Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 7 - Evidence
CALGARY, Thursday, February 20, 2003
The Standing Senate Committee on Foreign Affairs met this day at 10:03 a.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, today, we continue our study on the very important subject of managing Canada's relations with the United States and, in particular, the various trade problems that we have been dealing with. We have had some extremely interesting evidence. The Standing Senate Committee on Foreign Affairs has an order of reference to look into and report on the various aspects of the free trade agreement after 15 years.
I will introduce our two witnesses: Mr. Don Barry, Professor of Political Science at the University of Calgary, and Mr. Rolf Mirus, Professor and Director of the Western Centre for Economic Research, School of Business, at the University of Alberta.
We are very interested in your evidence, which we will be going over when we get back to Ottawa.
Professor Barry.
Mr. Donald Barry, Professor, Political Science, University of Calgary: Mr. Chairman, thank you for the opportunity to make this presentation today.
The rapid rise in Canadian-American integration in the wake of the Canada-U.S. and North American Free Trade Agreements, combined with the security implications of the September 11 terrorist attacks upon the U.S., have brought the management of the relationship into sharp focus. The most important challenge facing Canadian decision-makers is how to respond to the post-September 11 security environment while ensuring the uninterrupted flow of commerce across the Canada-U.S. border.
The dimensions of this challenge became apparent in the immediate aftermath of September 11 when the U.S. temporarily closed its borders in reaction to the attacks. Quick action by Canadian officials lead to the December 2001 ``Smart Border'' action plan, designed to shore up border security, while facilitating the flow of people and goods between the two countries. Since then, Ottawa and Washington have been working to flesh out the principles contained in the action plan and to bolster defence cooperation. However, these undertakings have often been overshadowed by allegations in the American media and by American legislators concerning the porous Canada-U.S. border and Ottawa's lack of enthusiasm for the Bush administration's policies.
Alarmed Canadian business interests have called for bold action to alleviate U.S. security concerns in order to protect our access to the American market. For example, in November 2001, the Coalition for Secure and Trade Efficient Borders, composed of some 40 business associations and companies, urged the Canadian government to adopt ``a comprehensive and integrated solution'' to security and border matters.
In the spring of 2002, economist Wendy Dobson proposed that Ottawa strike a ``strategic bargain'' with Washington that would see Canada support U.S. objectives on ``border security, immigration and defence'' in return for enhanced access to the American market through ``a customs union or common market arrangement.''
Recently, the Canadian Council of Chief Executives called for the establishment of a joint approach to trade, immigration, energy, security and defence that would ``transform the internal border into a shared checkpoint within the Canada-United States economic space.''
The common theme running through these proposals is that security and trade are closely linked and that explicit trade-offs can be made between them. This idea is not new. It is an extension and formalization of the partnership paradigm that constituted the basis of the management of Canada-U.S. relations in the first two decades after World War II. Conceived of as a partnership created by the Soviet threat, the relationship was managed by government elites who held compatible world views, were in firm control of their own governmental processes and in a position to sustain trade-offs that were central to the stability of the relationship. The U.S. gave Canada favourable economic treatment in return for Canada's willingness to maintain an open investment climate and to contribute to continental and North Atlantic defence.
By the mid-1960s, the erosion of the Cold War conditions sustaining the partnership approach, institutional changes on both sides of the border, and the proliferation of actors and issues in the Canada-U.S. relationship as it grew more interdependent, challenged the capacity of government elites to manage the trade-offs that were central to the partnership paradigm. Prime Minister Brian Mulroney discovered this when he came to power in 1984. Seeing closer trade and investment ties to the U.S. as the key to our recovery from the recession of the early 1980s, he attempted to revive the partnership approach. He offered the U.S. foreign policy and defence support and liberal investment laws in the expectation that President Ronald Reagan would give Canada a sympathetic hearing on economic issues.
A dramatic improvement in Soviet-American relations made it relatively easy for Mulroney's government to support U.S. policies. Although Reagan was a strong president, he was not able to provide the favourable economic treatment that Mulroney sought. As a result, the Mulroney government shifted its efforts toward finding ways of exploiting interdependence with the U.S. while subjecting American power to legal constraint. The results could be seen in the Canada-U.S. Free Trade Agreement and NAFTA, which improved Canada's access to the American and Mexican markets and established a dispute settlement process to check the whimsical application of U.S. trade remedy laws.
The Chrétien government attempted to build on this approach by promoting hemispheric, transpacific and transatlantic free trade so Canada could diversify its trade, broaden the basis of its interaction with the U.S. and extend support for the multilateral trade system. However, its efforts bore little fruit because the U.S. government, its role constrained by the fracturing of the domestic trade consensus following NAFTA, was not able to play its critical leadership role in these undertakings.
Can a revived partnership approach provide an effective framework for managing current security and trade relations with the U.S.? Not likely. In the first place, there is no evidence that the Bush administration, its sights firmly fixed on national security and domestic politics, has any interest in big ideas. Moreover, when he came to office, President Bush responded to Mexican President Vincente Fox's overtures for closer ties by making Mexico a top foreign policy priority. Although relations with Mexico have taken a back seat to the war on terrorism, Bush remains sensitive to the Mexican president's position. Thus, deeper formal cooperation, if and when it does occur, is likely to take place on a North American rather than a Canada-U.S. basis.
Even if the Bush administration were to respond favourably to Canadian proposals for closer formal arrangements, a successful outcome is not assured. It is probably fair to say that Washington's priority is security, while Canada's is trade. How would the trade-off be weighted? How much security cooperation would be required for how much economic cooperation? Which side would set the terms? Would U.S. legislators be prepared to go along? In the continuing election campaign that is congressional politics, would congressmen and senators be prepared to take a larger view of their own interests? One need go no further than the long-running softwood lumber dispute to hazard a guess.
What, then, should Canada do?
First, I think we should continue to emphasize to Americans Canada's importance as an economic partner of the U.S., including our vital role as a supplier of oil, natural gas and hydroelectric power to that country's market.
