FAIT Committee Meeting

37th PARLIAMENT, 1st SESSION

Standing Committee on Foreign Affairs and International Trade

EVIDENCE

CONTENTS

Tuesday, June 11, 2002

¿

0910

The Vice-Chair (Mr. Bernard Patry (Pierrefonds—Dollard, Lib.))

Mr. Robert Keyes (Vice-President, International Division, Canadian Chamber of Commerce)

¿

0915

¿

0920

The Vice-Chair (Mr. Bernard Patry)

Mr. Day

¿

0925

The Vice-Chair (Mr. Bernard Patry)

Mr. Robert Keyes

¿

0930

Mr. Stockwell Day

The Vice-Chair (Mr. Bernard Patry)

Mr. Alexander Lofthouse (Policy Analyst, Canadian Chamber of Commerce)

The Vice-Chair (Mr. Bernard Patry)

Mr. Pierre Paquette (Joliette, BQ)

The Vice-Chair (Mr. Bernard Patry)

Mr. Robert Keyes

¿

0935

¿

0940

The Vice-Chair (Mr. Bernard Patry)

Mr. Alexander Lofthouse

The Vice-Chair (Mr. Bernard Patry)

Mr. Sarkis Assadourian (Brampton Centre, Lib.)

Mr. Robert Keyes

Mr. Sarkis Assadourian

Mr. Robert Keyes

Mr. Sarkis Assadourian

Mr. Robert Keyes

¿

0945

Mr. Alexander Lofthouse

Mr. Sarkis Assadourian

Mr. Robert Keyes

¿

0950

The Vice-Chair (Mr. Bernard Patry)

Mr. Mark Eyking (Sydney—Victoria, Lib.)

The Vice-Chair (Mr. Bernard Patry)

Mr. Robert Keyes

¿

0955

Mr. Mark Eyking

Mr. Robert Keyes

The Vice-Chair (Mr. Bernard Patry)

Mrs. Jennings

Mr. Robert Keyes

Ms. Marlene Jennings

À

1000

Mr. Robert Keyes

Ms. Marlene Jennings

Mr. Robert Keyes

Ms. Marlene Jennings

Mr. Robert Keyes

The Vice-Chair (Mr. Bernard Patry)

À

1005

Mr. Robert Keyes

The Vice-Chair (Mr. Bernard Patry)

Mr. Alexander Lofthouse

The Vice-Chair (Mr. Bernard Patry)

Mr. John Duncan (Vancouver Island North, Canadian Alliance)

The Vice-Chair (Mr. Bernard Patry)

Mr. John Duncan

Mr. Robert Keyes

Mr. John Duncan

Mr. Robert Keyes

Mr. John Duncan

À

1010

Mr. Robert Keyes

Mr. John Duncan

Mr. Robert Keyes

Mr. Alexander Lofthouse

The Vice-Chair (Mr. Bernard Patry)

Mr. Robert Keyes

À

1015

The Vice-Chair (Mr. Bernard Patry)

Mr. Alexander Lofthouse

The Vice-Chair (Mr. Bernard Patry)

Mr. Sarkis Assadourian

Mr. Robert Keyes

Mr. Sarkis Assadourian

Mr. Robert Keyes

The Vice-Chair (Mr. Bernard Patry)

The Vice-Chair (Mr. Bernard Patry)

The Vice-Chair (Mr. Bernard Patry)

Mr. Mario Polèse

À

1050

À

1055

Á

1100

The Vice-Chairman (Mr. Bernard Patry)

Mr. John Duncan

Mr. Mario Polèse

Á

1105

Mr. John Duncan

Mr. Mario Polèse

The Vice-Chairman (Mr. Bernard Patry)

Mr. Pierre Paquette

Mr. Mario Polèse

Mr. Pierre Paquette

Mr. Mario Polèse

Á

1110

Mr. Pierre Paquette

Mr. Mario Polèse

Mr. Pierre Paquette

Mr. Mario Polèse

Mr. Pierre Paquette

Mr. Mario Polèse

Mr. Pierre Paquette

Mr. Mario Polèse

The Vice-Chair (Mr. Bernard Patry)

Mr. Pierre Paquette

The Vice-Chair (Mr. Bernard Patry)

Mr. Pierre Paquette

The Vice-Chair (Mr. Bernard Patry)

Mr. Mark Eyking

Mr. Mario Polèse

Mr. Mark Eyking

Á

1115

Mr. Mario Polèse

The Vice-Chair (Mr. Bernard Patry)

Mr. Pierre Paquette

The Vice-Chair (Mr. Bernard Patry)

Mr. Pierre Paquette

Mr. Mario Polèse

Á

1120

Mr. Pierre Paquette

Mr. Mario Polèse

Mr. Pierre Paquette

Mr. Mario Polèse

The Vice-Chair (Mr. Bernard Patry)

Mr. Mario Polèse

Mr. Pierre Paquette

The Vice-Chair (Mr. Bernard Patry)

Mr. Mario Polèse

The Vice-Chair (Mr. Bernard Patry)

Mr. Mario Polèse

The Vice-Chair (Mr. Bernard Patry)

Mr. Mario Polèse

The Vice-Chair (Mr. Bernard Patry)

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CANADA

Standing Committee on Foreign Affairs and International Trade

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NUMBER 089

l

1st SESSION

l

37th PARLIAMENT

---

EVIDENCE

Tuesday, June 11, 2002

[Recorded by Electronic Apparatus]

¿  (0910)  

[English]

    The Vice-Chair (Mr. Bernard Patry (Pierrefonds—Dollard, Lib.)): I now call the meeting to order, the order of the day pursuant to Standing Order 108(2), a study of North American integration and Canada's role in the light of new security challenges.

    We have as witnesses from the Canadian Chamber of Commerce, Mr. Robert Keyes, vice-president, international division; and Mr. Alexander Lofthouse, policy analyst.

    Welcome to our committee this morning. You have some remarks to make. Who is going to speak? Mr. Keyes? Thank you.

    Mr. Robert Keyes (Vice-President, International Division, Canadian Chamber of Commerce): Thank you, Chairman, and good morning. We're happy to be here to talk about Canada-U.S. integration, the many dimensions of this fascinating and crucial issue. It is an issue that we've discussed a few times within our committees at the chamber. Not unexpectedly, when you have small business, large business, and people from coast to coast, you get a very interesting diversity of views.

    I've given the clerk a short discussion paper, which will be distributed to everyone on the committee. We hope this will assist you in your discussions and thoughts in the report you're going to put forward.

    The background paper prepared by the parliamentary research staff covered the ground pretty well, but it has more questions than answers. I guess that's no real surprise, given the nature of this exercise.

    I want to make six general points as a prelude to the discussion, and then we can get into questions and answers and chew this around some more.

    My first point is that the Canada-U.S. relationship is one that we've often taken for granted. We're neighbours, we're economic partners, we're allies. Canada and the U.S. are pretty comfortable with each other. We have strong linkages, commercial ties, infrastructure, the power grid, the highways, financial markets, distribution networks, tourism, families on both sides of the border, and so on. Arguably, perhaps we have stronger north-south ties on some fronts than we do east-west ties, just given the nature of geography and systems.

