was a poignant moment in public service. Here was an agreement, designed to facilitate travel, with a clause being inserted that specified that governments might not be able to keep up with it if it works. We were heading for trouble, and public services were unable to keep pace with market demand.

September 11 changed the issue temporarily. However, the goal for Canada must be to do something other than return to the standards we had prior to the terrorist attacks. Those attacks have distracted our attention from the facilitation issue.

I heartily endorse many of the comment Mr. Brady made earlier. In the past two and a half months, we have focused our attention on security instead of ease of travel. Our number one concern has been the sheer physical demands on personnel and on systems as we inspect personnel, passengers, crew and bags.

The whole system in the airline business is designed around time and speed of throughput. In some cases and on some occasions, usually to considerable media attention, the system grinds to a halt and delays become unacceptably long. There is obviously a serious problem with passenger demand as people increasingly try to avoid the airport if they can travel some other way.

My colleague and our president Mr. Mackay is here to talk about the details of security relationships that we have with the United States, if that comes up in questioning.

For the short time we have here, I would like to talk about an area of particular concern to us, and that is our relationship with the U.S. in dealing with the exchanges of information that airlines have about passengers.

This has been an area of considerable activity for the last couple of years. Governments throughout the Western World have talked much about using airline data to pre-screen or to profile passengers so as to not waste resources investigating and interviewing people who are frequent travellers and do not fit a risk profile. Canada has been one of the countries working particularly hard with airlines to develop consistent systems to facilitate travel.

However, since September 11, the shift has been towards gathering this data for purposes of security. On October 15, 2001, the U.S. passed customs security legislation. Recently, Canada passed Bill S-23, the Customs Act, and Bill C-11, the Immigration Act, all of which empower the minister to have airlines give out information. Minister Collenette, on the transports side, put forward Bill C-42, to amend certain acts to enhance public safety.

The Chairman: Perhaps you could stick to the script that we have before us. Trying to follow what you are saying is becoming confusing, although we do appreciate all the information.

Senator Angus: Is it Bill C-42 or Bill C-44?

Mr. Everson: Under Bill C-42 Transport Canada can compel us to release the data.

Senator Angus: What is Bill C-44?

Mr. Everson: It is a quick-and-dirty privacy exemption for release to foreign competent authorities.

The United States law is of particular interest. It will be imposed on carriers all around the world if they wish to enter the United States. Recently, the head of Customs has made it clear that, even before their 60-day notice period is up, they will start to face aggressive screening of passengers.

Our main point, which we wish to put vehemently before the committee today, is that Canada cannot survive with the same deal the rest of the world gets, probably not in our economy generally and certainly not in our airline industry. We need a special deal that is different from other countries because our situation is different from that of any other country.

No other country's airlines are being forced to pay the tremendous costs that ours are, since we share a great deal of the risk borne by U.S. carriers in the current environment. More over, no other country has the same travel patterns to and from the United States. I do not want to get into the details of the exchange of air rights, but carriers from every other country are permitted only limited and specific access to the U.S. market and vice versa. Other countries will typically find very large airplanes that fly a long distance to go to one of seven or eight major hubs.

Canada and the U.S. have an Open Skies Agreement, which is the envy of most of the world, which permits any licensed operator to fly point to point - from any point in Canada to any point in the United States or vice versa.

The Chairman: Are you saying that an American carrier can take you from Montreal to Toronto?

Mr. Everson: No, but it can take you from any point in the United States to any point in Canada.

The Chairman: That is not what it says.

Senator Angus: Your sentence is misleading. It says, "to any point in either country."

The Chairman: Obviously, that is a mistake, is it?

Mr. Everson: Yes. The freedom of the Open Skies Agreement has been an enormous economic boom for carriers and customers. In particular, it has allowed Canadian carriers to avoid what we call the "fortress hubs" where U.S. carriers are so dominant.

The transborder market is not a good market for the transmission of passenger information. Most flights between Canada and the U.S. are typically less than two hours. That is usually not sufficient time to transmit individual files, have them compared to databases, and be ready to interdict a specific individual.

As we do not require Americans and Canadians to carry their passports across the border, we do not have the easy option of running the passport through a reader, such as is done in Europe.

Have I said something that has annoyed Senator Meighen?

Senator Meighen: No. Have you tried to cross without a passport recently? I tried it, and I made it, finally, but they were not at all happy about it.

Mr. Everson: Indeed. If someone as honest looking as you has difficulty, just imagine what would happen to the rest of us.

As security tightens, there will be pressure to force those foreign carriers into fewer large hubs, so that resources can be concentrated there. Some foreign carriers are actually asking for that because they do not want the onerous burden of maintaining passenger data. They want to use points of departure such as is done in Europe. That is a prescription for disaster for the Canadian airline industry.

Canadians are accustomed to thinking of the border as a physical line. However, for the Canadian airline industry, the border has not been a line. It is a process as opposed to a place. Making the process work requires innovative and focused Canadian policies. We say "Canadian" because the border matters much more to us than it does to the United States. We believe it will be up to us to make the suggestions and push the solutions. Our experience, especially in these last two months, has been that the Americans are not hostile, but they are indifferent, and they are not well informed.