Second, we should continue to build up our security and defence capabilities, not only to ensure the confidence of American decision-makers, but also to enhance our own capacity to make effective policy choices.
Third, we should continue our low-key efforts under the ``Smart Border'' action plan to improve border infrastructure and to enhance the compatibility of Canadian and American regulatory arrangements. This approach has already produced a record of solid, if unspectacular, results that will likely serve Canada well in the short to medium term.
Finally, we should ensure that, to the extent possible, relations with Washington are conducted within a system of rules in which issues are dealt with on the basis of agreed standards. Moreover, we should not hesitate to use those rules to challenge questionable U.S. policies.
Mr. Rolf Mirus, Professor and Director, Western Centre for Economic Research, School of Business, University of Alberta: Honourable senators, I was born and raised in Germany. I studied in the United States, and I have lived and worked in Alberta for 30 years now. My views are inevitably coloured, if you will, by this experience.
I agree with Professor Barry to a large extent; however, I believe we should think perhaps a little bit more boldly.
The events of 9/11 have changed the U.S. First, security concerns dominate. Second, November brought elections that have changed the U.S. We have Republican majorities in both houses. Third, President Bush has trade promotion authority.
At the risk of belabouring the obvious, the U.S. is Canada's largest customer. Forty-three per cent of GDP was exported to the U.S. in 2001. Eighty-seven per cent of merchandise exports went to the U.S. Four million Canadian jobs depend on U.S. trade, tourism and foreign direct investment. I am stressing foreign direct investment here because of the long-run dimension.
For Alberta, 41.3 per cent of the gross provincial product is exported. Almost 89 per cent of merchandise exports are to the U.S.; 70 per cent of Canada's merchandise exports rely on five border crossings; 90 per cent of Canada's merchandise exports rely on eleven border crossings. At the risk of belabouring the obvious, we are in a North American integrated economy.
This integration also brings vulnerability. Our national interest dictates that we take the initiative with the U.S. to secure and reshape our trading and security relationship. The status quo is not really an option. Border closures and slowdowns are big risks. Foreign direct investment might be deterred and the issue-by-issue approach is perhaps not workable in this climate. We need to put our vital trade interests front and centre.
Senators, we cannot prosper without the U.S. Anyone who says otherwise closes his eyes to reality. Access to the U.S. market is vital for Canada.
In my submission to this committee, I am advocating that Canada move in the direction of a more formal trading relationship with the U.S., such as a customs union, with Mexico possibly joining at a later date. The customs union, whether formal or informal, recognizes that there is one North American market. Products from outside, regardless of where they land, face one customs levy, one inspection regime, one set of procedures, whether in Canada or the U.S. Imported inputs from outside North America will no longer be cheaper in the U.S. or in Canada because of a different tariff. That means we no longer need rules of origin. Their purpose is to prevent importation into the lower tariff jurisdiction for transhipment into the higher tariff jurisdiction. Rules of origin have been abused as protectionist devices, and they are costly to administer. Some estimates suggest that rules of origin in the European Free Trade Agreement cost 3 per cent to 5 per cent above the value of the exports. A common external tariff would establish destination neutrality for imports into North America.
What does this mean? It means two things, in my view. It means negotiating a common external tariff with the United States through a joint working group. I am not advocating that we redo the NAFTA. I think this can be done in incremental ways, along the lines suggested by Professor Barry. We need more common institutions at any rate, as we get more integrated and have more hassles.
I suggest a joint working group with side agreements with respect to embargoes, such as the one on Cuba. We cannot buy into American foreign policy, so we would need side agreements.
We could phase out the rules of origin. We could set aside agriculture and other sensitive sectors. We could establish transition periods.
The common external tariff, and we are not that far apart in our tariffs now, moves us toward common administrative procedures for goods and services trade vis-à-vis outside countries, lessening the importance of the internal border for commercial movement.
In recognition of one North American market, the second necessary step down the road would be to get away from American application of anti-dumping and countervailing subsidy laws, similar to the way in which the Europeans have one common market, one competition authority. We are not going to integrate to that extent in North America. I am not advocating that, but we could ask the Americans to subject Canadian imports to their competition tribunal, the Federal Trade Commission, or FTC. It deals with all internal competition issues, unfair trade issues. We would similarly subject imports from the United States to the Canadian Competition Bureau.
My guess is that 95 per cent of the cases that we see going to anti-dumping and countervailing subsidies proceedings would not be handled by the FTC. The FTC in the U.S. has, not a whimsical record, Professor Barry, but a very strong record of looking at the economics of the case. Canadian products in the U.S. would be subject to the FTC. U.S. products in Canada would be subject to the Competition Bureau, and that is the way Europeans have done it. Actually, the Europeans have a centralized system.
These two steps would move a customs union forward, formally or informally. Market access would be more secure for Canadian products.
What does Canada have to offer? We have to approach the United States. Professor Barry has stated what we have to offer. We make a commitment to open markets, which includes energy, and we make a commitment to security at our borders. This brings benefits to the U.S. — secure energy supplies and secure borders. Canada is, after all, the biggest petroleum supplier for the U.S. In 2001, I think we exported 14.5 billion barrels, so we were the leading supplier of energy. We do have some leverage there.
We could have common administrative protocols for goods and services, including security procedures for ships and aircraft, to allay American security concerns. We would not surrender but a small bit of sovereignty here because I am not suggesting we move to a common market for people, movement of people.
I am worried about merchandise, goods and services crossing the border. We need people who service machines, people who are consultants and so on. That is already happening. That is already clear.
I am not saying open the borders for free movement of people such as a common market would entail. I am not pushing for a common market.
That, in summary, is my proposal: to think boldly, use the opportunity of a constellation in the United States that gives the President some power in both houses and trade promotion authority. We should broach the issue informally and see where we go from there. Without trying, we will never know.
The Chairman: I have the impression that the free trade agreement has had pluses and minuses. We had some very interesting evidence in Vancouver that the exchange rate has been possibly as important as the free trade agreement, particularly when you look at the imports into Canada from the U.S. versus the exports from Canada to the U.S. Imports from the U.S. into Canada are about the same as they were in terms of percentage as when the free trade agreement came into force. However, it has gone about as far as it is going to go at this point.
