Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 3 - Evidence, February 11, 2003
OTTAWA, Tuesday, February 11, 2003
The Standing Senate Committee on Foreign Affairs met this day at 6:17 p.m. to examine and report on the Canada- United States of America trade relationship and on the Canada-Mexico trade relationship.
Senator Peter A. Stollery (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, we shall continue with our hearings based on our order of reference of November 21, 2002, that the Standing Senate Committee on Foreign Affairs be authorized to examine and report on the Canada-U.S. trade relationship and on the Canada-Mexico trade relationship with special attention to the Free Trade Agreement of 1998, the North American Free Trade Agreement of 1992, secure access for Canadian goods and services to the United States and Mexico, and the development of effective dispute resolution mechanisms.
We have with us today Mr. Charles Gastle, a partner at Shibley Righton where he is also the chairman of the International Dispute Management Group. Mr. Gastle was the first Canadian lawyer on record before the U.S. Department of Commerce in the Canada-United States softwood lumber dispute representing First Nations communities from northern Saskatchewan.
[Translation]
From the Free Trade Lumber Council, we have today Mr. Frank Dottori, Chairman, as well as Mr. Carl Grenier, Executive Vice-President.
[English]
The Free Trade Lumber Council is a pan-Canadian organization representing more than 40 per cent of Canadian softwood lumber exports to the United States. The council was created in 1998 to seek re-establishment of free trade for lumber products between Canada and the United States.
From the Communications, Energy and Paperworkers Union of Canada, we have Mr. Fred Wilson, the national representative, who is replacing Mr. Brian Payne, the president.
Gentlemen, please proceed with your presentations.
Mr. Frank Dottori, Co-President, Free Trade Lumber Council: Honourable senators, thank you for giving us the opportunity to come before you. I am the Chief Executive Officer of Tembec Inc., which is an integrated forest products company. We have operations across Canada — New Brunswick, Quebec, Ontario, Manitoba, Alberta and British Columbia — and in a number of foreign countries as well. I am also co-chair of the Free Trade Lumber Council, which is an organization set up in 1998 to promote free trade for lumber in the North American market. The objective was to provide some leadership to try and get the Canadian industry together and address the issue when the SLA was going to expire, so that we would have a free market and free trade between the two countries.
As you know, the softwood lumber problem between Canada and the United States has existed for some 200 years, but it is only in the last 20 years that it has become very litigious and high profile.
This is the fourth U.S. investigation since 1983. As noted, the Atlantic Provinces have always been excluded. At the current level, we have 27.22 per cent tax on sales to the United States — 18.79 per cent on the countervailing duty and about 8.43 per cent as an average from the anti-dumping. This barrier has a significant effect on our operations. In effect, if you sell $100 worth of lumber, $27 has to be taken off the top. As a consequence, it has severely affected the Canadian industry, with almost $1 billion paid in dues to date. For a company such as ours, it amounts to between $80 and $100 million per year.
As a result, we have had to announce curtailments and shutdowns because, on average, this industry has had a 14 per cent profit margin over the last five years, not 27 per cent. There have been some fairly significant job losses, which I think one of my colleagues will attest to, in shutting down and curtailing mill operations at sites and laying off a large number of people.
Canada has been pursuing a two-track strategy. Track I is the judicial approach. We are going to court with the confidence that we can win this issue, as we have in the past. We believe we have a strong legal case. The recent decision by the WTO threw out the foundation of the U.S. case against us, which was based on cross-border evaluations, so we are quite confident we can win at the WTO.
Canada also has pursued a negotiated solution — Track II. As always, we seem to surrender when we get to the one- yard line. There is a strong group that wants a negotiated settlement with the belief that you can never win against the U.S. Therefore, it is best to take what you can and run.
This negotiating approach was started in August 2001 and ended in failure in March 2002. The U.S. coalition refused to change its position and the U.S. authorities were not in a position to take any action against it.
Recently, there was an initiative by Grant Aldonas, a lawyer who represented B.C. in one of these issues some time ago. He is currently Undersecretary of International Trade for the U.S. Department of Commerce. He has taken a different approach to try to bring this to a conclusion, which certainly has merited some consideration from all of us.
Recently we were in Washington, but it is difficult to say if these talks will succeed. However, the agreement has started to emerge and there are some fairly important decisions to be made. From our position, it means, basically, that the U.S. will dictate Canadian forestry policy in the future and decide whether it is adequate or not to meet their market requirements. As of today, it is very clear that they will decide, according to their standard, whether or not Canadians meet those obligations. The draft policy bulletin is out. It is basically unacceptable to most Canadian provinces except, perhaps, British Columbia, which seems to have an urgency to settle and is prepared to make forestry policy changes.
I will not get into these particular details, but the danger is that, in order to meet those costs, we have operations across Canada. That will seriously and permanently damage our competitive position going forward.
It will take some time to implement some of these changes. As a result, everyone is talking about the interim agreement, which would be an export tax. The provinces are supportive of this because it helps them balance their budgets. From an industry point of view, although we would rather see the money in Canada, as Canadians it still does not help our economic viability whether the federal government takes it, or the U.S. government takes it, or it goes to one of the provinces.
There are still some issues that have not been addressed. There is the question of the anti-dumping, which is not addressed under the current proposals that the U.S. has put forward. There is also the level of the border tax. The coalition has submitted its response saying that the tax will be at 18 per cent. In addition to that, once the price drops below a certain level, it will go up $10 for every $10 the price drops. That could result in a 60 per cent tax, which will be totally unacceptable.
They also say they will not return the $1-billion deposit that we made. That will be a fairly strong issue for some of us because it is our money and we believe we are entitled to get it back under international law. There is, as well, the question of the litigation. Their position is that we must drop all litigation, which leaves us in a vulnerable position going forward.
History has shown that we have never been able to get the U.S. to take a reasonable position unless we go to court and win it. Even then, we seem to negotiate a compromise. We believe that there are improved rules under the NAFTA and the WTO that enhance Canada's position going forward for a change, and that provide a counter to U.S. law. That is why, in my view, we should not abandon our legal proceedings before the WTO and the NAFTA unless the U.S. is prepared to put an attractive alternative on the table.
The U.S. is in a big rush to settle since it is clear that 15 per cent of the 18 per cent on the current CVD will disappear because cross-border comparisons are illegal. That, in itself, should bring the tax down to 3 per cent. Obviously, they will try to jack it up higher than that; but we have some legal rights as well that might take it down to zero.
We believe there is a big push to settle now because the U.S. can see the handwriting on the wall. However, both sides are still very far apart. An export tax of 25 per cent would devastate the Canadian industry, which, as I mentioned before, has had only a 14 per cent margin over the past five years.
The Free Trade Lumber Council has asked the Canadian government to use the Export Development Corporation to provide loan guarantees as part of the export guarantees program. Our legal advice is that it is not countervailable. The government has decided not to do that up to now. As a consequence, we will all run out of cash if we keep paying the U.S. money. They will bleed us into submission. That is an evident U.S. strategy that is working very well. At this point, a good part of Canadian industry says "we will settle it with anything because we must survive. If we continue this way we will all be out of business.''
There are some tough decisions here that must be addressed. We do not see any reasonable flexibility on the U.S. side as of last Thursday or Friday.
I made the unfortunate comment that we were like termites down in Washington. Someone said termites are blind and chew on wood and I guess that is how I felt as a Canadian down there. We did not have a strong, organized position. We have provinces negotiating with the U.S. Department of Commerce, where the federal government sits as an observer. We do not have a strong, united pan-Canadian position, even though everyone is trying to make it look like there is one.
Instead, we have an international trade dispute that comes squarely under federal jurisdiction, but the heart of the U.S. allegations have to do exclusively with provincial forest policies. There is no formal way to deal with such a situation. We understand the problem that the federal government has in such a situation. The provinces say that it is their right and the federal government has the trade rights. That makes for a rather awkward situation. This is the type of situation that gave us the 1986 Memorandum of Understanding that wiped out 43 per cent of Quebec industry, until the MOU was demolished.
This time, the B.C. government has taken the initiative to lead the way to a conclusion to this issue. We found ourselves there last week trying the rear guard action, to pull back, because the B.C. proposal on the table today would wipe out a good part of eastern Canadian saw milling. I think it will have some fairly disastrous effects on B.C. as well, when they look at the fine print. Some people who have read the fine print called me last weekend to say that they now understand exactly what the policy papers contain.
We have some difficulty with how these are handled. We will not delve into constitutional reform but we think that Canada has to take a hard look at itself in consideration of how we negotiate. Trade should come under federal jurisdiction and the provinces should be brought in line under federal leadership.
Members of the Free Trade Lumber Council, along with the majority of the industry, believe it is an integrated market. We supply 34 to 35 per cent of the U.S. market and we supply 30 per cent of the energy, which is an integrated market. At 30 per cent, we do not understand why lumber should not be an integrated market at 34 or 35 per cent. We do not see a tax on energy, so we do not see why there should be a tax on lumber.
We think that American and Canadian industries should work together to build and to develop the North American market. The consumption of wood in the U.S. is only .44 cubic meters per person. In Finland, the consumption is 1 cubic meter per person and in Canada it is .6 cubic meter. A 10 per cent increase in wood consumption in the United States would eliminate these hassles because there would be a shortage of lumber rather than a surplus of lumber.
We should not be fighting over market shares as if it were a zero sum game. We are champions of North American cooperation. Our group, in particular, are free traders. We believe in continental North American markets, but in the United States, under their trade laws, the government is forced to represent individual interests such as timber ownership. This is what is giving us the problems.
The U.S. Government has been a kind of slave to the whims and unreasonable demands of timberland owners and of some small producers in the United States. Is by happenstance, the U.S. Senate committees dealing with the lumber issues are always headed up by one of the states that have large lumber producers? When Senator Trent Lott of Mississippi became the Senate Majority Leader, many people thought that cotton is the biggest industry in Mississippi but it is actually forest products.
The consequence of this configuration of chance and influence has been sustained U.S. government protectionism on behalf of the U.S. lumber industry and timberland owners for quite some time. They make completely irrational demands and, I guess from our point of view, we need a strong Canadian position to defend us.
In summary, my recommendation to the federal government would be first, to maintain Canada's legal recourses before the WTO and NAFTA — if we give those up, we may as well forget it; second, to direct the EDC to offer all companies in need a loan under the current programs to help fight the legal trade harassment on part of foreign governments; and, third, to develop a better, more formal system of federal-provincial cooperation, with private sector input, to face the complex international issue of the lumber dispute, which currently pits provinces against the federal government when we are trying to negotiate an international agreement with the United States.
The Chairman: Thank you, Mr. Dottori. Mr. Wilson, please proceed.
Mr. Fred Wilson, National Representative, Communications, Energy and Paperworkers Union of Canada: I will try to be brief. Thank you for hearing us today. I will raise some of the things Mr. Dottori said from a slightly different perspective.
The Communications, Energy and Paperworkers Union is the largest forest sector union in Canada. We have some 70,000 working members in the forest sector in Canada from British Columbia to Newfoundland. This includes the overwhelming majority of people who work in the pulp and paper sector and in most of the mills that Mr. Dottori has. It also includes 12,000 sawmill workers in Ontario, more in Quebec and loggers and other associated industry workers.