ATAC is a member of the Coalition for Secure and Trade-Efficient Borders. They tabled their report this week. We endorse a number of the comments made in that report. We would also endorse the concept of some kind of bi-national commission to preside over the border and ensure its evolution in this time of greater threat.

Every minister of the Crown encounters a different piece of the border and deals with it within his or her own mandate. We think that there is a lack of overarching responsibility.

Winston Churchill once characterized our relationship with the U.S. as a neighbourly respect and honourable obligations. Such a relationship is a rare and vulnerable thing in the modern world and we neat full-time caretakers to ensure its survival.

Senator Angus: I should like the clerk to note for the record that I have an interest as a member of the board of one of the airlines that is a member of this association, but I do not see any conflict in the context of this meeting. Please note the declaration of my interest.

In this study, we are trying to determine the economic impacts of the tragic events of September 11, quite apart from the things that you stated, Mr. Everson, in your opening remarks. We have read in the newspapers that those events, in and of themselves, have been the most devastating events that have ever happened to the commercial airline industry. Could you tell us if that is true?If so, could you give us the order of magnitude and the dimension of this impact? That goes right to the issue that we are studying.I understand that the numbers are very dramatic.

Mr. Mackay: We believe that to be the truth. We have never in the history of commercial aviation seen an event like we saw as a result of September 11. To give you some rough dimensions of the issue, we have seen a reduction in capacity over and above the slowdown that we were seeing before September 11. It is something in the order of 20 per cent. That is not just in Canada, that is all over the world. The rate of recovery coming out of that is very uncertain.

Senator Angus: Is that an average number across the border?

Mr. Mackay: Yes.

Senator Angus: Can you be more specific in terms of the United States and Canada?

The Chairman: You said reduction in capacity?

Mr. Mackay: That means that there are 20 per cent fewer seats out there for you to buy in the airline industry worldwide.

The Chairman: You have parked a lot of planes?

Mr. Mackay: Yes.

In terms of Canada-U.S. it has been more dramatic. Transborder traffic is down probably 25 per cent to 30 per cent. Again, it is very uncertain as to the pace of recovery of that traffic. It is impacting all market segments, not just the business traveller. We have seen very significant reductions in leisure travel as well.

Senator Angus: That is all as a direct impact of September 11?

Mr. Mackay: We believe that is a major element. It is analytically difficult to spit out some of the causations because, obviously, there is an economic slowdown and we have seen softness in the Canadian dollar. Those factors are there. However, many people are expressing concerns about flying because they are not quite certain that they feel completely comfortable with the safety and security environment. We have been working hard to convince the travelling public that it is fine, but I must tell you that there is still a body of opinion out there that says it is not fine.

I was talking, basically, about the top line. One of the two most dramatic increases in costs since September 11 has been insurance. We have seen increases in premiums of 200 per cent to 300 per cent. In certain areas, particularly in war and terrorism, it is simply impossible to buy insurance. At last count, over 60 governments have had to put in place extraordinary measures so that the industry can continue to operate in the absence of commercially available war and terrorism third party liability insurance.

That continues to be the case. I wrote to the minister just two days ago to ask him to consider extending the Canadian indemnification beyond the 90-day limit that expires on the 24th of this month simply because all of the of the advice that we are getting from the brokerage and underwriting community is that there is not risk capital available for that type of insurance.

The other dramatic increase in costs relates to security. We have advised the government that, in the Canadian context, the additional security costs as a result of September 11 will be greater than $1 billion.

Our total revenues as an industry are in the order of $11 billion to $12 billion a year. Security and insurance costs are gargantuan numbers for us by any stretch of the imagination.

I hope it was helpful, senators, to give you a sense of some of the magnitudes with which we are dealing.

Senator Angus: I would like to delve further into the economic consequences of the tragedy. American Airlines is generally considered to be one of the five largest airlines in the world, if not one of the two largest. Their CEO, Mr. Donald Carty, who has Canadian roots, has stated that it is an absolute "crisis," that it is a question of "survival" and he has used words like that that have appeared on the front pages of international newspapers. By my own count, over 10 bankruptcies or insolvencies have occurred in the wake of September 11. Could you elaborate on that? Some cynics suggest that it would have happened anyway, but I do not know.

Mr. Mackay: Consolidation in the industry was a fact of life and was happening before September 11. Again, the events of September 11 have dramatically changed the financial circumstances of many companies. There have been discussions in Europe among a number of companies. There have been two very high-profile bankruptcies in Europe - Swissair and Sabena - and independent analysts are predicting more.

As early as yesterday, the head of the competition bureau at the EEU was publicly advocating industry consolidation in Europe in anticipation of further problems for European airlines. In the U.S., we have seen independent studies that would indicate that, among the top 10 to 12 U.S. airlines, there is a significant expectation that at least three more will go bankrupt, perhaps even as many as five more.

These numbers are beyond the pale by any historic standard in the industry. We have been through many depressions over the years, but we have never seen anything like this.

The Chairman: How will we bring the discussion back to border crossings?

Senator Angus: I did not know that our hearing was to be focused on border crossing only. I thought we were dealing with the economic impact of the events of September 11.

The Chairman: You can continue to deal with this point, because it may be useful to us.

Senator Angus: Other industries are related to the airline industry. I am told that related agencies such as travel agencies, hotels and vacation places are all directly impacted by that terrible event, because people do not want to board planes. Do you have any relevant statistics to share with us?

