FAIT Committee Meeting

STANDING COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE

COMITÉ PERMANENT DES AFFAIRES ÉTRANGÈRES ET DU COMMERCE INTERNATIONAL

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 12, 1999

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[English]

The Chairman (Mr. Bill Graham (Toronto Centre—Rosedale, Lib.)): Members, I'm going to call this meeting to order. We only have until 5 p.m. in this room, so it's an hour and a half.

We have an eminent panel with us this afternoon. For the benefit of those watching on CPAC, this is a continuation of the hearings of the foreign affairs and international trade committee on Canada's position in the possible upcoming negotiations involving the WTO, the World Trade Organization, which we assume will be commencing in Seattle in November of this year. In the course of that study we've travelled across the country hearing witnesses, and we expect to be depositing a report with the minister before the House rises in the middle of June of this year.

We're very pleased to have two eminent experts in international trade who have come to us from the United States: Professor Paul Sauvé from the John F. Kennedy School of Government at Harvard, and Jeffrey Schott from the Institute for International Economics in Washington.

Gentlemen, welcome. Mr. Schott, we've met with your colleagues often in Washington when we've been there. Mr. Sauvé, welcome back to Canada. We're very grateful for you sharing your time with us today. So perhaps, Mr. Schott, if you could go first, then we'll ask for Mr. Sauvé. If you're fairly short, we'll have lots of time for questions and answers. Thank you.

Mr. Jeffrey Schott (Individual Presentation): Thank you very much, Mr. Chairman. I greatly welcome the opportunity to come before the committee again and talk about a very important issue: preparations for the next ministerial meeting of the World Trade Organization in Seattle. What I will try to do very briefly is to summarize my statement—why new trade negotiations are needed, what needs to be included on the negotiating agenda, and how the negotiations should proceed.

I will conclude with some brief comments on the implications of the impasse over fast-track legislation in the United States, because I think it has a bearing on both the process and the substance of the prospective negotiations. I will not address the leadership problems in the WTO that are now causing a great deal of turmoil in Geneva, but I would be happy to respond to questions on that matter. I have some views on what needs to be done in that regard.

The Chairman: Mr. Schott, I've been waiting to try this one on. There are certain partisans of a certain former Canadian member of this House.

Mr. Jeffrey Schott: Yes.

Let me state very briefly why a new round is needed. First, it's because the global financial crisis has raised concerns about the willingness of countries to pursue new trade liberalization, even as it has increased the need for such reform in both developing and developed countries to promote and sustain the economic recovery we are just beginning to see emerge in Asia and in some countries in Latin America. WTO negotiations are needed to promote medium-term growth prospects in the countries that have been affected by the crisis and to forestall a protectionist backlash in the United States and Europe against increased imports from those countries. I should note that in my country alone we are expecting a trade deficit this year in the order of over $300 billion. That's a figure—though relatively modest in ratio to the GDP—of such large absolute magnitude as to provoke very strong protectionist concerns in the United States.

The second reason why a round is needed is that the implementation of the WTO's dispute settlement understanding has exposed a number of systemic problems that need to be corrected. I think the recent experience with the banana case and the beef hormone case illustrates that there are gaps in the rules that need to be remedied. This needs to be done quickly if the credibility of the dispute settlement mechanism is to be maintained.

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Third, the WTO system has suffered some growing pains in its first few years and has had a number of birth defects that need to be remedied in new talks.

Importantly, the WTO has severe resource constraints that already hamper its activities. Member countries have not provided adequate resources to service new negotiations or administer the caseload in the dispute settlement mechanism, or to conduct the trade policy reviews or the accession negotiations, or to work effectively with the World Bank and the IMF regarding trade reforms of countries in financial crisis. This is a tremendously serious problem that is not dealt with seriously by governments, my own included.

In terms of birth defects, there are a number. The most important probably involves the lack of a management or steering committee to effectively organize the running of the World Trade Organization. There is nothing akin to what the World Bank or the IMF has. It's run by a committee as a whole, which is an unworkable process when you have 134 member countries.

De facto, the Quadrilateral has acted as the management committee for the World Trade Organization. We in North America think that's a pretty good system since the U.S. and Canada have half the votes in the Quadrilateral, but it's not a sustainable one, particularly with the growing membership and particularly if one looks at the new members that are coming in, or likely to come in, such as China, which have political as well as economic weight that they will want to wield in the management of the system.

The fourth reason for the need for a new round is because concerns about the effects of globalization have threatened to undercut public support for new WTO initiatives in the United States and in other countries. This raises concerns about environmental issues, labour issues, and social policy issues. Many of the trade-related aspects of these issues are relevant to the trading system and deserve attention on the trading agenda, even if trade pacts are not the primary channel of action in these areas. They are essential if we are to promote a broad-based coalition of support for new trade initiatives in the WTO and regionally as well.

On the negotiating agenda, one could spend a lot of time on it. There already is a built-in agenda that all the WTO member countries have already agreed to, including important issues such as agriculture and services. So negotiations have already been agreed to commence later this year. The question is, how broad an agenda will the negotiations cover? Will that agenda be sufficient to provide sufficient latitude for trade-offs, cross sectors, and cross issues, so that one can reach a deal that meets the priority interests of both developed and developing countries?

Right now the built-in agenda does not meet that requirement and will not succeed unless the agenda is broadened to include more issues than services and agriculture and even industrial tariffs. I can go into more detail on the particular issues.

In the interests of time I will pass on this topic in my opening statement, except to note that the issue Pierre Sauvé will be addressing—investment—I would put on the top of the list of issues that need to be introduced onto the WTO agenda.

If one expands the agenda, there is always the criticism that some officials worry that the WTO will bog down if negotiators cover too many issues, including some that are not ripe for immediate resolution. There is an interest in having quick results in the WTO so that it can bear fruit and justify continuing public support for the negotiating process.

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Critics fear the requirement that the new round be a single undertaking will effectively block conclusion of new trade pacts if the agenda is too broad and includes contentious issues that may take several years or perhaps even a decade to be fully worked through the WTO process.

I think those concerns reflect an outdated concept of single undertaking based on the old GATT model of trade rounds and can be remedied by the fact that the WTO is now an institution that provides the basis for continuing negotiations. I have counselled for the past five years that countries accept that challenge and work on a new model of trade negotiations, which I call the roundup, that can start and finish talks on some issues while other issues remain under debate and new issues are added on the agenda.

What I envisage is having continuing negotiations and every two or three years trade ministers use their regularly scheduled meetings as action-forcing events to put together a package of trade agreements, not necessarily covering every aspect of every issue, but pulling together parts of agriculture, perhaps eliminating or significantly reducing export subsidies in the first round and working on tariff rate quotas and other agricultural restrictions in subsequent rounds of the process. In this way, countries can conduct a series of seamless trade negotiations with new talks starting immediately after a package of trade agreements is concluded, unlike the GATT process, in which you had a long hiatus between rounds in which protectionist pressures always built up and caused new problems. Each roundup could build on the results of the previous round, so it would be an interim process, and over a decade the WTO could produce three or four of these roundups.

For the United States, each roundup would require new implementing legislation. Roundups would thus increase the urgency of early reauthorization of fast-track authority. Let me conclude my very truncated remarks with a few comments on why this is important and why it is such a serious problem today.

