Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 1 - Evidence, February 24, 2004
OTTAWA, Tuesday, February 24, 2004
The Standing Senate Committee on Foreign Affairs met this day at 6:04 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, this evening we will continue our hearings on the Canada-United States trade relationship and the Canada-Mexico trade relationship. We are delighted that our witnesses have been so patient over our schedule so that we may benefit from their wisdom on this important subject in preparation for our travel to Mexico to hold two days of hearings on the issue. Our first witness this evening is from the NAFTA Office of Mexico in Canada, Mr. Carlos Piñera Gonzalez. We will also hear from Mr. Robert Armstrong, from the Canadian Association of Importers and Exporters; and Mr. David Winfield, from the Canadian Council for the Americas.
Mr. Carlos Piñera Gonzalez, Chief Representative, NAFTA Office of Mexico in Canada: Honourable senators, I wish to thank you for this opportunity to appear before you. I am especially glad to be with you here today to share my views on NAFTA's impacts on Mexico and the future of our trade relations in North America. I am especially glad to speak to the economic interests of our two countries. This year, we are commemorating six decades of diplomatic relations between Mexico and Canada, as well as the 10th anniversary of NAFTA.
As honourable senators are aware, NAFTA has been a major engine for economic growth in North America. I would like to take this occasion to highlight some of the most significant results of Mexico's trade liberalization process, with particular emphasis on the relationship between Canada and Mexico and some of the opportunities and challenges that we, as members of the NAFTA community, face in the context of North American integration.
I would like to begin by calling your attention to Mexico's profound transformation over the last decade. My country has made a dramatic transition from a relatively closed market to one of the most open economies in the world.
Since Mexico joined the General Agreement on Tariffs and Trade, GATT, in 1986, the expansion of foreign trade has been a key element of Mexico's strategy for sustainable economic growth. Aside from implementing a series of measures to deregulate commercial activity and encourage investment, my country has embraced international free trade agreements as a means to promote industrial competitiveness and job creation. Indeed, Mexico is at the centre of the world's most extensive network of free trade agreements, encompassing 32 countries on three continents.
Ten years ago, few could have foreseen that Mexico would become one of the top trading nations in the world and the first in Latin America. It is currently ranked as the eighth largest exporter and the seventh largest importer worldwide. Both our imports and exports increased by approximately 300 per cent between 1990 and 2003.
The North American Free Trade Agreement has been the cornerstone of our trade liberalization process. When NAFTA came into force in 1994, Mexico, Canada and the United States created the most comprehensive free trade agreement in the world. The agreement was the first of its kind to include disciplines such as investment, services, government procurement and intellectual property rights. NAFTA has since become a model for several other free trade agreements.
Ten years later, our achievements under NAFTA have surpassed all expectations. Not only is North America one of the largest free trade areas in the world, with a combined market of 360 million consumers, but it is also one of the most prosperous and integrated trade blocs.
The NAFTA countries conduct almost U.S. $2 billion in trilateral trade each day, accounting for one-third of the total trade in the region.
NAFTA has also attracted foreign direct investment that, in turn, has led to a more competitive North America and ushered in a regional boom in sectors such as automotives, electronics and textiles.
Mexico is now the third largest recipient of foreign direct investment among emerging economies. Since 1994, Mexico has received nearly $140 billion in foreign investment. This capital inflow averages nearly U.S. $14 billion per year, more than three times the annual amount received in the seven years preceding implementation of NAFTA.
Not only has the volume of capital inflows increased, the quality of the investments has also improved. International companies choose to invest in Mexico to take advantage of its vast free trade network and its ideal geographic location.
Furthermore, foreign investment in Mexico has facilitated the transfer of knowledge and technology on a large scale, enabling firms to modernize their production processes and upgrade their workers' skills.
I will now address how free trade contributes to Mexico's economic growth.
Exports have been one of the driving forces behind Mexico's economic and employment growth. For instance, the share of exports in Mexico's GDP increased from 15 per cent in 1993 to 23 per cent in 2003. At the same time, our dynamic export performance has generated nearly half of Mexico's economic growth.
Likewise, more than half of the new manufacturing jobs created in the last 10 years are export related. Moreover, these positions pay almost 40 per cent more than those in other industrial sectors.
There are still more ways in which NAFTA has played an important role in our economic development. These are best described as contributions toward regional and sectoral diversification as well as growing numbers of small and medium-sized export firms.
For instance, at the regional level, in the past, export activities were concentrated in the major cities and along the northern border. More recently, they have spread throughout the country, allowing the benefits of trade liberalization to reach a broader base of business and people.
At the sectoral level, during the 1990s, we diversified and strengthened our export base and export markets. In the early 1980s, oil and related products represented the vast majority of Mexico's exports. Today, 85 per cent of our foreign sales comprise a wide range of manufactured goods. This has enabled us to manage sharp declines in international oil prices, something that would have been practically impossible a decade ago.
Meanwhile, at the firm level, Mexico's trade and economic liberalization policies have encouraged increasing numbers of Mexican companies to participate in export-oriented activities, contributing to job creation and the development of stronger domestic markets.
Today, more than 8,000 mostly small and medium-sized enterprises are in the export business, an increase of 65 per cent since NAFTA came into effect. This is significant because it shows that our entrepreneurs are capable of competing at the international level.
Having said all this, we cannot be satisfied with the economic gains we have attained so far. Some sectors of our economy, such as agriculture, are faced with increasing socio-economic pressures that have resulted from longstanding structural deficiencies. This situation has been compounded by the subsidies that some developing countries grant to their agriculture sectors, creating unfair competition for our producers. The Mexican government is collaborating with disadvantaged sectors on a program to enhance their competitiveness and eliminate structural deficiencies.
Let me describe a little the Mexico-Canada trade and investment relationship.
When it comes to trade, there is no disputing that our two nations have greatly deepened their ties as a direct result of NAFTA. Mexico is now Canada's primary trading partner in Latin America and its fourth largest worldwide after the United States, China and Japan. The increase in bilateral trade has been remarkable. In 2003 alone, we conducted U.S. $15 billion in trade, more than three times pre-NAFTA levels.
Mexico has become one of the most important destinations for Canadian products. In fact, it was Canada's third largest export market in 2003, exceeded only by the United States and Japan.
Last year, Canadian exports to Mexico amounted to U.S. $4 billion, an increase of 250 per cent over 1993 levels. Evolving products such as automobiles and trucks, colza seeds, motor vehicle parts, wheat, steel bars and rods, and beef comprise the bulk of Canadian exports to Mexico.
On the flip side, Mexican exports to Canada have tripled in the 10 years following NAFTA's implementation, reaching almost U.S. $9 billion in 2003. The principal Mexican products exported to Canada include automobiles and trucks, motor vehicle parts, television sets, computers, oil, telephones and beer.
In terms of foreign investment, the amount of Canadian investment in Mexico has averaged U.S. $450 million per year since 1994, making Canada the fourth largest foreign investor in Mexico.
Also, as of June 2003, 1,324 companies with Canadian capital were registered in Mexico, mainly in the services, manufacturing, retail and mining sectors. As honourable senators can see, investment is another important component in our bilateral relationship.
I will now outline my thoughts on increased North American integration and the recent efforts of our governments in this regard.
As honourable senators are well aware, the governments of North America recently reaffirmed their commitment to ongoing cooperation at last October's meeting of the NAFTA Free Trade Commission in Montreal. The trade ministers of each country agreed to explore new avenues to deepen regional integration in North America.
The recent establishment of the North American Steel Trade Committee is a perfect example of this. The steel committee's objective is to promote continued consultation and cooperation on international steel policy matters and reduce remaining distortions in the North American steel market.