    So given that comfortable relationship, a lot of things just happen naturally without much thought. For this reason, our border, in our view, basically suffered from considerable benign neglect until September 11. The pace of trade had vastly outstripped the border machinery and infrastructure capacity, and while the border system was not broken, it was pretty creaky in places.

    The members will be familiar with the CUSP process, which was initiated in April 2000. I participated in that first meeting down at Niagara-on-the-Lake, but it was a low-key, rather tentative initiative that really never took off, notwithstanding being launched under the tutelage of President Clinton and the Prime Minister.

    All this to say we were basically drifting along until September 11, and then, in the aftermath, the kinds of issues you are considering have really accelerated the debate and the pace of thinking on the future.

    My second point is that the Canada-U.S. relationship is getting deeper by the day. De facto economic integration is here, and we have to consider all the options. I don't think a lot of Canadians are really aware of the depth of economic integration and the way it is intensifying. The reality is that we have a lot of companies with production lines with a border in the middle. They're producing products for an integrated marketplace that with the passage of time becomes more homogeneous. Certainly many of the business people I interact with look at North America as a single, integrated marketplace, with only minor differentiation.

    For that reason, since September 11 the chamber has argued that efficient and effective border management is in the interests of both countries, and for Canada it's really a strategic issue. If we want to attract the incoming foreign investment that is going to use a Canadian base to service NAFTA, the border has to work.

    Last week I was meeting with an ambassador in the economic ministry in an embassy from a major European country. They are being asked by their business community, “Well, how is the border working? If we make an investment here, are we going to be able to use Canada as that launching pad for North American expansion?” I've had the same question put to me by my colleagues around the table at the International Chamber of Commerce--I was at a meeting in Denver in May.

    My point is just to flag for members that these issues do count. They are real. These questions are being asked. This is not an artificial argument.

    Thirdly, the paper we're tabling with the committee has some possibilities we can think about. There's a continuum: convergence and harmonization, a customs union, a common market, total economic integration, and even dollarization, which has been raised from time to time, and of course it was an argument that was tossed around frequently whenever the Canadian dollar was testing new lows a couple of months ago.

    We've discussed the dollarization idea at both our committee and board levels, and there's a view that it's rather intriguing, but there's no sentiment at all to head in this direction. At the current time, in our view, it just doesn't make economic sense.

¿  (0915)  

     The various ideas I mentioned, from a customs union to a common market, etc., imply an increasingly close relationship, with implications for Canada's economic independence. We can talk more about the implications of these when you have a chance to read the paper, where you'll see that we have set out the pros and cons of these ideas.

    One specific thought that I would leave with you is to draw your attention to the need for Canada and the U.S. to think about their respective regulatory processes and approval standards and this kind of thing. Many companies are producing for an integrated market, but they still face separate regulatory approval processes on both sides of the border. These can be time-consuming, costly, and frustrating, when they're essentially serving exactly the same kind of market. Through mutual recognition agreements and mutual recognition of each other's standards, there has to be a way to improve this situation.

    My fourth point is with regard to the reopening of NAFTA. It's sometimes suggested that NAFTA should be reopened as a next step in the process of the Canada-U.S. relationship. Doing so, we could deal with considerable unfinished business, including, for example, chapter 16, dealing with the movement of people; and with trade remedies, such as anti-dumping, countervail, and subsidy measures, for example.

    But reopening NAFTA could also be fraught with difficulties. It's like appealing your grade in university or appealing a court sentence. You're going to take your chances with the outcome. It's not always a win. It might lead to a reopening of discussions that we would rather not have, or we could face new demands, or we could have issues put on the table that were left out before. These issues could include, for example, culture and the various service sectors--areas in which Canada has done very well. Textiles might also be put back on the table for discussion.

    So I think a reopening of NAFTA would have to be thought through very carefully. There are pros and cons to it.

    My fifth point is that Canada must be a full and active partner in this bilateral relationship. If we don't want to be led, we have to lead. In the wake of the events of September 11 and the development of the 30-point smart border action plan, we give good marks to Canadian ministers and officials for taking the initiative on many of the points in the discussions with U.S. counterparts. Many of these ideas came from Canada, not the U.S. By being proactive, we've been able to try to ensure that not only does the border remain open, but also that our interests are reflected in the solutions that are being put forward in this new security agenda. As we go forward, we've got to be proactive, we've got to be confident, and we've got to be creative. And let's not think negatively or put ourselves in the all-too-common role of seeing ourselves as the underdog or the weaker partner.

    Let me relate a recent event. A month ago in Denver I met with a business association called the Canada-Colorado Association. This group has 400 members in the Denver area, consisting of companies and individuals with substantial Canada-U.S. ties. I'd be hard pressed to find a more confident and self-assured group, about what they are doing, and with a real can-do attitude. It was a real eye-opener to talk to these folks. They don't spend time doting on being the underdog Canadian in the huge U.S. market. They're getting on with their jobs, with enthusiasm and confidence. I think we have to do this as a country.

    The business community hasn't waited. We've seized the opportunities through the FTA and the NAFTA. Trade and investment statistics bear witness to this. Each day more and more Canadians are giving shape, de facto, to the Canada-U.S. economic relationship. They're the ones who are voting with their trade and investment dollars.

    My final point is regarding getting noticed in Washington. In glancing at the records of the discussions of this committee involved in this exercise, I've seen that one of the committee's interests has been how Canada can get noticed in Washington. Of course, in the wake of the softwood lumber dispute, there's been much reflection and discussion about getting on to the U.S. radar screen...how we get hurt. There's no easy answer to this. Our embassy representatives in Washington do an excellent job at pursuing Canadian interests. They try to cover a very broad agenda. But they face challenges as well. We can't just rely on the good work that our representatives do in Washington.

    We don't underestimate the challenge of this. It's not easy to get noticed in Washington, especially when we don't vote there. In an election year like this, Canadian interests, along with those of other countries.... We're not unique. I hear of this through representatives from business communities in other countries, who have the same problems we do in Washington.

    I have a few thoughts on what we need. We need political leadership at the top. We need business-to-business interaction; companies active in the U.S.; and companies with facilities on both sides of the border. We also need associations, such as the kind of bilateral relationship we have with the U.S. chamber and through relationships between our local chambers and border chambers in the U.S. For example, there's a very strong relationship between the chambers in Plattsburgh and Montreal. We also need relationships between parliamentarians and U.S. legislators; between provinces and states; and between trade unions, and so on.

¿  (0920)  

    We really have to have a multi-layered approach, one with common messages and common themes, so that we speak to Washington in the kind of language Washington understands. We have to continually ask ourselves, are we hitting the right buttons? Sometimes perhaps we aren't.

    We have to make our American friends understand that the two countries have an important relationship that cuts both ways. It's win-win for both of us. There are a lot of Americans who don't recognize that for 38 of the 50 states, Canada is their largest trading partner. Do we use this fact to our advantage? Our whole communications strategy vis-à-vis the U.S. is something we need to think about.

    Let me sum up, Mr. Chair. This exercise by this key FAIT committee comes at an important time. As I said earlier, one of our biggest concerns is the benign neglect that has occurred over the years; it should not continue. We can't afford continental drift. The Canada-U.S. relationship is just too important for this to happen.