Professor Mirus, you say that we must think boldly, which is very difficult in this atmosphere of security concerns. When the Americans are internalizing everything, just how do we go about doing that?
The added problem that I do not think we have fastened on to — we have heard about it, but we have not been thinking about it — is that there are elections in the U.S. every two years, meaning that they are on a permanent election footing. The Democrats will obviously try to take the Congress back, and local issues and concerns about trade will be with us for some time because partly of this two-year election cycle.
New York State, particularly northern New York State, is dependent on trade with Canada. It is a depressed area generally, and yet Senator Clinton has been very vocal about security problems at the Canada-U.S. border. First, you say it is not clear that that is true. I do not think it is true. Never mind ``not clear''; I do not think that is true. Second, you would think she would be interested in keeping that border flowing because it is important for the local economy of cities like Buffalo.
What about the WTO and the Doha Round? I know as well as anyone that some people say the Doha Round will never end. I am aware of that, but will not some of the trade barriers be dealt with in the Doha Round? Do you think anyone will make commitments before they make their positions clear at the Doha Round?
Mr. Mirus: I am prepared to comment on the prospects for the Doha Round in as much as it may provide some background to move on from.
The Doha Round is very difficult because, in the previous round, the Uruguay Round, the poor and developing countries were disappointed. They did not get the market access that they thought they ought to get and that, in my view, they deserved. There is big disappointment, and they are going to play very difficult to get this time around. Unless Europe can make concessions on agriculture, this round is not looking good. The prospects that all attendant negotiations relating to reducing barriers to services and extending the agreement to new areas are not good until the agricultural issue is resolved.
Mr. Barry: Agriculture is a huge stumbling block, and there are no signs of resolution of the agriculture issue for the immediate future. Talks are stalled at the moment for that very reason.
The Chairman: This committee understands this reasonably well. We are quite knowledgeable about the European Union, having completed a couple of studies. Certainly, the agricultural issue will have to be dealt with because the budgetary implications will have to be dealt with.
Mr. Barry: It may be that the Europeans will be willing to move because they have got to bite this bullet when they add the new members to the European Union. They simply cannot afford the huge subsidies that these countries may require and may have to confront this issue internally before they will be willing to move externally.
The Chairman: They are not going to say anything until they are ready to say what they are going to say.
Mr. Barry: Perhaps not.
Senator Di Nino: It has been an interesting three or four weeks. It is obvious to us that the issues are similar in the sense that expert witnesses we have heard are grappling as much as we are in trying to find solutions to these problems.
You will find that B.C. has a particular interest in softwood lumber; the West in the Farm Bill and agricultural issues. We really come down to three or four or five things that pretty well everyone has focused on.
Professor Barry, in your brief you talk about the allegations by the American media and legislators concerning the porous Canada-U.S. border and Ottawa's lack of enthusiasm for the Bush administration's policies. It has been suggested to us that we truly are not doing a good job at marketing ourselves or communicating with the Americans who we are and what we are, and that maybe we are allowing U.S. politicians such as Senator Clinton too much leeway in the pronouncements that she and others are making without any basic fact to back them up.
Perhaps the understanding in Canada of the political system and the political reality in the U.S. is not as sharp as it should be. In particular, maybe we do not focus on the fact that politics is very much at the local level in the U.S., much more so than it is in Canada. Do you agree with those comments, and do you have any thoughts regarding how we might address those issues?
Mr. Barry: I think we understand the problem, but we have to devote more resources to dealing with it. I think the embassy in Washington, in particular, is doing a very good job, but it is doing the job with limited resources.
We have been hammered in the American press. These myths, in many cases, have been repeated by American legislators who one would think would know better, but they are very responsive to the media and to local concerns.
It is a very difficult job, and I do not think there are any easy solutions. Suggestions have been made about media blitzes and that sort of thing, but I think they would have limited results.
We need the resources to get across the country and to spread the message, and I think we are doing that. The ambassador and the consuls general have been active across the United States, but our coverage is somewhat limited. I think we only have 10 to 12 consular offices.
The Chairman: Something like that.
Mr. Barry: That is a very limited range. Given the connections between the two countries, we must to boost our representation there in order to get the word out about Canada's reliability as a security partner of the United States and our importance as an economic partner to that country.
Senator Di Nino: How about the suggestion by more than one witness that we should create strategic alliances, particularly with, as the chairman was saying, the northern part of New York State, which is heavily dependent on the Ontario market, the softwood lumber industry, the Home Builders' Association, et cetera. In your opinion, are we putting enough resources in those areas and are we hitting the right targets?
Mr. Barry: The fundamental problem in our trade relations with the United States relates to the nature of our impact on that country. The impact is sectoral and regional. As a result, perceptions of Canada are rarely aggregated at the national level, except for a general view that is somewhat benign and not very well informed.
Given the nature of our impact, sectoral and regional voices in the United States often hold sway when decisions are made, particularly in Congress. We have to find allies to counter the pressures coming from those sources, if they are harmful to us. When we do that, we almost have to build a new coalition each time, which is not easy. There are no permanent coalitions, as such. Depending on the issue, we have to build a new coalition. That is what makes it difficult for us.
Senator Di Nino: When you talk about the relationship between Bush and Fox, the Mexican relationship, our other NAFTA partner, a lot of votes in the southern U.S. relate to the Latin vote. Many Mexicans vote with other Latin immigrants. One of the previous witnesses said that before the last election, Bush wanted to have control of both the House of Representatives and the Senate. He knew that he needed votes from some of the southern states to regain control of both, and that was a major factor. Is this a reality?
Mr. Barry: In Mexico-U.S. relations?
Senator Di Nino: Yes.
Mr. Barry: I think there are three reasons it assumed a high profile at the time Bush was elected.
First, of course, he was Governor of Texas and was familiar with border issues.