I must tell you that there is something fundamentally flawed in the current process that Canada is engaged in with the United States. Unions such as ours, which represent tens of thousands of workers in this country, and our fraternal union, the IWA Canada, which represents workers in Western Canada, feel excluded from this process and have to take extraordinary measures to be informed about what government and, to some extent industry, is negotiating on our behalf.
There is also something fundamentally wrong with a process that would have Canadian government officials and industry leaders meet in Washington D.C. last week to negotiate the fundamental aspects of Canadian social policy with an American trade negotiator, rather than discuss these issues where they should be discussed — in Canada with Canadian citizens. There is something fundamentally wrong with that.
I would like to draw to your attention that, in our view, right now is an urgent situation. I am not sure about what role this committee can play because I know the committee is part of a larger process. However, I cannot emphasize enough how urgent the current situation is. I differ with Mr. Dottori on this count, but we are very close to a so-called settlement. Our information is that it could be some time in the next 10 days to two weeks of the current round of negotiations. That would have far-reaching consequences for the Canadian forest sector.
I was only half-joking with a colleague in the hallway when I said, "What do Iraq and the Canadian Softwood Lumber Industry have in common? They are both faced with a set of circumstances that amount to regime change.'' That is what is happening now at the negotiations in the United States.
Like Mr. Dottori, our union and other unions were in Washington last week where we met with Mr. Grant Aldonas of the U.S. Department of Commerce. Earlier today, we met with the Minister for International Trade, Pierre Pettigrew. Based on these meetings and other briefings that we have had, we can tell you that Canada has basically signalled to the United States that the so-called "Aldonas plan'' is the basis for a settlement. I am not sure if you have been given a copy of the policy bulletin mentioned by Mr. Dottori a few minutes ago. No government official has given us a copy of it but I do have one before me. It is available on a Web site in the United States, where it was leaked. That is the only way one is able to obtain this rather important document.
This document proposes that this trade dispute would be resolved in the short term by the imposition of a border tax. The American trade sanctions against Canada would not go away; they would just be reassessed and then Canadian provinces would work on a so-called "policy-based solution'' to change our Canadian forest policies to meet the criteria set out in this paper.
After we complete that, to the extent that the Americans are pleased enough, we could then apply for changed circumstances under American trade law. They would then consider to what extent they would relieve us of the current duties and countervail are assessed against us. It sets out in considerable detail in this document — in a way that we as Canadians, find a national humiliation — how our provinces should change our forest legislation.
I will give you the headlines of the issues on which we are expected to act. First, appurtenance requirements. In other words, for more than half a century in Canada, the deal is that if you use public Crown Lands, you make a commitment to the community and the public of providing processing of that fibre. Other issues include minimum cut requirements, mill closure restrictions, minimum processing requirements, and long term non-transferable tenure. Is there anything left of Canadian forest policy when you take these things away?
These are exactly the measures that are set out in this policy bulletin to which Canadians are to respond. I believe that you have before you a document that was circulated by the committee clerk. It is called "Principles for Joint Labour Proposal to Resolve the Softwood Lumber Dispute.'' We have an alternative proposal.
Our union, together with IWA Canada, and PACE International Union and the International Machinists Union, the two major forestry unions in the U.S., along with the Canadian and American central labour bodies — the Canadian Labour Congress and the AFL-CIO have agreed on principles to resolve the softwood lumber dispute that respects Canadian sovereignty over forest practices in Canada. These are set out in the document in front of you.
I would also like to note that one of those Americans unions that came together with us was a signatory to the original petition against Canada that led to the current countervail. It is not insignificant that these unions are prepared to reach hands across the border and discuss with us a set of joint proposals to resolve this dispute.
You have the document before you, so I will not read it to you. The kernel of the solution is that there would be an export tax imposed by Canada or by the provinces through the form of higher stumpage, in order to regulate and manage Canadian access to the American market.
Why are we in favour of this? We are in favour of this because over the last 20 years or longer, there has always been something there. That does not mean that we accept that our wood is subsidized. It just means that there has always been some sort of mechanism in place. Call it a "managed trade arrangement'' between Canada and the United States, which frankly we favour. We do care as union members in Canada if American workers are unemployed.
This is only an issue at the bottom of a market cycle. It is true that at the bottom of a market cycle when prices are low, workers in American timber states can be unemployed while our industry tends to operate at a higher level. That is because of currency values and a number of different things including the efficiency of our mills.
Yet, we can address that to ensure that when the market is at the low end, workers and industry on both sides of the border are sheltered from being hit more one than the other through an export tax on a sliding scale. Hence, that when the price is high the tax goes down to zero; and when the price is low, it would go up again. Such a formula for an export tax should also take into account currency values. If the Canadian dollar goes up, then the tax should reflect that.
There should be a bilateral commission that would monitor the situation and make such changes accordingly. The bilateral commission should also talk about market development for both of us. It should refrain from telling Canadians how Canadian provinces should change their forest policy.
In conclusion, it has been suggested that the Aldonas plan will lead to a lasting solution. I want to emphasize as strongly as possible that the road they are going down quickly right now will not lead to a lasting solution. It will lead to conflict on the Canadian side because there are 300 communities in Canada that are based on the forest industry. Many of these communities only exist because there is an appurtenance. Someone got access to trees, built a mill and a town is there.
People should not underestimate the social conflict that is inherent in deciding that we will now suddenly, in order to appease the Americans, turn our whole forest industry upside down and move go to a so-called market based policy.
Our trade lawyers have advised us that Mr. Aldonas says that we need not follow his entire plan, that we could do only some of it. If we do enough, then we will be protected in the future. That means that those in the U.S. Department of Commerce can say no to American industry later when they come for additional countervail. The trade lawyers who we have consulted tell us that that is fool's gold, and that the only lasting solution that will protect Canada from future countervail from the United States is an agreement between the Canadian and American governments.
We favour a negotiated agreement. If there is an agreement between Canada and the United States on the principle of an export tax, we are sheltered against further countervail actions. Any other type of solution, in our view, would just lead us to more conflict in the future.
Mr. Charles Gastle, Partner, Shibley Righton: First, I would like to thank you for inviting me here today.
By way of background, I have a doctorate in international trade and competition law, and I am an adjunct professor at Osgoode Hall Law School in the area of international trade law.
As I am on the record before the binational panel, I will stay away somewhat from softwood lumber. I will broaden the focus. When I read your terms of reference you included Doha and the Free Trade Agreement of the Americas.
I would like to do three things: First, I will talk about the context in which Canadian trade policy has to be developed. Second, I will note the challenge that Canada faces. Third, I would like to turn quickly and briefly to a very particular issue of Aboriginal rights.
The first point is the context. We are entering, obviously, a turbulent period. There have been a series of financial crises that have gone from Asia into South America, from 1997 into 1998. You are seeing a strengthening of Mercosur, which is the common market in South America. You are also seeing is something new in the United States: persistent external deficits in the United States and signs of weakening of the American dollar.
How will this affect Canadian trade policy? You have heard Mr. Dottori talk about a 25 per cent tax. What happens if the Canadian dollar rises from its current level of 65 cents to 70 vents or as high at 85 cents? You cannot understand trade policy separate from the finance system.
Second, what does the current recession in the United States mean? If you take a look at the trade promotion authority by which fast track negotiating authority was given, you will see that one of the chief negotiating objectives is to maintain their dispute settlement mechanisms.
Another question is, in the circumstances of the recession in the United States, will they be prepared to give the kind of meaningful access in areas such textiles and agriculture that will be necessary to see some of these trade agreements take place?
Let us turn to the Free Trade Agreement of the Americas and see what it really means for that. It is very unlikely that there will be a Free Trade Agreement of the Americas by 2005. I do not see it happening because of what is happening in South America and Brazil. Lula is already trying to push back some of the meetings.
Let us turn to Doha. The Doha Round is known as the development round because the majority of gains from trade to be realized are from the developing world. The developing world is quite concerned that they did not get a fair shake in the Uruguay Round. They are sceptical that the developing world will open up the key sectors, especially in light of what is taking place in the States. They are concerned that they do not have the institutional ability to fully understand the negotiations — which is what happened at the Uruguay Round. They are also concerned that they do not even have the physical infrastructure needed to realize the gains from trade.
The Doha Round was on the heels of Seattle where it failed. Doha occurred shortly after 9/11 and must be understood in that system. The chances of there being a successful Doha Round by 2005, I would submit, are extremely slim.
Canada has two trade challenges. First, to what degree is Canada being marginalized? Mexico has negotiated a free trade agreement with Europe. A few weeks ago, it started negotiating a free trade agreement with Japan. Neither Europe nor Japan wants to negotiate with Canada. If Canada's free-trade partner establishes preferential links with other extremely important trading blocs, will there be a diversion of foreign direct investment out of Canada and into Mexico?
I put that question to a friend who was a member of the Japanese negotiating team in Mexico. He told me something amazing. He said it is his belief that a Japanese-Mexican free trade agreement might have very little impact on the flows of foreign direct investment between the free-trade partners. That is because the Japanese maquiladora sector is looking at moving to China and the Far East because China is now part of the WTO. Why is that? The reason appears — and I say appears — to be that the NAFTA advantages do not outweigh the WTO advantages. From the Canadian standpoint, rather than considering our trade relations and our position on a cost basis with respect to Mexico, we had better look at what is happening in the Far East.
Canada has marginalized itself to a degree in the negotiations of the Free Trade Agreement of Americas, by the position that it has taken in the Bombardier dispute. Canada has alienated Brazil, which is the most important market in South America. Since the financial crisis in Argentina, Brazil is heading up a highly strengthened Mercosur. What have we accomplished by our trade disputes with Bombardier? Not much. There is no solution yet and it is basically an intractable dispute. I have my own views on how it should be settled but time does not allow.
Regarding Aboriginal issues, we have not sufficiently dealt with the following question: The Government of Canada has a fiduciary duty to consult with Aboriginal peoples if a legislative or regulatory initiative has the potential to impact upon Aboriginal or treaty rights. What happens if the Free Trade Agreement has the potential to impact upon a treaty or Aboriginal right? What is the obligation in those circumstances?
Aboriginal issues have not really been dealt with in any of the free trade agreements. There have been some annexes and exclusions from NAFTA Chapter 11, which is the investor-state mechanism. In fact, there appears to be no meaningful analysis as to potential impact of free trade agreements while they are being negotiated. Nor is there a clear consultation mechanism. There is no SAGIT — Special Advisory Group on International Trade — for Aboriginals.
There is a model for including Aboriginal peoples in such negotiations. It is found in the amending of the 1916 Migratory Birds Convention. That convention imposed a certain period for harvesting migratory birds that impacted on the Aboriginal right to hunt for the full year. Canada, to its credit, in 1994 negotiated a solution with the United States. The Aboriginal peoples were at the table for part of those negotiations.
In our free trade negotiations, no real thought has been given to doing the necessary analysis of the potential impact. Where there is an impact, we must comply with the fiduciary obligation that is imposed upon the government.
Trade agreements compromise sovereignty. The reduction in tariffs that was seen between 1947 and the Tokyo round in 1979 is no longer enough. The WTO is being asked to go into the social issues. In that situation, there will be more impacts and more compromising of sovereignty, which is implicit.