    The long list of questions developed by the committee's secretariat indicates the complexity of the issue and the need for us to think about it proactively. As I said at the outset, these questions do more to provoke further questions than they do to provide answers.

    Let me leave you with one final thought. At the current time we don't have any strategic approach to these questions. We don't have a broad or bold vision of the context in which integration is happening. We don't have a single policy or plan or a specific department that is really charged with this. With the recent announcement by President Bush of a Department of Homeland Security, perhaps the U.S. is starting to think this way and think on a more integrated basis. We have to do the same.

    The Canada-U.S. relationship needs a hands-on approach, not an ad hoc approach. We have to define our priorities, our interests, and our goals, and we have to do it on our terms and with our needs in mind. The report this committee is doing is going to be important in helping that debate and in focusing that discussion. I look forward to talking to you and to reading the report the committee will produce at the end of its hearings.

    Thank you.

    The Vice-Chair (Mr. Bernard Patry): Thank you very much, Mr. Keyes.

    Now we'll start the question and answer period. Mr. Day, please.

    Mr. Stockwell Day (Okanagan—Coquihalla, Canadian Alliance): Thank you, Mr. Chairman.

    [Editor's Note: Inaudible]...that the Canadian government just does not have a broad and bold vision with respect to relations with the United States. If there's a positive in terms of our relationship, it's that the business community itself has always been ahead of the curve when compared to government involvement. They've been out there as individuals, spontaneously developing relationships whether with their United States trading partner or with individual businesses, groups of buyers, and consumers. I encourage the chamber and its associated organizations to continue to take the lead because governments by nature are not going to be successful in doing that. As a matter of fact, if governments get too heavily involved, we see too much intervention and a slowing down of the very type of spontaneous relationship that can develop between businesses, whether they're in the same country, in different countries, or across the street from each other.

    You mentioned the area of regulatory regimes. Do you have with your partners in the United States, as fellow chamber members, a network that is set up to identify some of the regulatory differences? You could then bring them to the attention of this government and the administration of the United States for the purpose of seeing some consolidation there.

    On the issue of U.S. protectionism, which is obviously of real concern to us, do you have a partnership with the chambers in the United States such that they can--to use the words of a former President--feel our pain, that they understand? I am very concerned.

    History shows--go back as far as 1929--that trouble in the markets really becomes deepened...and we're heading for stock market trouble when we have a protectionist attitude, as they do now in the United States. It's just not enough for them to say, well, it's the election cycle, so we have to play to those interests. We're going to see some real problems as we get retaliatory action from other countries. That cycle has repeated itself.

    Do you have an understanding ear with your counterparts in the States such that you can link arms with them and, let's say, go to the White House or Congress and say, “This is a problem; it's a problem for our Canadian friends and a problem for others, and it's going to come back to hurt and haunt the United States”?

    If you could, tell us the degree of relationship you have there and if there's something effective that can be done.

¿  (0925)  

    The Vice-Chair (Mr. Bernard Patry): Mr. Keyes.

    Mr. Robert Keyes: Thank you.

    As to your first question, Mr. Day, on a counterpart basis with the U.S. chamber, we've discussed this at a general level, but I think the specifics are really left to a more sectoral level, especially those sectors that are facing the issues directly. So be it in the automotive sector, the pharmaceutical sector, or consumer products, there is no work on a bilateral basis to point out these anomalies.

    Some of them are really quite interesting, especially in the drug and cosmetics industry, where the same plant produces the same ingredients and the same product for both markets, but one's treated as a drug and one's treated as something else. It really doesn't make any sense. Yet if there were a way we could have a better mutual recognition of what we each do, and accept that, the level of frustration and cost could be dramatically reduced.

    The answer to your first question is if you were to talk to some of the sectoral associations, they would have a lot more going on, on a direct bilateral basis, than we have, other than agreeing at general levels, chamber to chamber, being very broad-based organizations, that this is a problem.

    It's in the telecom too; producing telecom equipment and meeting communications equipment standards is different. There are differences between ULC requirements and CSA requirements. You see a lot of equipment with both labels on it because it has to meet the same standards twice.

    It's the same in the food areas, Alex reminds me.

    Are there concerns? Yes. Are those standards there for good reasons? Yes, they are. But a lot of this predates what is really now an integrated market in so many ways that the market has moved ahead of the regulatory mechanism and where it is. We have to do some rational revisiting as to whether the system we have is the right one.

    As for your question on protectionism, again, we've raised this with our U.S. colleagues, who certainly share the concerns. But quite frankly, I think some of them find themselves compromised in the political trade-offs within their own membership. Whenever I go to my counterparts and say, “What about steel tariffs? Where are you on steel tariffs?”--well, they have consumers and they have producers, and they've found them hamstrung on both sides.

    And with the most recent concern over steel and the U.S. Farm Bill and so on.... Again, in this ICC meeting I was at in Denver, which I referred to, there were people there from 82 countries, and it was a universal condemnation of U.S. trade policy and protectionist elements and where they're going.

    In the dance between the two elephants, the U.S. and the EU, the elephants may not hurt each other very much, but there's going to be a lot of collateral damage. That has to be of real concern. As these two elephants go at each other, the kind of trade advancement where we all want to help developing countries is where there potentially will be significant problems. They're just going to undermine some of these efforts.

    So, yes, people refer to the elections, but you basically have an election cycle in the States every two years, with the mid-terms. As long as you have a very closely balanced Congress, as you have now, that's where the votes are. And members know that all politics are local. You folks will know that far better than we in the business community.

    There are real issues there, Mr. Day. There's no easy answer to this.

¿  (0930)  

    Mr. Stockwell Day: Thank you, Mr. Chairman.

    The Vice-Chair (Mr. Bernard Patry): We'll hear remarks from Mr. Lofthouse, then we'll go to Mr. Paquette.

    Mr. Lofthouse.

    Mr. Alexander Lofthouse (Policy Analyst, Canadian Chamber of Commerce): Thank you.

    Just to add to Mr. Keyes' last point, Mr. Day, the argument...just thinking purely within the United States, there is a constituency within the United States that is uncomfortable with a number of the moves that have been made on softwood, on steel, on the Farm Bill. You'll see these things bubble up.

    In fact, the New York Times editorials have come out squarely against this, and there is a constituency within the business community that says this is a bad idea; it's going to throw the Doha trade agenda totally out of whack. But that's a much harder sell than somebody who comes representing a very specific constituency, who says, “I have this specific, pinpoint problem”. That's a much easier political sell in Washington than this big thing called Doha. A lot of people just don't really understand.

    So that's part of the dilemma in getting this message across in Washington. There are certainly Americans who understand it, but that's a much more diffuse argument that's a lot harder to make, as opposed to specific sectoral problems, which are a lot easier to articulate and get a lot more political mileage.

[Translation]

    The Vice-Chair (Mr. Bernard Patry): Mr. Paquette.

    Mr. Pierre Paquette (Joliette, BQ): Thank you, Mr. Chair.