Mr. Mackay: I cannot give you detailed statistics, but I do know that the Hotel Association of Canada has some numbers, as does the Tourism Association. As a broad indication of this, you need only to look at the packages being offered today to Bermuda and holiday destinations in the Caribbean. For example: Four days, return air, a three-star hotel in Nassau, for Can. $229. Today there are numerous good hotels in the resort belt that are operating at 10 per cent occupancy rates.

Senator Angus: To come back to cross-border issues,I understand that you have statistics. You mentioned that there has been a general reduction in capacity worldwide in the aviation industry post-September 11. I also understand that, because of the Canada-U.S. cross border situation, the problem is worse. Do you have any numbers on yield, any revenue numbers, any numbers on seat occupancy, people flying, and business travel, in particular?

Mr. Mackay: We can given you capacity numbers. I mentioned that it was roughly 30 per cent and, depending on particular point-to-point locations or city fares, it may be even higher. I cannot give you yield numbers because they are held fairly closely by our members, and they are considered to be commercially sensitive.

Senator Angus: How about the 70 per cent of the planes that are flying?

Mr. Mackay: Load factors are what they were prior to September 11 when we were running loads in the low 70s, and sometimes even higher than that. We are now seeing loads below the 70-percentile mark. You must also recognize that even though the loads are not as dramatically down as the traffic, we have taken much of the capacity out of system. There are fewer airplane seats available.

Senator Angus: It is a compacted number.

Mr. Mackay: Yes.

Senator Angus: Are there any other statistics you can add that would help us understand the order of magnitude of the situation? What is the situation with regard to business travel, for example?

Mr. Mackay: Business travel seems to be coming back, but even so we are seeing much more use of upgrades and other such things to try to avoid the cost. We think that is more a function of the tightness of the market and the recession than of September 11. Those kinds of business practices are prevalent today, and that is just exacerbating the situation.

Senator Angus: There is another issue, and I do not know whether it would be considered economic, but it is a consequence of September 11 that affects the Canada-U.S. cross border traffic, and that is air marshals. Are we interested in that? Certain Canadian airlines are unable to fly to U.S. destinations that they used to fly to unless they carry armed marshals. That is a big issue. It involves a great deal of money.

Mr. Mackay: The one U.S. airport where it is now an absolute requirement to carry air marshals is Reagan National, in Washington D. C. Air Canada carries air marshals on the flights to that location. As a rough order of magnitude of the cost of the service to that one location, it probably costs in excess of $3 million per year to keep those air marshals on those airplanes. If we went to a broader air marshal program, the numbers would be staggering.

The Chairman: This is very important information, but we will have to meet to decide how we assimilate it.

Senator Angus: If there is any industry that has suffered a direct consequence, it is obviously the airline industry. First, it is a high profile industry, but it was also the airline industry that was involved in September 11. There is a whole population out there that will not go near an airplane. I was trying to elicit some of that data for you.

The Chairman: I appreciate what you are doing, but I do not know how far our study will go. Nevertheless, we will have this information, and we can decide later.

Senator Banks: I wish to press you a bit, if I may, on some of the things that Senator Angus has raised.

Many of us fly frequently. My anecdotal observation is that passenger load factors have recovered nicely. Granted, you have removed many seats from the market, but for the last few weeks, I have not flown on a plane on which there were any empty seats that I could see, which is wonderful.

Senator Angus made the point that September 11 was a fulcrum event that lead to some of the difficulties. Many people have said that that was a factor but not the main factor. This pertains to cross border questions because, if we want to fly planes into the U.S. we will have to provide air marshals. If we do not, then they will not only stop the planes flying but they will make it extremely inconvenient for passengers who want to disembark. It will take a long time for them to retrieve their luggage and to go through Customs.

Swissair and Sabena went bankrupt within a few weeks of September 11. I am hard-pressed to believe that is the entire reason that they went under. Everyone knows that there was a financial malaise. I take it as accepted, conventional wisdom that there was financial difficulty in the airline industry before September 11.

You said that the load capacity is now at 70 per cent, whereas it was at about 72 or 73 per cent before September 11, and you have removed 20 per cent of the capacity. That demonstrates that we would have been in big trouble in the airline industry without September 11. Is that right?

Mr. Mackay: I will reply and then I will ask my colleague to add to my response. You are correct in surmising that the industry was under significant pressure before September 11. There is no doubt about that. Some companies were struggling.

What changed after September 11 is that we went from a situation where many companies were already into cash conservation programs and other things to manage their way through the recession, to a situation where, suddenly, those plans became impossible. In our industry, unfortunately, cash is king. Unfortunately, one can run out of cash in a big hurry running an airline, and the situation becomes very serious very quickly.

Most people do not understand that our business is so volatile because we have high fixed costs and we burn enormous amounts of cash whether or not we have enough passengers paying the of top-end prices to keep us profitable.

As a result of September 11, a difficult situation was made, in some cases, impossible. You are absolutely right to make the point that before September 11 some companies were struggling. September 11 was a watershed, however.

Mr. Everson: I do not think people realized what a precarious business the airline industry was through the era of deregulation. Through the 1990s, the average return to investment in theNorth American airline industry was 3.5 per cent. This was through the biggest economic boom in my lifetime.

Senator Banks: However, your association never argued against deregulation.