Second, there were pressing border issues to be dealt with. He knew Mr. Fox. Mr. Fox had been down there in the Mexican state of Guadalajara, I think. Bush was acquainted with Mr. Fox.
Third, there are about 35 million Spanish-speaking American citizens who are a substantial force in U.S. electoral politics. The question is this: What has that added up to so far in Mexican-U.S. relations? The answer is not very much.
Mr. Fox is frustrated that very little progress has been made on the pressing issues between the two countries, particularly the issue of immigration. Mexico is having problems of its own in dealing with the United States at this time.
Senator Di Nino: Professor Mirus, I would welcome your comments on any of those issues as well, but the main issue, if I read your presentation correctly, in both verbal and in written form, is the proposal to create a customs union within NAFTA. We have heard witnesses talk about that, some in support of it and some strongly against it. Perhaps you could remark on one of the main opponents referring to a customs union as a disaster, principally because we would have to adopt and be playing by American rules instead of our own and that we would not be considering that at all.
Mr. Mirus: First I will briefly deal with a couple of issues on the table.
With respect to the exchange rate, Mr. Chairman, both exports to the U.S. and imports into Canada have grown remarkably since the NAFTA, and the exchange rate has some responsibility in that regard. The import growth has been so strong that I think it has had a minor impact. I think the NAFTA has had a big impact.
With respect to marketing Canada in the United States, I studied at the University of Minnesota, where I talked to educated Americans. They thought that Japan and China were their biggest trading partners, not Canada, and that is because these countries are more visible. They have more political power, and we are being taken for granted. We are the reliable friend up north, so no need to worry.
The Chairman: I suppose it says ``Made in China'' on everything, whereas it does not say that when they buy canola oil.
Mr. Mirus: Marketing Canada in the U.S. is a very difficult job for a small country. Academics like Professor Barry and I receive invitations. We are encouraged, but it is just a drop in the bucket. We do not reach too many people, if we even have the time.
The personal relationships between American and Canadian politicians are under-exploited. North-south business flows now suggest that we are more active — let us say, Premier Klein and the Governors of North Dakota and Montana — and so on. These relationships are beginning to develop. I could see a relationship between Michigan and Ontario develop, and I think that is a project situation. There is a very good personal relationship between Tom Ridge and Finance Minister John Manley, which can be built on. When personal relationships are good, things go better for us. You just pick up the phone.
It is true that if we go into a full-fledged customs union, such as it exists in the textbook case, that means an incremental application of sovereignty. We are losing our sovereignty anyway with a north-south trade flow that is our life blood. We must recognize the obvious: When you live next to an elephant, you have to give a little.
We have to look to where our national interest is, and, as an economist, I think it is with jobs, business and the economy. We cannot afford environmental programs, social programs, scholarships or anything for Canada unless our economy is in shape — so we depend on the U.S.
I am prepared to give a little bit on sovereignty. I am not giving on immigration. I think we will use our Canadian immigration criteria. I am not giving on Cuba. I think that is not a good policy for the Americans, so we would have to have a lever, side agreements saying that the Cuban embargo does not apply to Canada.
We can have a common external tariff. Administratively, it is a North American space. How much do we give up there? We can look into that, but our tariffs are not that different anymore. If we continue down the road with the WTO successfully, then tariffs would, in my lifetime, go to zero. We would have a customs union with zero common external tariffs. That would be the eventual outcome.
I am prepared to say that we can satisfy the Americans on security when it comes to overseas flights landing at airports in Montreal, Toronto or Vancouver so that the Americans are satisfied that our border inspections do not bring them added security risks. They have enough of them. If they have confidence in our inspections at the border, and if we have common procedures with respect to customs forms, the world is easier. Then we will not have the hassles of the internal border because the security concerns will be allayed or lessened, and we will build confidence.
I agree with Professor Barry that it would build confidence with the U.S. if we had a stronger military. I could not agree more. You hear American making jokes about Sea Kings, and that embarrasses me.
Senator Setlakwe: My first question concerns our relationship with the European Commission because you have a lot of experience and knowledge of what our trade relationship has been with the EC.
The Canada Europe Round Table for Business, CERT, meets annually. Since the meeting we attended two years ago, has there been any progress toward liberalizing trade between Canada and Europe?
We heard last week former Minister of International Trade Roy MacLaren that Pascal Lamy had said that free trade between Canada and Europe was unavailable. That struck me as rather drastic considering the interest shown by both sides in doing something to liberalize trade. I am aware of the impediments caused by agricultural policies in Europe and also in the United States.
Our trade with Europe has gone from 25 to 5 per cent or 28 to 5 per cent, even though Europe represents 25 per cent of the foreign direct investment in Canada and vice versa. Perhaps that is a subject we should just drop and concentrate on what Professor Mirus refers to, a customs union with the United States.
Professor, you did mention that we should continue to emphasize to Americans Canada's importance as an economic partner to the U.S., including our vital role as a supplier of oil, natural gas and hydroelectric power to that country's market.
Yesterday, we heard that the Petroleum Producers Association of Canada is very happy with the concessions that Canada has made. I would think that in this respect — electricity and oil and natural gas — we do have some sort of customs union between Canada and the United States.
When it comes to asking those who benefit from that whether they are willing to intervene in favour of others who are not as happily served by the Americans, they say that linkage is not in their interest. I think that is worth thinking about because we are hurt by the countervailing and anti-dumping duties imposed by the Americans. We have one very important sector of our economy that is not being affected by countervailing duties because it is in the interests of the Americans. There are no lobbies, sectoral or general, in the United States to complain about petroleum and electricity imports into the United States, although up until 1970 that was certainly the case. If the Americans find other sources of petroleum and natural gas anywhere in the world, they may not feel as generous to us as they are now.
These are some of the general questions that have crossed my mind while both of you have been speaking this morning.