    I would first like to thank the Canadian Chamber of Commerce for their presentation. I was held up by the rain this morning and consequently missed the beginning. I always appreciate the clarity of your presentations. Nevertheless, I would like to look at three topics in more detail.

    Firstly, on the issue of Mexico, does the Canadian Chamber of Commerce have any concerns in terms of its relationship with Mexico? If we look at the North American economy as a whole, do you think that it would be possible for us to work with Mexico to develop more effective leverage in terms of the US than what we have working alone? Consequently, what role does Mexico have to play in North American integration?

    You mentioned the need to develop sectoral relations between Canada and the United States. You were of course referring to the business community, but also to trade unions and members of Parliament. I was pleased to hear you broach that subject.

    As concerns negotiations on the Free Trade Area of the Americas, a forum made up of business people has been set up. I don't remember the exact name of this forum, but if I'm not mistaken, I think it is known as the Americas Business Forum. There is also another organization which acts as an umbrella group for civil society bodies. This organization is known as the Hemispheric Social Alliance. It has requested that it be referred to by this official title. Concerning the rationale that you put forward in terms of Canada-United States relations, don't you think then it would be appropriate for our committee to recommend that governments focus more on civil society, rather than the business community, as a way of dispelling, to a certain extent, any suspicion hanging over the Free Trade of the Americas talks? Consequently, what role should other sectors of civil society, apart from the business community, play in these talks?

    My final question deals with chapter 11 of NAFTA. As you know, yesterday, the Quebec Minister of International Relations, Ms. Beaudoin, announced that Quebec would not endorse any more free trade agreements containing provisions like chapter 11, in particular, those governing the settlement of disputes between corporations and countries. Mr. Pettigrew once again, reiterated last week in Mexico that in his opinion, this whole issue would have to be addressed. It appears that the Mexicans are increasingly sensitive to this particular matter, as is the United States Congress, in particular, given the fact that some Canadian companies are using chapter 11 to challenge United States lumber-related action. I would like to know whether the Canadian Chamber of Commerce has looked into this issue, because this is a debate which is far from over.

    Thank you.

[English]

    The Vice-Chair (Mr. Bernard Patry): Mr. Keyes, please.

    Mr. Robert Keyes: Thank you for your questions.

    First of all, in terms of Mexico, one of the dilemmas we have is whether we think Canada-U.S. or continentally--North America. Clearly the overwhelming relationship for Canada is with the United States, and I think that has to be our first priority. Working with Mexico as an ally and partner is clearly in our interest. There is a set of common issues and common problems. But at the same time, they have some unique problems along their border with the United States that are quite different from what we face.

    They have problems with illegal immigration, for example. Security is a different type of problem from what we have, and the preoccupation of Washington with issues in Mexico is of a different order and level. I think there are things we can do together, but there are things we can do separately. Our first order of priority has to be with ourselves and the U.S., not with Mexico. That's not to say there aren't things we can do together and think more continentally on than we have.

    Mexico is emerging as a significant competitor and partner in NAFTA. Their trade, their economic activity, is growing rapidly. I have to give full marks to the Mexicans for reaching out and doing bilateral trade deals, to position themselves as a launching pad for economic activity into the United States. They have a deal with Europe; we do not. So the Mexicans have been very aggressive and successful in what they have done. Full marks to them for doing that.

    But as we look at this issue of Canada-U.S.-Mexico...Canada-Mexico is a long way behind where the Canada-U.S. relationship is, and that has to be our primary focus.

    In terms of the Americas Business Forum, I have participated in several of those meetings. I do not know whether I'll be going to Ecuador this fall, but I was in Buenos Aires for the last one. I am sure this fall U.S. trade policy is going to be a major issue; it will certainly be a question mark in the discussions.

    Everybody is waiting for the Americans to get their trade promotion authority through. We won't see substantive progress in the FTAA until that happens. The FTAA is a useful forum for the business community to interact and exchange views and messages.

¿  (0935)  

     I was part of the group that met with civil society in Quebec City. That was a useful meeting. I think it surprised some of us that there could be some rational and intelligent discussion, which has not been present at other fora, but it was actually quite a good session, and I think relationships happened there.

    Concerning your remarks on chapter 11 and the views expressed yesterday by the Quebec minister--I haven't seen those, so I can't comment in detail--I would hope that in this discussion over chapter 11 we do not lose sight of basic principles of investor protection, of non-discrimination, and of fair treatment. That's what underlies investor protection mechanisms, be they in bilateral agreements, of which Canada has twenty-some-odd; be they in NAFTA; be they, as they're going to be, considered in terms of so-called Singapore issues within the Doha round. The fundamental core is to protect the rights of investors, and if we want to attract investors and we want Canadian investors to be abroad--and you'll have seen the recent statistics on just how much Canadian investment there is abroad--then these investors have to be assured they're going to get fair treatment.

    Chapter 11 gets blamed for virtually everything, something I don't agree with. It is a mechanism where I think the jurisprudence is still being written. As with any law and any mechanism, I think we're still finding the boundaries. There have been a huge number of investments that have proceeded without any problem whatsoever, and without resorting to disputes. It's just like the 95%-plus of our trade with the United States that proceeds without problem: you never hear about that. But you do hear about the thorny issues that remain.

    There are moves under way to clarify and to have more precision in how these agreements are to work. I get this from several sides, because I also run a committee of Canadian arbitrators who have been involved with chapter 11. I hear this from the arbitrators' side, and some of their concerns are that they're not being left to do their job. This can be an issue for another discussion on another day, because it's a long, involved discussion, but there are many issues involved in this. This is not a simple, straightforward situation.

¿  (0940)  

    The Vice-Chair (Mr. Bernard Patry): Mr. Lofthouse.

    Mr. Alexander Lofthouse: Thank you, Mr. Chair. This is just a very quick point on Mexico. Mr. Paquette, you and I have discussed this before, before the subcommittee, and I think my answer then probably bears repeating in this context.

    When it comes to North American integration, I don't think we should look at it as an either/or choice. We work either bilaterally or trilaterally. We're not going to work at the same speed on all issues at all times. This is one place where the European experience is really instructive. I don't think the process of European integration is actually a very good model for North America in a lot of ways, but in one way it is.

    There's a concept in Europe of multi-speed integration, where not all partners are integrated in the same way at the same time. Common currency: they're not all part of it because they're not all ready for it and they're not all willing to do it. The Schengen Agreement on internal boundaries: they're not all part of it because they're not all ready for it.

    I think we can look at the same thing with Canada, the United States, and Mexico. There are some issues on which we can work on a trilateral basis, such as what we already have--tariff reduction, investment policy, and the list goes on. But on some issues, such as border security or movement of people, we're simply not working that way. There's nothing wrong with that, because we're talking about three very different countries operating in three very different contexts.

    So I would say if there are issues on which it is better for us to work bilaterally--Canada-U.S., or for that matter U.S.-Mexico--then so be it. I just think we can do the same as we construct this trilateral economic space and still work on issues bilaterally. I don't think the two are mutually exclusive.

    The Vice-Chair (Mr. Bernard Patry): Mr. Assadourian, please.