I have a lot of background in the legal framework of the countervailing-duty mechanism and the anti-dumping mechanism — the mechanisms that give rise to the softwood lumber case. I can explain that background if it comes up in questioning.
The Chairman: Mr. Wilson, would you be prepared to share with us the Internet document that you said is unobtainable?
Mr. Wilson: Here it is.
The Chairman: The softwood lumber issue started off with Article 18, which did not work because the bi-national panels decided on national law, and the Americans just changed their national law. Therefore, the dispute over softwood lumber has increasingly gone to the WTO. Correct me if I am wrong.
Our expenses and legal fees at the WTO so far, I was told in Geneva, are $200 million. You said that $200 million has been spent in legal fees at the WTO on the softwood lumber dispute, according to the secretary general of the WTO. What I do not understand, though, is that it has been said that we have won part of the case at the WTO. I read that case. My understanding is that there are two aspects: You must prove that there is a financial contribution, and the Americans apparently won that part of the case. There is a financial contribution in the stumpage system. This is the decision. I would be very interested if you would just set me straight on this. It was not proved that that financial contribution was a subsidy. Would you like to enlighten me?
Mr. Gastle: There are two different issues. The first issue is whether stumpage can be a countervailable subsidy. The second issue is what is the margin or how is it calculated? First, does it qualify under the law to be countervailable in the first place, and second, how much is the duty?
The Chairman: The WTO agreement, as we have been reminded, did not exist when we signed the FTA and the NAFTA.
Mr. Gastle: That is right. The issue is that the WTO panel found that stumpage programs can be countervailable. It also found that the method of calculation that the Americans used — the cross-border calculations — was wrong and inconsistent with the countervailing duties agreement in the WTO.
The Americans won on the issue of whether it can be countervailable. The United States needs to come up with a methodology that is consistent with the WTO law. Their cross-border comparison, the way they have calculated, is not right. It is wrong.
The Chairman: You say they will not be able to do that. That is why you want not to make a deal in Washington and would prefer that the thing be pursued to the end of the WTO. Is that not what you have said?
Mr. Gastle: There are two different positions.
Mr. Dottori: Our position is very clear. We are saying that we would prefer a negotiated continental agreement that would provide free access to the market and would provide fair competition. As Canadians, we represent a free trade group that said we can compete with anyone in the world. We do not think we are dumber than anyone else and under fair competition we can compete with anyone. That is our position.
We are saying that if the U.S. imposes artificial and illegal means against Canadian industry, we will take them to court.
The Chairman: The court is the WTO, is it not?
Mr. Dottori: That is right. We have done that, and they ruled that what the U.S. is doing is illegal under the WTO by using cross-border comparisons. We have had that decision. That is clear.
Mr. Wilson: I will respond briefly. From the union side, we are highly sceptical of finding a satisfactory solution through the WTO for the reasons you have already mentioned. We are also fearful that if it ever did come to a conclusion at the WTO, the conclusion may be more than what we want. If you want the total free trade solution, that may mean free trade in logs, for example, to which we are very opposed.
Mr. Gastle: There are two different systems here, and I want to be sure that we understand that. One is the WTO system; the other is the NAFTA system. They are two competing legal systems. It is possible that there will be a divergence in the findings between the WTO and NAFTA.
The Chairman: Everyone says that the binational panels have not worked. Increasingly, these disputes are going to the WTO. At the WTO, you have 120 countries. If you win or lose a case, you have the force of 120 countries with you. The panels are taken from countries that are not partners in the dispute, whereas the binational panel is only between us arguing with the U.S. on U.S. law. Is that not right?
Mr. Gastle: I disagree.
The Chairman: I just read the agreement. I thought that is what it said.
Senator Carney: As then Minister of International Trade, I handled the 1986 agreement that had to be dealt with in order to "clear the decks for the Free Trade Agreement.'' It was a crucial agreement.
Each of you has made interesting contributions to our study. I should like to return to why we are looking at this issue. We are looking at this issue because it is one of the most serious trade irritants between our two countries. The result of it impacts communities, lays off people and brings economic casualties on both sides of the border. It creates an atmosphere in which it is very difficult to carry out trading relations and defence relations and energy relations when there is a feeling that the players are not playing fairly and that we are being brutalized in the process. Let us look at why we are doing that.
We do not have time to go into the entire issue, but I wish to ask you a question in regard to your testimony. There are some fundamental factors here. The first issue is that in the U.S. system, it is private lands. In the U.S. economy, there is something like 5 per cent public lands in the forests and 95 per cent private lands. That is why the Maritimes have been excluded from the bulk of this disagreement. In the Maritimes, through acts of God and settlement patterns, many of the forestlands are still private. However, in most of Canada, in British Columbia and Ontario — I cannot speak for Quebec — you are dealing with public lands, and the administration of public forest lands in Canada has been based on what is often in B.C. called the "Sloan Commission view,'' which is that these are the Crown jewels of the provinces. The jurisdiction is with the provinces. The regional forests should be used for the social and economic goals of the people in that region.
In places like Northern Ontario and British Columbia, there were no communities before they developed these policies. There were only scattered float camps and A-frame logging and hand logging. On the basis of this policy of using the regional resources for the social and economic goals of the province and the communities, we have Gold River and the forest and the pulp mills. We have Port McNeil, which I saw grow from a logging camp into a thriving little town of several thousand people. We have Prince George. When I first went to Prince George as a forestry reporter, there were 5,000 people and you could roll up the boardwalk sidewalks at night. Now it has 100,000 people and three pulp mills. These policies have had economic and social benefits. That is why it is so devastating when they are affected by trade disputes. Let us think of that.
Second, there is split jurisdiction. The feds have control of trade policy, with input from the provinces, but the provinces own these resources. The federal government is bound by the fact that it can convey and do its duty in trade policy, but the provinces own these resources, and the provinces do not agree, and industry does not agree.
Mr. Gastle, when you had the Canada-U.S. Free Trade Agreement and you had NAFTA, you did not have the Delgamuukw decision and the Marshall decision. There were no such rights as you mentioned — good or bad — on the policy negotiators. The federal government was responsible for Aboriginal policy in most of these areas and the provinces had a fiduciary responsibility to the citizens. Your argument is compelling but I think you should recast it in the time frame.
We have a situation in which we should be focusing on the fact that, if the negotiators reach an agreement, it must be the right one. I agree with Mr. Wilson's point that there are too many exclusions from this process. Having industry and government officials in Washington to deal with the industry and the bureaucrats without input from the workers or from the communities affected is not a comfortable position. The goal of the industry is to maintain as much long- term tenure as they can. That is what they need. Some of the policies being discussed would have an effect on communities. If you let anyone come in and bid on a market system for your timber, they will be Americans, too. Do we really want to see our logs exported to Washington and Oregon?
In B.C., log exports are at an all-time high, as the IWA will tell you. Because of the duties, it is much easier to cut from private timber reserves than to ship to the U.S. I will come to my question, but I wanted to give you that background, which is different in Ontario. Some of the Ontario mills are represented in your group. Ontario lumber is 15 per cent of the industry and the rest is pulp and paper. When you say that you represent 40 per cent of the softwood lumber industry, 50 per cent of that is in B.C. Your membership in B.C., while commendable, is comprised of small interior mills. There is a discrepancy.
Mr. Dottori: We produce 500 million board feet in B.C. A small producer does not do that.
Senator Carney: I say that in consideration of most of your members named on your Web site. I am not denigrating your view, but I am saying that there is a view in British Columbia that does not support you. There are different groups in the industry. That is what I am saying. There are splits between the industry representation, the big coastal producers and some of the others, such as Slocan Forest Products Ltd., which is an interior producer that is not a member of your group. They are pushing for something else. There are also Canfor Corporation and Weyerhaeuser.
There are splits in the jurisdictions, in the industry and in the provinces because they have a different use of the forest for their economic base. I want to explain that. There is no overriding solution that fits everyone.
There are flaws in all of the arguments. Mr. Wilson's important contribution, with industry, would find it difficult to put up cash and investment against some of these scenarios. However, I want to be specific about the differences between your industry group and some of the other industry groups, so that we can get a sense, when we hear them next week, of why we have opposing views. Could I ask that of you, Mr. Dottori?
Mr. Dottori: I wish to correct something for the record. About 37 per cent of the U.S. forest is publicly owned — not 5 per cent. In the Northwest U.S. 75 per cent is actually owned by the federal and state governments — not this perception that it is 5 per cent.
Senator Carney: I would challenge those figures.
Mr. Dottori: You can check them. We do our homework well. The data is there. We will certainly be happy to provide it to you. We do cross-border comparisons. For example, in Michigan, 69 per cent is owned by the state. That is greater than what is owned in some of the Canadian provinces by the federal government. In the East, the highest stumpage is in Quebec, which supposedly is subsidized when compared to New Brunswick. I have operations across six provinces in Canada. I think I can speak with a pan-Canadian view.
Senator Carney: I am not challenging that. I am just saying that I am doing a broad brush of the two fundamental differences between the Canadian view of the publicly owned forest and the American view of that.
Mr. Dottori: Certainly.
Senator Carney: That is my point.
Mr. Dottori: I agree with that.
Senator Carney: Therefore, the forests are run on an auction system in the U.S.
Mr. Dottori: That is not true.
The Chairman: Please allow Mr. Dottori to reply.
Senator Carney: There are clashes in viewpoints.
The Chairman: I think you have made your point well, Senator Carney.
Senator Carney: Why does your view differ from that of the other associations?
Mr. Dottori: Our view does not differ significantly from other people's view. The difference is a question of confidence. We are believers. Incidentally, again for the record, when we went to NAFTA panels, we won; we did not lost — just for the record. We have always negotiated agreements subsequent to that because the United States does not give up. That is a different issue. We believe that the best way to get justice when you go up against the school bully is to not negotiate with the school bully when he beats you up once or twice; you go to the principal.
We believe that an independent judicial system will give us a better deal. That is a negotiating strategy. At the end of the day, we would like to have a long-term solution whereby we would grow the market. There will be no long-term solution to this dispute until there is an opportunity to grow the market.
The Chairman: Would you explain what you mean when you say, "grow the market''?
Mr. Dottori: In the United States, they use 0.44 cubic metres of wood per person. In Finland, they use 1 cubic meter per person and in Canada, we use 0.6 cubic meter per person. If they were to use 0.5 cubic meters in the U. S., that would mean an increase of about 6 billion feet of demand for lumber in the United States. The oversupply problem would disappear. If we continue to apply export taxes to drive the prices up artificially by price support systems, the customers will turn to alternative materials such as steel, cement and plastic.
These materials have already caused a 10 per cent displacement of wood in the United States over the last five years. Do we want to continue that policy? That is not in our long-term interest. We are believers that we should promote and grow the market. We have been proposing a bilateral commission for more than one year. We have suggested how to market under the U.S. Producer Act that allows them to collect $1 per thousand board feet from each producer to do market development.
In 1988, in Norway, they created the Nordic Council. They had the same problem because they could not export to Germany and other countries of Europe. In 8 to 10 years, they doubled the per capita use of wood. If you travel to Scandinavia, you will see the amount of wood they use in comparison to the amount used in Canada. We are simply saying that we should do just one-half of that in North America and our problem will go away. Then we would not have to sit here wondering about who will be out of work.