Mr. Everson: That is correct, and we do not now. Just because it is good for consumers does not mean it is easy for business people to make a living.

The airlines that were the weakest died after September 11. Swissair was grievously weakened through the strategy they pursued. Sabena had labour problems, and Ansett was already bankrupt, with a receiver trying to put it back into business.

The next line of casualties that are starting to appear are also carriers that, for one reason or another, are cash poor or constrained. Aer Lingus is in terrible trouble, as is Alitalia. However, some big and fairly robust air carriers are experiencing considerable difficulty now and are burning through cash at a staggering rate.

The industry in the United States was burning $19 million a day before September 11, but for the rest of the month of September the burn rate rose to over $50 million per day. It has settled back down.

The point you made about seats being full is important. All through the spring of this year in Canada our seats were full and there was increasing demand. We saw gross traffic volume increasing through July right into August. However, yields were falling very sharply. Air carriers were losing money, especially Air Canada, which has the lion's share of the market. It was losing money and losing yield as people became less price-sympathetic. They became harder-nosed. Even though Air Canada took more passengers on board through May, June and July, it started to lose money on flights.

Senator Banks: In your presentation you said that a deal with the U.S. that is the same as the rest of the world is not good enough. You also said that our Open Skies Agreement is the envy of the world. Surely it must be an advantage to Canadian operators, or it has been seen as an advantage, to have such a policy. Since it is better and since it must be an advantage, why do we need a better deal than that? We already have a better deal than everyone else.

Mr. Everson: As a result of the increased concern about security, we are nullifying the benefits of that agreement and our Preclearance Agreement.

Last week, U.S. Customs announced that, notwithstanding the fact that passengers have already been past a U.S. Customs officer in a Canadian airport as they depart to the United States, the air carrier will still be required to provide passenger data on all those people, at its own expense, and in some cases that expense will be considerable. We are shaking our heads, saying, "You have already entered the United States as far as the law is concerned. Why would you compel the carrier to then give you data on who those people are?" The flight might be going to a place like Kalamazoo where there is no post-clearance. What will they do? Will they rush the local sheriff off to meet the plane? Indeed, that is what they will do.

It is a weird and frightening environment for us. Other carriers are trying to organize the system to reduce their costs as much as possible. They want to concentrate on a few key hubs and have the U.S. government handle all the border issues at those points. That might be good for BA and Lufthansa. It would be inimical to our interests. That is why we need a different deal. We need to cut out some turf on our own.

Mr. Mackay: You must understand, senator, that one reason we have been so successful in capturing the lion's share of the transborder market is because our companies have pursued a strategy of avoiding the high-cost hubs to the degree they can do so. They fly point to point, like the truckers, into particular markets in the U.S. where they believe there is a demand for that service. The regional jet is a classic example of the kind of airplane we fly.

If we must now live with the kinds of information exchange and security measures that are being proposed by the U.S., we will be in deep trouble because we will have great difficulty in trying to serve those markets.

Senator Banks: You would also have increased competition. I always try to fly on a Canadian flight carrier, but if I know, after several instances. that in flying from Edmonton to Minneapolis I will get really hassled at the other end, I will fly on Northwest Airlines because I will not be hassled because they have a sky marshal.

Mr. Mackay: It is not a question of whether there is a sky marshal, it is a question of all the information that we are being asked to provide, with much of it, frankly, ending up in a void. We need the same sort of recognition as we have had in the past with the U.S. government officials, that is, this relationship is broader and more complex than the kind of relationship they have, for example, with Japan, in terms of access. That needs to be recognized in the measures we put in place.

We are not asking them to compromise security systems. We are asking them to deal with us flexibly so that we can make it work.

Senator Banks: Are you saying that Northwest can afford to do that when they fly me from Edmonton to Minneapolis?

Mr. Mackay: Northwest will not pay for that sky marshal. The U.S. government will pay for that.

Senator Banks: Do you want us to?

Mr. Mackay: If we must go to sky marshals, the answer is clearly "yes," but we would prefer to see the resources go into other kinds of security measures that we think are more effective.

Senator Banks: Who now pays for the sky marshals flying on Air Canada into Washington?

Mr. Mackay: Air Canada pays. It is very expensive.

Senator Banks: Are they Mounties?

Mr. Mackay: Yes.

The Chairman: Thank you, gentlemen, for appearing before us. It was very productive and will form an interesting part of our report next week.

I would like to welcome the Canadian Vehicle Manufacturers' Association.

I understand that your group has a prepared submission.

Mr. Mark A. Nantais, President, Canadian Vehicle Manufacturers' Association: Yes, senator, we have a statement we would like to make.

I would thank you and the rest of the committee members here for the opportunity to address you.

The CVMA, if you do not know, is the national industry association of Canada's largest automakers. Our membership includes DaimlerChysler Canada, Ford Motor Company of Canada, General Motors of Canada, International Truck and Engine Corporation Canada and Volvo Cars of Canada.

The purpose of these hearings, as we all know, is to assess the impact on cross-border commerce arising from the horrific events of September 11 in New York City. As more time goes by, it is becoming very clear that the terrorist attacks have deeply affected the psyche of the nation and the sense of our own personal security. Heightened concern over personal security in the United States is understandable against the backdrop of September 11 and the ongoing threat of anthrax contamination.