    Mr. Sarkis Assadourian (Brampton Centre, Lib.): Thank you very much, Mr. Chairman. I have three short questions. First I'd like to have your reaction, Mr. Keyes. We discussed many times softwood lumber and the 29-point-something percent changed duty on the softwood lumber. There was a suggestion we should do the same thing to Americans about energy. I'd like to have your reaction to that suggestion.

    Second, can you explain to me if there's any connection between Republican administration and Democratic administration ideologically, vis-à-vis the problem we are having now with the Bush administration? What I'm trying to say is, if Democrats were in power in the White House, would you expect to have the same relations in trade between us and the Americans, or would there be different sets because of the ideology? These guys have a more protectionist policy than the Democrats, I would think.

    The other question is, if you put yourself in the position of the U.S. Chamber of Commerce, tell us what's wrong with American policies to deal with us.

    Mr. Robert Keyes: That's an interesting question.

    Mr. Sarkis Assadourian: Thank you very much.

    Mr. Robert Keyes: Those are three very interesting questions.

    On the softwood lumber and the linkage issue, my answer would be no. Do not do the same. If you have not seen it, former Canadian ambassador to the U.S., Allan Gotlieb, did a very interesting article a year ago on this linkage issue, where he talked about playing leapfrog with a unicorn and how it could get very painful. His point there was that we have such a multi-faceted relationship--

    Mr. Sarkis Assadourian: Was he a Conservative?

    Mr. Robert Keyes: We have such a very multi-faceted relationship that to try to get into a tit for tat kind of thing...you end up shooting yourself in the foot. This has been proven over and over again where you have countervailing actions. It's all well and good to take these actions, and we've seen this in trade disputes. The issue has come up, for example, with Canada-Brazil. If we were going to get into retaliation, we end up at the end of the day doing ourselves more harm than we do good.

    So getting on to a linkage kind of thing, while it has some very simple appeal initially, would not be a strategy we would counsel. I think it would be very dangerous for us to do that. We're just so closely integrated.

    On your second point on ideological differences, I know my colleague Alex wants to add a word or two.

    I would think if you looked at rhetoric and what you would say is the policy platform and plank, we would have expected a more open free trade approach from a Republican administration than we would from a Democratic administration. I think there was an expectation from the U.S. business community that this is indeed where the Bush administration would go, and I think they have perhaps been somewhat disappointed. The platform they campaigned on has now been offered up to domestic political expediency and a very closely balanced situation in political terms in the House. I've heard one of my counterparts in the U.S. business organization say that under the Clinton administration we didn't like some of the things he did, but at least we knew exactly where we stood, and now we don't. We just don't know, and it's very unpredictable as to how the scenario is going to unfold.

    In terms of the U.S. Chamber, if we put on U.S. Chamber glasses and looked at us, I think they would look at some of our systems, the way we do things.... We are seen as still having a lot more state intervention, government mechanisms, crown corporations. We have a different way of doing things, and that's fine. But we found out through the softwood lumber dispute and stumpage issues--and we see this through the actions of the Canadian Wheat Board--that because we do things differently, it doesn't meet the test of U.S. trade law. We're constantly coming up against this. It's the same in agriculture.

    So there is a lack of understanding and a lack of flexibility in the U.S. system and in U.S. thinking to appreciate the way Canada does some things differently. They might see it as wrong, but we don't. Yet these mechanisms in the market are used against us.

    Alex.

¿  (0945)  

    Mr. Alexander Lofthouse: Thanks.

    Mr. Assadourian, you had three excellent questions.

    I just want to add a point on the second one about whether we would expect more trade problems with a Democratic administration or a Republican administration. I would actually ask that question and another one in addition, and that's who controls Congress. As someone who spends an awful lot of time watching events in Washington, as I'm sure do most of you, I know that so much of the agenda there is congressionally driven. Even in areas that are clearly within the administration's purview, as trade policy is, the White House is often led by Congress. That's true whether it's the same party in control of both branches or it's divided government.

    So I would just throw that back and say, well, in some ways don't look at the White House; look at who's controlling Congress. We have a very sharply divided Congress heading into an election year, where the jostling for seats is intense, because in both Houses you only need one or two swing constituencies to change and the whole dynamic changes. I would say your question is a good one, but I would ask an additional one, and that is who's in control of Congress, because that makes an enormous difference.

    Mr. Sarkis Assadourian: We understand the problem, but what is the solution then? We already know the problem. Do we give in, throw the towel in and say forget it because this is the way it is? What can we do? If I am a frog and they're the unicorn, what's the point of arguing about it?

    Mr. Robert Keyes: At the end of the day, Mr. Assadourian, I think it boils down to the fact that Washington and the Americans have to have a better appreciation of the nature of the Canada-U.S. relationship and just how important we are to each other.

    I was in Australia when the steel tariffs were announced. There were editorials all over the Australian press that Canada was left out of the steel action because we had NAFTA and that protected us. So Australia needs a free trade agreement with the United States. I met with some former colleagues I had worked with down there, and I said don't believe it for a moment. Just because you have a free trade agreement, that doesn't necessarily protect you from any of these things. We, in essence, have a freer trade agreement; we don't have a totally free trade agreement.

    Going that next step and integrating institutions and what it means so that we can avoid some of these issues is a huge step, which we've never been able to do. This trade remedy stuff is one of the big unfinished pieces of business we've never got around to, and we've never been able to put it back on the table in Canada-U.S. terms.

¿  (0950)  

    The Vice-Chair (Mr. Bernard Patry): Mr. Eyking.

    Mr. Mark Eyking (Sydney—Victoria, Lib.): Thank you, Mr. Chairman.

    Mr. Keyes, I was on the international trade committee before I was on foreign affairs, so I appreciate the way you've put it all in a nutshell about the relationship between us and the States, where it is, how important it is, and where we have to go.

    Over the last year, especially since September 11, the Americans have been acting a bit like a cornered animal. They just figure the world is out there and they have to do what they have to do.

    I totally agree with you that these bilateral communications are key. We can understand them more, and also they can understand us and know that we're really friends. But as you said, it has to be with all segments of society, whether unions or municipalities, this going back and forth.

    I'd like to talk about Canada being a launching pad for these European and Asian countries in the North American free trade zone. You often hear that they want to get in there some way and that they see Canada as a place to start. For Japanese or European companies to come here, for instance, do we have an environment just as good as or better than in Tennessee or other states?

    We had a guest speaker the other day, Buzz Hargrove, and he said, well, we have a whole lot of things here better than they are in the States: we have our health care system, which saves money for these companies; we have an educated workforce, and so forth. He's pointing to the incentives as one of the keys to setting up shop in North America.

    My question is, how do we really match up? Mr. Day said government shouldn't be involved; you have to let businesses make the decisions, and it has to be totally free enterprise. Mr. Hargrove's assessment is yes, but if Honda is going to open--I'm just using an example--a plant in the States instead of Quebec, perhaps Tennessee, where the municipalities are giving them free this, free that, and so forth...you call that a kind of corporate welfare.

    How do we stack up? I know it could be different between states and provinces. Should we be doing more to step up to the plate, or is it a main incentive for...? Where's that part?

    The Vice-Chair (Mr. Bernard Patry): Mr. Keyes.

    Mr. Robert Keyes: Thank you.