Senator Carney: That is a great forecast. I do not think anyone disputes the idea of growing the market or of having joint marketing ventures and the like. The basic dispute here is over the stumpage policies, the ownership of the forest, and the tenure of the forest. The B.C. government has already told the big, tenured companies that have the rights to the forest that it will take back 20 per cent of the tenures. That will have enormous fiscal effects. We are speaking about the supply of timber, not about the marketing of timber.
Is your company Canadian-owned?
Mr. Dottori: I am the founder of the company. I took it to a $4-million company from a shutdown mill. Yes, it is a nationalistic Canadian company.
Senator Carney: Great. That is an issue in some of the other arguments about the question of access.
Do any of your companies in B.C. have tenure rights? I know that TimberWest is a major company that has possibly the largest control over privately owned land.
Mr. Dottori: We are the third largest in B.C.
Senator Carney: You have the largest concentration of privately owned lands compared to some of the other companies that result in public forests. Again, TimberWest is in a position to sell its own timber in the U.S. without restrictions.
Mr. Dottori: We agree with the Americans that one or two should be rescinded. If I am a private log owner, I should be able to sell it. However, if there is a tax on lumber, there should be an equivalent tax on the logs so that you do not export the jobs to the United States.
Senator Carney: You would be exporting jobs when you tax the logs.
Do any of these companies listed on your Web site as members of your association have significant tenure? Are Ainsworth Lumber, Apollo Forest Products, Carrier Lumber — which was just compensated for its lumber holdings — Downie Timber, Dunkley Lumber, Federated Cooperatives, and Flavelle Sawmill small independent companies that rely on log sources from a variety of ways, or are they heavily tenured companies with access to public timber?
Mr. Dottori: The majority of Canadian companies are heavily tenured.
Senator Carney: Your membership in B.C.?
Mr. Dottori: Yes that is correct.
Senator Graham: It occurred to me that while Senator Carney's numbers may differ from Mr. Dottori's, I have a great deal of respect for Senator Carney's experience, particularly as the former minister of international trade. She deserves a lot of credit for bringing forward the Free Trade Agreement.
Mr. Dottori, would you favour a judicial approach or a negotiated solution? Obviously, we must use both. Mr. Wilson clearly favours a negotiated solution. He said that, after meeting with Minister Pettigrew, we could be within 10 days to two weeks of a settlement. Is that correct?
Mr. Dottori, you were more pessimistic and said that we always seem to surrender on the one-yard line. Does the "we'' apply to both the U.S. and Canada or just Canada?
Mr. Dottori: I wish it were both, but it is just Canada.
Senator Graham: Would you provide me with an example?
Mr. Dottori: In the last round, we had won a negotiated agreement, but to get the $1 billion, we agreed to the quotas, which created the current problem. It was not fair.
It generated an extra 4 to 6 billion board feet of production. It created a wall of wood from Canada and brought imports around the world from other suppliers. Provinces that were not covered increased their production by about 1 billion to 2 billion feet. We created this huge surplus in the market of about 6 to 8 billion feet.
In the market, we face the consequences that all quotas and artificial measures create. We have the strongest housing market in history. If some of you wish, you could find it in the Hay-Roe report. We are at record consumption levels, yet we are at record low pricing. There is record production that is artificially created as a consequence of the SLA.
I disagree with Mr. Wilson. I care about my workers because I started out with a shut-down mill in partnership with the unionized workers. Our specialty is taking over mills that are in trouble, such as the Chetwynd Pulp Mill in British Columbia or Matane in Quebec. We create many members for Mr. Wilson.
You must let the free market forces operate. You cannot artificially do that. If we take, as recommended, a tax, which is basically a price support system, 20 per cent to 25 per cent of the Canadian industry will shut down under today's market. If that is good for union members, that is fine. I do not think so. I do not think people have looked at the consequences. I know my numbers right down to a tee. I know what my contribution is per thousand feet that I put out. I know the costs that I must meet in every area.
The proposal linking it to the Canadian dollar will never work because the federal government will never allow that. What will you do next — wheat, steel? It will not happen. Furthermore, if the Canadian dollar was to go to 70 cents, there is a 16 per cent difference right there and I would have a 20 per cent tax. You can kiss 25 per cent to 50 per cent of this industry goodbye. I do not think honourable senators want to do that.
Do I want only a legal settlement? No. Do I want a negotiated settlement? Yes, but a fair settlement — not one that will put me out of business.
Legally, I am right. I am suing the U.S. government under the NAFTA. I have not given up that case. I have rights under Chapter 11, as well. This dispute is under Chapter 19.
The coalition has to put the emphasis on market development. They must stress free trade between our countries. They should demand an interim tax in the order of 5 per cent until we can build up the market. We must set the mechanism to do some reforms in Canada.
I have been a strong advocate, for example, of lifting the log export restrictions, which does not win me too many friends. However, I cannot sit here and preach free trade and then support artificially inhibiting exports. You cannot be on both sides of the argument. You will either be honest or you are not.
You are going to look at these kinds of issues on mandated cuts. They are wrong for the Canadian industry. There are measures that the Canadian government can take with the provincial governments to address some of the social issue in communities, as Sweden has done. We do not have to re-invent the wheel. This has been done before. We have to do it.
I have enough "steel,'' as we say, to cut every single tree that exists in Northern Ontario. There are five of us competing. There is not enough room for all of us. The reality is that we will have to rationalize in Canada and there will be some pain. However, we should control that pain. We are a sovereign country, and we should control how we do that. It should not be dictated by the United States, which wants to put us out of business.
You can tell I am a strong nationalistic Canadian. This is an absolute invasion of sovereignty. We can colour it any way we want. You get a copy of the paper that Mr. Wilson has taken off the Internet. Read the Aldonas paper, and then you tell me as a Canadian that you can read that and say that it is not an invasion of sovereignty. I am saying that policies and laws should be done here in Canada.
Senator Graham: Perhaps Mr. Wilson, you would like to share some of your optimism with us with respect to being within 10 days or two weeks of the possibility of a settlement.
There is obviously a problem with how the federal and provincial governments operate. We are here to help you. If there is anything we can possibly do to get people in the same boat pulling on the oars at the same time in the same direction, we would like to do it. Have you any suggestions as to how we might get the Government of Canada and their representatives in the provinces cooperating?
Mr. Wilson: Why do we fear an agreement in the short term? Mr. Aldonas' and Minister Pettigrew's offices have just informed us that it is imminent.
Senator Graham: Just for the record, you do not like the agreement because you think it is being dictated by the United States by Aldonas.
Mr. Wilson: Exactly. I agree entirely with the way Mr. Dottori just characterized the present agreement. On that, we agree entirely.
Over the last two weeks, there have been more Canadian industry leaders and Canadian provincial government forestry officials in Washington than there have been in Canada. They have been down there in a very intensive process. Minister Pettigrew's office has encouraged Mr. Aldonas to write the policy bulletin that you have before you.
The British Columbia government says that it is the basis of a settlement. The Ontario government is also, we are informed, willing to negotiate on the basis of this. Some other provinces are more reluctant. However, there is enormous pressure.
We should be aware that if an agreement is to arrive, what this agreement would be like. It is not as if there will be a ribbon cutting somewhere. Mr. Aldonas' paper is not for negotiation. It is a policy bulletin issued unilaterally by the United States Department of Commerce.
The Americans will agree that there could be an export tax imposed by Canada in lieu of the current countervail. All their current countervail actions against us would remain in place. That is the nature of how these things would come together.
With regard to the export tax, we must keep in mind that we currently have a 27 per cent countervail and anti- dumping duty imposed on us. The question is not whether to have an export tax or nothing. There are already considerable burdens on our industry that are having a very negative effect. There will be winners and losers as a result of that. We are already seeing many of the losers.
To respond to Senator Carney's question, some parts of industry are quite prepared for the winners-and-losers game because they think they will be the winners. Some people go out of business; others pick up the fibre and the markets. We think the best approach is to negotiate a settlement. If we stop chasing the cheapest two-by-four in the world and if the price goes up, then that tax will come down and perhaps we can have job stability and investment stability.
Mr. Dottori: Mr. Grenier is an expert with 20 years' experience and he can answer the question of what the federal government should do.
Mr. Carl Grenier, Senior Vice-President, Free Trade Lumber Council: Honourable senators, I started doing trade policy with the federal government. I was a member of the Canadian negotiating team for the Tokyo Round in Geneva in the late 1970s. I then joined the Quebec government and saw the provincial aspects of these issues. I was there when Senator Carney negotiated the MOU in 1986. I was part of the negotiating team for the SLA in 1996. I have been dealing with these issues for a long time.
I want to address the federal-provincial aspect of the question that Senator Graham posed and which we also addressed in our paper today.
Following the negotiation of the Free Trade Agreement in the late 1980s, the provinces wanted to formalize the cooperation that had been set up by the federal government for the free trade negotiation. We worked very hard for about a year, among the provinces and then with the federal government, to formalize that. We needed a mechanism to address the problems that Mr. Dottori described to you. There is a difficulty negotiating on an issue like this when the provinces really have the final say over the policies that are being attacked by a foreign government, such as the U.S. government.
We did not get anywhere in 1990-1991. The federal government finally refused to formalize the same mechanism it had put forward to allow the provinces to participate in the negotiations. We do not have a mechanism, but we sorely need one. Right now, everything is done informally. There is no way to know in advance how the federal government will make up its mind when it negotiates an agreement such as the softwood lumber agreement or any similar agreement dealing with a trade issue with the U.S. or with any other country.
We need to formalize this matter. Otherwise, we risk falling prey to a very concerted effort like that of the U.S. It is very easy to take advantage of the flaws in our own system and our own lack of policy-making equipment.
Senator Di Nino: Honourable senators, I will switch gears a little bit. I will ask Mr. Gastle to expand on his comments, which impact the whole relationship of the trade agreements with North America. You said that Canada is being marginalized. Particularly you said that Canada has marginalized itself by fighting Brazil on the Bombardier deal. You also said you had an opinion on how that should be settled.
Mr. Gastle: The Bombardier case began in 1996. It has gone through five or six different iterations. There is no settlement, no solution. Lula is now in power. To my understanding, he is making certain changes to the way this thing will be negotiated. We are no further ahead in terms of a solution.
Between the Bombardier battle and the meat crisis, I think we have alienated the most important country in the concluding of a Free Trade Agreement of the Americas. Brazil is somewhat different than North America in that it has a much stronger trade relationship with Europe than with North America. They have not bought fully into the North American scheme. The more that we alienate Brazil, the more we contribute to a marginalization or a reduction in our position.
In terms of a solution, I was retained by potash companies from the sulphur industry in Saskatchewan and Alberta to do an analysis. I worked with Joe D'Cruz from the Rotman School of Business. Potash sales were being sideswiped in Brazil, and they wanted to know how to go about working out a settlement. We delivered a paper to the government in which we recommended an expedited arbitral mechanism.
The WTO works by evaluating the subsidy package after the contracts are in place and it is too late to withdraw them. One solution is to put in place an expedited arbitral mechanism to evaluate these subsidy packages before the contract is awarded. Regarding the Northwest Airlines contract, Canada had enough lead time for an arbitral possess.