During the same meeting, the ministers discussed adopting a joint strategy to prepare for the impending liberalization of the international textile and apparel trade. The integration of the North American textile sector will lead to reduced costs for our producers and strengthen our competitiveness vis-à-vis other countries and regions.
Similarly, the NAFTA commission has instructed the working group for trade to analyze whether the harmonization of most favoured nation tariffs could reduce export-related transaction costs.
To complement the gains made under NAFTA, we have been working on additional ways to strengthen cooperation among our countries and create a more integrated and competitive region. To this end, Mexico and the United States have launched the Partnership for Prosperity, P4P. This initiative seeks to channel private resources toward job creation and development in the areas of Mexico that have fallen furthest behind. Currently, Canada participates in this project as an observer.
Additionally, other existing mechanisms of cooperation, such as the Smart Border Agreement and the Free and Secure Trade Program, or FAST, between Canada and the United States, as well as the Mexico-U.S. border alliance, have a direct impact on trade. These agreements are based on the principles of respect for each other's sovereignty, shared responsibility and mutual trust. They allow our countries to work bilaterally to ensure the security of our shared borders.
Honourable senators, I would like to conclude these brief thoughts with what I consider to be some of the main challenges that lie ahead.
After a decade, NAFTA's primary goals have been largely accomplished. Most goods traded within North America are now free of tariffs, and a regulatory framework that provides certainty to trade transactions and investments is firmly in place.
The North American Free Trade Agreement will continue to be an effective mechanism for promoting economic integration between Canada, Mexico and the United States through increased trade and investment flows.
Nevertheless, our desire for cooperation remains strong, and we must continue to work toward perfecting the conditions for a more competitive North America.
As we consider the future of North American relations, we must not overlook the new priorities of our respective communities. In light of this, Mexico is convinced of the need to strike a balance between efforts to ensure security and, at the same time, allow the smooth flow of goods and people throughout the region.
On the domestic front, we must diversify our export base and ensure that the benefits of free trade reach more sectors and the poorest regions of the country. Mexico enjoys several comparative advantages that will help us to improve our economic situation, namely, the geographical position that makes Mexico a natural trade hub; our extensive network of free trade agreements; and our young and skilled labour force.
In my view, Mexico is now a part of the irreversible process of economic and technological integration on a global scale, particularly with our NAFTA partners. The decisions made today will have a direct impact on the well-being of our nations tomorrow.
Senator Graham: We have been following this matter with great interest. There is so much to ask. Mr. Chairman, I wonder if I could ask about the competition from low-cost suppliers like China, what kind of an effect that is having in keeping Mexican wages comparatively low. How big an effect is the importation of goods from China having on keeping Mexican wages at a comparatively low base?
Mr. Piñera: As you know, China is one of the main competitors because it is producing the same products that Mexico is exporting worldwide. This has been affecting our participation in world markets. As an example of this, we have been reducing our participation in some markets in the United States and Canada. To face this kind of competition, we are working to take advantage of our opportunities.
We are working in the field of promoting our neighbouring sectoral agreements that give us preferential access to the main markets. Also, we are working on developing infrastructure, because we consider that Mexico could be an important contributor to logistics. We are aware of the competition that China represents for Mexico in the international markets. This is one of the first things I would like to stress in this regard.
Senator Graham: Is raising Mexico's minimum wage an effective solution to the problem of comparatively low wages in Mexico? Has consideration been given to raising minimum wages there? What would the effect of higher minimum wages be on Mexico's international competitiveness?
Mr. Piñera: As I mentioned, China is taking advantage of the wage situation. Our minimum wages are also a factor in our competitiveness. While this is an important factor for us, we have other advantages that we are developing. We are not only thinking about competing in the field of wages; we are also thinking about going beyond this. We are thinking of creating, as I mentioned before, an improved infrastructure, and other factors that allow us to increase our competitiveness. We are not only looking at the subject of wages.
Senator Graham: Can you tell us something about your labour laws and union representation in Mexico? To what extent would comparatively weak labour laws, and perhaps inadequate representation from a union's point of view, prevent wages from rising?
Mr. Piñera: Unions in Mexico represent important factors in defending the interests of workers. They are, of course, supporting workers trying to increase the level of wages. This has been an important factor in wage negotiation in Mexico.
I am no expert in the labour market, but I would say that unions have been an important factor in promoting schemes that allow workers to increase salaries and wages.
I would like to say, also, that it is important that my government is assessing some changes in the labour laws. We consider that sometimes these mechanisms are, in certain ways, preventing us from increasing the competitiveness of Mexico.
Senator Graham: Do you consider that the unions have a positive effect in your country?
Mr. Piñera: I could say that the unions have a positive effect, since they defend the interests of the workers. Also, we have to see a balance in the way that the unions promote the defence of the workers. We have to be careful, with that defence, not to go beyond the real interests of the country. That means that we would like to have a framework law that would increase our level of competition in the market.
The Chairman: I wish to remind everyone that I will be selective because we have two other witnesses sitting over there.
Senator Di Nino: Following up on Senator Graham's comments about China's manufacturing at probably lower wages, I have been told by members of your Parliament that a big problem, and it was described by them as a very big problem, is that the illegal importation of goods from countries such as China is having a major impact on the economy of Mexico. I wonder if you could give us yours thoughts on that?
Mr. Piñera: Yes, in this case, when China was negotiating its membership of the WTO, we were negotiating with them hard, because one of the main concerns was this kind of competitiveness and their prices for certain kinds of products. In that regard, we have the tools at the WTO to defend against this kind of situation when some products are entering the market at dumping prices.
When we are having these kinds of problems in Mexico, we are now invoking these kinds of instruments to defend our interests and the interests of our domestic producers.
We have several products for which we are now applying for countervailing duties because we consider that these products are entering the Mexican market at dumping prices.
The Chairman: To clarify, you are talking about products that are sold by China in Mexico, and in the view of Mexican officials, these products may be sold below their cost of production.
Senator Di Nino: It is apparent, because of the difficulty in policing the borders, that there are a lot of goods coming into Mexico. Some members of your Parliament state this and I will explore this further when we go to Mexico. A lot of goods come in containers and avoid any sort of duties. There is a huge influx of illegal products coming into the Mexican economy, which is having a tremendous impact. I do not want a long answer because I have a couple of other questions. I just wondered if you had thoughts on that.
Mr. Piñera: Are you talking about smuggling?
Senator Di Nino: That is a good word.
The Chairman: From where do they smuggle?
Mr. Piñera: We are working with our authorities, because there are a lot of claims from our producers in Mexico who have detected these kinds of practices. The authorities that apply these kinds of policies in these cases are working to prevent these practices because they harm our national producers.
Senator Di Nino: How big a problem is it?
Mr. Piñera: I do not have an estimate of the size of the problem, but I know it is now more frequent than it was in previous years.
The Chairman: Do these products come across the U.S. border, or across the Guatemalan border, or are they off- loaded in some of the ports, so that we all understand what this is all about?
Mr. Piñera: That is one of the problems. If they enter into Mexico through smuggling, it is difficult to identify from which border or port of entry they are coming. These are the kinds of problems.
Senator Di Nino: To switch subjects for a moment, I think you used the word "transformation" in relation to your economy. It has come to our attention in the last few months that the transformation of the economy has brought with it some ugly side effects. We have been hearing about the horrible situation in the Maquiladoras. In the Maquiladoras, hundreds of women are missing and dozens have been found murdered. These are principally young women who come from the very poor parts of Southern Mexico; however, some are from other parts of Central America — they come to work there — and this has become a huge problem over that last two or three years. Could you make a comment on that?