    We like to think that Canada is a pretty good launching pad for overseas investors to come here and use. Mr. Hargrove mentioned that we do have a lot of advantages: the health care system, a well-educated workforce, our dollar, and our cost base. Our tax system is getting better. We've made a lot of progress. We still have a way to go, but it's getting better.

    If you look at the locational analysis study DFAIT has done a couple of times--I think KPMG did it--and the costs of doing various things in various parts of the country, it was well documented that we do indeed have some considerable advantages. We don't play this subsidy game. Canada has been moving away from these overt business subsidies we've had. We just don't have the treasury capacity to hand these things out. Is that a factor in locational analysis? I'm sure it is. If we tried to compete on a dollar for dollar basis like this, I'd be very concerned that we would get onto a slippery slope where we would be offering too many things we really couldn't afford. Through our dollar, lower wage costs, and other things, we are offsetting some of the value of some of those things in other ways anyhow.

¿  (0955)  

    Mr. Mark Eyking: Would it really balance? In terms of your sense of companies coming and going, do they balance out? Do you talk to companies that think about coming, and one balances out the other, so to speak?

    Mr. Robert Keyes: No, I have not gone into the equation and let's line things up on both sides and what do the dollars come down to. Companies make locational decisions for all sorts of reasons, and they'll look at the economic situation; they'll look at the labour situation; they'll look at taxes; they're going to look at regulatory approaches. To think back to my days being involved in the mining industry, if you had a mine in two jurisdictions what would tip the balance one way or the other, leaving subsidies aside...decisions got taken for some rather interesting and sometimes strange reasons. But I think the advantages we have, and some of our lower-cost structures, are offsetting these kinds of overt subsidies and tax-free municipal bonds, and that kind of thing.

    The Vice-Chair (Mr. Bernard Patry): Madam Jennings.

    Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you very much. It's a pleasure to see you again, Mr. Keyes. I remember you appearing before us when I was on the industry committee, and you as well, Mr. Lofthouse.

    Mr. Robert Keyes: We get around. It just goes to prove that the international agenda touches so many aspects.

    Ms. Marlene Jennings: I want to start by saying that I really appreciated your presentation. I didn't get to hear all of the presentation. As with my colleague, Mr. Paquette, and apparently you too, I was late getting here because of the rain. But the part of your presentations I heard and your subsequent answers to questions I found very interesting. I found it particularly interesting when you talked about how the European model of integration is not really appropriate for our North American integration, but there are certain aspects we should be looking at that could be applicable to North American integration, like multi-layered, multi-speed, and the fact that even in Europe not all sectors have been integrated at the same time, not all countries within the European Union have integrated on common rules, or whatever, whether it's currency or other issues. I find that very interesting, because when one looks at North American integration, one of the industries that you, Mr. Keyes, identified, the steel industry, is probably the most integrated in North America.

    When we look at Europe, historically that's actually the industry that began the roots for the European Union. Now there's integration pretty much within the three industries. There's integration even on the union side, whether they belong to an overriding organization or they have their own structures in place, an umbrella organization.

    When we travelled to the United States and then to Mexico, particularly in Mexico, the people we met with who were from the steel industry in Mexico--the union, the industry, and the government politicians--were all in agreement that we should be attempting to move to common rules of competition and actually take that integration to a further level. They used the example of this latest dumping issue, where the United States imposed anti-dumping duties and tariffs and Canada and the United States were exempted from it.

    They explained how it came about that the Canadian steel industry and unions, and the Mexicans, were actually lobbying the Americans to move on that, saying, we don't have a problem if you impose a tariff because we know we will be in a position to protect ourselves against that, etc., and we'll try to get our own countries to move on that.

    If you are in agreement that, one, it is the most integrated, and two, we should be looking at those areas where we can move integration further and that could be one where it would be trilateral, what are the next steps you would recommend this committee look at in terms of part of our report recommending to the government, here's an area where you can actually move trilaterally and here are some of the next steps that as a government, in terms of policy, in terms of negotiation, etc., you should be looking at in order to push that particular sector forward in terms of integration?

À  (1000)  

    Mr. Robert Keyes: The steel industry is a perfect candidate, you might even say guinea pig, for a model on a North American basis. The idea that you could have a very integrated approach has been tossed about. There'd have to be regulatory changes, and issues of competition would come to the fore.

    The U.S. Department of Justice and the anti-trust people would have to be very much in the loop. There would likely be marketing issues, standards issues, and customs issues, the way these shipments are tracked. We would almost need--and I hate to use the word--a perimeter approach on steel, where the three countries would say, “Okay, we now have this integrated market and we are going to share”--and I use the word advisedly--“this market. We have so much domestically produced steel and so much internationally produced steel. We're going to take this.”

    It could come down to a product-by-product basis, where certain facilities would specialize in certain products. It could be much like the auto industry, where they give a particular plant either a world mandate or a North American mandate. Pretty well all the corn flakes in North America come out of Kellogg's in London. That's the mandate.

    There would also be issues where you would have stronger companies and weaker companies. We have candidates on both sides of the border in all three countries for companies that are stronger and others that are suffering.

    In the OECD discussions on steel capacity that have been going on, they've been very careful to say this is not a matter of each country producing so many tonnes. It's very much a matter of asking where is the subsidization, where is the capacity that should not be sustained?

    I think you'd get into some very detailed discussions. Some plants might have to disappear. You would have to have adjustment programs and packages, and that can get painful for the communities involved. So competition, trust, marketing--there's a whole host of possibilities, but it's not beyond the realm of the possible to look at as a model.

    Ms. Marlene Jennings: Do you think a first step might be to actually sponsor some kind of conference on the issue, bringing together the key players?

    Second, given our 30-point plan on border security, would looking at a common customs union be one step?

    Mr. Robert Keyes: It could be. I would clearly have to take the advice of the steel industry on that.

    Ms. Marlene Jennings: The Mexicans are in favour of it.

    Mr. Robert Keyes: I'd have to see what our colleagues in the Canadian steel industry had to say. It has been a real concern that we have an integrated market here, but each country is still applying its own rules, its own trade remedies, and there's an inherent conflict. That's what's getting us into so much trouble.

    Increasingly, we have that on softwood too, where companies are on both sides of the border. We have an integrated market, but we have the old trade rules.

    Ms. Marlene Jennings: Thank you very much.

    The Vice-Chair (Mr. Bernard Patry): I have one question for you, Mr. Keyes. In a recent study by the C.D. Howe Institute, “Shaping the Future of the North American Economic Space: A Framework for Action”, they argue that Canada needs a big idea.

    Should Canada pursue a big-idea approach in getting the attention of U.S. policy makers, and should that include a customs union?

À  (1005)  

    Mr. Robert Keyes: Good question. If we go back to the launch of the FTA, it took a pretty bold vision, and a pretty bold idea and initiative. Canada took the initiative with the United States and really pushed it, saying, this is what we want. We're in a situation now where we have an incremental approach. We are doing things bit by bit. We are moving towards integration. But as I said in my opening remarks, we don't really have an overall context or plan. The business community is doing what it sees best and what it sees it needs to do. The growth in our investment and trade patterns is clearly showing this.