I would like to provide the committee with a quick update on the current state of the automotive industry. The Canadian automotive industry is fully integrated on a North American basis. As such, more than 85 per cent of the vehicles and major components that we assemble are exported to the United States. As you are well aware, it was recently noted that the U.S. has officially entered an economic recession that has impactedU.S. vehicle purchases, which are down approximately 2.6 per cent or almost 400,000 units in year-to-date October through 2001.

With regard to production in Canada, again year-to-date for October is down about 15.5 per cent from last year, and for CVMA members, production is down almost 20 per cent. It is projected that vehicle production in Canada will be around 2.45 million units as opposed to 3 million units for each of the past two years.

It is interesting to note that this difference equates to an annual production of about two average vehicle assembly plants. We are already faced with a global overcapacity situation of about 22 million units, of which about 6 million units of that overcapacity resides in North America.

With respect to our domestic market, even though Canada enjoyed record sales year last year with almost 1.6 million cars and light trucks sold, it took us nearly 12 years to surpass our previous sales record in 1988.

This 2000 calendar-year sales record was supported in great measure through the use of costly incentive programs that are not sustainable in the long term. Indeed, Canada is the only OECD country that did not sell more vehicles in the decade of the 1990s than it did in the decade of the 1980s. The average age of a vehicle in Canada is 8.3 years, compared to 7.2 years in the United States. Our members are concerned that the level of disposable income in Canada is a real issue when purchasing a new vehicle. In other words, we have an affordability issue.

However, in the short term, consumers have benefited from the zero per cent financing that has been offered by our member companies over the last few months in an effort to sustain sales volume and retain market share. Although October industry sales were up 10.9 per cent over the last year, despite these costly incentives, CVMA member companies' sales collectively increased only about 4 per cent in October and their 2001 year-to-date market share has actually eroded almost 6 percentage points compared to 2000.

It is projected that light vehicle sales in Canada will be in the 1.49 to 1.51 million range. This is still a respectable year but, as already noted, we can only achieve such levels of sales through the incentive programs we have offered, and these are not sustainable.

I am sure you are well aware that the auto industry has been completely rationalized in North America since 1965 with the signing of the Auto Pact. As Canadians, we have benefited immensely through this rationalization, which allows production facilities in one country to produce vehicles to be sold in both countries, with parts and vehicles moving across the Canada-U.S. border relatively free of delays.

The industry was further integrated under the Canada-U.S. Free Trade Agreement in 1989 and again the North American Free Trade Agreement in 1994. Currently, roughly about 25 per cent or $300 million of the $1.3 billion in daily two-way trade between Canada and the U.S. is in the area of automotive products. This is a very important fact. For over 35 years, the automotive industry in both countries has relied upon the relatively unimpeded transportation of parts and finished vehicles across the border to sustain the industry in both countries. Over that time, our industry has evolved to a just-in-time delivery system that effectively makes the trucks crossing the border a fundamental component of a vehicle assembly plant's production process.

The Chairman: Will you point out that your industry was already in decline before September 11, and that this is a cyclical thing which the border-crossing situation is exacerbating?

Mr. Nantais: That is where we are going. We have a softening of the market on both sides of the border.

Simply put, delays at the border add cost. For instance, to be certain that the companies and the plants have inventory to keep their production lines running, some of our members have opted to increase inventory levels by about 5 per cent, with all of the attendant costs associated with such action. These costs and border uncertainties are adding costs to the Canadian andNorth American automotive industries at a time when they are taking severe actions simply to remain competitive on a global basis. In such an integrated industry, many thousands of jobs on both sides of the border depend on a seamless, efficient Canada-U.S. border.

In the days following September 11, production at automotive plants was disrupted as parts shipments were delayed at the Canada-U.S. border. Both in Canada and the U.S, over 20 assembly plants were temporarily idled immediately following the terrorist attacks, with many experiencing parts shortages due to border delays three to four days after the attacks that necessitated plant shutdowns. The unplanned production loss resulting from parts shortages has been estimated to cost manufacturing facilities in the range of about $1 to $1.5 million per hour, or $25,000 a minute. Those are pretty staggering figures.

Carrying extra inventory or be faced with unplanned production losses are now hard operating costs that Canadian plants did not previously incur, and they will become one of several factors to be considered in future investment decisions.

Canada and the United States negotiated trade agreements with the assumption that the border would not impede the trade that such agreements facilitated. Therefore, Canada must work to take the necessary steps to ensure that border crossings remain unimpeded. If certainty of supply cannot be guaranteed, there are risks for both near- and longer-term sustainability of highly integrated industries like the Canadian automotive industry.

Delays at the Canada-U.S. border have significantly decreased since September 11. However, we must point out that truck volume at major Ontario border crossings remains down about5 per cent, while the volume of car traffic across the same border crossings remains down about 10 to 20 per cent. It must also be remembered that temporary emergency staffing levels at U.S. border crossings are still in place.

The CVMA was pleased that the governments of Canada and the United States were able to strike an accord to guide the management of the border between the two countries. We were especially pleased by two aspects of that accord. First, the accord was ratified by cabinet-level officials from both sides of the border. However, without the political will to enhance our border management, it seems that little will be accomplished.