Why are manufacturers that are benefiting from the low labour costs of some of these poor people, who have come to these areas to make some money to send home to their families, not providing appropriate policing or appropriate transportation? Why can that not be part of their mandate? In effect — if you are going in to set up shop in these areas, we expect you to keep our employees safe.
Mr. Piñera: Regarding the first point, you mentioned one of the main problems that we have faced in the recent years, which is that some investment in the Maquiladoras sector has been leaving the country. Maquiladoras have emigrated to other countries, mainly China. However, the concern about these situations is an international problem of competitiveness, with Mexico losing in this regard. One of the main factors is the low wages in China. We have been working on that specific program with Maquiladoras to restore the competitiveness of this sector. Now we are designing programs with the idea of bringing more infrastructure and social programs to recover the competitiveness. This will allow these people to recover their jobs. The Maquiladoras is one of the most important factors for our exports and we are now working to create a program to increase the competitiveness in this area.
What is the second part of your question?
Senator Di Nino: I mentioned all the young women who are being murdered in these areas and wondered if there is some attempt to police the areas. I understand many of them are abducted while going to and from work. Why could there not be some transportation provided? It is an ugly side of the transformation of the economy, which will have an impact on how NAFTA is viewed by the North Americans, the Mexicans and the world.
Mr. Piñera: Yes, this is a problem that the authorities in Mexico are now working on. President Fox is even creating a commission to conduct an investigation and find a solution to this kind of problem, with the idea of developing an infrastructure of transportation and providing safety to the people working in that area. It has an impact on the image of the country, and a good image is needed to attract investment. As we are working through this commission to clarify the problem, we are also working on recovering the investment confidence to the levels that we had previously, so that this kind of investment will not leave our country.
Senator Grafstein: I will focus on NAFTA for a moment. We have a trade deficit of $4 billion with Mexico. What is your trade situation with the United States? Are you in deficit or do you have a surplus with the United States?
Mr. Piñera: We have a surplus with the United States. My colleagues can help me with the numbers. In the first years of NAFTA, we had a deficit with the United States, and now we have a surplus.
Senator Grafstein: A surplus. Can we get those numbers? This brings me to the heart of my question. I will try to be clear about this. There is growing criticism in the United States of NAFTA. The presidential candidates are all complaining about the loss of jobs as a result of NAFTA. At least one, if not two, presidential candidates have said that if they are elected, they will renegotiate NAFTA because of the public pressure relating to loss of industrial jobs to lower cost areas, which I assume includes Canada and Mexico.
Is there a similar issue in Mexico about disengaging from NAFTA because of concerns about how it is working?
Mr. Piñera: This is not the first time that NAFTA has been under pressure during the political campaigns. The answer is rather easy, because since NAFTA has shown its positive effects, if the three countries renegotiate it, we might be opening Pandora's box.
It means something different in the agenda of each country. Canada has its own interests; Mexico has its own interests; the United States has its own interests. If we start to work to renegotiate NAFTA, the result at the end of these negotiations might not be exactly what we want.
I am trying to say that NAFTA has proved its importance. It is not a perfect mechanism. We can enhance it, but we have the tools within NAFTA to deal with these kinds of things. When we think about renegotiating, maybe there are political procedures or other situations that might be more convenient than the way that the agreement works so far.
Senator Grafstein: There is deep criticism in Canada about the ineffectiveness of dispute mechanisms under NAFTA. We follow this issue. Is there similar criticism in Mexico about the ineffectiveness of the NAFTA dispute settlement mechanisms?
Mr. Piñera: Yes. As you know, our main disputes are with the United States, the same as you. I would say we have a mixed opinion. There are some aspects where the dispute settlement mechanism has been working very well, and others where it has not worked in a manner that solved the problem in the way we would desire. This is one of the elements that are on the international agenda, mainly at the WTO, because our dispute settlement is based on these kinds of mechanisms. We are proposing in this area some changes in timing, because sometimes it takes a long time to implement a decision, and that is one area that we are working on to improve so that the decisions of these panels can take effect in a more appropriate and rapid time period.
The Chairman: I will refrain from asking if Mexico is taking more and more cases to the WTO, as we are doing in Canada. I would remind members that, to some extent, our people taking notes are really preparing for our report. If we do not have these things in the evidence, it is difficult for us to come up with a good report.
Senator Sparrow: I want to go back to Senator Graham's questioning about the labour laws in Mexico. Our reasons for going into the agreement were twofold. One was to increase trade, but also our hope was to assist Mexico in raising the standard of living of its people. We discussed that.
The question that arises, then, is whether the government dictates the labour laws of Mexico. Are there basically a minimum wage and a maximum wage that we are not familiar with in Canada? Does the Mexican government control the labour unions to establish those salaries? A Canadian company going to Mexico says, "We are required to pay $3 per hour," or whatever the figure may be, when the labour rate in Canada might be $10 or $12 or $15 an hour, but we are held back from actually increasing the standard of living of workers because of those laws.
Mr. Piñera: I must say that I am not an expert in labour law, but the commission that establishes the wages in Mexico is a governmental commission, and they establish the minimum wage yearly, depending on the region. We have different wages depending on the region. They consider several elements. The union is one part of the negotiations, and they also consider the inflation rate and the purchasing power of the worker. Perhaps I can get some information on this system, and I will be delighted to send you something explaining, in a broad manner, exactly how this works in this field in Mexico.
Senator Sparrow: Do you have an average industrial wage for Mexico that you can give to us today?
Mr. Piñera: Unfortunately I do not have that kind of average with me, but I could send you that information.
The Chairman: If you could send that to the Chair, I will ensure that the members of the committee get it.
Senator Sparrow: Do you get representations in your office from Canadian companies that may be experiencing difficulty in doing business in Mexico, and if so, could you give us some idea of what those problems are? We have other witnesses this evening of whom the same question will be asked, and they may have some opinions, but surely your office would be experiencing some concerns from industries. What might they be?
Mr. Piñera: We have receives several requests in our office from people interested in doing business in Mexico. The most frequent request is to know exactly how our legal system works as a whole. They sometimes ask for the level of wages, the legal framework that applies in some states specifically, the incentives that Mexico grants for some areas. I have to say that Mexico does not grant benefits or subsidies in any area. It is not our policy. They ask for general information, mainly regarding our legal framework, our regime of investment, some administrative procedures. Sometimes they ask for information regarding prices in some markets, and we have this kind of information. We answer these requests with the appropriate information or by putting them in contact with the appropriate offices in Mexico.
Senator Sparrow: I was talking about the existing businesses in Mexico. You are talking about those who are questioning the program with the anticipation of moving there. I am asking about those that are there and the adverse experiences they are having that would be brought to your attention.
Mr. Piñera: I participated last week with Minister Peterson, Minister of International Trade, in Mexico at a table with some important Canadian business persons who have investments in Mexico. I heard from them that things are now working well in Mexico. To be frank, I did not hear any claim in that regard. I mentioned in my presentation that there are more than 1,300 enterprises with Canadian investment in Mexico, and this reflects the huge potential that we have in the field of business. I have not heard anything about situations regarding wages and those kinds of things.
The Chairman: I wish to thank our witness. I know Senator Mahovlich would like to ask a question, but it will become quite late if we do not end this now because we have so many questions. I want to thank the witness on your behalf. I also want to remind everyone, while you are here, that at 4 o'clock tomorrow we have a teleconferencing call with the Carnegie Foundation Endowment and the World Bank. This will give us another opportunity to get answers to the questions that Senator Sparrow, Senator Grafstein and others have.
Mr. Piñera: Thank you very much for the invitation.
The Chairman: Thank you very much.
Next, senators, we will hear from Mr. Armstrong, followed by Mr. Winfield.