    But I would certainly think there's merit in looking at this bold vision. We have to define it. I think that's part of the struggle. What is it? If you do go the customs union route--which we discuss in the paper we're leaving with you--there are a lot of pros and cons. Are we ready to lose some of the flexibility we have now in trade, fiscal, and monetary policies? The closer you get, the more you lose this flexibility. The European Union has to move as a block. But in the European Union, you have a lot of partners that are more or less equal. When you look at the North American context, you have very different sizes and capacities. It would be a real challenge to act as an equal partner within.... While people tell you, think of the EU model and the customs union, we're not dealing with equal partners. So there would have to be a lot of safeguards for us, and our interests. We would have to be prepared.... Are we going to sit down with the United States and move as a block on trade policy? This is what a custom union implies.

    The Vice-Chair (Mr. Bernard Patry): Mr. Lofthouse.

    Mr. Alexander Lofthouse: This is something I wanted to mention when you referred to the customs union before. Going the route of a customs union is certainly worth looking at, but it's important to remember that it's going to be very complex. The European experience is one that you can look at. The European Union tries to negotiate as a block. But if you look at what actually happened in Doha, guess what? You realize it's not a federal state with 15 constituents; it's a block of 15 sovereign states with very, very different interests. Even though they're obliged to negotiate as a block, they have a really difficult time doing this and coming to a consensus. And even when they do come to a consensus, it doesn't always hold. It didn't at Doha.

    So if we are going to go the customs union route, one thing we'd have to remember is that it would have impacts well beyond one particular industry and one particular policy area. It's worth looking at. But let's look at it with our eyes open.

[Translation]

    The Vice-Chair (Mr. Bernard Patry): Thank you very much.

[English]

     Mr. Duncan, do you want to ask a question?

    Mr. John Duncan (Vancouver Island North, Canadian Alliance): We have the time, I understand.

    The Vice-Chair (Mr. Bernard Patry): I'm very open this morning.

    Mr. John Duncan: I understand you are leaving us with a paper. Do you have an expanded document on the subject of a customs union or some specific policy analysis from the viewpoint of your chamber that is different from what you're presenting today?

    Mr. Robert Keyes: No, we don't.

    The document we're leaving with you actually had its origins in a paper we presented to our board. It went through options and ideas on Canada-U.S. integration. There is a fairly extensive section in it on dollarization, and the pros and cons and various ways to go. If you're interested, we have a longer paper available on the dollarization issue, but the current paper is basically what we have. We haven't gone into a long, detailed examination of the pros and cons.

    Mr. John Duncan: Are any of these papers on your website?

    Mr. Robert Keyes: I believe the dollarization paper is on the website. But I can easily send it over to the committee.

    Mr. Alexander Lofthouse: It isn't on the website yet. It hasn't been translated.

    Mr. Robert Keyes: It will be.

    Mr. John Duncan: Right.

    So you represent a pretty healthy cross-section of Canadian business. Surely there must be more talk about a customs union type of arrangement, or a new arrangement, than there was in the past, given the number of trade disputes we're involved in. Would that be a fair statement?

À  (1010)  

    Mr. Robert Keyes: I think I would paraphrase your statement as saying there are a lot of questions in the minds of our members and our board as to, as Mr. Patry said, what's the next step. Where are we going? The business community is proceeding to act and to seize opportunities and to move forward, but on this question of framework, a vision, where are we going? We see in the United States now, in President Bush's announcement, a major reorganization that is going to have impacts for Canada in how we interact with Washington on an agency-to-agency basis.

    We don't have that big vision. It's just de facto and happening ad hoc. As I said in my remarks, we don't want continental drift, but I think that's what we've had. That's why I think the kinds of deliberations the committee is having right now are extremely important, because it is on the minds of business people.

    Do we spend every day discussing it? No, we don't, but in the wake of September 11 we went through the perimeter security phase, where people were talking about that, and now we have a much more integrated security system than we had. Agencies on both sides of the border are working in a very different way than they did. We've had a lot of incremental change, responding to the security agenda we've been presented with. So we are in a new mould.

    Mr. John Duncan: The security agenda has not entirely resolved itself. Its complexion changes from month to month, and what's going on now with the amalgamation in the U.S. will fundamentally change how the Americans view us, once again, in my view.

    I guess the other question that leaps to mind is, we tend to focus a lot of our thought process on our U.S. NAFTA partner, but we have another NAFTA partner. I'm wondering if your organization has direct dealings with your counterpart in Mexico.

    Mr. Robert Keyes: We do.

    Have we had a detailed discussion on NAFTA integration or our bilateral relationship and where it's going? No, we haven't.

    Mr. Paquette asked a question earlier, too, about Mexico, and also in conversation with Ms. Jennings we talked briefly about the pace of doing things with Mexico. Like Europe, there are things happening quickly on some fronts.

    What was the term you used, Alex?

    Mr. Alexander Lofthouse: It's a term that European integration academic wonks like to use. It's “multi-speed integration”.

    Actually, I should give full credit. The person who I first heard apply it to the North American context was Chris Sands, from the Center for Strategic and International Studies, in Washington.

    Basically, just to reiterate briefly what I said to Mr. Paquette earlier, not all partners are ready to do all things at the same speed, all at the same time.

    The two examples I can think of from Europe are a common currency and the Schengen Agreement on common borders. Not all 15 EU partners are part of those two things.

    I think you can see the same dynamic in North America with Canada, the United States, and Mexico. Some things you can do bilaterally. Some things you just can't do trilaterally, because you're not ready for them; the structures of the three countries are too different. But bilaterally where we can and trilaterally where we can, a mix of approaches is called for. That would probably be the fairest way to put it.

    The Vice-Chair (Mr. Bernard Patry): Mr. Clarkson, in his submission to the committee last May, stated that NAFTA has no institution that might give Canada and Mexico the voice they need to upset Washington and increase power. Do you think we should have a national institution to equalize the power?

    Mr. Robert Keyes: A NAFTA parliament?

    The Vice-Chair (Mr. Bernard Patry): No.

    Mr. Robert Keyes: I haven't seen Mr. Clarkson's remarks, so I don't know what he is potentially talking about. You do have three partners of very different economic weights trying to achieve a balance within what started as a trade agreement--the NAFTA partnership--but has taken on....

    Our relationships have so many more dimensions now. Is it NAFTA-plus? I don't quite know what the plus is, and as I said earlier, the reopening of NAFTA potentially puts you onto a bit of a slippery slope, because you have to deal with things that you might not want to deal with. But do we need a supranational institution? I don't know.

À  (1015)  

    The Vice-Chair (Mr. Bernard Patry): Mr. Lofthouse.

    Mr. Alexander Lofthouse: I started out by saying earlier on that the European experience is not that instructive and now I'm about to refer to it one more time.

    When we talk about institutions, it's important to keep in mind what kinds of institutions we're talking about and what role we expect them to play. In Europe, they started with the institutions and it was an institutionally based process of integration. In North America it's been a rules-based system where we've worked out common rules among three sovereign countries with very, very few common institutions.

    So I think the follow-up question to yours would be what kind of institutions would you want to construct and what exactly would you expect them to do? I think that would be a key part of that.