Canada and Brazil had been negotiating a solution up until the election of Lula. I understand that they are now beginning to drift away from that proposal and that the positions are hardening in Brazil.
Senator Di Nino: In commenting that Canada was being marginalized, Brazil was only one example. What were you referring to when you made that comment — marginalization within the world or within the North American context? Be a little more specific.
Mr. Gastle: In terms of the Free Trade Agreement of the Americas, Brazil would be a natural ally for us in our negotiations with the United States. When Canada is negotiating with the United States, we do not seem to have very much power.
Mercosur is made up of Argentina, Brazil, Uruguay and Paraguay. With the financial crisis and the Argentina situation, Mercosur is becoming a much stronger entity. Brazil has said, in negotiating a Free Trade Agreement of the Americas, that Mercosur must deal with Brazil a little differently; that this is not going to be simply an expanded NAFTA. Brazil will not sign on to a NAFTA. They want to be treated as a more important trading partner.
If we want reform in things like anti-dumping and countervailing duties, we should be partnering up with Mercosur and with others in that region. That may strengthen our position in negotiation with the United States. If we alienate those countries with our own aggressive trade policy, we lose a natural ally.
The second marginalization occurs with Mexico. We have an integrated zone that includes Mexico, the United States and Canada. That is fine. What happens if suddenly Mexico becomes almost a hub and spoke system. It now has free trade agreements with the European Community. It is negotiating one with Japan. If all of a sudden there are preferential relationships between Mexico and two extremely important economic zones, what does that do vis-à-vis Canada if we do not have the same relationships?
One would think that Mexico would have an advantage in terms of attracting foreign direct investment from those two zones into Mexico at the expense of Canada because we do not have the same relationship. I can tell you that Japan is not prepared to negotiate a free trade agreement with Canada right now. My understanding is that Europe is not prepared to negotiate a free trade agreement with Canada now. That is the other aspect of marginalization.
The other point I was making is that — to my surprise — it sounds like the Japanese Maquiladora sector, notwithstanding the fact there may be a free trade agreement between Japan and Mexico, is actually thinking of taking a significant part of its investment and going to China. Suddenly, because of China's accession to the WTO and the amazing things happening there with the WTO and China, NAFTA does not provide enough of an advantage to outweigh the advantages of what is happening in the WTO in China.
Senator Grafstein: Mr. Chairman, I have been on this file for three years as co-chairman of the Canada-U.S. Interparliamentary Group. I was in Washington last week and had been involved in these discussions for these three years. I will make a little statement and then deal with it.
First, I commend all the witnesses because their evidence and contribution to this very terrible dispute has been very helpful. I commend the industry and the legal representatives and the unions because they have worked mightily across the country, despite the obstacles, to see if there could be a coherent position on behalf of all Canadians. I commend you particularly in the lumber council for showing leadership. It has been a very difficult task. We have been watching this and trying to help for these many years.
As well, I have been chairman of the Canada-U.S Interparliamentary Group for over 10 years and on a member of it for 18 years. There has never been a tougher, more difficult problem.
The only thing I can say by way of advice is this: I have spoken to 56 senators and 100 congressmen about this. We went down to lobby and met them on a number of occasions. Some things could have been done differently at the outset, since this was a private dispute, really not a government-to-government dispute. Mr. Dottori, you know that it is a private dispute from a private industry, and you have to distinguish that between subsidies and other issues to understand the difficulties that even the government has in the United States to deal with this. My suggestion, which was not taken up by the ministry or the private sector, was that the industry should have sued in the United States legally — not at the WTO, not at NAFTA, but the Department of Commerce legally. I have asked a number of lawyers and advisers to do this, and here is where a Canadian law firm could make hundreds of millions of dollars if they chose to follow this advice, so this is free advice to every lawyer listening.
I believe, based on my observations, that the Americans respect their Constitution and they respect due process. I do not believe that the Canadian industry has been given due process in the United States at the Department of Commerce. Why? Because there has been interference. What do I mean by interference? If a Canadian parliamentarian or Canadian minister called a tribunal under arbitration, we know what would happen to that minister, and we know what would happen to that parliamentarian, and we know what the courts would say. I also know that senators and congressmen directly intervene in that process to the detriment of the litigation. I think it is important that the Americans be made to respect their own law. The only way to do it, frankly, is to do it in the United States.
When this all happens again, as it will, and you will be back here again a decade from now, if not before, please, go the American courts, because you will get a better form of justice than you will by arbitrary decisions made at a lobbying level that is unfair to you and to the Canadian interests.
The Chairman: Thank you very much.
Senator Di Nino: We have been at this for about a week and a half now, and each time we are confronted with this problem of not having enough time to discuss, to ask questions, to engage the expert witnesses who come before us. Surely, we can increase the time even if we have to find some other slots in our calendar or extend the hearings a little longer. It is certainly not fair to our witnesses and not fair to us as contributors. We have eight to twelve people around the table, each of whom would like to have an opportunity to engage the witnesses. My strong recommendation is that we find an opportunity to increase the time for all of the future witnesses.
The Chairman: Senator Di Nino, I must say that this is a very complicated issue. This evening Senator Carney is with us, and she was the trade minister, so I think it is reasonable and appropriate. It is complicated. We sat all last week as well, and there are conflicting stories. I am not saying that the stories are wrong or right, but there are certainly conflicting stories.
Senator Graham: I think this is a problem we can solve internally.
The Chairman: That is right.
Senator Carney: Since you started with me, I think it only fair to end with me. In support of Senator Grafstein's comment, when I was trade minister and went to Washington and met with the all the officials and took with me my provincial counterparts, we were assured that we would get fair process and a proper hearing. The day after, our minister in the Canadian embassy was taken into the back rooms of Commerce and told point blank that we would lose this case, regardless of anything that we were told at the political process.
The Chairman: Thank you, Senator Carney.
Senator Carney: I thought the record should show that.
The Chairman: Honourable senators, we have two more witnesses this evening: Mr. Avrim Lazar from the Forest Products Association of Canada and Ms Diana Blenkhorn from the Maritime Lumber Bureau.
Ms. Blenkhorn, please proceed.
Ms. Diana Blenkhorn, President and Chief Executive Officer, Maritime Lumber Bureau: Honourable senators, I would first like to thank you for the opportunity to be with you this evening. I will spend a few moments on the Canada-U.S. lumber wars previously discussed, which will be the basis of my presentation today.
I have been involved in each of those trade cases dating back to 1982. I am familiar with questions with regard to the Maritimes. I was at the table and knew Senator Carney as we went through the 1986 debate and other items.
The Maritime Lumber Bureau was founded in 1938. Since that time, it has been effective in representing the interests of lumber producers in the four Atlantic Provinces in a coordinated and unified position that was most often representative of the industry. We are unique in that we have been effective in coordinating a unified position between industry in four provinces and provincial governments in four provinces despite partisan lines. The most notable of the coordinated unity of those positions is the position that has been maintained between industry and government in the four Atlantic Provinces in the softwood lumber dispute between Canada and the United States.
My remarks here this evening will be restricted to trade between Canada and the United States. As Atlantic Canada has no significant trade in softwood lumber with Mexico, I will not be addressing Mexico except in the context of any comments under the North American Free Trade Agreement.
I am certain that honourable senators are aware that despite the Canada-U.S. Free Trade Agreement in 1988 and the North American Free Trade Agreement of 1992, a number of disputes have continued between our two countries including wheat, poultry, salmon, steel, potatoes, of which we are familiar in the Maritimes, and wool. Undoubtedly, the most publicized and most politically charged of all of those disputes has been the softwood lumber dispute.
The lumber wars have rumbled between our two countries since the 1820s. In preparing for the presentation here this evening, I found an 1853 debate on the Reciprocity Treaty with "the Canadas'' during which Ohio Congressman made the following remarks: "Increase the duty on imported lumber, and stumpage will rise still higher; reduce the duties then stumpage will be lower.''
Since the early 1980s, Canada has consistently been targeted by the United States in a series of attempts at "managed trade'' or "trade remedies.'' This has existed despite the FTA and the NAFTA. A good portion of my early remarks this evening will relate to the history of the softwood lumber dispute. I know that some honourable senators are familiar with that history. I would ask that you allow me to again reference it, as it is important to my concluding observations with regard to the ability for Canada's trade agreements to represent specific regional interests in the atmosphere of trade disputes.
At the root of the disputes is the difference in timber ownership. In the United States, 72 per cent of all timber is owned privately and sold in the open market at competitive prices. That is an aggregate number looking at all of the states. In Canada, the aggregate number is 93 per cent of timber owned principally by the provincial governments and stumpage is set by the government using various administrative formulas. Because of this difference U.S. producers over the years have levelled subsidy charges at their Canadian counterparts trying to impose a series of trade remedies that include, but are not restricted to, quotas, countervailing duties, anti-dumping penalties and, most recently, provincial forest policy reforms to "level the playing field.''
It is the difference in timber ownership that has set Atlantic Canada apart from the treatment of the rest of Canada in each of the successive trade disputes from 1982 to the current CVD litigation.
In the Maritimes, 76 per cent of all softwood lumber production is generated from private land. In the Maritimes, the Crown is not the principal supplier of raw materials for the production of softwood lumber; it is only a residual supplier.
Because of the landownership patterns, the Maritimes more closely mirror the U.S. system than they mirror the system in the rest of Canada. That does not mean that we do not appreciate the attempts, and are not committed to working with the attempts, to find a long-term, durable solution to this on going dispute with the rest of the country.
During the 1991 U.S. government self-initiated countervailing duty case that followed Canada's termination of the MOU, the United States industry specifically stated of the Maritimes:
The United States' domestic industry does not claim that countervailable subsidies are being provided to the Maritime Provinces. Timber from the Maritime Provinces is sold competitively and in an open market. Furthermore, because of the bulk of timber harvested in the Maritimes is from private lands, the domestic industry does not believe that there are any subsidies provided to the Maritime Provinces that result in imports causing or threatening material injury to the United States' softwood lumber industry.
In the petition for the current CVD dispute, the United States Coalition for Fair Lumber Imports specifically stated that there were no allegations of subsidy against the Maritime Provinces. They recommended that the U.S. Department of Commerce treat the Maritimes as it had in 1991.
I should like to quickly review the history of the wood lumber trade with the United States since 1986. I would go back to 1982, but in the interests of time as you have indicated, the actual significance in the phases since 1986 demonstrates the unique treatment of Atlantic Canada in this ongoing dispute.
In 1986, the United States conducted its second CVD investigation of softwood lumber. The U.S. Department of Commerce reversed the decision of 1982. It concluded that in Canada provincial stumpage programs confer subsidies. At the time, the number was 15 per cent. Five companies in the Maritimes — out of 300 — accounting for 92 per cent of the region's shipments to the United States received company-specific exclusions at that time.
In 1987, Canada and the United States entered into the memorandum of understanding. Canada agreed to impose an export charge of 15 per cent as the settlement on softwood lumber exports in return for the United States industry withdrawing the countervailing duty petition. That very same MOU was amended on January 1, 1988 to totally exempt the Atlantic Provinces. Other amendments occurred during the time the MOU was in force to reduce the export charge for those provinces that had implemented forest policy changes deemed by both the jurisdiction of Canada and that of the United States to constitute replacement measures.