Mr. Robert Armstrong, President and CEO, Canadian Association of Importers and Exporters: It is an honour to be here tonight to speak to your committee. I am most pleased to hear that you are on your way to Mexico. I will be there next week participating in our Canada-Mexico chamber. We are having a 10th anniversary of NAFTA celebration with President Fox. I will probably be repeating there some of what I will talk about today, but in our association, Mexico is very dear to our hearts, as it is part of NAFTA. I am also President of the Association of International Automobile Manufacturers of Canada, and we have very integrated automobile manufacturing, assembly, et cetera, in all three countries. Mr. Winfield is my chairman. I am also President of the Canadian Council of the Americas, and we focus a lot on Mexico.
I spend a fair amount of time in Mexico. About 10 years ago, when we were doing the NAFTA negotiations, I travelled incognito by truck to Mexico and reported my findings to then President Salinas. At that time, the Mexican border was considered a black hole, and it was pretty interesting. Today, 10 years later, it is no longer a black hole. Our relationship with Mexico, from a pure trade and movement of goods standpoint, is 120 per cent better than it was 10 years ago. In fact, today we have excellent railways. Both CP and CN have excellent rail systems and the north-south movement of goods to Canada-U.S.-Mexico by train is better than it is within our own country now. We also have excellent truck highways. When you look at the whole, you have to look at Mexico as part of NAFTA. It is overwhelmed by our $1.3 billion a day in trade with the United States. I am here to give just a few messages today that I hope you will take as food for thought.
Obviously, in Mexico's case, we buy far more than we sell. Trade statistics are always distorted by direct shipments, transshipments, and so on, but we are probably buying about four to five times as much as we are selling, which means we are not doing as good a job as we should vis-à-vis selling into Mexico. In our association, we meet a lot of delegations from Mexico, such as governors from the various states, who bring their business people there. They are always inviting us to tour their factories, their warehouses and their distribution centres to show us how we should do business there. I say to them, "How would you like to come and tour our country and see what we can do for you, too?" We must work harder at that.
We need to see Mexico as the good market that it can be for us. Again, if you look at our dependence on the U.S. market, what is going on in the U.S. today should encourage Canada to seek closer economic and political links with Mexico. As we heard earlier from one of the senators, protectionism has obviously resurfaced in the United States. It is an election year. Canada and Mexico have a shared interest in maintaining our other, secure access to the U.S. marketplace, but we need to work together to ensure that Americans keep that commitment to keep the border open for our goods and for each other.
Canada's most important trade objective must be, first, secure access to the U.S. marketplace, and then ultimately, to Mexico. I will not go into all this because you have heard about it during the current U.S. elections. However, they talk about tearing up the NAFTA. When you look at that on the surface, you think that Americans may say, "That is a wonderful thing, because we have lost jobs to Mexico." The reality, however, is that they have actually gained. It is different industries that have changed, just like in Canada. If they were to take away the NAFTA, then the flood of Chinese imports, to be honest, would probably put a lot of U.S. factories out of business, just like it would in this country. NAFTA is a good thing, in terms of a trading bloc, and should be kept that way. We must look at that. Various bills are being introduced to counter unfair competition in the U.S. If you look at it all on the surface, a lot of our companies use Mexico for low-cost inputs. If we are to compete with China in the future, the major thing we need as Canadian manufacturers is the lowest cost inputs we can get. If they cannot come from a Canadian supplier or an American supplier, then Mexico is our next choice, because of the NAFTA preferential status and the better logistical costs of getting a product to Mexico. We need Mexico in the future to ensure that our manufacturers can remain competitive at home.
We also do a lot of sub-assembly in the auto industry. It is very integrated. When we used to send wiring harnesses, everyone said that we only did wiring harnesses in Mexico. On your visit, however, you will see the sophisticated manufacturing plants that are now located in Mexico. There is a lot of new technology there. You need only look at how much direct foreign investment has gone there, especially in the auto industry, to see how it serves our country well, as it does theirs. We feed on each other.
In the current circumstances, we need to ensure that North American integration is not disrupted. This must be a priority for Canada. Secure access to the U.S. is being readdressed by the new Prime Minister, and we support those efforts. However, we also support the effort and the work of this committee. We like your initiative to study our relationship with Mexico because we think it is vitally important.
After all, we signed the free trade agreement, the NAFTA, and we are basically citizens of North America. Mexico is an important part of the North American marketplace and it is a competitor with us for foreign direct investment, but tends to be a very fair competitor. It provides labour efficiencies that improve the competitiveness of industry in all three countries, especially in light of the competition that is now coming from China.
Earlier, we were talking about, when I received surveys from my members over the years, how much has changed from 10 years ago to now. Now the main concern is sometimes getting paid. Five years ago it was: "I made a sale and never heard from them again." Now there is more consistency. That is one of the good things we are seeing.
Canadians take the time to cultivate relationships. As we do a better job at that, we find Mexicans to be good partners. It is taking a little longer, but our trade will get better. Again, they are a lot like us. They like to be friendly with us. You will see that when you are on your trip. Those who have travelled there know that they like to know you to do business with you. I know I am very well treated in Mexico. I enjoy going there. They have come a long way. I was also there during the last three elections as an observer with Elections Canada, in both the rich and poor parts of Mexico, so my eyes were opened on many things there.
Again, Mexico is forging a hub and spoke, a set of free trade arrangements with the European Union, with Mercosur, with Japan and other key markets that we do not have. Canada is not part of any of those arrangements. The question arises as to the degree to which trade and investment diversion could occur. We need to be looking at that. If Mexico is positioning itself well with the rest of the world, it could have negative implications for us if we are not working with them.
It would be problematic if Canada were to attempt to develop a closer relationship with the United States at the expense of our relationship with Mexico. That is one thing I would really caution you on. Theoretically, Canada might obtain a competitive advantage over Mexico if it could develop a more preferential relationship with the United States, but I think it flies in the face of the integrated marketplace that NAFTA represents; and maybe Mexico could do the same. If you remember, when President Bush was first elected, his first visitor was President Fox. Canadians thought right away, "There goes our advantage. Now they are buddies with Mexico and we are out." However, that has not happened. I think Canada and Mexico would be put in a worse situation if the United States pitted one against the other. I do not think that would ever be good for us. It is better to treat us all as North American partners.
Canadian-Mexican cooperation is also needed to ensure NAFTA's integrity in our hemispheric trade negotiations. The FTAA, free trade in the Americas, as some of you know, is obviously in trouble. What has happened just recently is that it appears that Canada, the United States and 13 other nations want to negotiate a purely lateral accord, leaving Mercosur to pursue its own unique brand of South American integration. It all tends to have to do with social policies and social development.
Canada and Mexico need to cooperate even in those circumstances where the United States is pursuing further trade liberalization in the hemisphere, because the U.S. is making all its bilateral agreements. We need to really look at that situation and make sure Mexico is included in any effort to develop and harmonize regulations within North America. You will often hear from Canadians, too, about harmonization standards. It is still an issue in the auto industry. We want harmonized standards with the United States as well, but we need more harmonization of standards throughout North America. That would benefit everyone, but we certainly need to raise the regulatory standards within Mexico. That is one of the things they really need to improve on.
We need to improve the enforcement of the regulations that exist. That is another thing they are not very good at.
The performance of Mexico is an example of the benefits of trade liberalization for the Latin American countries. I will not get into that, as it is in my paper, but I wanted to end with this. At a time when market liberalization is being challenged in Latin America, Mexico's performance within NAFTA becomes an important test case and symbol within the hemisphere. After 10 years, there are many attempts to evaluate the impact that NAFTA has had on Mexico and the kinds of lessons that may be drawn from its economic performance over the past decade.