To be sure, U.S. trade officials do not need fast-track authority to enter into new trade negotiations. In fact, if you look at the free trade area of the Americas, the U.S. is negotiating with the other 33 partners in the western hemisphere without that authority. Fast-track is in essence a gentlemen's agreement between Congress and the executive branch to expedite consideration of legislation to implement the results of trade agreements, and therefore it's not essential to have it at the beginning of the process, or so it seems. That's the argument from U.S. trade officials.

In the past, in fact, we have gone several years without fast-track authority and it hasn't affected the talks. But in those days there was an implicit understanding that the executive would get the fast-track authority from Congress well in advance of the conclusion of the talks, and so there wasn't a concern that the United States would come to the end of the round without the requisite authority.

Today, however, congressional approval at a later date cannot be assured. To the contrary, fast-track legislation has been defeated in Congress and stands a low probability of passage in the next few years. The five-year impasse over fast-track has two important implications for the WTO talks that I would want to emphasize as perhaps the most important aspect of my testimony today.

First, the impasse raises questions about the depth of the U.S. political commitment to new trade initiatives. Not the political commitment of Ambassador Barshefsky and her team, which is ardently working for the laudable trade goals that are shared by our two countries, but the political support for those policies seems to be weak. The reluctance of the Clinton administration to defend ongoing regional and multilateral trade initiatives against the critics of globalization within their own party, particularly in the run-up to the presidential election next year, underscores such concerns, and the differences over labour and environment are part of this problem.

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Secondly, the impasse over fast-track ties the hands of U.S. negotiators in preparing the agenda for new trade talks and limits prospects for multilateral accords. U.S. negotiators have been reticent to offer proposals that require significant changes in U.S. practices, policies, and trade barriers, particularly in areas such as agriculture, textiles, and anti-dumping and competition policy. If one looks back at the history of the last five years of trade agreements, there have been notable successes in financial services and basic telecommunications and information technology, but none of those agreements required significant changes in existing U.S. laws or regulations. In a sense, the U.S. was able to free-ride because the rest of the world wanted to adopt what were essentially U.S.-Canadian-European norms.

When one gets into the broader agenda of services and agriculture, textiles, and other areas where the United States maintains its few but notable trade barriers, barriers that are going to have to be on the table to have a comprehensive deal in Geneva, that situation is going to be different. Without a congressional mandate, U.S. officials fear that such actions would galvanize widespread opposition to fast-track renewal from a diverse coalition of business, labour, and non-governmental organizations. Unfortunately, this posture makes it hard for U.S. officials to be responsive to the priority objectives of other WTO members, particularly developing countries. So I think this is one of the reasons why you see developing countries being less than wholeheartedly supportive of a new round, because they don't know what's in it for them if the developed countries, the major markets, are not going to put their barriers on the table.

Under those circumstances, the task of building an international consensus on an expanded WTO agenda becomes increasingly difficult, and in my view this is the bind that Ambassador Barshefsky is in today in trying to prepare for the Seattle ministerial. She wants to have a successful launch of new negotiations that promote a stronger international trading system, but she is constrained on what she can say about her own barriers in developing the agenda for those talks. Hopefully, Canada and other major trading nations will take up the charge to ensure that new negotiations involve a broad-ranging agenda, and one that liberalizes trade, strengthens the world trading system, and promotes global prosperity.

Thank you very much.

The Chairman: Thank you very much, Mr. Schott. That's very helpful. You managed to pack a lot into a short period of time.

[Translation]

Mr. Sauvé.

Mr. Pierre Sauvé (Individual Presentation): Thank you, Mr. Chairman.

You introduced me as a fellow of Harvard University as well as a non-resident fellow at the Brookings Institution, both of which are true. My profession does not preclude my holding two offices. I also have ties with the OECD and I am currently on leave from that organization and working in the United States. The views I will be expressing today are my own and should not be attributed to the OECD Secretariat, or to OECD member countries.

Jeff Schott made a very interesting presentation on the overall landscape that ministers are confronted with when attempting to draw up a timely agenda for the ministerial meeting in Seattle. One of the important questions that will be addressed is that of investment. Much has been written about this subject recently in Canada and in numerous OECD countries in the context of the Multilateral Agreement on Investment, or MAI.

I will be confining my remarks today primarily to the subject of investment as a potential item for inclusion on the WTO negotiation agenda. Much as I'd like to agree with what Jeff just said, namely that it would it would be desirable in principle to launch a more global negotiation process on investment, my analysis leads me to be far more cautious in my proposals and to have less lofty expectations.

[English]

If you allow me to dispense briefly with my three sound bites, I will make the following three proposals.

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One is that investment shows a lot of signs of becoming, or having already become, a back-burner issue on the multilateral trade agenda. That's my first proposition.

My second proposition is that one need not lose sleep over this. One should not be unduly concerned about what I would deem to be a temporary short-term adverse development. The reason for that is that the prevailing market fundamentals on investment policy conduct and investment behaviour of countries is and continues to be strongly liberalizing, even as it is legally unbound.

Third, absent the attempt to integrate a comprehensive NAFTA- or MAI-type set of disciplines into the WTO—

[Translation]

The Chairman: You're from the OECD, not from anywhere else.

Mr. Pierre Sauvé: I hope not. I'll leave it at that.

The Chairman: As a professor in the US, you enjoy a certain measure of anonymity, isn't that right?

Mr. Pierre Sauvé: Absolutely, and I hope to remain as anonymous as possible, in so far as this contentious issue is concerned.

Now, back to my third sound bite.

[English]

Absent the attempt to integrate a comprehensive set of disciplines on investment into the WTO, I think the looming investment agenda in Geneva offers a lot of scope for moving forward on investment in ways that are of use both to investors and to host countries, and I would surmise that the negotiations that are about to resume under the General Agreement on Trade in Services, the GATS, offer quite significant potential for achieving that objective.

Now let me briefly explain how I come to these three sound bites.

First, what do we have by way of an investment policy landscape right now as we contemplate a rule-making journey in this issue in Geneva? Let me just map out what I think are some of the determinants—economic, political, juridical—that are going to shape how countries go into Seattle on this front.

I start first with market forces, because it's important never to lose sight of what the market is telling us, what economic reality tells us. Well, inflows and outflows of foreign direct investment continue to grow very strongly. The most recent data from the OECD that I looked up suggest that despite the financial turmoil of Asia, its aftermath and its lingering effects here or there, FDI activity continues to be extremely strong, and in fact flows of investment directed toward the developing countries continue to stay above $100 billion a year, and that's been the case for the last four years. So far from dampening corporate interests in deploying productive assets abroad, the recent events have emboldened, I would say, the further push of foreign direct investment activity across borders. I think that's a very important marker to lay down as we look at these issues.

A second very important determinant of the landscape is, of course, the quite spectacular, if incredibly swift, demise of the MAI, a demise that was as spectacular, and, I would say, as sudden as its promise was in the eyes of its proponents. I think many of the lessons of that demise have to be internalized, digested, and studied—and I'm happy to reflect on that, if I can remain anonymous in doing so—before we can really launch a new negotiation.