Professor Mirus, you said in your presentation that the European Union, which resulted from a common commitment not just to further the economic interests of member countries but to avoid war, aims at eventual federation as a political union. In the EU there are many sovereign states willing to sacrifice their independence. However, in North America, if you exclude Mexico, which is a minor player, why would Canada ever want to enter into a customs union and see eventual political union if we consider that the size of the American economy and their population is 10 times that of Canada's? We would not have very much if we entered a customs union. This thought has been expressed by others who contest the very idea of a customs union. The principal reason they invoke objections to the customs union is that they think the size of the American economy and population will just drown us.
Mr. Barry: I think that the relationship with the European Union is of vital importance to us. For starters, the more we integrate with the United States, the less visible we become elsewhere, but we are a country that has global interests. Thus, our other connections are important, including our connection with Europe.
There is a very important foundation of values and interests upon which we can build a relationship. To the extent that the Europeans realize that, and they have been the reluctant partners so far, it is in their interest to respond.
The agenda of Canada-EU relations has expanded dramatically since 1996, but it needs to be drawn together in a partnership agreement that would give strategic vision to the relationship and that would signal the importance that both sides attach to their relations. I have suggested that on many occasions, and the response is always mixed.
There is a certain inertia within the European Commission. We cannot do that because it will create unrealistic expectations. I think it would be useful to pursue it.
Senator Setlakwe: I forgot to mention that I heard for the first time last week that there is a Canada-Europe trade enhancement meeting in Greece sometime this spring and another one in December. Their purpose is to discuss anything about free trade and tariff barriers. They want to discuss, for example, regulations, investment, movement of people and professionals.
Mr. Barry: That is right. I think it would be very useful to have an agreement that drew the elements of the relationship together, and it is pretty extensive at this time. I think it is true, as you say, that trade remains at the heart of the relationship.
There is enthusiasm in some quarters for free trade and it is tepid, at best, in other quarters. The European Commission seems to regard Canada as an open but small market that would yield only limited results for the community. On the Canadian side, some of the Canadian trade people argue that we ought to focus our efforts on the U.S. market, on the WTO, where they say it matters most.
In 1999, Trade Commissioner Lamy said that he would be prepared to consider a business case for free trade. Since that time, a number of studies conducted on both sides, but particularly on the Canadian side, have shown substantial support for free trade. The first one was a study carried out by the Department of Foreign Affairs, which showed that there were gains to be made on both sides of the free trade agreement. The European Commission and the Department of Foreign Affairs on our side both agreed to conduct business surveys. The business survey on the Canadian side, released last November, showed that business was overwhelmingly in favour. The European Commission has not released its study.
In December, Commissioner Lamy seemed to have changed his tune somewhat. He said originally that he was prepared to consider the business case, but in December, just before the Canada-EU summit, he argued that market access issues should best be resolved in the Doha Round.
The Canadian government agreed to settle for a trade and investment enhancement agreement, the content of which, as far as I know, has not yet been established. Apparently this is supposed to be studied, and a report is supposed to be made to the summit in December 2003.
CERT, of course, has been at the forefront of efforts to promote free trade with the union, but their efforts, like those of the Canadian government, at least so far, have borne little fruit. It remains to be seen what the results will be of this commitment to establish a trade and investment enhancement agreement. The two sides agreed to survey the whole relationship. A report is due on that next December as well, I believe. That is where we stand at the moment.
Mr. Mirus: I want to add something to Professor Barry's comments about EU negotiations. I think that that would be time ill spent, given the trade relationship, given the complexity, given the limited number of trade negotiators we have, and given that any negotiated results would have to be consistent with NAFTA. In other words, the results could not be inconsistent with our obligations to our American partners. It is a very complex undertaking.
Senator Setlakwe: You say it would be futile on our part.
Mr. Mirus: Not futile because all trade agreements, free trade agreements, generally have some benefits.
Senator Setlakwe: It would not be very productive.
Mr. Mirus: It would not be very productive.
Senator Setlakwe: At the same time, Mexico has got a trade agreement with the Europeans. The Americans are talking to the Europeans and they are talking to Americans. Why should we not do the same?
Mr. Mirus: We can talk, but with respect to the American side of free trade with the Europeans, we will be taking over those clauses that are in there anyway, because if investment comes into North America, we must look like we are not giving different conditions to the Europeans than we are to the Americans. We would piggyback on the Americans, and I do not see negotiating with the Europeans separately as having any gains for us.
We have strong cultural, political and other ties, and I would like to see them continue, but trade negotiations are complex. We are an agricultural exporter in many respects. The Europeans are putting up barriers there, and they are not going to change. They have many problems in that respect. We are number 15 to them or number 50, so I take a dim view of that. However, I agree that free trade is better than no trade. However, you can perhaps keep this on a small flame and keep it going so that you have your Canada Europe Round Table. I am not saying that you abandon that, but I do not think we should have big hopes for quick results on that front.
With respect to your question to me about the customs union, there is a size and symmetry between Canada and the U.S. that makes it difficult to negotiate such an agreement. We do not have as much bargaining power, being the smaller unit. That said, what we really need as a small country is a rules-based approach, just as Professor Barry said. We need rules so that we can conduct our business without being subject to the whims of the superpower all the time. Therefore, an incremental move to improve the rules should be welcomed.
Now, it is not easy and there are many little roadblocks, but if we do not have the courage to think ahead 10, 15 or 20 years, we are not doing our job as academics. The status quo is perhaps not an option in the long run.
We may have an opportunity. The Americans want our energy, yes, and they take it gladly. They keep out our softwood, and I do not like that. There may be a window of opportunity to broach matters such as security and trade and then repackage the relationship. It does not hurt to talk.
Senator Setlakwe: You did link security with the possibility of a customs union. I introduced a bill in the Senate amending the Canada Customs and Revenue Act. This was before September 11. It was a forward-looking piece of legislation. The bill amended the act to the extent that we attempted, successfully, I think, to expedite shipments between the two countries using pre-inspection and preauthorization before they arrived at the point of entry. Also, the bill applied to people coming through airports — high-risk scans and the like.
As far as security is concerned, someone mentioned that there was a close relationship between Minister Manley and Tom Ridge on the American side, and that there are no real bottlenecks with regard to establishing security, certainly not an intention to do otherwise. Therefore, I think that we have acted as good neighbours and good international citizens.