I would submit to you, and I put it into my paper for you, some excerpts from a World Bank study on the effect that NAFTA has had on the economic performance of Mexico. It is probably one of the best studies I have seen so far. The report's main conclusion regarding NAFTA is that the treaty has helped Mexico get closer to the levels of development of its NAFTA partners. The research suggests, for example, that Mexico's global exports would have been about 25 per cent lower without NAFTA, and foreign direct investment would have been 40 per cent less. Again, you can see where NAFTA has been good for Mexico.
Also, the amount of time required for Mexican manufacturers to adopt U.S. technological innovations has been cut in half. Trade can probably take some credit for moderate declines in poverty and has likely had positive impacts on the number and quality of jobs. However, NAFTA is not enough to ensure economic convergence among North American countries and regions. This reflects both the limitations of NAFTA's design and, more importantly, pending domestic reforms. Again, I am sure you will see some of this on your trip so I will not go further into it. It is in my paper for you to read.
It is clear from Canada's Innovation Strategy that we also face some similar challenges in R&D and innovation that Mexico is facing, although perhaps not as severe. It raises the issue of ways in which Canada and Mexico might develop collaborative programs. I hope that is something you may learn about on your trip, because I think business and government in both countries need to work together. Maybe we can collaborate on some new programs.
In conclusion, with regard to fostering a strategically more important relationship with Mexico, that relationship would not be very important if it was strictly from the standpoint of bilateral trade. If that were all we cared about in Mexico, then our relationship would not be very good, even given the possibility of future growth.
Canada's relationship, however, becomes extremely important if it is viewed from the standpoint of maintaining market access to the United States and promoting trade liberalization within the hemisphere in which we live. This is especially so in a time marked by increasing unilateralism and the threat of protectionism in the United States.
Honourable senators, I want to tell you that I think we have come a long way in 10 years in our relationship with Mexico; yet there is still a long way to go.
Mr. David Winfield, Chairman, Canadian Council for the Americas: Honourable senators, it is a great pleasure to be with you this evening.
I will comment briefly on my background, for those who have not met me before or do not know me. I spent 30 years in the Canadian foreign service as a trade commissioner. Close to 50 per cent of my time in the foreign service was spent dealing with Latin America and with Mexico.
I first started working with Mexico in 1976. I had two assignments in the country. I had the privilege of visiting Mexico many times on official business. When I left the government to work for Nortel, one of my most important areas of responsibility was Mexico. I am Canadian, but my heart is very much aligned with Mexico.
I am here today as Chairman of the Canadian Council for the Americas. This is Canada's sole business organization that focuses on fostering business relationships between Canadian business and businesses in the Caribbean and Latin America. It is national in scope, with chapters from Vancouver through to Montreal. We are now, as of last year, affiliated with the Canadian Association of Exporters and Importers, and my dear friend Mr. Armstrong is our very active and able president.
When I was contemplating what I should say to you today, I had a list of about 16 or 17 things that I thought I should mention, but realizing that time is precious, I think there are basically three things I want to say.
First — and something that Mr. Armstrong and Mr. Piñera mentioned — the relationship with Mexico has gone from being relatively unimportant in the 1980s to one that is regarded by both countries and both governments as a strategic relationship. It is a broad, complex, fascinating, expanding relationship that needs to be nurtured; it needs to be developed and it needs the efforts of not just the government but also the private sector, the academic community and civil society in Canada and Mexico, to meet the full potential that relationship can offer.
Second, we need to continue to build knowledge and understanding of one another. We did a lot of work prior to and during the negotiation of the NAFTA. Senator Eyton was one of the leaders in that area, as was Senator Austin. We were grateful for the leadership they showed in terms of the business community and of government in helping to build bridges that were very important and that have led to this expansion. I will talk a little about the relationship and where I think it should be going.
The third thing is that NAFTA was only the beginning. There are those who say that we negotiated the NAFTA agreement, it is done, let us get on with other things. If NAFTA is going to succeed as it should for each of the three countries, but particularly from the Canadian perspective, then we need to continue to work hard on some of the issues that continue to face us.
We need our trade negotiators to be in contact with the private sector through associations such as ours to understand the challenges the private sector is facing in its dealings with Mexico. We need to look at issues, for example, like the rules of origin. They are complex and need to be simplified, and that work apparently is still ongoing. We need to look at not only harmonization of standards, but also harmonization of tariffs in order to, in the end, lower transaction costs and improve access to the marketplace.
There is one final, serious issue that probably is not for us to resolve, although at one point during the negotiations we thought we were in the lead on it, and that is access for trucks across the border into Mexico. That one really is a U.S.-Mexico issue, not so much a Canadian issue, although we lose because the Americans and Mexicans are not able to come to agreement on that.
To go back to my first point, when I consider where we were when I was on my first assignment in Mexico in 1980 to 1983, we were full of optimism and excitement. President Lopez Portillo was a friend of Prime Minister Trudeau — he visited Canada — we had visits to Mexico, we had more economic and other commissions meeting, but that pales in comparison with what was done during the negotiation of the NAFTA. It seems to me that following the negotiation, there was a sort of sigh of relief, I suppose, that it was over and we could sit back and relax. Well, as I have said, we cannot.
The good news is, of course, we have not. Apparently, the Canadian and Mexican governments have negotiated over 60 different bilateral cooperation agreements in a host of areas. Some of the areas are concerned with institution building. For example, Elections Canada was very much involved, which was not publicly known, in electoral reform in Mexico, and I personally believe that if it had not been for their influence and advice, the elections, certainly in 2000 and in 1996, would not have been, as they were heralded as being, the cleanest elections in Mexican history.
Academic exchanges are crucially important, because if we can have our young people understand what our two cultures and countries are all about, we can start to build a truly fruitful and broad-based relationship. It is encouraging to see that 10,000 Mexican students come to Canada every year, both to study English as a second language and to study in our universities, and those numbers are rising.
I do not know what the numbers are for Canada at the moment, but they certainly are nowhere near 10,000. One only needs to look outside the window, particularly if you were in Toronto this morning, at the snow falling and the messy roads, to realize that Mexico is a much better place to be during certain times of the year, if not throughout the year.
Canadian and Mexican universities have done a great deal to forge these sorts of relationships. The Schulich School of Business, for example, has an internship program with the Tec de Monterrey in Mexico, which is working well. I am on the international advisory board of the Schulich School and I follow that. I know Ivey and Toronto are also building relationships, as are universities across the country. We need to do more of that.
We probably need to start even at the high school level. There are a good number of private schools in Canada that receive Mexican students. Why could we not maybe send our kids to Mexico for a year to learn Spanish? It is something we need to think about.
I realize I am talking outside the area of trade at this moment, but one of the things that impressed me hugely when I was in Mexico was the success that greeted Canadian cultural activities when we brought, for example, different ballet and musical groups and Canadian artists there. We had writers' symposia and so on.
Senator Mahovlich: Were there any hockey teams?
Mr. Winfield: Unfortunately, no, but it was only during my last year or so that they had ice in Mexico City, senator.
It is the same in sport. Despite the fact there is very stiff competition, the Canadian national soccer team is well respected and well regarded in Mexico. Of course, if you have 150,000 people in a stadium to watch a match and it is on every television, it makes a huge impression.
These are ways we can build a better understanding between Canada and Mexico, such as bringing Mexican sports teams, Mexican art, cultural activities and events to Canada to help build that knowledge that is so important to the future of the relationship.
In the area of the press, we need to do far more in terms of having Canadian press representatives actually on the ground in Mexico. I know Paul Knox of The Globe and Mail does a fantastic job, but he is resident here when he is not in Afghanistan or elsewhere. We need to look at that as well.