Second, we were pleased that the accord was focused on a cooperative approach based on working together to achieve common objectives. As it currently stands, there are simply too many agencies, departments, ministries and services involved in border management for the necessary steps required to re-engineer the border to be taken.

While the CVMA and its members are focused on border issues from an economic security and trade efficiency perspective, we recognize that the United States is focused primarily on matters of personal security. If we know who is crossing the border and, in the case of cargo, what is crossing the border, then a proper risk assessment process can be undertaken. Scarce human resources can then be focused on high-risk travellers and shipments, while technology can be employed to facilitate the border clearance of low-risk travellers and shipments.

At the Canada-U.S. border, particularly for key high-volume surface crossings in Ontario, we need to take several important steps that will facilitate the flow of high-value, low-risk goods. Specifically, we believe the following steps should be taken.

The first step would be to allocate sufficient human and monetary resources to ensure the existing border crossing infrastructure is maximized. For instance, we are aware that the Ambassador Bridge in Windsor is operating at significantly less than capacity due to insufficient resources at inspection facilities and the lack of appropriate technology that actually could increase through-put.

The next point is to improve intergovernmental cooperation on roadway infrastructure leading up to the border. Canada, the province and applicable municipalities need to ensure that everything possible is done to decrease congestion and maximize the efficiency of roadways leading up to the border and to stream low-risk travellers and cargo shipments into dedicated lanes.

Dedicated lanes should be available at the border for low-risk travellers and shipments. Shared databases could also form the basis for complete electronic clearance of low-risk people and goods under the Customs Self-Assessment Program.

We could expand the use of known and proven technologies to allow for in-transit electronic reporting prior to arrival at the border, and to track shipments.

We encourage the use of expanded pre-clearance initiatives such as the Customs Self-Assessment Program, which is designed to facilitate the flow of goods for those companies with significant cross-border traffic, such as in the auto industry. The CSA provides the opportunity under specific conditions to obtain pre-arrival clearance privileges and self-assess customs duties payable. CSA knowledge about the importer, the driver and the carrier ensures that we can designate these shipments as low-risk shipments. Dedicated lanes should be made available at the border for such low-risk shipments, along with low-risk travellers.

We encourage international cooperation with respect to data sharing, the development of international standards and joint Canada-U.S. inspection programs. Government-industry partnerships such as CUSP - the Canada-U.S. Partnership - will ensure that the best private and public sector minds are brought to bear on border matters.

Our border problems did not begin on September 11 and they will not be solved with a single or easy solution. A comprehensive strategic and bilateral approach is required to solve our problems.

Regarding these critical border issues, we would once again like to acknowledge and express our appreciation for the ongoing efforts of the federal government undertaken in support of both our national economy and our security interests.

We believe now more than ever that the federal government needs to facilitate a business environment conducive to economic growth. This requires a Canada-U.S. border policy that allows Canada to maintain its place in an integrated North American economy, and a fiscal framework that provides consumers and investors with the confidence to keep our industry moving.

Once again, Mr. Chairman, we appreciate the opportunity to be here. We will be pleased to answer any questions you may have.

Senator Angus: Welcome, all of you. I noticed that you were in the room for all or part of the evidence of the two earlier groups. Did you listen to the testimony of the Canadian Trucking Alliance?

Mr. Nantais: We did, indeed.

Senator Angus: Did anything come out of their testimony with which you would disagree?

Mr. Nantais: We have not been primarily concerned with air traffic. However, we have been very concerned with truck traffic. In fact, the CVMA hosted a congressional delegation in Windsor. We toured the Windsor bridge facility on the U.S. Customs side and Mr. Bradley was part of that delegation. We indeed share many of the same concerns and ways to address the issues.

Senator Angus: I was assuming that your identity of interests with the road carriers would be much more than with water or air modes?

Mr. Nantais: Yes. However, we do have an interest in rail.

Senator Angus: You will have heard my question about the bizarre result of September 11 that, if there is anything good about it, it brought into sharp focus the border situation and has created an opportunity for major shippers and receivers like yourselves to fix a problem, which has been a very thorny one over the years, and to get government attention. Do you agree with that?

Mr. Nantais: Unfortunately, we do, yes. It is very unfortunate that it took an event like that to bring an acute focus to the issue.

We have been trying to work with the border authorities. As we mentioned, certainly the Windsor Ambassador Bridge is operating under capacity. They would certainly require resources to bring things up to full capacity, and that would certainly help us.

We are looking for a risk-assessment approach. In other words, for the high-value, low-risk goods, such as those associated with our just-in-time delivery systems, we need to do everything we possibly can through enhancement of our knowledge of electronic solutions and new programs such as the Customs Self-Assessment Program to ensure we have an unimpeded flow of traffic over the key border points such as the Ambassador Bridge in Windsor.

Senator Angus: One of the economic impacts of September 11 was the closing of the GM plant in Sainte Thérèse, Quebec, which is in or near Senator Kolber's and my riding. We are devastated by that.

Ms Faye Roberts, Manager, Government Relations, General Motors of Canada Limited, Canadian Vehicle Manufacturers' Association: It was certainly a difficult decision. Given your proximity to the location, I am sure you are aware that this was an ongoing concern of ourselves and certainly the employees in the area for a number of years. It was with great regret that we did have to announce the closure. From a corporate perspective, it was a coincidence that it happened the same month as the tragedy in New York City.