Senator Di Nino: I have a comment regarding Americans understanding the importance of Canada. Canada is the biggest customer, trade partner, of 38 of the U.S. states. We are their biggest supplier of energy. We understand how that came about and we understand the rules. Surely that has to be one of the subjects that we must continuously remind them of, if we have to, and it appears as if we have to.
The other issue that you raised in my mind when you were speaking is the fact that we have another commodity — water. I really hate to bring it up, but one of these days it will come up in a way that we cannot avoid it. These folks are going to need our water. Surely that is another one of those things that can be put into the hopper during the discussion.
Mr. Barry: To get back to your first observation about getting the Canadian message across in the United States, the real problem is that there is no Canadian constituency in the United States that we can appeal to.
Senator Di Nino: No votes.
Mr. Barry: No votes. We are not like Spanish-speaking Americans or other ethnic groupings within the United States, if I can put it in those terms, or national groupings. Therefore, we have to go out and recreate this coalition every time an issue comes up. We have got to find which levers we can press, and it is not an easy job.
What I think you are moving to is some sort of suggestion that we can develop strategic leverage through the use of commodities like water and that sort of thing. I am not sure on how explicit a basis those things can be traded, a water linkage with something or an energy softwood linkage. Remember that when that was suggested last spring, there was great resistance.
I am not so sure that issues can be settled by trading sector by sector, individual sectors. I think they have to be rolled into something bigger, but if you do that, you are into a huge, complex undertaking. I like the other kinds of arrangements that have been suggested here today, like the common external tariff, and so on, because security is linked with economics and all the rest of it. They will all be in the mix somewhere, but the question is whether it will become too big to fly.
Senator Di Nino: My question is, are we using those tools? Are we communicating this information to the Americans sufficiently so that they understand it? In effect, are we doing a good job of selling ourselves? That is really what I meant. Although I agree that it would be an unruly animal to put together, are we enunciating the positive things that Canada brings to the table? That was my question. Perhaps I did not articulate it properly.
Mr. Barry: We are doing what we can, but we need the resources to do more. At the same time, I think there is a huge obstacle to overcome at this point. It is hard to overestimate the vulnerability that Americans feel right now. This means that security is an overwhelming priority. No matter whether Canada is doing everything it should, it will be very difficult to satisfy Americans at this time that we are doing everything they think needs to be done.
Having said that, I think what we are talking about here are public perceptions and legislative perceptions. We should be working with American officialdom under the radar screen to develop understandings that will work in a practical sense. I do not think that going to something overt at this time would be very productive because it would get caught up in this maelstrom of concern about security, and we may not be able to come up with anything workable in those circumstances.
Mr. Mirus: I am not far away from these comments. I do not want to raise the issue of water. I think Canadians are very sensitive about it, and I think it is perhaps better left unsaid.
The Americans are forward-looking people. They know they depend on the energy. They do want to build the Alaska pipeline through the Yukon with, perhaps, subsidies. They do know they need Canadian energy, natural gas, electricity and so on. They know that.
If we move forward from the incremental, ad hoc method of fixing things at the border now, I can envision an idea where we have common procedures at the outside and where there is a North American perimeter. Customs forms are the same and procedures are very similar. Sure, the refugee situation is different, as is Cuba. The water issue could be explored sometime in the future, perhaps under the radar screen. You do not jump forward with something like that, but it should not be left untouched. It should be explored because it might put this important trading relationship on a better footing down the road.
Down the road, there will be more integration. It is inevitable. The north-south pull is very strong. As you said, 38 U.S. states have Canada as their biggest supplier. That will to continue.
What can we do to raise the profile of Canada? We can spend money advertising in the papers, but I do not think it has a high payoff. I think we just have to make some policies.
The best advertising for Canada would be re-equipping our military, making a statement that we care about defence and that we are not free riders. That might get their attention.
Senator Setlakwe: We might also intervene with our friendly nations and convince them that peace is better than war.
The Chairman: I think we should remind ourselves that yes — and Senator Di Nino is perfectly right — we are very important to those 38 states. On the other hand, 35 per cent of our GDP is dependent on trade with the United States, and only 2 per cent of their GDP is dependent on trade with us. If they have a growth rate this year of 2.5 per cent, and they cut off all trade with Canada, they would still have a growth rate of 0.5 per cent. That perspective is very important.
I want to get back to the border issue and to possibly the European Union. We know it is not an alternative to a country that is right next-door. That is obvious. On the other hand, the EU is the only other great market in the world, its GDP, depending on the exchange rate, about equal to the United States. We have been essentially cut out of that.
When the depression in Japan ends, which is not in sight, then the Asia Pacific region will be important. The fact remains that the banking centre is Japan. The financial centre in Japan has been in a terrible state for some time.
With respect to the Canada-U.S. Free Trade Agreement and the NAFTA — and you may correct me if I am wrong — the tariff issue has pretty well been dealt with. That is not going anywhere. The real reason for the whole thing, of course, was to deal with non-tariff barriers because the Macdonald commission decided that the United States was becoming protectionist and that we needed to protect ourselves against that protectionism.
I think it is clear that dumping and countervail have not been resolved by the free trade agreement.
The other thing was that we would have access to procurement. I guess both countries would have access together. I am not certain how that has actually ended up because you do not hear much about it.
There is another issue related to a customs union or a selective customs union. The standards issue concerns me because if we accept a customs union, even a limited customs union, we may also have to accept standards that we may not agree with, such as food standards. For more than 100 years, Canada has traditionally had quite different standards in the clothing business and in the food business.
I had an interesting conversation with a dairy farmer. In the cheese business, for example, there has been a slide in Canadian food standards down to the American food standards. Many people do not realize that we are still a large exporter of cheddar cheese to England. I do not know how that happened, but you can go to a cheese-aging shed in Belleville, Ontario, and to this day all of that cheese is destined for Salisbury, England.