Finally, in the area of government and political exchanges, I welcome immensely the visit you will be making next week. These sorts of exchanges among senators, congressmen, congresswomen and MPs are important. We should continue to foster those sorts of exchanges, because in the end, the Mexicans look at us as being a softer, maybe easier country to understand and to deal with, and they look at our institutions as being very good examples. Maybe they do not fit within the congressional system, but they like the way Canadians manage their country.
We have a tremendous base to build on and a future to work towards.
Senator Mahovlich: Do the Mexicans have the same problem that we have when our dollar fluctuates against the American dollar? If the American dollar drops, our dollar goes up and our manufacturers are in trouble. Do we have a problem with our trade with Mexico when that happens, or does the peso just stay with the American dollar?
Mr. Winfield: The peso stays with the American dollar, but obviously, as our dollar fluctuates against the U.S. dollar, it fluctuates against the peso.
The Chairman: Do you mean to tell me that the Mexican peso is now fixed to the U.S. dollar?
Mr. Winfield: No, it is not, it fluctuates.
The Chairman: Is it a tri-fluctuation?
Mr. Winfield: It is a tri-fluctuation, yes, but most Mexican businesses will want their prices for imports in U.S. dollars and they will quote U.S. dollars, not pesos. The medium of exchange is the U.S. dollar, which in turn causes somewhat of a problem in that we are both adjusting our prices to that medium of exchange.
It is a leveller, a common denominator, if you like, between us. To the extent that either one of our currencies is fluctuating against the U.S. dollar, there will be an impact.
[Translation]
Senator De Bané: Mr. Winfield, would it be accurate to say that Canada was instrumental in bringing Mexico into NAFTA? It began as an agreement between Canada and the United States, and, as I understand it, Canada convinced President Bush to allow Mexico to join us. Is that correct?
[English]
Mr. Winfield: It is an interesting point of discussion, senator. In fact there was discussion of a free trade agreement between Mexico and the United States prior to any discussion with Canada. It was when President Salinas came back from his trip to Europe in the early part of 1990 — and I had the privilege to call on him — that he said, "We have to be thinking of something broader than our relations with Europe. We need to do something about our relations in North America." He met with Prime Minister Mulroney on March 17, 1990, and they talked about this issue at length in the garden of Los Pinos. The conclusion was that because of the fierce debate that had taken place in Canada over the FTA, if Mexico wanted to go ahead with the United States and establish a free trade agreement, then it should do so.
President Salinas announced this publicly about a month and a half later, after people in Ottawa had been able to think through what the implications of this might be. I can tell you that the Mexican embassy in Ottawa and the Canadian embassy in Mexico City were hard at work to make sure Canada came to the table.
President Salinas was convinced that a free trade agreement would give him access to his most important market.
Senator De Bané: Is it true that Canada opened the door for Mexico with President Bush?
Mr. Winfield: No.
Senator De Bané: Tell me something about this NAFTA between the three countries. From my perspective, Mexico looks to NAFTA as a way to solve its immigration problem. The United States looks to NAFTA as a way to deal with their security and energy needs. Canada looks to NAFTA from the point of view of exports to the United States, of having a secure market. Each of them looks to NAFTA from a different angle. Obviously, with respect to immigration, which is so important to Mexico and the United States, we are too far away. That is not a problem there.
Do you really see a day when those three countries will have a harmonious view of what should be done, or is the interest of each is so different that you will see those — as Senator Grafstein was saying — candidates for the presidency of the United States saying, "I will tear that agreement apart"? We are saying, "Well, we want this, but why will Mexico not allow our oil companies to be active in their country?" Each is pushing. You know so much about that country, and I would be interested in having your views.
Mr. Winfield: I think, senator, from the Mexican perspective, and excuse me for speaking for Mexico at this moment, that the important thing is access to the U.S. market for its goods and services. First, it is important because, as you can see from the numbers that were quoted by Mr. Armstrong and Mr. Piñera, the exports from Mexico to the U.S. have grown tremendously and the potential for further growth is immense, which helps to create jobs in Mexico.
Second, the broad provisions of the NAFTA do help to safeguard investment and the Mexicans want to continue to attract U.S. investment into Mexico. Over the 10 years of the agreement, Mexico attracted approximately $12 billion a year on average from the U.S. That is huge when you consider that it is much more than went to India, for example. China is the only country that received more. That is a second objective, from the Mexican perspective — to continue to attract investments. They have to do other things, and we can talk about that if we have time.
From the U.S. perspective, and I agree with your point about energy, already the three countries are talking about energy relations, looking at energy supply, looking at ways in which we can better coordinate the grids and the energy networks. Over time, these types of cooperative arrangements will grow, provided there is an interest in each of the countries. There may be bilateral arrangements, and you know well yourself, sir, that Canada and the U.S. are talking about security, and Mexico and the U.S. are talking about security issues. That is the way we would want to continue to proceed for the moment. I understand there are discussions between Canada and Mexico on security issues, but the real issues are at our respective borders.
All of you have been in politics, or much closer to politics than I have, and you know that sometimes, politicians can be exuberant in the way they describe their reaction to certain issues. I would find it very difficult to believe, in today's reality, that if one of the candidates who are currently running for the Democratic leadership were to become president, he would tear up the NAFTA. I just cannot see it being a practical or common sense thing to do. However, I am biased.
Senator Andreychuk: I am glad you gave the background because you have a longer history on this than I, but certainly we had great discussions as to whether we should enter into an agreement with Mexico, and we built the justification that it is better to work from within than be standing outside watching a relationship develop that inevitably would hurt us.
Now at that time, we said that NAFTA was all and that bilateral arrangements, et cetera, would be left to cultural activities, and we have to overcome that to try to build greater linkages with Mexico.
Ten years later, you are telling me we have made progress, but we have a way to go. Do we just keep doing more of the same, or what can we do 10 years down the line that is different? As a little preface, Mexico did not stand still. What it has done with Europe, et cetera, has been very much a factor in with how much time they spend on Canada. What do we do beyond what we have been doing? Are there any other incentives, trade arrangements or opportunities that we should be following, particularly as this Foreign Affairs Committee will perhaps be giving advice to the government as to what it should do?
Mr. Winfield: First, I think that the arguments you sometimes see in the press and from certain learned ladies and gentlemen, that we should focus all of our effort on the relationship with the United States, is a fallacy. It is not a fallacy that the relationship with the United States is important to us, but I think of my grandmother's adage about eggs in baskets, and having been a trade commissioner in the foreign service for a good part of my life, I can appreciate the need for us to diversify the markets into which we are exporting and with which we are trading.
It would be a huge mistake if we stopped promoting Canadian exports outside of the United States. The Canadian Council for the Americas is currently preparing a brief that we will present to the Minister of International Trade urging that the ministry enter into negotiations with Mercosur, particularly with the Brazilians, because that is the one remaining large market in this hemisphere that we have not done much about, other than to fight with them; but we are not here to talk about Brazil.
In respect of our relationship with Mexico, in the end, it takes time and effort. Nothing can be done quickly, as we have seen with the European Union. It took them many years to develop the various instruments they have; and I am not suggesting that we take that direction. To build the kind of relationship that we are talking about, which is broad, healthy and complex, takes education, time, effort and investment; and all members and sectors of the communities, academic and cultural, members of political organizations, and governments talking to one another and exchanging views on institution building. That cannot be done quickly, so, more of the same, yes.
I would have liked to see new resources in other parts of the world, rather than opening many new consulates in the United States. That was a decision that the government took. The activities that the Canadian embassy in Mexico City and consulates are embarking on are broad range. They will have about two activities per day, such as ministerial visits, the visit of your committee members, trade missions and such. I am not sure they could do much more, but you have to keep at it. In Japanese they call it "watering the roots," developing and nurturing the plant that is the relationship.