A third important parameter of the investment landscape is a new reality of global negotiations, and that is the considerably greater presence and voice of Internet-based NGO networking. NGOs really cut their teeth very significantly in the MAI and are going to be a mainstay of how negotiations take place in future in the WTO. This was just target practice, dress rehearsal, for the next big game. I think we have to reflect on the implications of this new reality, and the challenge for governments, of course, is to develop the kinds of communications skills required to respond to NGOs—the legitimate expressions of concerns and the quite disingenuous concerns that are out there. There are both those concerns out there. So it's a challenge of communication, which I would say was woefully inadequate in the context of the MAI.

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The fourth important determinant is the fact that the American government is still very hesitant on this policy front, even while the United States probably has the most to gain from a multilateral regime on investment in Geneva. Yet because the United States' bureaucracy and its private sector invested so heavily in the MAI, they are, in my view, still somewhat in denial on this front.

Second is the fact that the growing shadow of U.S. presidential politics—we have entered the season of U.S. presidential politics already—will be cast over this issue. In the public debate in the United States, investment is still viewed, from a political perspective, mainly as a potentially anti-labour or anti-environment issue, and that's going to be a factor in how the administration plays or doesn't play this game.

The fifth element of the landscape is Europe—a weakened European Commission, and a soon-to-retire trade commissioner who is very much an activist on this issue, who took a very determined personal interest in investment matters and championed the cause of a WTO regime on investment.

I would say Europe is also characterized by two other things. One is the new-found assertiveness of the European Parliament, which I would view as a fairly legitimizing development. But the European Parliament took a very skeptical view of the MAI and presumably will continue to be somewhat skeptical about investment rule-making in Geneva. Finally, there is the fact that the political landscape in Europe is dominated by left-of-centre governments, most of whom are in power in Europe. Most governments are not necessarily predisposed toward a very strongly liberalized trade or investment agenda.

The sixth element of the landscape is in Geneva. Since the Singapore ministerial of the WTO, WTO members have been meeting periodically in a working group on trade and investment that was established in December 1996. That process, of course, has been very slow, and I think that reflects a number of things. One, it reflects the inherent steepness of what I would call the learning curve on investment issues. This is a very complex area. So moving up that ladder in Geneva, among the very broad and diverse membership, with countries at very different levels of development and with very different trade priorities, is by definition a slow process. The third set of main actors here, apart from the U.S. and the EU—the developing countries—have been and are taking, now that we've entered the final stretch of preparations for Seattle, a fairly cautious view of this policy area.

A seventh element of the landscape, of course, is the ministerial meeting itself, which will force a decision of one type or another on what to do about investment. Do we launch a negotiation? Do we just forget about it? Do we renew the mandate of the working group and say keep talking, you're doing great work, which they are?

Finally, the last aspect of the landscape that I would note is the fact that there remains, on both economic and rule-making grounds, a compelling case to embark on a rule-making journey on investment, to do for investment what was done successfully for trade over the last 50 years. One cannot affirm that trade liberalization, embedded in legally bound rules in Geneva—in the GATT and now at the WTO—is responsible in part for the remarkable prosperity of the world in the post-war period, and also affirm an empirical reality that investment today is more important than trade as an integrating force in the global economy, and not correspondingly come to the conclusion that perhaps what works for trade also works for investment. I think if we look at it that way, a fairly compelling case can be made for at least exploring the scope for embedding investment disciplines in the WTO.

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I add all of these elements of the landscape and come to one conclusion. My conclusion was contained in my first sound bite basically, or flows from it. We should downscale expectations of what is doable in Seattle on investment, however compelling the case for getting there eventually.

I come to this conclusion for a number of reasons. My first reason is that before launching any rule-making crusade, you have to ask one very fundamental question. What problem are we trying to fix? Where is the market failure? Where is the policy failure that a comprehensive set of rules would aim to redress?

If you look at empirical trends, if you look at what has been happening to world investment activity over the last 20 to 25 years, it's hard to come to the conclusion that the absence of a multilateral set of investment disciplines has crippled cross-border investment activity. The incredible noise that is generated by this debate in political circles should not obviate the reality of a strongly continuous, virtuous trend of unilateral investment regime liberalization.

There is something that distinguishes investment from trade, and that is the political economy of protectionism plays out very differently. Trade is an area where there is a cyclical tendency to see pockets of protectionism emerge and calls for protectionism to be pursued.

There is seemingly a natural tendency in investment to do the right thing, and the evidence from the trend in policy change around the world—the UNCTAD surveys year after year and changes in trends in domestic investment policy regimes. Over the last six or seven years, there have been something like 600 significant changes to investment policy made around the world. Only 26 of those have gone in the direction of less liberal treatment of foreign investors. So the overwhelming trend is toward what I would call unilateral virtue. That's already something that provides a blanket of security about the fact that, lo and behold, if we don't get there in Seattle, we can still sleep soundly.

The second reason not to be unduly concerned about scaled-back ambitions for investment is the fact that investment is already in the trading system. The Uruguay Round contains a large number of provisions that address investment issues already in a somewhat messy way, in a somewhat incidental manner, in a way that calls for greater coherence and more integration. But there are a lot of investment anchors in the system already, be they in the agreement on trade-related investment measures; the agreement on trade-related intellectual property rights, which could be viewed as an investment protection agreement; the GATT, of course, where the bulk of the provisions are found; the agreement on subsidies and countervailing measures; or the dispute settlement understanding.

There are elements of a nascent investment regime already in the WTO that provide a basis from which to work, and that's part of the challenge of the next round of the built-in agenda.

The last point I want to make, and to temper expectations, is the fact that the existence of the working group on trade and investment, to some extent—and you have to go to the meetings to feel it in the air—amounts already to a de facto negotiation underway in Geneva. There's no de jure mandate to negotiate, but the way in which countries have approached this agenda item suggests to me we are already in a pre-negotiating mode.

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I would say there are compelling reasons not to elevate, not to go from de facto to de jure just now, because that will introduce mercantilistic reflexes that will probably take us away from the substantive journey about why we should be doing it, what it should be about, and how best to tackle the issue. That's the more immediate challenge in Geneva.

So I will finish with one basic recommendation, which has two components. One, renew the mandate of the working group on trade and investment for three more years, which is basically the duration of the built-in round that most proponents see as coming down the pike. There is still a lot of pedagogical work to be done in understanding what a comprehensive set of investment disciplines entails.

Second, focus on existing elements of the WTO to advance the cause of investment rule-making in ways that serve legitimate, useful purposes for investors and for host countries.

I would say—and I tried to develop the ideas in the paper—in conclusion, the services area holds the greatest potential for investment regime liberalization because basically investment regime liberalization is a service game. That is where most impediments to cross-border activity through a commercial presence are maintained in all countries.

The agenda is not a protection agenda, which was so prominent in the MAI. That has almost become a non-issue, or you can make it into an issue if you draft the rules poorly, as was perhaps done in NAFTA and was at risk of being done in the MAI. The real agenda is a liberalizing agenda. I think there is a lot to work from currently in the system, while we continue to plough ahead pedagogically in the working group. That's my twofold proposal.

The Chairman: Thank you very much, Mr. Sauvé. We'll go to questions. We only have 45 minutes, members, so try to keep it short.

Mr. Obhrai.

Mr. Deepak Obhrai (Calgary East, Ref.): Thank you for your very interesting presentation. I guess I'll have to read quite a lot before I can ask intelligent questions.

Jeffrey, your presentation deals with the political and the working situation of the WTO and what you foresee as the situation. But the forthcoming negotiations will be on the agenda for the countries.