In September of 1991, Canada, without notice, unilaterally terminated the MOU. It is worthy to note that my organization, through my involvement and others, lobbied the federal government for more than a year not to unilaterally terminate it. It was not that we had a difference of opinion necessarily with other Canadian provinces that wanted it to go away for sovereignty reasons, such as the impact on forest policies. It was our expressed fear that a termination of the MOU would terminate the Maritime exclusion and we would once again be forced into a dispute in which there were no allegations against the Atlantic region.
In October of 1981, the United States' Department of Commerce self-initiated a third countervailing duty investigation against Canada and imposed an interim bonding requirement of 15 per cent under Section 301 of U.S. trade law. In a precedent-setting move, for the first time in the United States' history, a political subdivision of a country was excluded from an investigation. The provinces of Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland were excluded from the scope of that CVD investigation. No interim bonding had been required, and no eventual countervailing duty would be imposed against those Canadian provinces in that particular case.
That case went forward and was subject to FTA panel review. In the interests of time, I will not go through each of the remarks I prepared, but it is important to note that Canada challenged it under the FTA binational panel. While Canada eventually won, at some point through that particular case when the panel remanded the decision to the Department of Commerce, the U.S. reaffirmed its decision and actually increased the duty. The duty fluctuated between 14.48 per cent down to 6.5 per cent and back up to 11.4 per cent in a very short period of time. The numbers here are not important, it is important that we understand that since 1986, Canada has always been subject to a trade remedy. In July 1994, the dispute ended when the FTA panel ruled in Canada's favour in the determination of whether or not Canadian imports were injuring the United States.
In December 1994, it was announced that the Canadian and U.S. governments had agreed to establish a bilateral consultation process. That process became known as the lumber dialogue. Canada's primary objective through the dialogue was to avoid further litigation, as that was needed under U.S. law for another U.S. investigation to take place was the submission of a new complaint by the U.S. industry. The U.S. industry had made it clear that if the lumber dialogue did not lead to satisfactory results — what they had predetermined would be those results — it would file a new CVD petition. What was significant about the dialogue was that it was the first attempt to compare notes on the respective forestry regimes in North America in a North American context, albeit with considerable suspicion on both sides. It is an important phase in where we are today.
In May 1996, the next agreement — known as the "softwood lumber agreement'' — was reached. This was a new level of trade remedy, and it imposed volume restraint at the Canada-U.S. border. The quota of 14.7 billion board feet was allocated to softwood lumber producers in B.C., Quebec, Ontario and Alberta. QUOTA did not apply to Manitoba or Saskatchewan or the four Atlantic Provinces.
Again, the Atlantic Provinces established a precedent when they were able to obtain a separate agreement in the form of the exchange of letters signed by the two federal administrations. This agreement provided protection for the region — given our experiences with the MOU being terminated unilaterally — in the event that the agreement was terminated before its scheduled expiration date of March 31, 2001, or either party breached it.
The agreement, which became known as the "Maritime Accord,'' outlined specific undertakings by Atlantic Canada. Some of those undertakings were minor with regard to provincial forest policy changes. In another, more major undertaking, it required that the Maritime Lumber Bureau implement a program called the "certificate of origin'' program to ensure that only lumber produced in the Atlantic region from logs originating in the region or the state of Maine receive the intended exclusion from the softwood lumber agreement.
In April 2001, immediately following the expiration of the softwood lumber agreement, again the United States' Coalition for Fair Lumber Imports filed petitions to the U.S. Department of Commerce. This time, there were two petitions requesting investigation. For the first time in the long-running dispute, an anti-dumping investigation was added to what we anticipated to be a CVD case, with the claim that Canadian lumber was sold in the U.S. at less than fair market value. As stated earlier, in the most recent U.S. countervailing duty petition, there were no allegations against Atlantic Canada. The U.S. coalition specifically requested that the Atlantic region be treated as it was in 1991, without investigation.
However, once again, we became collateral damage and were forced to defend ourselves in a case where there were no allegations against us, when the U.S. Department of Commerce first initiated the CVD case, it was against all Canadian provinces. In yet another precedent-setting move, in July 2001, days before the Department of Commerce issued the first preliminary subsidy determination — again for the first time in U.S. history — the Department of Commerce amended an original notice of initiation once a case had begun. In this instance, it was amended to exclude Atlantic Canada from the scope of the countervailing duty case.
The previous legal arguments of defining a political subdivision of a country permitted the Department of Commerce to make this legal determination. In addition to the exclusion from the scope of the CVD investigation, the U.S. amendment required that the certificates of origin issued by the Maritime Lumber Bureau on all softwood lumber shipments originating in the Atlantic region be required as an entry document to the U.S. Customs Service. This extraordinary requirement of documents issued by a private, non-government organization is again evidence of the United States' recognition of the unique circumstances prevailing in Atlantic Canada relative to the root cause of the ongoing dispute.
However, as anti-dumping allegations are against all producers of subject merchandise in a country and not government jurisdictions, the Atlantic region was left with the "all-others'' anti-dumping rate, despite the fact that there were no subsidy allegations in the CVD case and that none of the Atlantic companies were investigated in the anti-dumping investigation.
If there is one distinctive feature in the ongoing round of the softwood lumber dispute, it is that there has been more emphasis from both sides of the border on a long-term, durable solution to the dispute. We believe that transparency, predictability and enforcement are essential if we are going to reach a positive result. Both sides are tired of funding costly and acrimonious litigation. I personally estimate that the Canadian contribution to the Washington legal society will exceed $800 million U.S. since 1986.
On both sides of the border, our lumber industries share many common goals, objectives and challenges. Both countries need to focus on the development of a shared vision for the future of this renewable resource. We need to concentrate on the growth of our markets — I understand those comments were made quite articulately by Mr. Dottori — and we need to satisfy the legitimate and increasing environmental consciousness of our customers. The forestry sector is not unlike the steel sector in terms of the range of upstream industries and products, and the gradual integration of sectors in recent times. Significantly, the steel sector now sees itself as a North American sector, particularly in regard to dealing with foreign-dumped or subsidized steel products. In forestry, one can hope that there is now a collective will to look hard at the competitiveness issues around Crown timber and work towards fully transparent regimes that address both forestry management and revenue objectives.
Rather than focusing our common interest over the past 18 years, the U.S. and Canadian industries have devoted financial resources to fighting each other. While this dispute has been ongoing, both industries have been faced with questionable integrity in the eyes of the public. We have seen substitute products take an increasing share of available markets and, most importantly, we have watched imports from outside of North America grow at significant rates. We are forestry-based provinces and we have a longer border with the United States than with the rest of Canada. Yet, in 2002, the United States imported more lumber from off-shore supplies than it did from Atlantic Canada, despite the fact that we have maintained relatively free market access with our continued exclusion from countervailing duties. From 1995 to present, offshore supplies to the United States have increased by over 220 per cent.
Senator Grafstein: What share of the total North American market is off-shore Canada and the United States?
Ms. Blenkhorn: I am not sure. They are about 3 per cent of the U.S. market. Atlantic Canada is about 2.9 per cent of the U.S. market. Depending on what happens with price, that tends to grow.
An important point that has to be understood is that for only 18 months since 1986 has Canada had free trade in softwood lumber with the United States. Only the period of August 1994, following the binational FTA panel ruling, until the imposition of the SLA on April 1, 1996, did Canada have unencumbered access to the United States market.
Canada is heavily dependent on the American market. Softwood lumber is one of this country's main exports. Honourable senators will understand the volume and the importance of our industry in Canada. We believe that what mainly prompted Canada to negotiate a free trade agreement with the United States was to secure provisions against retaliatory measures or trade remedies. Softwood lumber has not had free market access since either the implementation of the FTA or the NAFTA.
I make that comment despite the fact that the people whom I represent have had relatively free market access. I want to go to where we have not been unharmed by the ongoing aspects of dispute.
In contrast, though, the Maritimes, through the application of the very U.S. laws that we are challenging through our international trade disputes — the NAFTA, the WTO, the GATT — have been able to maintain that relatively unrestricted access to the United States. U.S law — not trade agreements — has provided the flexibility to recognize the distinct differences that prevail in our region, relative to the root cause of the softwood lumber dispute.
The Maritimes have not been left unharmed in the wake of this dispute, despite the continued recognition by the United States of those unique circumstances. Our home market has been lost to supplies originating in other regions of Canada that have been subject to those trade remedies.
We have been forced to mount costly legal defences against the series of disputes despite the fact that there have never been any allegations against the region. Our market-based system of obtaining raw materials from both private sources and the Crown leaves us competitively disadvantaged in down markets, when we are forced to compete with higher-volume, lower-cost producers located in other Canadian provinces. Understand that of the 22-billion-plus board feet produced in Canada, Atlantic Canadians only produce 2 billion. We are small provinces. Our capacity will not grow beyond that. Despite allegations in previous rounds that exclusions prompted major increases in production, we are at capacity.
I want to touch on a sensitive issue that came up recently. It is actually our goal to try to build unity within Canada, not to diffuse it. For the purposes of informing honourable senators in this committee, however, I raise it here. The Canadian government has assisted in eroding what we believe is a competitive position by providing "assistance'' to other associations in an effort to offset the impact of the softwood lumber dispute. Our position is that however eager the Government of Canada is to assist in mitigating the effects of the prevailing dispute, we must be mindful that the root cause of the dispute is the allegations of provision of government subsidies — additional subsidies simply exacerbate subsidy allegations. One very recent example is the bill that appeared last week before the U.S. Senate asking for that Canadian duties be increased to 46 per cent.
This Senate committee is studying the Canada-U.S. trade relationship and making valued recommendations to secure access for Canadian goods and services in the United States and to develop effective dispute-settlement mechanisms in the context of Canada's economic links with countries of the Americas and the Doha Round of the WTO. As you do so, we request that the committee consider the experiences of the Maritimes in the decades-old softwood lumber dispute.
Provisions should be enhanced in any international trade agreement to reflect circumstances of a region within a country in the applicability of trade arrangements and/or in the dispute-settlement process.
It is likely that, in the coming weeks, Canada and the United States will reach yet another "mutually acceptable'' — question mark — resolution to the latest softwood lumber challenge. Canada must ensure there is no erosion to the Atlantic region as being exempt or excluded in its desire to achieve a pan-Canadian solution that we have supported and encouraged. Our position has consistently been no duties, no quotas, no export tax — which means absolutely no applicable trade remedy — no CVD, no anti-dumping, and certainly no export tax imposed by the Canadian government. Atlantic Canada continues to support a long-term, durable solution enabling the provisions of NAFTA and the WTO to prevail.
For decades, the Canadian Parliament — the government of the day — has been faced with the challenges of finding a permanent solution that addresses the numerous complexities of the softwood lumber dispute. The Chairman was speaking about those very same complexities earlier today.
It has been particularly challenging to find a solution that would be acceptable to Canada as a whole because the fundamental basis of this issue lies within provincial jurisdiction of provincial forestry practices. Collectively, Atlantic Canada is very small in the Canadian context of softwood lumber production. However, the unified position and the uniqueness of the region appears to have been understood by all levels of government.
Thank you for the opportunity to appear before this committee. I welcome any questions.