What about the standards issue? Canadians are concerned about sovereignty, naturally, but sovereignty is very much an issue of standards. If you have the same standards as the other country, you start to lose your sense of difference, which is the reason that the Maastricht Treaty — I watched the debate between Mitterand and the head of the French Farmer's Union, and Mitterand, in my opinion, won the debate hands down. Nevertheless, the difference in the vote in France was less than 2 per cent in favour of adopting the Maastricht Treaty because of the people's concern that they would lose their national standards for a variety of things. Whether they did or not, that is what the people thought.
Is this not a big problem? If we go into a selective customs union, the standards will be set by the larger partner. The U.S. is not ten times larger than we are, but they are certainly nine times larger because our population has been growing faster than theirs. However, does that not mean we will then be in the position of adopting American standards even more rapidly than possibly we already are?
Mr. Mirus: There is no difference between a customs union and a free trade agreement when it comes to standards because, right now, we have adopted American standards in automobiles. We have done so because it serves our purpose. We have an integrated North American automobile industry, and we do not want to have two production runs — one for Canadian standards and one for American standards. It would kill us cost wise. Therefore, we have adopted and bought into the American standards.
Is this a loss of sovereignty? We make these trade-offs, and I am not going to decide that. The people make these choices. I think it is a reasonable choice.
We do have the authority to impose our own standards under the NAFTA, and we have this authority under a customs union. The issue is this: Do we want a second production run for the softer American standards, if theirs are softer, or can we agree on a common standard?
It was very difficult for Europe to agree on a trucking standard, and they still do not have a common standard with respect to axle size, road weight and so on.
We can continue having different standards and live with them, but where the economic pressures are very strong, there would be a tendency to harmonize. That happens under a free trade agreement. That happens under a customs agreement.
The Chairman: I understand that, but what happens within a customs union when something is imported from abroad? What happens if Senator Setlakwe, in his business, wants to import something from England or the United Kingdom? The standard becomes an issue. After all, we do import goods from countries other than the United States. In the cheese business, it is a very big deal. The U.S. does not allow non-pasturized cheese into their country but Canada does. If we adopted the same standards, then I suspect that Canada would not be able to import that type of cheese.
Mr. Mirus: We would be free to have our own standards as we have now. It might occasionally be painful to have a different standard, but if we think it is important, we would have our own standard. Free trade agreement, customs union — no difference there. The difference is that there is an incremental degree of harmonization from non-members at the outside, at the border.
That is why we have not discussed Mexico because Mexico is problematic. They are not at the same stage of economic development, so they might have an option to join later. They would obviously be invited. If we move in that direction, they would be informed and kept abreast because they are good partners. Our future lies, in part, with the Mexican market also.
I think the standards issue is not a big difficulty.
Mr. Barry: I think the issue of common standards is to some degree an offset of the EU because very often decisions are made through a process of intergovernmental bargaining. Increasingly those decisions are being made on a weighted voting basis, which does not allow for a veto.
If we take a broad view of standards, things are made with the ingredients that go into them.
What about the softwood lumber case? We are really talking about standards of a particular kind, about the conditions under which logging companies can access logs on Crown land. In many ways, the issue at stake in the softwood lumber dispute between Canada and the United States is about the conditions under which softwood is exploited. It makes a difference.
The solutions that have been proposed by the Americans for resolving this dispute would see Canada moving to American standards, moving to competitive bidding and that sort of thing. That is what concerns me.
When we have a market where 87 per cent of our exports go to that market, who is going to bend? That is where I think international rules are important, and that is why I think it is very important that we stick to our guns and stay with the WTO to get a solution to this softwood lumber issue.
Senator De Bané: Professors, it is interesting to note that with you, like with other witnesses, we see different points of view. For instance, I look to Professor Barry, who states in his brief:
Even if the Bush administration were to respond favourably to Canadian proposals for closer formal arrangements, a successful outcome is not assured.
On the other hand, Professor Mirus, you are a strong advocate of a closer integration, a customs union. You are very frank when you write:
To sum up, a custom unions mean deeper economic and political integration. On economic grounds, deeper is better: simplified and more harmonized border procedures facilitate trade; common product standards enable longer production runs; and a more rational competition policy better serves the integrated market. The price to be paid for these benefits is reduced national autonomy, the cost of which is more difficult to assess.
Recently, former Minister of International Trade Roy MacLaren appeared before the committee, as well as some very competent witnesses from Toronto, and the three of them said that under no circumstances should we consider a customs union. I am not an economist like you, but I understood them to mean that a customs union with a country 10 times bigger than us means they will write the music and we will sing the song. This is why Senator Setlakwe, who is both a businessman and a lawyer, tells me that a customs union would mean a big loss of our sovereignty.
We were in Vancouver two days ago and heard testimony from Professor Helliwell of UBC. I understood from what he said that a great number of studies show that most of the NAFTA benefits for Canada have already accrued by way of free trade and closer economic integration with the United States. He said all of the studies show that future benefits would be marginal at best. That was his main argument.
Perhaps you would like to read the transcripts of our sessions with those distinguished witnesses, who said, no, do not consider a customs union. Professor Barry says that he does not see the mood in the United States for substantial talks with Canada at the moment. Professor Helliwell says, no, most of the benefits, we have them already. It would be very interesting to have both of you give your reaction to my very imperfect summary of what I have heard in other places.
Mr. Mirus: Senator De Bané, I find myself impressed by the wisdom that you bring to the table in summarizing respected economist trade policymakers like MacLaren, Helliwell and so on. I would find myself in agreement 90 per cent of the time with these two gentlemen. I think they have both done great work for Canada: in the case of Helliwell, research; in the case of MacLaren, trade relationships and negotiations. Where I disagree is that I think we underestimate the risks when we say we will stop here. We can continue ad hoc with the U.S. It works, we fix it; it works, we fix it.