In our travels, those who have come forward have put forward a case. You identified the important role the NGOs are now going to play and to listen to them. A couple of points that will become quite important are the environmental standards and the labour standards they want to put into the WTO, while the business community is saying to have outside or separate agreements. The difficulty is, how are you going to tie that in? One is saying leave them here; the other is saying no.

You have identified very clearly that the WTO is under a lot of stress. One of the points I've been trying to figure is if you put all of these things in there, the WTO may just collapse under the weight of all these regulations and disputes and not really reach its mandate, which should be to promote free trade as well as human rights. So this is becoming a more and more important issue.

I don't see you addressing that anywhere—just the statement recognizing it's an important issue. What's your view on that? Should there be a separate agreement apart from the WTO? How do we interface it? What do you think?

Mr. Jeffrey Schott: Very briefly, I think there are trade-related aspects of environmental issues and labour issues that are extremely relevant to the conduct of international commerce and should be part of the trading system rules and regulations.

In the environmental area there are already numerous provisions and agreements that cover aspects of environmental problems that involve international commerce. There are other issues that have been under debate in the committee on trade and the environment in the WTO that seek to deal with other issues not yet subject to WTO rules, including how to ensure the conformity of multilateral environmental agreements, obligations under those agreements, with those of the WTO—how to deal with eco-labelling. They're not easy to resolve.

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But I think there is a broader landscape for working on environmental issues. So one should not talk about environment and labour as part of the same problem. They are different.

The labour issue now has a lot of baggage because of the way it was introduced, primarily by the United States, back in 1994. That baggage has impeded the ability of countries to sit down together and talk about what are the real problems in the labour area—labour standards and labour practices—that distort international trade and investment and should legitimately be the purview of the trading system.

Given that baggage and the fact that the Singapore ministerial ruled quite definitively that labour issues would not be on the WTO agenda, yet recognizing that there are important constituencies in developed and developing countries that rightfully argue there are aspects of those problems that deserve to be on the agenda, I put forward a proposal in my statement, which I did not cover in my oral remarks at the beginning of this hearing, to seek at least a procedural reopening of the debate in Geneva that would involve the commissioning of a joint WTO-ILO working group, giving it legal authority or codifying an informal practice that is already underway and asking that committee to explore, examine, and report to WTO members on the types of problems that affect international trade and investment and that could be the subject of further review. That allows countries to maintain an arm's length from the process, and yet it starts institutionalizing the discussion so that one can look at the problems in the labour area.

Not to belabour this too much, let me add one more point. One of the reasons the labour issue has been so contentious is that many countries argue that countries seeking it, particularly the United States, are really masking protectionist intent, that they want to use trade sanctions against countries that have labour standards that are lower than the North American norms as a way of withdrawing trade liberalization that was provided in previous negotiations. I'm not going to comment on those types of allegations. I think perhaps there are some elements that are protectionist, but more so to support improving labour standards. But so do all the governments around the world.

If one has a negotiation or a discussion in the WTO that involves carrots as well as sticks, or indeed puts aside the sticks issue and just discusses ways in which to promote better labour standards, perhaps through green-lighting subsidies, which has not been the subject of WTO discussions, then I think there is an opportunity to reopen in a much more constructive way the discussion of trade-related aspects of labour issues and to start that negotiation going.

But I think the initiative has to come from the United States, because the United States is the one that created the problems by its rather strident demands five years ago.

The Chairman: Thank you.

Mr. Deepak Obhrai: Do I have time for another one?

The Chairman: No, we had better go on, if you don't mind. We can perhaps come back.

[Translation]

Mr. Sauvageau.

Mr. Benoît Sauvageau (Repentigny, BQ): Thank you, sirs, for your presentations. If I have enough time, I will put questions to the two witnesses.

Mr. Schott, you were kind enough to send us the text of your statement in both official languages prior to the start of our meeting. Thank you for doing that.

My first question concerns several of the remarks you made. Among other things, you stated that rulings by special groups and the dispute appeals body should be disseminated immediately to all WTO member countries and to the public. How do you propose that this be done?

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Later on, you state the following:

Oddly, the United States has resisted budget increases, even though growing WTO bottlenecks caused be resource constraints will adversely affect US trading interests [...]

Could you clarify that statement for me?

Mr. Obhrai spoke of social standards and you hinted at the possibility that a joint WTO-ILO working group might be struck. I'd also be interested in hearing more about this. This could be one interesting solution for linking these two issues which have been frequently discussed.

Mr. Sauvé, you spoke at length about the Multilateral Agreement on Investment and about the expanding role of NGOs and the Internet. A new round of WTO negotiations is been launched and the issue of investment and, who knows, perhaps even culture, will be addressed. You mentioned the lack of communication between these various institutions and the public and NGOs. What steps do you suggest we take to avoid finding ourselves in the same situation come September and facing demonstrations which could shift the focus of the debate to the absence of democracy and so forth?

I want you to know that we have consulted with 400 groups representing many people. I suppose we're going to hear once more that these negotiations will be a secretive, closed process. Do you have anything to say about this?

[English]

The Chairman: Mr. Schott, do you want to go first?

Mr. Jeffrey Schott: Let me start by addressing the questions very succinctly, because in many ways several of them are interrelated with regard to the dissemination of dispute rulings and budget constraints.

Let me start with the budget constraints. The WTO budget is small compared with almost any other international organization I can think of, and yet the United States, Canada, and many other countries regard the WTO as the primary international organization for the conduct of international trade relations. That's penny-wise and pound foolish.

This limited budget has already greatly strained the legal and economic analytical resources in the WTO, making it harder to implement the dispute settlement mechanism on a timely and effective basis. It is basically burning out a highly competent legal staff in the WTO. It is burning out the distinguished appeals panellists, who devote part-time to the conduct of WTO cases but end up spending almost all of their time resident in Geneva. In fact, the head of the WTO appeals staff is a very distinguished Canadian jurist, who has been working since its inception. The appeals body has worked very well. I must say that they are just being overwhelmed with the number of cases coming forward.

Now, with regard to the dissemination of dispute settlement rulings, because of the resource constraints, there has been a delay in writing the findings under the very tight deadlines of the WTO rules, in translating them into the requisite languages, and in distributing them. What happens is that the reports leak out anyway and are published in the trade press, and almost anyone who wants to get a ruling finds out about it early anyway.

So I have argued that the ruling should be disseminated right away. In the past there was always a period reserved for governments that were participating in the dispute to comment on the panel findings in the hope of correcting obvious mistakes, which essentially never happened anyway. What I have argued is that the dispute appeals body gives countries the ability to challenge differences over fact in law in the panel rulings, and there is no need for any delay in the dissemination of the panel rulings, so there can be a broader public discussion of the issues under dispute.

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On the ILO-WTO, again, this is an area where the WTO resource constraints affect its ability to staff and work closely with its sister international organizations, whether it be the ILO, the WIPO, the OECD, the World Bank, the IMF, or a number of other organizations, which can benefit from the expertise that each organization has. Certainly the WTO is not going to be the resident expert on intellectual property or on labour issues, but it can benefit from the expertise in the other bodies and it should take advantage of that. We shouldn't try to replicate mini-ILOs in the WTO. That's why I urge this type of cooperation and coordinated action, but I should note, and your question links the two very clearly, that all these initiatives are hampered by the resource constraints, the overly tight budget under which the WTO operates.