Senator Eyton: I suppose my question is directed to both Mr. Armstrong and Mr. Winfield. Would you quantify the relationships between Canada and Mexico? I want to take us back to 1990, when most Canadians knew Mexico as a place to visit for sun and sand. At the time, a few large corporations did business with Mexico and the business was two-way. We have many measures of the dollar relationship from the trade back and forth, but I would like you to comment on the depth of the business trade and the investment relationship now. I remember your telling me, years ago when you were the ambassador, Mr. Piñera, the number of commercial visits you had in one year and the dramatic escalation of that over just a few years, even while NAFTA was being settled; and I am sure that has continued. Are smaller businesses aware of the opportunities that go both ways between Mexico and Canada?
Mr. Armstrong: Small business has taken a while to get on the bandwagon, but the provinces, their trade relationships and trade missions, and ours, do more with small business — and our big companies are there. As in other parts of the world, I always measure success in terms of SMEs, because I think it is more important for a country such as Canada to brag about how many small businesses do business. In my association, probably three quarters of the members are SMEs, many of whom do business with Mexico and do quite well. They are finding that they travel to Mexico more frequently, vacation there and even retire there. I believe that the latest figure is 55,000 Canadians who have retired to one part of the country.
Some of my members found business opportunities through the tourist industry. Our own travel to Cancun and Puerto Vallarta — beyond Acapulco — has grown so much that many of our exporters are small businesses selling the same services that they sell here in Canada, to Fairmont Hotels and the like. It is interesting.
When I travel across Canada to make speeches, I try to get Canadians to understand that they have a variety of needs. What is the population of Mexico? I believe that it is 100 million, of which at least 35 to 40 million have money to spend. As well, they are a huge tourist destination, not only for Canada but also for the world. There is one of the greatest opportunities for Canadian businesses — the tourist industry. Just think of all the things you could sell to the tourist industry; it is enormous.
Senator Eyton: On a slightly different tack, when NAFTA was being negotiated, there was a broad difference between the Mexican and the Canadian business communities and between the negotiators from a variety of sources. The Mexican and Canadian negotiators discovered that, working together for a common cause, they could make points sitting opposite the big American behemoth that they could not on their own.
Is there opportunity now to work with the Mexicans in common cause on some of the great issues, such as NAFTA- plus, particularly given that Mexico has been much more aggressive in signing free trade agreements? They may be a greater hub and spoke than Canada is today. Is there opportunity for us to work together at different levels, opposite America, so that we can improve NAFTA and its reach?
Mr. Winfield: The short answer is, I believe so. Mr. Armstrong is probably in a better position to talk about the detail. I will go back to one of the debates and discussions we had in Mexico during my travels around the country to talk about Canada and NAFTA. Many Mexicans felt that finding simple solutions to the difficulties of NAFTA, should there be any, would be cause for Canadians and Mexicans to get together and "bring those dastardly Americans to their knees." Not only as a matter of policy, but also as a matter of common sense, I tried to dissuade the Mexicans from doing that on broad policy issues, and certainly in terms of negotiation, unless, of course, there were some issue of common cause that could be followed.
I think there may be opportunities in terms of company-to-company, but it is different. When business people can get together and talk about the things that are of concern to them and identify how they might go about resolving them, you could find how to do that.
On a government-to-government level, I suspect we already do that in a number of areas. However, in the past, particularly in the Department of Foreign Affairs and International Trade, the reality is that the relationship with the United States has been fragile for a host of reasons. Things changed on 9/11. People have been focusing on how we can deal bilaterally with the Americans and keep the border open to keep the goods flowing. People have not had the time or energy to really look at how we might work with the Mexicans, should there be issues that need work. Certainly, if I were in Mexico at this moment I would look into that. We do work together on issues of foreign policy at the United Nations, so channels have clearly been established.
Mr. Armstrong: In November, we had a meeting in Montreal with the three trade ministers. I had an opportunity to address them on the issue of simplifying rules of origin and paper documentation for small business among three countries. The Mexican minister and the U.S. trade representative picked up on it. They actually kept coming back to ask me more about it. Since then, I have fed them more information from actual businesses in all three countries.
There is an example of something that they are looking at again. There are a lot of businesses that do not take advantage of NAFTA because of the documentation necessary to comply with the rules of origin, et cetera. They do not bother filling it out. It mostly impacts small business in all three countries, so it behooves us to continue to work on that.
If we in business do not press the government to do that and work with them, it will never happen, so we have to continue to work together to ensure that they follow up and that their officials make it happen.
The Chairman: This committee has looked extensively at the free trade agreement and we have issued a report on Chapter 1, exchange rates. We have heard people say that they will rip up the FTA. Well, the tariff schedule ended in 1996 or 1997, so what will they do? Will they put the tariffs back on again? That would be the result. Is that what they are contemplating? The dispute settlement mechanism has pretty well ended because it has been so unsuccessful that we go to the WTO.
In the case of Mexico, and given these comments that we have heard from some American candidates about ripping up NAFTA, what would they rip up? Has the tariff schedule ended between Mexico, the U.S. and Canada? That would involve putting tariffs back on, I presume. Is that what they are talking about?
Mr. Armstrong: First, they have high tariffs.
The Chairman: There is really nothing to rip up. It is all ended. The deal is done; it has been ended for some time, so let us put that story to rest, because there is nothing to rip up. You would have to make an active intervention by increasing tariffs and things of that nature.
Second, we have not discussed incomes in Mexico. I have spent many years in South American and Central American countries, as well as in Mexico. I am told that the average annual income in Canada is about $33,000 a year. What is it in Mexico?
Mr. Winfield: The average per capita income in Canada is about $29,000 to $30,000, and in Mexico it is about U.S. $4,000.
The Chairman: What kind of purchasing power do people have with a $4,000 income?
Mr. Winfield: Not much. It is an average.
The Chairman: Is that a reason for the instability of the banking system, that there are not enough deposits?
Mr. Winfield: No. One of the challenges they have in Mexico is huge income disparity. If roughly 50 per cent of the people are at or below the poverty line and roughly half of them are in dire poverty, then —
The Chairman: However, the average income is about U.S. $4,000 a year.
Mr. Winfield: Spread across 100 million people.
The Chairman: Thank you.
Senator Di Nino: To clarify, I heard a comment that approximately 35 million of the 100 million Mexicans would be considered to be middle class, and they would be earning considerably more than the $4,000. You are saying that they probably have a bigger market for some of the products that we produce than Canada itself has because of the population.
Mr. Winfield: That is absolutely right.
The Chairman: The average annual income is U.S. $4,000 a year, and how it is distributed can be determined by looking through Mexican statistics, I suspect. I think that is a very important figure. We can all say that there are many middle class people. What is the middle class?
I have never been to Acapulco, Cancun or any of the resorts, but I have certainly travelled around Mexico a lot, and I have seen many people who consider themselves to be in the middle class, by Mexican standards, who would not be in the middle class by Canadian standards. That is just my own observation.
Senator Grafstein: I would like to deal with the concept of deepening our relationship with Mexico. One of the dangers for Canada is our lack of diversification. Our percentage of trade with Mexico is de minimis. Our significant trading partner is the United States, as we all recognize. That represents between 85 and 87 per cent of our total trade, so we have become a one-customer country. The good news is that our trade surplus is good, but it is deteriorating. It is dangerous; we are past the orange and into the red zone.
I am obviously interested in being counterintuitive and saying that we must deepen our relationship with Mexico to generate more activity, but as our chairman points out, that is not going very far very quickly because the consumer market there is not deep or strong.