Mr. Avrim Lazar, President, Forest Products Association of Canada: Honourable senators, I wish to make three points. Trade with the United States has a huge impact on jobs and well-being in Canada. People tend to underestimate that. Second, trade is endangered by non-tariff barriers, not just softwood and also by domestic Canadian policy. Third, we must adjust our approach if we are to be successful in the long term.
One million jobs in Canada depend on the forest industry. Many of those jobs are in rural areas. There are 350 rural communities that depend entirely upon the mill in their towns. Another 1,200 communities depend substantially on the mill in their town. Try to create new jobs in those communities once the mills close down. It is very hard. Try to create jobs that pay twice the average wage, as does our industry. That is almost impossible.
The government tends to pay a lot of attention when we close a mill but it does not seem to hear our voices when we say we have problems keeping the mill open and that we need changes in policy. No other industry brings technology to rural Canada as we do. The aerospace, transportation, chemicals, and automotive industries combined use less high- tech equipment than the forest products industry. We put most of that high-tech equipment into jobs that pay double the average wage in rural Canada.
This is not just about trade law or the niceties of trade or profits for big corporations; this is about 1 million jobs in small-town Canada.
Sixty-five per cent of our product is exported to the U.S. and Mexico. Trade has been increasing. Over the past 10 years, paper trade has increased more than 100 per cent; wood, more than 180 per cent; pulp, almost 50 per cent. Those increases cannot be taken for granted. The jobs that come from this trade will disappear unless changes are made.
Second, I would like to talk about the threats. There is no point in my rehearsing the various points. Ms. Blenkhorn did an excellent job on the Maritime twist. The facts remain, and you have all heard it more than once.
I think it is worth pointing out that Price Waterhouse Coopers estimated the cost of the current duty at about $ 1.5 billion annually. That is a lot of money out of the pockets of working Canadians.
The duties ignore both the intent and spirit of NAFTA and that, under NAFTA, we are left at the mercy of U.S. law. Our only recourse under NAFTA is to demonstrate that the United States is not consistent with its own law. It takes a long time and makes a lot of lawyers rich. If we win, they can go home the next day and change the law. That is what they have done and that is what they told us they would continue to do.
We are also worried about the impact of the softwood disputes on other forest products. The obvious impact, of course, is that pulp and paper production becomes more expensive as the softwood that provides most of the raw material for pulp and paper production gets in trouble. The more worrying possibility is that if you sit in the U.S. in another forest product and watch those softwood guys trying to get fat by embargoing the Canadians, the temptation to do the same thing and seeing whether you can get it is almost overwhelming. It is not only what is being done to us in softwood. If we lie down on this one, they will walk over us on all the others.
While we are very grateful for what Mr. Pettigrew and the Government of Canada have done to date in protecting our interests, it is becoming increasingly clear to us that new approaches are needed.
Getting in the door in a trade area is only half the battle. You must be competitive once you get in there. When talking about trade, we tend to forget the domestic part of it. My U.S. colleagues in the American association did a study of taxation, thinking they could show that the U.S. forestry industry was the most heavily taxed. The CEO put it in the mail and called me and said, "You can use it, Avrim, because Canada is the most heavily taxed forest industry in the world.'' That is what the U.S. study concluded. Not only are we very heavily taxed, but capital taxes place a huge disincentive on buying modern equipment. If you want to tax our profits, go ahead — not too much, please, but we will live with it — but taxing investments just drives away jobs.
The other thing we suffer is federal-provincial regulations that overlap. Other countries have environmental regulation, none more stringent than ours, but we are the only ones who cannot figure whether it is a federal or provincial jurisdiction. We are willing to accept both the feds and provinces having environmental responsibilities, but please sort out the roles. This creates business uncertainty, reduces investment and increases costs.
We are the only country that treats our forest products industry as if it is domestic. Finland has one big company, as do Australia and New Zealand. Our Competition Bureau looks at what concentration could do to prices in Canada and says we are not allowed to merge. You cannot do business in the international marketplace when you export 80 per cent of your product if you are a bunch of small companies. If the companies can survive, good on them, but let the marketplace decide, not some bureaucrat in the Competition Bureau. Let the marketplace decide what the optimal structure of the industry is. Getting into markets is half the battle; being of a structure and living in a business climate where you are competitive once you get in is just as important.
One of the ideas that we have been experimenting with is whether we can get to our American allies on the U.S. side. These punitive duties are the result of U.S. politics. In the United States, there are real free traders, and they have political power. There are also a lot of people who live in and build houses from lumber. There are many industries — all the construction trades and a great deal of industry — that depend upon competitively priced lumber. One of our recommendations is that we put far more attention into partnering with those allies in enabling them and mobilizing the U.S. interests that are the same as ours.
Canada to U.S. representation is good, but all our friends in Washington tell us, "It is nice when your Prime Minister comes down here. We know you want to sell lumber without duties, but it is much more powerful when five or six congressmen or senators and governors come and say we cannot afford these duties.''
The government has assisted us with some funding to do some lobbying in the U.S. I think the clerk handed out the copies of the ads. If I may, I will show you what sort of advertising we have been doing. It should come up on the screen.
(Video presentation)
We put out print ads, we have hired lobbying firms, and the message is always the same: This hurts everyone. This hurts American consumers. This hurts the American construction industry. This also creates a rift with America's best friend, closest ally, biggest customer, and largest source of oil and gas. Why would you want to do that to yourself, United States? Why would you want to keep this going? That lobbying has been going very intensely in the U.S.
Our suggestion is that if we get a deal — we hope it will be a reasonable deal — that we understand that the root of the problem is U.S. politics. It is the desire of the U.S. industry, which is not as productive as Canadian industry, to hide behind tariff barriers. The motivation to do this gets stronger every year, because each time they have a tariff barrier, they get weaker and we get stronger, so they are more and more afraid of competing with us.
We have to be in Washington and throughout the United States, not just when there is a tariff, but year in and year out, telling the Canadian story, telling them we are not subsidized, telling them our environmental practices are equal to any of those in the world, and partnering with wood consumers in the U.S. so that the political momentum cannot build up for this to be done time and time again.
Rather than go through the rest of my presentation, I think we should take some time for questions.
The Chairman: Thank you very much. That is very sensible.
Senator Grafstein: Can I ask you to step back and look at the shape of the industry itself? We now know that prices are really bad. What do bad prices do to the Canadian industry? Do they make it more or less competitive?
Mr. Lazar: The commodity business is a very rough one. You have to understand that prices cycle, but the cycle has only one direction. They go up and down, up and down, but the down is more and more and more. This is the same in computer chips, in rutabagas, and in any commodity industry.
What do we have? We have trees, energy, really smart, productive people, and we have fairly good plants. Our problem is that over the last 10 years, the return on capital investment has been less than the cost of capital. Why is that? Because the government is collecting rents from the industry beyond that which the international marketplace can sustain. You have three small plants, all of them not competitive on international standards, and you want to invest in one big plant. Quite a few provinces will say, "It is a free country, but if you close any plants, do not expect to chop down any trees in this province.'' It is easier where the forestlands are owned by private interests.
As a result, we have not been modernizing at the speed we should. Most modern plants are having trouble because they are competing with plants that should have been closed. Slowly, we are becoming less competitive than we are. Can this be turned around? Absolutely. We have the know-how. We have the resources. We have the management culture of innovation. To survive in Canada and compete internationally, you have to be pretty good. However, we need a new partnership with government to create a business climate where this innovation can happen.
Senator Grafstein: Perhaps you could shorten your answers by directing yourself to the question only, please. What percentage is the American share of foreign ownership of the Canadian industry in Canada?
Mr. Lazar: I do not have that number with me but we could obtain it for you.
Senator Grafstein: Is it between 40 per cent and 50 per cent now?
Ms. Blenkhorn: I do not have the exact number but two major acquisitions have occurred: MacMillan Bloedel by Weyerhaeuser and Weldwood of Canada by International Paper. The figure would be substantive. I do not know if it is as high as 40 per cent.
Mr. Lazar: We will get that number for you.
Senator Grafstein: Let us assume it is 40 per cent and moving up substantially. At what point do you think this problem will resolve itself when the American interests own 50 per cent to 70 per cent? In other words, from my perspective coming back from Washington last week, that one of the motivating factors that is not on the table is that there is now a desire on the American side to make a settlement. That is because ownership on both sides of the border is now dealing with industry in Canada. Is that a fair response — that as American ownership moves up in Canada, this problem will resolve itself?
Ms. Blenkhorn: It is important to note that the majors that have purchased are not participants in the U.S. coalition. The U.S. coalition that is actually bringing the case against Canada comprises small to medium-sized operations that are not as efficient as was indicated earlier. Rather, they have been successful by using politics. Those are the same politics that we use when we talk about rural communities that will not survive if sawmills close, or when we talk about integration and about becoming more competitive but at the same time, saying that we need to keep rural communities operating.
I think it will assist in making the problem go away. However, I am not sure that it the "end-all'' answer because of who currently funds the U.S. case.
Senator Grafstein: To save time, chairman, could Mr. Lazar give us the percentage of foreign ownership of timberlands in Canada?
Senator Carney: — by region.
Senator Grafstein: By region would be helpful, however, I am looking at overall pictures.
Mr. Lazar: Is that ownership of timberlands or of timber operations?
Senator Grafstein: Both.
Mr. Lazar: Most of the timberlands, with the exception of the Maritimes, are owned by the provinces.
Senator Grafstein: Give us the percentage in both categories.
My next question is this: Is it not fair to say that, as a result of this increasing consolidation and the fluctuation in the marketplaces, the real elements in the industry that are becoming flagellated are the medium to small operators because of the reduction in the margins that they are not able to sustain?
Mr. Lazar: Big guys are getting killed as well.
Senator Grafstein: Big guys are getting hurt, but they are not getting killed because they have deeper pockets. However, is it fair to say that medium-sized businesses are becoming flagellated?
Mr. Lazar: Small to medium-sized business will go down faster, without a doubt.
The Chairman: Thank you.
Senator Carney: I would like to thank both witnesses for their presentations.
Mr. Lazar, from your contacts with your counterparts in the U.S., and because you have an interest in the marketing side, what would be the motivation of the U.S. coalition to remove the duties? I think you should know that, under U.S. trade law, you need a wide percentage of an industry producing X percentage of the overall production before it triggers the trade law. The U.S. wants access to higher prices and the bottom line is that many of them are small independents. That would give us an idea of just how big the coalition is. They want higher prices and that is why they want the duty. What motivates them to reduce it?
Mr. Lazar: There is one big player — International Paper — who is the "pay master'' really. Those legal fees would not be possible without their contribution — keep in mind that they are the super-giant among all the smalls and mediums. There are various motivations. The first is if they can get a deal that will them give them certainty that they are not subject to what they would see as the vagaries of international trade panels. That is an element. Business likes nothing better than knowing what the future will be because, before you make investments, you want to know what the return will be.
Second, prices have not gone up. The anti-dumping duties have had the perverse effect of driving prices down and anti-dumping charge is based upon your cost of operations. The only way to deal with it is to close your high-cost operations and run your low-cost operations 24 hours and drive down the average cost. It is had this perverse effect, which has helped them to return to the table.
There is also a small element of the gathering forces of the free traders in the U.S. who are saying, "You guys can get away with only so much.'' At some point, there is an embarrassment factor and they can sense a little bit of shift, politically. There is no one thing that will make them change. Some would say that the root cause of this is the difference in policy.