The Chairman: Thank you.

[Translation]

Mr. Sauvé.

Mr. Pierre Sauvé: Perhaps the WTO needs the kind of help the United Nations received from Ted Turner, namely long-term funding to help resolve its serious budget constraints.

First of all, I want to apologize to the committee for not making my document available to members prior to my appearance and for distributing it in only one official language. I didn't start to draft it until 8 o'clock last night. At 7:59 p.m., my submission didn't exist in either official language. I felt it would be shameful to show up without a paper to submit. The university semester finished just last week and I've spent the entire time since marking papers.

Mr. Benoît Sauvageau: It's nothing personal.

Mr. Pierre Sauvé: No, but I...

Mr. Benoît Sauvageau: I just mentioned that we hadn't received your document...

Mr. Pierre Sauvé: Yes, but I feel it was somewhat remiss of me to show up with a document that complies only partially with the country's language requirements.

I wish I had an intelligent answer to give you regarding the communication problem. One of the MAI's shortcomings was that the absence of communication became apparent only after the negotiations were already under way. By then it was too late and the damage had already been done. Admittedly, the MAI was also in some respects the first multilateral negotiation to face this kind of onslaught from NGOs and civil society. The MAI

[English]

sort of encapsulated all that was feared about globalization. It was a metaphor for globalization, and it was a sitting duck. It was the only target available at the time. Nothing was happening in Geneva. Everything was lumped on the MAI. Even the best preparations on the side of governments would have been inadequate to face that kind of an onslaught, particularly since the political economy of doing it was so weak to start with. The agreement was on shaky conceptual grounds to start with, with limited support even within the private sector to really go to bat for it. It was a very difficult challenge of communications.

[Translation]

In my opinion, the only way to counter this problem is to attack it head on. The lessons learned by governments during the MAI negotiations will stand them in good stead during the next round. The government now has a series of arguments with which to defend the notion that it could be useful, and even noble, to pursue the goal of liberalizing trade and investment, that this notion is rooted in serious economic analysis and that the benefits to be gained from this are worthwhile.

However, communication will remain a challenge. As you yourself said, you have met with 400 groups. Perhaps the 401st will accuse you of not being transparent enough. Governments will never be able to totally escape this kind of criticism, which can easily be spread via the Internet.

• 1630

A little humility is in order. It's impossible to counter every single attack. However, we need to devise adequate means of communication and give public officials and politicians the necessary arguments to address the concerns raised, some of which are totally legitimate, and others, totally farfetched.

From a communications standpoint, we live in a very imperfect world. There's no magic solution to this problem, but certainly this is a skill that we need to hone. We're dealing with something that is new to the world of trade. Never before have we truly negotiated in a public forum and the fundamentals of the communications process have never been a concern. The world has changed radically and this is something we need to take into account and prepare for.

Mr. Benoît Sauvageau: Thank you.

The Chairman: Thank you.

[English]

Madam Finestone.

Hon. Sheila Finestone (Mount Royal, Lib.): Thank you very much.

I hadn't intended to do a follow-up,

[Translation]

however, your comments on doing the groundwork are very important. We mustn't lose sight of the importance of keeping civil society well informed. Those countries that wanted the MAI to be implemented failed in this task. It's time to keep in mind the average citizen.

[English]

So in that regard, I'm not sorry that the MAI failed. I think it deserved to flunk for many reasons, and that's one of the reasons why I have a concern about the new move for investment undertaking.

There are two points I'd like to bring forward. First, I was in Southeast Asia when there was a tremendous play of the market that caused the sinking and the horrendous outcome of the money markets and the economic soundness, or lack of soundness, in those countries. When you can go from 20 million to close to 45 million unemployed in one country and it's as a result of money market play, I think there's a serious problem and there needs to be some control. That's the first part of my observation.

The second part is that there seems to be some real resistance or formal resistance in negotiating any kind of investment liberalization at the WTO level from a large number of what I would call middle countries—Brazil and other countries like that. I guess those are developing countries, or are they developed countries? I don't know how you define them, but even if all countries are interested in attracting inflows of investment, many are reluctant to give up their domestic policies and their domestic levers, in other words, their own sovereignty in this area, to manage those flows.

What kind of an investment negotiating agenda do you think would succeed in responding to the concerns of those countries and their citizens, who have every right to know and understand what you're proposing? What do you think would overcome their resistance to putting new investment issues in place on services as well as investments that would follow up, I presume, the WTO meetings or the millennium round in Seattle? I would really like to know what you think will be the implications too of China coming into the system.

[Translation]

This question is either for you, Mr. Sauvé, or for

[English]

Mr. Schott, because I was very tempted to ask you what the prognosis is without the leader yet in place for the WTO. If you'd like to start with that, please do.

Mr. Jeffrey Schott: Okay.

Mr. Pierre Sauvé: Do you want to take the last question?

Mr. Jeffrey Schott: Actually, I'd like to take up the first question too. We may have different views.

One can't talk any more about developing countries' views as a block. That has changed dramatically since the time at the start of the Uruguay Round when developing countries essentially got together and blocked the discussion of investment in the Uruguay Round except for the limited discussion of trade-related investment measures.

Since 1986, there has been a 180-degree shift in national policies on investment. As Pierre was saying in his introductory remarks, countries now want our money, and they are in a great competition for that money. It's what I've sometimes called a global beauty contest. Countries are trying to design the most beautiful economic policies to have the best investment climate to attract that money. Most of the developing countries that are major participants in the trading system now have already adopted nationally the types of investment regimes that we would have liked to push them towards in the previous negotiations.

• 1635

There are holdouts. Malaysia, India, Pakistan, and Egypt are the four countries that are vehemently opposed to new investment negotiations in the WTO. Many others have been very reserved, because they said if this is something you want us to do, what are you going to do that is high priority in terms of our objectives? They haven't received a satisfactory answer from the Quadrilateral countries.

I think if the Quadrilateral countries are more responsive, we will see a more responsive attitude from many developing countries for the broad range of investment discussions that I think are necessary beyond the discussion of investment in the services negotiation.

Mrs. Sheila Finestone: You don't think there's any challenge to their sovereignty and the right to manage their own affairs in question in this matter?

Mr. Jeffrey Schott: I think in many respects they realize that this sovereignty is already constrained. They can maintain their independence, as Mr. Mahathir has, by introducing capital controls, yet they can't get the benefits they want from it.

If you look at Brazil—and I know the minister and senior officials there very well—they are very supportive of an open investment regime. I think Brazil has been one of the most successful countries in the developing world, after China, in attracting foreign direct investment; they're number two.

But there are differences between countries, and I think it's important for this committee to keep in mind that one has to look at coalitions of countries involving both developed and developing, much like the Cairns Group in agriculture. Interests run across developed and developing lines now on a number of issues, and we have to be sensitive to that.

On the succession in Geneva, I would say that there were three strong candidates, three very well-qualified candidates, who ran. One, the Moroccan, was less qualified. But now the situation has degenerated. Both Mr. Moore and Mr. Supachai are qualified, but the impasse, the inability to develop a consensus around either one, I think is making it much more difficult for either to effectively assume the position if a decision is taken to support Mr. Moore or Mr. Supachai. I think Mr. Supachai has burned his bridges. But the GATT and the WTO have always worked on consensus, which has meant that in the end everyone gets around one candidate and gives the director general the moral authority to do his job. Unlike the head of the IMF or the World Bank, the head of the WTO can't dole out money to gain support for what he thinks should be done. He has to use political persuasion, and if he doesn't have the strong support from the beginning of the membership, his ability to do his job is going to be impeded right from the start.