Senator Angus: Was that the straw that broke the camel's back?

Ms Roberts: No, the problems there were associated with declining demand in the sports car segment. Those issues have been dealt with many times over. With all due respect to the Chair, I am not sure that issue was what we wanted to discuss today. I am certainly willing to take it up in another forum. I believe they are separate issues.The issues related to Saint-Thérèse are more general with regard to the auto industry, in terms of, as Mr. Nantais mentioned, the overcapacity in production facilities, which is a real problem. That is a larger issue that was in place prior to September 11.

Senator Angus: I should add that all four of us senators present, Senator Hervieux-Payette and Senator Setlakwe as well, are all very interested in this situation.

Thank you for your comments. We are glad to know the situation was not triggered by September 11.

Another question that I have comes out of what I call as a lawyer the res gestae, the background music. We see on television every night and in the newspapers every morning that the Americans are bringing in helicopters. They have 600 border guards. After so many years of living with the world's longest unprotected border, we are given the impression that it is the reverse now. I personally do not think that is happening, but I wonder what effect it is having on your particular issues as described in your brief. Maybe Mr. Nantais would deal with that.

Mr. Nantais: Frankly, it is probably good practice not to watch too much of CNN. It can be a little depressing after a while.

About 4300 trucks a day from our industries go across the Ambassador Bridge facilities. Since September 11, and notwithstanding the National Guard being present, the Canadian and U.S. Customs officials have done a tremendous job with what they have had available. We had problems prior to that, but that is because we have infrastructure problems, which is a longer-term issue.

If you have been to Windsor at all, you know that the lead-up to the Windsor bridge is through commercial and residential areas. That border crossing does not facilitate commerce.

When we signed NAFTA, I am not sure we fully understood the implications for border crossings. There has been a significant increase in traffic, because we have benefited from that increased trade.

We are in a situation now where, while September 11 did bring that focus, we have to make the move to deal with the short-term issues, and if the National Guard helps us get our trucks back and forth across that border, that is fine with us.

We do know they are looking to additional technology, again on both sides of the border. If that means X-ray machines to X-ray these large transport trucks, so be it. We have to keep the traffic moving. We have to ensure we have no delays in our just-in-time delivery system.

The interesting part of attending the congressional delegation was that we discovered that the U.S. Customs officials, who gave a great presentation, consider themselves to be part of the just-in-time delivery system. They were inspecting one truck per lane per minute, which I think is an astounding accomplishment. They certainly deserve credit for that.

We have immediate-term issues to be dealt with as well as some medium-term issues. The broader issue of infrastructure, which is much longer term, must be dealt with. Certainly, the Ambassador Bridge and its lead-up is a unique situation. The options available are perhaps not only limited but could be very costly as well.

Some suggest twinning the bridge. It sounds like an easy solution, but in considering the best location for that, there is an existing infrastructure situation, and the environmental assessment associated with that could take anywhere from six to eight years, I understand. Even if we made that decision today, we probably would not see an operational bridge for at least 10 years.

The key thing for our industry is knowing that we have a reliable border crossing. If we do not have that, then, as I said, that issue, along with the issue of potential shutdowns, goes into the decision-making process for future investment. That is something that I think we have to be very cognizant of here in Canada. In spite of a slowing economy in the United States, which affects our production plants in Canada, and the softening of that market, the most important thing we need is reliability and consistency.

Senator Angus: Earlier, Mr. Bradley said something intriguing with which you did not disagree, so obviously there is some licence. I heard him say, almost in a parenthetic way, that on the U.S. side there are senators and congressmen who preach for their parishes, and that might be part of the impediment in terms of the "buy American" attitude as opposed to preaching for enhanced trade with Canada. Is there a real problem in that regard in the auto industry?

Mr. Nantais: If you look at some of the news clips and see some of the vehicles that are being driven in Afghanistan, I could understand why some senators might want to move in that direction. I do not think we have witnessed that here. We are companies that are part of an integrated industry. We would benefit from a buy-American program because so much of our product is exported to the United States.

Ms Roberts: The larger issue is that the auto industry is a strategic industry - it is high skill and high wage. Just as you were saddened to see the closure of the facility in Boisbriand, your cohorts on the other side of the border would certainly have been thrilled to learn that theirs was a place for investment.

It is a very competitive environment. Of course, we all want to make sure that Canada puts its best foot forward as a location for continued investment. If we do not see that people on the other side of the border are competing as well, we will be missing a key point.

Mr. Nantais: People fail to recognize that the plants in Canada actually compete with sister plants in the United States for new product mandate. It goes beyond that now. We have facilities in Mexico and in the Americas. Certainly, the plants in Mexico are capable of producing quality that is second to none in North America. In fact, some of them do better than our plants here in Canada.

The key thing that Ms Roberts alluded to, is that we have to have an economic climate that is very conducive to maintaining what we have, and to attracting new investment in the future.

Senator Angus: "We," being Canada.

Mr. Nantais: Yes. An unreliable border does not help us.

Senator Angus: How are we doing in terms of productivity?

Ms Eda M. Cross, Manager, External Affairs and Public Policy, DaimlerChrysler Canada Inc., Canadian Vehicle Manufacturers' Association: Our productivity is good. We have an immediate concern in the Windsor area where we have an assembly plant that is currently set to be idled in 2003. The concern from our parent company is investment. Do they invest in Canada when the border situations are questionable? That is always in the back of one's mind.