The risk is significant of something else happening in North America and that the Americans will become more inward-looking and that Canada will be sideswiped. Because I see the risk as a bigger one, I would like to make this relationship into something that we can manage: where we have some input, where we talk, where we have a package, where perhaps we do not do explicit trade-offs in the press for secure access to energy. We must broach the subject with our friends and say that we may have common interests right now — security interests and resource interests. We need to build up our industry and guarantee employment for our young people in Canada so they do not have to move to the U.S. or elsewhere.
For these reasons, I am prepared, just as Don Macdonald was a long time ago, to make a leap of faith toward the free trade agreement. I think we can take a step or a leap and explore and see what we can do. If we do not explore, if we do not do it, we will never know. The Americans may not be kind disposed toward us and may not want to talk, but it is us who have to raise the issues.
I am in agreement with Helliwell. Most of the gains have been made. I am not disagreeing, but the gains are also at risk if another tower falls or if there is another inward-looking reaction in the U.S.
I am prepared to move forward a little, quietly. Trade diplomacy should be quiet, as Professor Barry has mentioned.
Mr. Barry: These ideas have been out there and floating around, starting with the common currency in 1999, I guess, and moving on through the strategic bargain. Other proposals have been made by the Coalition for Secure and Trade Efficient Borders and now by the Canadian Council for Business Executives. There has just been no reaction from the U.S. side to these proposal. Nothing. There does not seem to be any receptiveness at this time. My sense is that it is just not going to go anywhere. My sense also is that the Americans are committed to establishing closer ties with the Mexicans, and we will not get anything that the Mexicans do not get. It will take some time before that comes about.
It is like, yes, sure, you can put the idea out. I know that an analogy was drawn to the campaign prior to the Canada-United States Free Trade Agreement, but the circumstances are somewhat different now. They are somewhat less benign now than they were then.
I do not see the feasibility of going forward with this thing when we could be making progress in other ways at this time. I think that other progress is about all we can do at this time.
I have two other brief comments, the first dealing with the question of a security perimeter. A security perimeter for Canada and the United States really means that the two countries adopt common standards for entry into North American space. This, in turn, would diminish the significance of the border. At the same time, we want different policies on refugees and different standards of domestic law, such as gun control. As soon as we start talking about that, we are talking about a border again. Conceptually, it seems like a nice, easy trade-off, but in reality, the devil is in the details in so many ways on these things.
The other thing I want to say is that I think we should increase our defence spending, but I am not sure that it is a magic bullet, if I can put it in those terms. I do not think that things will suddenly change if we increase our defence spending. The primary focus really has to be on security within North America at this time.
From what I understand, Canadian and American military personnel work together very closely. Sure, it would be nice if we had more defence spending and, indeed, I think we should, if only to increase our capability so that we can make our own choices when it comes to defence policy. The danger now is that we may not be able to make them in the same way that we could otherwise if we had greater capabilities.
I do not think a giant increase will suddenly solve the problems of Canada- U.S. relations. Look at the huge disparity. The difference in military power between Canada and the United States is 30 times. It is not going to make a heck of a lot of difference.
The Chairman: Mr. Peter Berg, our chief researcher from the Library of Parliament, had a question for you.
Mr. Peter Berg, Researcher, Library of Parliament: I would like to ask Mr. Mirus about the customs union. We typically trade off the cost savings at the border for sovereignty, for a certain loss of policy autonomy.
First, you mentioned an estimate for the European Free Trade Association of 3 to 5 per cent cost savings at the border. You remove all of the complex customs procedures. Do you have an estimate for those savings with respect to Canadian GDP? I know Professor Harris has an estimate. I think it is 2 to 3 per cent of NAFTA, the portion of GDP that is NAFTA related.
Second, with respect to common external tariffs, our tariffs are roughly, on average, twice as high as the U.S.; however, I have also read that 40 per cent of tariff items are quite close, within 1 per cent. Do we harmonize down to their level, and is that a good thing for us? As well, can we do it sectorially? Can we do it for those 40 per cent? Can it be incremental?
Mr. Mirus: Both questions are technical. I do not have an estimate as Professor Harris has. My estimate is from Anne Krueger, who is now chief economist for the International Monetary Fund. She did this study when she was at Stanford, or before she actually was at Stanford. I quoted her estimate.
The rules of origin are quite cumbersome. The shipper does not see it, but there are quite a few costs involved. It is now an industry. A lobby would immediately argue against it because they would making a handsome living filling out these forms, storing them and so on.
Like many of these things, once you have them for a while, they are difficult to do away with. I am not underestimating that difficulty, but I am an academic paid to think creatively and to think forward. Therefore, I am willing to look at that issue.
With respect to the tariffs, what was the second part you asked?
Mr. Berg: Our tariffs are, on average, twice as high as the U.S. Do we harmonize downward?
If I could just sneak in one supplementary, is unilateral tariff reduction good for Canada?
Mr. Mirus: I am not arguing that this should be unilateral. However, Canada would have to pay a bit more of a price than the Americans obviously because of the size disparity. It might, in fact, have the beneficial effect of strengthening our trade relationships with Europe and others because, if we lower our tariffs on the outside, that means we get diversification of our trade away from the American giant. Because our tariffs are a little bit higher, we have incrementally more leeway to gain and, therefore, more diversify to the outside.
You would get opposition to doing it unilaterally because tariff reductions are commonly done. If I give and somebody else gives, that is quid pro quo, although economists, including Professor Helliwell and Professor Grubel, would all say, ``Do it because it is good; lower prices for consumers are good.''
I do recognize that there are political difficulties, and they should be addressed.
Mr. Barry: It has often been said that the lowering of tariffs will make us more competitive elsewhere, perhaps in Europe. It does not seem to be working. That was said before the Canada-U.S. Free Trade Agreement went into effect and before NAFTA, and our trade is still going down.
The Chairman: Thank you very much, gentlemen. This has been a very stimulating morning, and you have given us an awful lot of very important information. It will be very useful to us when we make our report on this issue.
If there is an interesting common theme from the beginning of our hearings it is that almost every witness sees a big problem with this border and with the question of security. The Americans, as Professor Barry has said, are preoccupied with their own security, which will not diminish.
The committee adjourned.