The longer this impasse continues, I think the more likely that both candidates are going to be irreparably damaged and that one will have to look at trying to find someone else, probably from the developing world, who could gain the support almost immediately from both developed and developing countries. I believe there are some candidates who could fill that bill, who have run a major international organization, who have the strong trade and finance expertise that is needed to deal with the problems we face in the world economy today.

Mrs. Sheila Finestone: Would you not agree that—

The Chairman: Excuse me, Mrs. Finestone, did you have a question to pose to Mr. Sauvé as well?

Mrs. Sheila Finestone: Yes, I did.

The Chairman: You only have about a minute left for him. So if you keep asking questions of Mr. Schott—

Mrs. Sheila Finestone: Okay, I won't.

Mr. Jeffrey Schott: I'm sorry for taking so much time with some of my answers.

The Chairman: I just wanted to warn you because I have three other members, with only 20 minutes left, and we're watching the clock.

• 1640

Mr. Pierre Sauvé: Very briefly, the MAI failure is full of useful lessons, so it's a useful failure, I would argue. But one of the lessons that's surprising, from the perspective of your question, is that it was not developing countries that exercised caution or rejected the deal; it was developed countries that were not prepared to play ball on this issue.

Mrs. Sheila Finestone: You didn't talk to them.

Mr. Pierre Sauvé: What this will entail, down the road, is a significantly narrower agenda of what is doable in a multilateral setting. You raised the issue of emerging markets being buffeted by volatility in financial markets. I think part of the pedagogical challenge ahead of us is to distinguish between portfolio and foreign-direct investment. Those two concepts tend to be confused and we tend to view financial market volatility through the prism of investment regime liberalization, which predominantly relates to foreign-direct investment. They're quite different issues.

I think it's important to distinguish between those two realities, and probably an investment regime at the WTO should focus more narrowly on productive investments, which foreign-direct investment is. The borderline is a bit difficult to make sometimes, but there is a big difference. We should narrow the focus, the same way we should narrow the focus on liberalization and not worry about protection, because protection issues are addressed satisfactorily in bilateral investment treaties.

In the 1990s there has been an explosion of bilateral investment treaties between developed and developing countries. Jeff was saying, yes, sovereignty is already circumscribed. But in 1996-97 a BIT, bilateral investment treaty, was signed every two days. So developing countries are willing to sign these agreements to provide the signal to foreign investors that they are open, but they're providing some degree of protection. There's no need, in my view, to multilateralize those kinds of provisions, particularly since we, in highly regulated societies, are not prepared to live under those disciplines.

So I think there are many sobering lessons here that cut across developed and developing countries and will require some time to digest.

One last word on China and Brazil. Those two countries are big enough that they don't need rules. Investment will flow to those countries almost regardless of the policy environment because the market is so big that investors will be prepared to take lots of risks in those markets. Yet, lo and behold, the trend in both countries has been towards systematically more liberal treatment of foreign investors, with little incidence of significant reversal of those policies.

So again, the underlying trend is a reassuring one, begging the question of whether we need a multilateral regime, given the politics and the complications of doing that.

Mrs. Sheila Finestone: Thank you very much.

The Chairman: Thank you.

[Translation]

Mr. Patry.

Mr. Bernard Patry (Pierrefond—Dollard, Lib.): Thank you, Mr. Chairman. Thanks also to our two witnesses.

Mr. Sauvé, in your presentation, which I enjoyed very much, without trying to put the brakes on future negotiations, you raise some very important questions, among others, whether it is advisable for the WTO to try and negotiate some outcomes as quickly as possible. You also referred to a major developments in the new negotiations, namely the arrival on the scene of NGOs, particularly ones concerned about labour, human rights and environmental issues.

Mr. Sauvageau talked earlier about the problems encountered during the last round of MAI negotiations. Mindful of the lack of communication to which you alluded, I'd like to go one step further. Since, as we all know, the WTO negotiations take place in a vacuum, what can be done to involve NGOs and civil society in the process? The committee has heard from several NGOs and from representatives of civil society. Can we involve them solely by taking into account the concerns they raised in our report to the minister, or under the current rules, is there some way to enhance their participation in the WTO if we really want the next round of negotiations to be a success?

Judging from your presentation, you seem to be very satisfied with the work of

[English]

WTO working group on trade and investment.

[Translation]

One of the first recommendations you make to the ministers who will be meeting in Seattle is that they renew the working group's mandate for three years. Could you describe for us in greater detail what the working group actually does?

• 1645

Mr. Pierre Sauvé: I'll answer your last question first? This working group does research and serves a forum in which all aspects of multilateral investment rules and how they relate to areas currently dealt with by the WTO can be discussed. This is a complex issue, in part because the WTO deals with a wide range of areas as they relate to investment.

The fundamental question of renewing the working group's mandate must be on the meeting agenda and the ministers must be asked to reflect on the following two basic questions: firstly, what kind of framework agreement on investment can be devised? Is there some kind of consensus within this organization on the contents of such an agreement? What kind of agreement is the committee prepared to negotiate?

Secondly, what concrete impact would integrating NGOs and others into the process have on existing players? What needs to be done to ensure cohesion within the WTO from a legal standpoint?

A multilateral agreement on investment at the WTO would have very practical consequences in terms of the operation of the agreement on services which in some respects covers investment in services. A little housekeeping in this area is in order. That's the kind of renewed mandate I see for this Geneva-based working group.

Getting back to your first question, I consider the WTO to be an intergovernmental organization. Most WTO member governments enjoy a certain democratic legitimacy. We'd like to see more of this, but we have to live with the system we have. In my view, the obligation to arbitrate varying national public opinions rest with national representatives and with OECD member countries. I fail to see how, within the forum that is the WTO, we can give NGOs, regardless of their views, a status equal to that of the governments that gave birth to them in the first place. This raises the issue of whether or not it is politically legitimate to involve NGOs directly in the negotiating process.

Having said this, I believe the WTO must be considerably more open, enhance its efforts to communicate, educate and involve others and stage more seminars and conferences. It has already made some progress on this front. Over the past few years, many international conferences have involved NGOs in ongoing talks on WTO-related fields. This process must continue, but I question whether NGOs should be directly involved in the negotiations or whether they should be given the same voice as sovereign states. Thank you.

[English]

The Chairman: I wonder if I could follow up on that question with Mr. Schott, since you were going to add something to that. We've had, obviously, the whole issue of the relationship of civil society in trade agreements, whether it's the WTO or even the free trade agreement of the Americas. As you know, there's a whole civil society envelope in those discussions.

One of the suggestions that has been put before this committee and one that was discussed by a panel at the last WTO meeting in Geneva, which some of the members of this committee attended, was the possibility of a parliamentary assembly to be associated with the WTO. It would take the European Parliament as a model, but it would not take it as far as that. But there would be some sort of parliamentary association, perhaps like the association that is proposed for the OAS, for example, which many of us are discussing at the moment.

Given your experience in the United States, do you think this would be well received? Do you think it would fly? Do you think it's possible? Have you any comments on it? It's one way to involve civil society by the use of elected representatives, rather than by NGOs, which tend to represent special interests of one type or another.