Where to go; what to do. You both touched on it in a different way. Frankly, we are shut out of Mercosur. It is not a question of getting together with the Mexicans and Brazilians; we are shut out of Mexico. That is a fact. We are shut out of Mercosur, which is run by the Brazilians. That is a bloc, and Mexico is not providing any help in that, although they have that relationship. I want to be the devil's advocate.
I am in favour of helping the Mexican economy to grow, but I am also in favour of helping our working poor in Canada.
The other major market is the EU. Guess what? We are shut out again, by Mr. Pascal — one man — who has said he will not deal with us, but he has entered into a relationship with Mexico.
What help can we get from the Mexicans? We are providing good help to them and are not getting much in return to help us with our big problem, which is trade diversification in South America and Europe.
I am not so interested in preserving the American market. We have the American market. How do we go to NAFTA-plus? How do you persuade the Mexicans to help us?
Mr. Armstrong: I think the opportunity for us in Mexico is in oil and gas. We have tremendous opportunity there. We must find a way to get President Fox and his people to see that we can be a better market, customer and supplier for them than the U.S. Likewise, if we can find some way of impressing them, they could be our allies in terms of Mercosur. However, I understand that Brazil has sent a diplomatic pouch to us to say they would like to talk now. It will be interesting to see where that goes.
I think there is still opportunity; that we have not talked to them enough about their needs today and in the future. They are having problems trading with the U.S. right now. I just think we can step in and be a better partner.
Senator Grafstein: You are not answering my question. I know what their needs are. We have fulfilled a great number of their needs, and I think it is great that we have helped a developing country moved up to a higher level. That is terrific for the stability of the world. I want know what is in Canada's interest here. How do we use NAFTA and our relationship with Mexico to ratchet up our relationship with Mercosur, where the Mexicans have a connection, and also with the EU?
Mr. Armstrong: We would be able to show Mercosur and the EU how well we did business with the two partners we had during NAFTA. It has been a success for all three parties. Mexico is selling us four or five times as much as we are buying. If I were Brazil and some of those other countries, I would be interested in the amount of trade they developed with Canada. I would be wondering how I could do that.
Senator Grafstein: That is not my question.
Mr. Armstrong: I know what you are saying.
Senator Grafstein: Please answer my question, if you can.
Mr. Winfield: I do not know, first of all, senator, whether we ever asked the Mexicans if they would help us. Second, after having asked the question, we would have to sit down and see if it was really in our interest to have the Mexicans help us.
In terms of our relationship with Brazil, we have done more than enough to shoot ourselves in the foot many times over in the last number of years. We have ourselves to blame. If I were recommending to the Minister of Foreign Affairs as to how we might approach the Brazilians, I would say we should do it on our own. It is not that we do not need the Mexicans, and it is not that they may not be willing to help us, but at what price? That is one thing.
I am less familiar with Europe. I am going to a conference at Monk Centre that will deal with this issue, but I would suggest it would be the same situation. I think that we would want to weigh carefully the price of having Mexico help us with the EU, and if we are incapable of doing it ourselves, why are we incapable? Where is our foreign policy or our approach towards the Europeans at fault?
Senator Corbin: My question has to do with lobbying. Is there such a thing as government and legislative lobbying in Mexico? Is it structured? How does it compare with the big operations in Washington and the creeping lobbying around Ottawa, for example? Who are these groups?
Mr. Winfield: With the opening of the Mexican political system, and by that I mean the freedom of the press, and then with a Congress that is out of balance in terms of representation vis-à-vis the presidency — the presidency is currently held by the PAN, the Congress and Senate are dominated by the PRI — the opportunities for lobbying have in fact just developed. It is a fairly new profession in Mexico. It probably started during the time I was there, which was 1989 to 1995. There are some competent lobbyists in Mexico, including former government officials, business people and university professors. Because the Mexican system is a congressional system, I would see lobbying developing in Mexico in a similar way to the United States.
Mr. Armstrong: To give one good example related to Mexican customs brokers, when I did that tour, $5 of every customs entry going into Mexico goes into a fund that they use in Mexico City. One thing we have never been able to change is the process at the border, and we ourselves have been lobbying the presidents of Mexico to get rid of it. All three previous presidents told us that the biggest problem they had was with the Mexican customs lobby in Mexico City.
Lobbying does go on there. They might call it by a different word, but there is money they are able to use because we have never been able to change that one rule.
Mr. Winfield: When I was at Nortel, I was in charge of global government relations. I also had the good fortune to be asked to join the board of a prominent Mexican bank. Some of the things that, as a corporation, we took for granted in Canada and in the United States were brand new to the Mexican bank. One of them was, if you have problems with Mexican banking legislation, should you not be talking to the banking committee of the House and the Senate? The answer was, "Well, why would we do that?" Because you, as a prominent Mexican bank, have a view to express, you have expertise in this area and maybe it would be a good idea to just sit down and have a chat. You are not trying to do anything more than educate people. They started to do that, but that was a new idea in 1996-97.
Senator Di Nino: Through some embarrassing moments, I have learned that we should be careful when we paint a picture of something that we do not really know about. There are probably more average, middle class people in Mexico — and we certainly should develop this — who can buy products. There is a huge market composed of people who have a lot of money, and that is something on which, when I was talking with some Mexican friends of mine, they straightened me out very quickly. The reason I am putting it on the record is because I believe we should deal with it in our report.
My colleague Senator Grafstein raised the other area. A great deal has to do with the fact that we have not really put resources into some of these areas we should have — human resources, financial resources and what have you — and the markets may be not quite as difficult for us to achieve as we think. Again, I want to put that on the record because I want to develop that.
One of the obstacles in the past, as I have understood it, and you gentlemen are both well qualified to respond to this, is the lack of institutional support for companies or corporations that go there and get themselves into trouble, with the judiciary, the regulatory bodies, et cetera. How has this developed in the last 10 years or so since NAFTA? Has it improved or is there still a major concern?
Mr. Winfield: Throughout my experience with Mexico, this has been a serious issue because the judicial system there is different. In other words, their legal framework, as you well know, is different from our own. Part of it was comprehension and understanding how it worked. Second, frankly, the judiciary did not always work in the open and transparent way that it does in Canada. This was an issue and, in fact, judicial reform continues to be an issue for the Mexican government.
In regard to how far this has come, perhaps Mr. Armstrong has had some experience with some of our members.
Mr. Armstrong: It is probably one of their greatest areas of improvement. A lot of Canadian law firms have partner law firms, and Heenan Blaikie, who put on an event here in Canada, brought up their partner; next week, their partner is hosting us in the Canada-Mexico chamber seminar in Mexico City. That is just one of the firms. Our experience with many members is that we get fewer questions about that now.
In the first 10 years, as we were saying earlier, it was always about legal issues. The answer was not understood, or it was so confusing they did not want to go there. The contracts were 18,000 pages long. That is one of the hurdles that have been overcome. I do not say it is perfect, but they have pretty high-class, quality legal firms now. They still have a lot of rules that we would like to break down, but it seems they are getting through to us better, and their answers are clearer so contracts seem to be better. It used to be you would never finish the deal because your own lawyer here would advise not to sign.
That probably, on the surface, is a great improvement.
The Chairman: Do they not have notaries?
Senator Di Nino: Do they have regulatory as well as judicial bodies?
The Chairman: I just wanted to put that on the record. I thought they used notaries, that it is still very important and quite distinct from our system. I just wanted to make that point.
Senator Di Nino: I just wanted to make a quick comment on the regulatory regime there that could put up all kinds of roadblocks for foreign companies going there to do business. Has that improved any in the last 10 years?
Mr. Winfield: Yes it has, and you can thank NAFTA for putting the pressure on in order to make those changes.
The Chairman: Everyone has been wonderful in answering our questions and we thank you.
The committee adjourned.