We have an immediate concern about losing another 800 jobs in the next several years, because we have no product mandate. Again, we are competing for the next product that is coming down the chute, so that they invest in Canada. We had already partially built a paint shop that is a huge facility, and now it remains empty. They have invested $100 million in this facility, and it is not going to go anywhere now, because they will close the plant. It is all up in the air. We want to make Canada attractive for even our own company to invest in.

Senator Banks: I know that you know more than we know about the present state of moving towards this streamed cross-border traffic. I would it appreciate if you would give us your impression of it, as it relates specifically to your industry; that is to say, how far along is it?

I am assuming you are watching its progress on practically a daily basis and quizzing people who know about it. How far are we away from a system, which will meet the needs of your industry and obviate those questions you mentioned about it being an impediment to investment?

Mr. Nantais: We have taken a positive step with the Customs Self-Assessment Program, which has been functioning on a pilot basis. It is a program that we would like to see fully implemented as quickly as possible. We are moving in that direction.

Senator Banks: Is the pilot program working very well?

Mr. Nantais: We have had some success with it. There are some administrative issues associated with it that we hope the Canada Customs and Revenue Agency will deal with. We have invested a great deal of money in the pilot alone. Perhaps some of the technical people involved, from the government, have not fully appreciated our concerns about these administrative issues.

Senator Banks: Is there any part of the Government of Canada that is an impediment? Is everyone working towards it, or is there a stumbling block?

Mr. Nantais: We have been working towards it, but we are have been talking past one another on some of the technical or administrative issue.

Senator Banks: Can you tell us whether these are internal problems or are they international negotiation issues? Are they matters that we could solve internally?

Mr. Nantais: This is not a situation that involves international negotiation; this is an internal matter that we can fix in Canada, and it is fixable.

Senator Banks: Are the people who are doing these things aware of your concerns, in that respect?

Mr. Nantais: Indeed, they are.

Senator Hervieux-Payette: I thought that much of the movement of goods was handled by railway companies. What is the percentage being shipped by truck, and what is the percentage that is being shipped by rail? Are the two modes being treated differently? Is it easier to go across the border by rail or by truck?

Mr. Nantais: We prefer, on a percentage basis, transport by truck, simply because of our just-in-time delivery system. The trucks are able to deliver the parts on both sides of the border within a very narrow window, which is tightened down now to about four hours, in some cases. Trains cannot accommodate that type of schedule.

The Chairman: What do you mean, "four hours? "

Mr. Nantais: That is from door-to-door. The parts are transported from the parts maker to the assembly plant floor in four hours.

Senator Hervieux-Payette: Except for Montreal, I suppose.

Mr. Nantais: Again, I am talking about the location of the majority of the traffic, which is in the Detroit-Windsor area and in Southwestern Ontario. About 95 per cent of all vehicle production in Canada is in Southwestern Ontario.

Senator Hervieux-Payette: What percentage is transported by rail, and what percentage is transported by truck?

Mr. Nantais: When we speak about parts and components, a preponderance of all those shipments is by truck. On the finished vehicle side, there would be a higher percentage of rail shipments.

Senator Hervieux-Payette: Are there fewer border problems in respect of trains as opposed to trucks?

Mr. Nantais: Again, since we do not use trains for inbound parts and components, I do not see that as an issue. The key is to make sure that the trucks flow relatively unimpeded. We are back to near normal conditions. However, quite frankly, I am not sure we will ever see pre-September 11 conditions again. I was in Windsor last week, and the trucks were still lined up at least three to four kilometres down the main throughway to the bridge. They were also lined up right across the bridge, which I did not believe was allowed any more for security reasons. This raises the issue of reliability and of having assurances that we can get those trucks back and forth.

We also have unique racking systems for the trucks. We can get a truck over, but we also have to get it back so that we can restock the truck, put it back on the road.

Ms Cross: Some of our truck drivers are on what they call "milk runs." They go back and forth across the border four times per day just picking up parts and delivering them to our assembly plants. The problem that we ran into was that they were coming over to Canada, but they could not get their racks back to load up again and return to the assembly plants on time.

Senator Hervieux-Payette: We have reason to be concerned, but at the same time, why do you have to go so fast when, in fact, the cars are not selling so quickly? It sounds crazy, but you do everything within four hours, and then, when you order a car it takes three to four weeks for delivery.

Mr. Nantais: Just-in-time delivery systems allow us to be much more efficient, and therefore, lower car costs can actually be more competitive. There is probably not a more fiercely competitive industry when it comes to the products that we build.

There is another interesting element of just-in-time delivery systems that is not readily noticeable. They allow our companies to ensure better quality. Many years ago when we stacked large quantities of parts components, if there were a defect or a quality problem associated with those components, we would not pick up on it immediately. The defective part was installed on the vehicle, ended up anywhere across Canada or the United States, and cropped up as a problem resulting from a quality issue.

Just-in-time allows us, within that four-hour supply of parts, to pick up quality issues almost immediately. We are able to rectify them on the spot, and we can minimize our quality issues and provide better customer satisfaction in the end. There is an added benefit that is not readily evident on the surface.

The Chairman: Thank you.

The committee adjourned.

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