Mr. Jeffrey Schott: I think it's useful to broaden the scope of the discussion of trade issues. Therefore, I have always favoured added input from non-governmental organizations. Their perspective is very important, particularly in influencing national policies and therefore promoting the type of result that would have broader-based public support.

• 1650

Now, the problem arises not only with the political legitimacy issues Pierre has mentioned, but also in many cases non-governmental organizations disagree with their governments and are trying to coerce changes in government policies that are not being pursued by their elected officials. So what they are trying to do is go over the heads of their governments to international forums and use those forums as a means to try to promote standards that would then be adopted by their own representatives.

Again, there's nothing wrong with that, but it puts non-governmental organizations and their representatives sometimes at cross purposes with their elected officials. So you will not appease those constituencies just by saying your elected representatives will do the job, because often they disagree with their elected representatives. That's clearly the case with NGOs in the United States and the majority of the members of the House of Representatives.

Mrs. Sheila Finestone: That they got elected is amazing.

Mr. Jeffrey Schott: They got elected not by the NGOs, but in spite of vehement opposition from many of those groups.

The Chairman: We won't get into PACs, for example, which may be a special type of NGO in the American political system.

Mr. Jeffrey Schott: They haven't been as much of a problem in some sectors.

The Chairman: Did you want to add anything, Mr. Sauvé?

Mr. Pierre Sauvé: My experience as a trade negotiator suggests to me that anything that contributes to dialogue has a civilizing effect. Anything that leads to dialogue in a way leads to co-optation in the useful sense of the term, co-optation in the sense that we can at least start to speak the same language and understand what we're talking about.

I give you a very concrete example from my days in the Uruguay Round and, subsequently, in NAFTA. It relates to the fact that the financial services people did not want to be brought into the WTO or NAFTA. They said, what does trade have to do with finance? That's silly business, that's dirty business, that's politics. We're financial regulators. We're very important people who deal with important systemic issues, and we're very reluctant to engage in the debate.

In fact, for the first year and a half of the negotiations on financial services, they were meeting in a Chinese restaurant outside of the WTO building. There was even a name given to this group, the Fu-Lung Group, which is the name of the restaurant.

Ten years down the road finance officials are in the WTO. They feel comfortable being under the WTO roof. They have come to understand that there is scope for walking together down this road. I think from a bureaucratic perspective it's an example I find compelling in that we have to find ways to talk to each other and understand what we're saying.

There are obvious resource constraints and problems of political legitimacy when you involve civil society, which makes it a bit more complicated, but I think there's no denying that the WTO will continue to intensify its dialogue with civil society throughout the course of the next negotiations, because that voice provides legitimacy to the journey that otherwise it would not have. However strongly you disagree with the views that are being expressed, they are still legitimizing voices that have to be heard within the resource constraints under which we operate in the system.

[Translation]

The Chairman: You have considerable international experience dealing with such matters, notably foreign affairs and resource constraints.

Mr. Pierre Sauvé: But the landscape is changing.

The Chairman: It has changed.

Mrs. Debien.

Mrs. Maud Debien (Laval Est, BQ): Messrs Schott and Sauvé, neither one of you mentioned culture in your presentations. As you know, this subject is of particular importance to Quebec and to other countries. I would like to hear your views on this subject.

I would also like to know how you feel about China's admission to the WTO. As you well know, China is negotiating its admission into the WTO, by way of the crisis in Kosovo.

• 1655

I think everyone would agree that trade has expanded considerably since the adoption of freer trade policies. Everyone was supposed to benefit from trade liberalization. However, we have come to realize that these policies have failed completely to increase the wealth of average citizens, or in turn, to improve the lot of developing countries. How do you explain this fact?

My third question is directly more specifically to Mr. Sauvé. In you conclusion, you stated that we need to lower our expectations of the Seattle meeting and not to get too upset. You also stated that before undertaking any new major initiatives, we should assess our failures and the problems we have encountered. Are you advising us to take a time out before starting up the next round of negotiations in order to review the achievements of the Uruguay and other previous rounds? A number of witnesses have made a similar suggestion. How would you feel about taking a timeout?

Mr. Pierre Sauvé: Right now is the time for the government to pause and reflect upon this. The thing is, negotiations are already set to resume on January 1, 2000. All WTO members endorsed the Marrakech Accord which gave birth to the WTO. In so doing, they also agreed to return to the negotiating table on January 1, 2000, that is in seven months' time.

Now is the time for reflection. This reflection will naturally continue throughout the negotiation process and to some extent, it will dictate whether certain countries come the table in a serious frame of mind, or whether they demand many concessions before they even agree to go forward. That is how the negotiating game is played. Therefore, the idea that we need some kind of timeout to review any concrete achievements since the Uruguay Round doesn't quite jibe with the timetable that has been agreed to.

Investment is somewhat of a different issue because its new to the negotiating table. We have an opportunity now to reflect upon a certain number of new issues, namely the environment, competition, investment, labour standards, taxation and culture.

Speaking of culture, I was in Paris a few weeks ago where I gave a speech on the topic of whether a multilateral agreement on culture was possible, or even desirable? My answer to both parts of the question was yes, because in the past, agreements on matters as complex and thorny as culture have been successfully negotiated, and in the case of some countries, even more has been accomplished. Therefore, we mustn't tell ourselves that our hands are tied because of the complexity of the situation. It's important to address this issue because it affects us closely.

Mrs. Maud Debien: Indeed it does.

Mr. Pierre Sauvé: We must stop hiding behind cultural exception clauses which, from a legal standpoint, are nothing more than traps. They don't exist. Canada has no real means of defending itself in the face of potentially discriminatory trade and cultural practices, as recent WTO panels have demonstrated. We need to take a serious look at how we can avoid falling into this trap because we are dealing with the United States which views culture as a business and as entertainment. The US doesn't quite understand the concerns of Canadians and is planning to put forward on January 1, 2000 some highly offensive demands in the area of audiovisual services. We need to prepare ourselves for when that day arrives.

Charlene Barshefsky has already announced the issues that will be on the agenda. The question is whether we can sit down at the table and agree on the parameters of an accord that dictates what governments can legitimately do to support culture and what kind of restrictions or progressive limitations they can impose, much like negotiations are conducted in other sectors.

• 1700

Can we argue that this is a somewhat different sector, one that hits closer to home? We will have to find a way to strike some kind of balance. The current situation is untenable and the US isn't likely to ease up until it has won its case. The procedural machine isn't about to grind to a halt in the US anytime soon. I think this fact alone should be enough to convince us to sit down at the table. Do the Americans feel like negotiating? Not in the least!

They are not in the least bit interested in concluding a multilateral agreement on culture because in their mind, this would legitimize protectionism in this sector. They have no qualms however, about legitimizing protectionism when it comes to government contracts, steel imports or shipping.

Mrs. Maud Debien: Or agricultural subsidies.

Mr. Pierre Sauvé: Or agricultural subsidies, although on that score, we are both at fault.

Mrs. Maud Debien: Not Canada.

Mr. Pierre Sauvé: Canada too, unfortunately.

[English]

Mr. Jeffrey Schott: We're all sinners in culture too.