I would characterize it differently because I think there are two root causes: First, U.S. producers are less productive than ours and they are afraid that they are losing the market share. Second, there are two systems of governance that are not understood. Another way that may help us to bring motivation to the table is to have competition from outside North America. There are huge timber resources in Eastern Europe and in Russia. They have a capacity to compete in North America because they do not have the same government rents put on them or the same environmental regulations. Many of our members are saying that the only reason they are not more into North America now is that they have not invested in the infrastructure to service our customers. The U.S. industry knows that there is this common threat, and fighting each other when the real competition is offshore, has dawned on many of our U.S. competitors. Furthermore, if you drive the prices up far enough, then concrete, steel and other substitute products become more attractive.
The bottom line is that, when you lose customers, whether to Russian timber, to Swedish timber, or to concrete and steel, it is difficult to get them back when the prices go down. Customers form relationships and habits. All of these factors together provide some motivation to come to the table but some of them just do not want to come.
Senator Carney: What is the motivation of the Americans to reduce tariffs? They wanted to go to a market system that they think will drive up lumber.
Ms. Blenkhorn: I am not sure that I totally agree with all of the aspects; and I do not totally disagree, either. As Mr. Lazar said, the anti-dumping duty had the perverse effect. There is now a group of people who have mounted cases against Canada, since 1982. They will not stand up and say that they made a mistake. The motivation to get rid of anti- dumping in a way that they are able to save face is driving them back to the table.
I will circulate this graph to the committee. Each one of these lines represents one of the various stages that I talked about. In each case, prices drove up dramatically until the anti-dumping duties, when prices dropped.
I think that we need to focus on the imports of European supplies. We cannot look at Europe as being totally independent in this issue. Most of those supplies coming into the United States are financed by U.S. companies. It is U.S. grading agencies that provide the service to give the market access — those same grading agencies that have boards of directors that are operating U.S. lumber companies. They would love to shrink Canada's share of the United States' market, where they have an unlimited resource that they have invested in from Russia, Austria, Germany or other areas. I think that you need to look at the ownership of those increasing imports to the United States.
The Chairman: Do we export to Europe? Do we export anywhere except the United States?
Ms. Blenkhorn: We used to export 40 per cent of our softwood lumber to Europe until 1993, when Europe brought a non-tariff barrier to trade against Canada in the form of the pinewood nematode. Therefore, we had European supplies of commodity lumber, we had Japanese supplies and we know where we went with the Asian flu.
At the same time that those markets were in decline, because of increased domestic supplies in Europe — plantations of forests that Canada had donated after the war were becoming mature — they now had their own supplies of timber to manufacture. They looked at Canada and those trade barriers. The only thing that saved the Canadian industry was the fact that the United States consumption from 1993 to the current date was on the increase, not decreasing. If we had lost Europe, Japan and the U.S., our industry would be in the tank.
Senator Graham: These have been very interesting presentations. I agree with Senator Di Nino that we must find a way to get more time to hear such interesting witnesses as we did with respect to the witnesses who appeared before you.
Ms. Blenkhorn, my curiosity has been aroused by the fact that you are the Maritime Lumber Bureau, which was founded in 1938, yet you include Newfoundland. Normally, when we include Newfoundland, we Maritimers say "Atlantic Canada.'' How in the name of God did you convince the Newfoundlanders that you should continue to call this very important organization the MLB?
Ms. Blenkhorn: When you have success with a name and become represented worldwide, even the Newfoundlanders understood the value.
Senator Graham: That is what I was hoping you would say.
How much representation do you do in Washington?
Ms. Blenkhorn: We have maintained representation in Washington since 1986 when we got involved. We understand the value of advocacy work and staying in touch. Our approach has been a bit difficult from FPAC. We are not just looking at the consumer approach in those, we also work at building some allies within the U.S. coalition and recognition of the circumstances.
Senator Graham: Do you have much interaction with the other organizations that appeared today?
Ms. Blenkhorn: We do. As I said in my remarks, we do support a long-term durable solution and would prefer to work with them as long as they do not go against us, given our differences.
Senator Graham: Mr. Lazar, you said that "Canada to U.S. representation is good.'' Am I correct in repeating that?
Mr. Lazar: It is good, but not sufficient.
Senator Graham: You should have said that when were you commenting. I do not think you said it was not sufficient.
You also said that the United States is not as productive as Canada. Is that right?
Mr. Lazar: In the wood business, the productivity has not been increasing as quickly as in Canada.
Senator Graham: I have heard others say that in other industries. Some subsidiaries located in Nova Scotia, indeed, worldwide Canada-wide organizations talked about productivity in Canada versus the United States.
You also said that Canada is the most heavily taxed country in the world when it comes to lumber. Did you say that?
Mr. Lazar: I said forest products.
Senator Graham: That is what I meant. Everything we are talking about tonight is with respect to forest products. However, you used as your source, I believe, a U.S. source.
Mr. Lazar: That is correct.
Senator Graham: What about your own sources in Canada? Have you made your own estimates with respect to the taxation?
Mr. Lazar: We have not done a study as comprehensive as the U.S. industry study did. We have started some work with the Conference Board of Canada, and it showed us that our European competitors tax labour more and equipment less, and that may result in their having far more high-technology equipment than we do. It is not as comprehensive a study as that done by the U.S. industry. To the extent that U.S. study would have been prejudiced, the temptation of the U.S. industry would be to get a consultant who would say their taxes are too high. It came out with the conclusion that the U.S. taxes are too high and Canadian taxes are higher.
Senator Graham: Do you have a comment on that, Ms. Blenkhorn?
Ms. Blenkhorn: No, that work was done by the Forest Products Association in the United States, and I cannot comment on it. However, I will look at it.
Mr. Chairman, I made a rather flippant response to Senator Graham's question on Newfoundland. I would like to clear the record. There is one important distinction. Maritime Lumber Bureau, being founded in 1938, started representing Newfoundland about the mid-1950s. The real reason there has not been any consideration in changing the name is that the Americans themselves, in recognizing the circumstances or recognizing our four provinces as a region, insist on referring to them as the Maritimes rather than Atlantic Canada. When you read my remarks, there is a great deal of interchangeability between the Maritimes and Atlantic Canada, and if they understand the four provinces to be the Maritimes, then we believe that we should be consistent.
Senator Di Nino: Mr. Lazar, as well as the overtaxation of forest products, the domestic Canadian policy is a problem, particularly as it relates to capital tax, jurisdictional duplications, and restrictions on mergers. Those are my words rather than yours. Is that correct? Did I capture correctly your comments?
Mr. Lazar: Yes.
Senator Di Nino: Would you feel that this committee should look at those areas in its deliberations and report, which, we hope, will be read by the appropriate authorities for consideration of changing the policy?
Mr. Lazar: We would strongly urge that. It is not enough to get in to a foreign market to sell. You must have competitive prices, and if you are carrying on your back uncertainty about whether it is a federal or provincial jurisdiction overlapping requirements, if you are carrying on your back taxes that are heavier, but most important, if you have government institutions treating you like you are a domestic industry — I will give you an example.
We have a firm out west that produces directory paper. They sell 90 per cent of their product in international markets. Their competitors are much bigger and can do it cheaper, so they wanted to take over another Canadian firm and become a bigger Canadian firm. They had to fight for six months with the Competition Bureau, and they eventually had to get the minister's personal intervention to get permission and sign a thing they would never get any bigger.
I can guarantee you the result of this in the long term will be that our competitors who are big enough will have the jobs, and the jobs in Western Canada will disappear. This is not about big versus small. It is about sustainable jobs versus unsustainable jobs. Our interest in trade cannot be limited to trade barriers. It must look at whether we are competitive.
Senator Di Nino: I have one question for both of you. We heard during the hearings from a witness who suggested that Canadian exporters should enhance relationships beyond Washington. I believe that is a direct quote from one of our witnesses. Mr. Lazar, I looked at your Partnership for Growth presentation, which I think addresses the same thing.
Could you tell us what sort of experience you had with that and whether it is working and is being useful? I would like Ms. Blenkhorn also to make a comment, particularly in relation to the comment you made a few moments ago about being a representative in Washington. Could you expand on that to other components?
Mr. Lazar: When we started the partnership from growth, we spoke to many prominent U.S. lobbyists. They came to us because they knew we had money. They said, primarily, that in domestic U.S. politics, the side for consumption of lumber was well under-represented, that B.C., the Maritimes and Quebec were well represented, Canadian government was well represented but their domestic interest in low lumber prices was under-represented. The lobby firm that we hired was rated by Forbes magazine as the most influential lobbyist in Washington. That was his advice. We paid a lot of money for his attention.
They lobby differently than we do. They determine which groups the president cares about. He cares about Hispanics because he needs those in the next election — they are his construction industry. He cares about a certain five governors because those are the five swing states. There is influence. They make a considered list of where the pressure points are and for which of those they have assets. There is then a concerted campaign of mobilizing those people to raise the issue. The advertising is just a supplement to create an echo chamber around the issue.
The work that has been done in the past to represent our interests and mobilize our allies has been very good. It is nowhere near the level and sophistication of Washington politics that we need to get on to that playing field. It is time to realize that we live in a North American market.
We are, to some extent, as the history of softwood proves, at the mercy of U.S. political forces. Is the government cannot get in and play domestic U.S. politics, a greater presence of the industry with government support — which we have had in the past and has proven effective — on an ongoing basis could be a big help. I do not pretend that that is enough. I do not pretend that all of a sudden people in the U.S. will say, "Okay, come take our markets.'' However, we have to be there and playing their game. We cannot be playing our game.
Ms. Blenkhorn: Our approach has been somewhat different. We have looked at Washington as being important for people to understand who the Maritimes are. We started with an absolutely enormous task.
If you are sitting in Washington, D.C., you do not know where Maine is let alone where Nova Scotia, New Brunswick, P.E.I., and Newfoundland are. It was difficult making the Americans that are influential in that sphere understand who we were and what we stood for that we could advance the position of the Maritimes.
We have maintained that over the past 18 years in a number of ways — principally through a retainer of our legal firm. The Maritime approach, which may not surprise honourable senators, is to develop personal relationships. We have taken that rather than the advertising approach. We develop and cultivate personal relationships within Washington, but most importantly within the industry that are the proponents.
There are areas of mutual interest — standards and building codes. There are a number of things in which the industry in the United States shares our interest. We have worked that. We have looked at projects that we can do together with our counterparts in the northeast: jointly influence building codes and work towards increasing the consumption of building products. Instead of approaching things from and adversarial approach, we are more advocates.
Whether you believe the Americans are right or wrong — and I am not determining whether they are right or wrong — they are a force with which we have had to deal forever. Our approach to that is transparent. We actually do technology transfers of saw millers coming out of the Maritimes. They visit saw millers deep in the U.S. South to find out what really cranks them; what are their real issues?
It is not a sophisticated heavily financed advertising campaign approach. It has been effective for the Maritime region.
Senator Di Nino: It sounds pretty good.
The Chairman: I wish to thank our witnesses for their terrific presentations. On behalf of the committee, thank you for coming. We have much to chew on. It is important and interesting.
The committee adjourned.