[Translation]

Mr. Pierre Sauvé: Therefore, we need to sit down at the table, all the more so given that at the next GATT round, these issues will be on the agenda. Can Canada forge any kind of coalition with other world countries to promote its cultural crusade? I rather doubt it at the present time.

Mrs. Maud Debien: Not even with France?

Mr. Pierre Sauvé: Oddly enough, France isn't really very interested in a multilateral agreement on culture either, but this is something that could be discussed bilaterally. That's something I learned during my trip to France.

[English]

Mr. Jeffrey Schott: The French have Disneyland.

Mr. Chairman, may I very briefly answer the three questions?

First, on culture, I'm not going to get fully engaged in it because of the time constraints, but my view is that countries should enrich their cultural heritage, and that will involve some means of protection. But there are ways you can protect, either by excluding or by subsidization, and I've always felt that if a country is serious about enriching their cultural heritage, they will do it through subsidization. That seems to have been an option that, because of financial or budgetary constraints in past years in Canada, was less tenable than other means of protection. As a practical matter, that has been a source of tension between the United States and Canada, but I agree that it's a much bigger issue, and time does not permit me to go into it.

Secondly, on China and the WTO, there should have been a deal last month between the United States and China that would have greatly accelerated prospects for China's entry into the WTO by the end of this year. Indeed, in my view, part of the reason a deal was not struck was that the Clinton administration was not prepared politically for the Chinese to come in with such a generous offer and indeed had not laid the groundwork in Congress for an acceptance of the terms that were offered by the Chinese, which went far beyond what I think anyone thought possible just three or four months ago.

Now we have the question in the interim, can that deal be maintained in light of both internal debate in China and the complications because of the military actions in the Balkans? There has always been an element of the Chinese political hierarchy who thought it was easier for them to continue their role as a free rider on the trading system, where they get most of the benefits of WTO membership without undertaking any of the obligations. But of course that view is incorrect, and that has been accepted by the Chinese leadership, but it still could resurface in light of the reaction to the developments of the last few weeks.

Thirdly, you raised a very important point about the distributional effects of the gains from trade in developing countries. One has seen in many developing countries, particularly in Latin America, that where they have liberalized their trade, the economies have responded very well and have grown very rapidly, but the benefits have not been shared equitably among the citizens, and so you've had a widening gap between rich and poor.

• 1705

That calls into question what the World Bank and the IMF are now increasingly focusing on, and that is the second generation of reforms, a means of providing adequate domestic policies—through administration, through a better judiciary, through improved public services—that will primarily benefit the poorer segments of the society. That needs to be done at the national level, but with the technical assistance of international bodies, so that this widening income gap can be arrested and the issue of poverty, which is still a very real one in the developing worlds—including the countries that have made tremendous progress in the last decade—can be addressed much more urgently than it is to date. So I think you've put your finger on a very important problem.

The Chairman: Thank you.

Mrs. Maud Debien: Merci.

The Chairman: Mr. Speller, we're really supposed to be out of here at 5 p.m., but if you have a very short question, you could probably—

Mr. Bob Speller (Haldimand—Norfolk—Brant, Lib.): I have a short question for Mr. Schott. You mentioned the need to get rid of export subsidies. I'm wondering if you see the likelihood of a conclusion to an agricultural deal, and if that conclusion would involve something in domestic support programs also.

Mr. Jeffrey Schott: Well, I think you probably know this problem better than I do. The ability to craft an agricultural deal in the next round has been complicated now by the actions of the European Union in Berlin and their retrenchment from their proposed reforms to the common agricultural policy. So unless one can get a more forthcoming position or policy from the Europeans, it's going to basically dilute the entire agricultural deal across the board. I'm not putting all the blame on the Europeans. The United States also maintains high protection in a few sectors. Sugar, for example, is a source of great concern for a number of countries—

The Chairman: Including Canada.

Mr. Jeffrey Schott: —including Canada, and it will be a central issue in both the WTO and the free trade area of the Americas negotiations. And yet, do the USTR and the Department of Agriculture have a plan for putting that on the table? Seriously, I'm not sure. So the only way to get a bigger deal on agriculture is the way we did it in the Uruguay Round, and that is to ensure we have a bigger deal in other areas so that we can have overall benefits for each country. For Canada to make reforms in its existing protection will require substantial gains across the board for Canada, improving the economies of the provinces from east to west. I think it's a very difficult task and one that isn't made easier by the fact that the major players are reticent to put their barriers on the table.

The Chairman: Well, thank you very much. We've heard a great deal about agriculture in our hearings. I must say that it's rather discouraging to hear that the Europeans may have prescuppered the whole possibility of getting anything done, but agriculture seems to be one of des problèmes épineux of the whole round.

Yes, Mrs. Finestone.

Mrs. Sheila Finestone: I wonder if I could ask Mr. Schott to complete the answer he gave Madam Debien on the cultural products.

The Chairman: The question about whether or not cultural agreements should be within or without WTO?

Mrs. Sheila Finestone: Yes. I really was interested in knowing whether it would be in the best interest to pursue the special arrangements within or outside the WTO.

Mr. Jeffrey Schott: Well, I'm a former subsidy negotiator. That's where I cut my teeth in international trade. Of course, I had the guidance of Rodney Grey to help me through my first negotiation, which was probably much to Canada's benefit. In that regard I see at least part of the solution as involving perhaps green-lighting subsidies so that if there are subsidies in support of cultural activities in member countries, they would not be subject to countervailing duty investigations. That might be a way, at least in one area of the WTO, to carve out a safe harbour for cultural protection in a positive way—the way I see protection in a positive way—through subsidization rather than through quotas.

• 1710

Mrs. Sheila Finestone: Would that override NAFTA or the free trade agreement where it's under exemption?

Mr. Jeffrey Schott: On the relationship of NAFTA to a new WTO agreement, I'd probably have to seek legal counsel.

Mrs. Sheila Finestone: Okay.

The Chairman: It would be subsequent, so there would be a good argument for saying it would be a subsequent agreement—

Mrs. Sheila Finestone: Wasn't that one of the things that—

The Chairman: —between the parties. But it is an issue that you may recall arose in one of the cases we had with the United States. I'm sure you've followed this closely in Canada, Mr. Schott, and you probably do know that the cultural groups in this country are very...not suspicious, but concerned about the subsidy solution to the problem. It may be a neater solution from the point of view of international trade law, but it is less sure to those in terms of receiving the subsidies when governments come and go and budgets get tighter—

Mr. Jeffrey Schott: Absolutely.

The Chairman: —so that the very players themselves are very reluctant to engage in the subsidy solution for precisely the reason they don't know how long the subsidies are likely to last. Therefore it's a difficult problem.

Mr. Jeffrey Schott: That, in a general form, is why people interested in liberalization or free trade always prefer a subsidy approach, because of the budget constraint, recognizing that constraint will tend over time to reduce the level of protection.

The Chairman: Thank you both very much for coming, from both Washington and from Harvard. We very much appreciate your taking the time to come and join us. It was very helpful and very enriching for our discussions.

We'll adjourn till tomorrow morning at 9 a.m. when we'll have Ambassador Juneau from the European Union here so we can ask him about the CAP. From 10 a.m. to 12 a.m., or 10.30 a.m. to 12 a.m., we're having hearings on Bill S-22, the pre-clearance bill. So we're sitting from 9 a.m. until noon tomorrow.

Thank you very much. We're adjourned until tomorrow morning.