    The Vice-Chair (Mr. Bernard Patry): Fine.

    Mr. Assadourian, one question.

    Mr. Sarkis Assadourian: A very short question, Mr. Keyes. Can you tell us if you have any relations trilaterally between you, the American Chamber of Commerce and the Mexican Chamber of Commerce, and, if you have, what kind of relations do you have?

    Mr. Robert Keyes: We did have a relationship. When I came into my present capacity five years ago, we had a trilateral NAFTA working group, and it met in 1997 and 1998. The last meeting we had actually was in Edmonton, where we had great difficulty in getting Americans to come at the end of the day. We simply couldn't get enough people to come out and we dropped it, and the reason was that NAFTA was working.

    They had originally started as a working group to deal with specific business issues in the context of the negotiations. It was almost like a group that Mr. Paquette talked about, an FTAA business forum. Well, we had a little NAFTA business forum and it basically lost its purpose, because the agreement was up and running. We didn't have huge business issues. We were getting on with the job and so it just dropped.

    So now our interaction is much more sporadic, issue or sector specific, but we don't have that kind of trilateral forum. If we were seriously looking, though, at next steps for NAFTA and where to go, perhaps it's time to revisit that and to revise it and get the business community....

    Mr. Sarkis Assadourian: So you know the problems we have with the Americans now.

    Mr. Robert Keyes: Oh, we know the problems. I think we all know very well the problems we have with the Americans.

    The Vice-Chair (Mr. Bernard Patry): Merci beaucoup. Thank you very much to our witnesses, Mr. Keyes, Mr. Lofthouse. It was very, very interesting this morning. Thanks again.

    We will recess for ten minutes. Thank you.

À   (1021)  

---

À   (1046)  

[Translation]

    The Vice-Chair (Mr. Bernard Patry): We shall now resume our meeting. The committee shall now hear from the Institut national de la recherche scientifique, represented by Mr. Mario Polèse, who is a senior professor whose specialty is urbanization.

    Welcome to our committee, Mr. Polèse. It's a great pleasure for us to have you here with us this morning. The floor is yours.

    Mr. Mario Polèse (Senior Adjunct Professor, Urbanisation, Institut national de la recherche scientifique): Firstly, I would like to thank the committee for having invited me here today. There seems to have been a bit of a mix up. I was led to believe that I was due here at 11 o'clock this morning. I'm sorry to have kept you waiting.

    The Vice-Chair (Mr. Bernard Patry): You are quite correct. Your invitation did indeed say 11 a.m. Please do not apologize, therefore. By your invitation, you are on time. You're even slightly early.

    Mr. Mario Polèse: Thank you for having waited. I'm very honoured.

    There is a slight technical hitch this morning. I had planned to make a PowerPoint presentation, but it appears that I don't have the appropriate equipment to do so. My presentation was very nice in colour, but these things happen.

    If you would be so kind as to give me your e-mail address, I could send you a copy of my original presentation electronically. That is not a problem at all for me. Indeed, I have already forwarded a copy to Mr. Knowles. I hope that everyone has access to a hard copy. At least that will give you something to follow.

    So, once again, thank you very much for the invitation.

     What I want to talk to you about this morning, in my capacity as a researcher,—obviously, I'm not trying to sell you anything here—is the regional impact of North-American economic integration. If it would help the interpreter somewhat, I could give them a copy of my notes. However, I don't know whether they'd be able to read my writing.

    As I said, I'm here today to talk to you about the regional impact of North-American integration. In other words, why will integration benefit some parts of the country more than others and, at the end of the day what are the implications of integration for the future?

    Where national economies integrate, a bit like the way Canada's economy is integrating with that of the United States, economic activity is gradually drawn to specific regions. This process is more or less inevitable.

    If you take a look at the map of Europe that I have here, you will see that this shift in economic activity has been quite systematic. Unfortunately, you might not be able to make it out on this map here, but if we agree that the economic heart line of Europe is situated approximately on an axis running from Amsterdam to Zurich, you can see that within each European country, the most economically vibrant areas, with the greatest growth, let's say, since the Second World War, are those which are the most geographically well positioned for trade with other European countries. The most striking examples of this phenomenon are northern Italy, northeast Spain, southeast England and western Austria, to name but a few.

    Therefore, you can see that in the long run integration has a restructuring effect. We shouldn't exaggerate the speed of this phenomenon, but, nevertheless, integration does gradually lead to a shift. The situation in North America is perhaps slightly less clear.

    Of course, the map of North America that you have in front of you is just an overview. First of all, it can be said that in North America the whole settlement process is not yet complete. In addition, in the case of North America, there are two major axes of economic activity. First of all, there is the historic economic heart line of our continent, which stretches along an axis between Chicago and New York, but there is also a second centre of economic activity, which is currently developing on the Pacific coast. What we are gradually seeing in terms of population distribution—and I don't have the exact figures here with me—is that, gradually, economic activity in North America is focusing in these two areas. There are what we call empty quarters, that is to say the whole centre of the North-American continent. These are areas of gradual decline. In Canada, examples would be Saskatchewan and Manitoba.

    Therefore, what does all this mean for Canada? I don't have to remind you that Canada's economy is currently undergoing very rapid integration with that of the United States. If you turn now to the next two graphs, you can see that historically speaking, what you're currently witnessing represents a fairly major change. It might have slipped our minds somewhat, but not so long ago, our major trading partner was the United Kingdom. This graph clearly shows that the integration of our economy with that of the United States is on an upward curve. I don't know quite when we will reach the 100% mark, but statistically speaking, it will be a very interesting era.

    If we look more closely at trade with the US, we can see very quickly that trade between Canada and our largest neighbour, is mainly an Ontario story. That should not come as any great surprise to anyone.

À  (1050)  

    If you look at the map of North America, you can see that out of all the Canadian provinces, Ontario is best placed geographically for trade with what we call the economic core of the continent. Approximately 56% of all Canadian exports to the US originate in Ontario.

    An initial conclusion that we can draw from that is that US economic growth, and, in parallel, the growth of Canadian trade with the United States, will consolidate the Ontario economy, in relative terms, compared to the situation in other provinces. Indeed, recent trends in Canada have demonstrated this fact. Ontario is doing very well.

    The other graph shows that of all Canadian provinces, the economy of Ontario is the one which is integrated to the greatest degree with that of the United States. The following graph shows the ratio of exports to the US to exports to other provinces. You can see that Ontario exports to the United States are approximately twice what they are to other Canadian provinces.

    As you are undoubtedly aware a parallel change has been taking place. On the whole, not only in Ontario, but in all Canadian provinces, an increasing amount of trade is taking place with other countries, especially the United States, rather than with other Canadian provinces. We could even see this as a breakup of the Canadian economy. We shouldn't exaggerate this phenomenon, but it is clear however, that trade with other countries is on the rise.

    This phenomenon is borne out by the next four graphs. Firstly, these graphs really show that the percentage of Ontario's GDP made up of exports to the rest of Canada has remained stable, whereas trade with the rest of the world, specially, the United States, has risen. The same thing has happened in Quebec. These two provinces are in a similar situation. Ontario is slightly ahead of Quebec, but the trend is the same in both provinces. This phenomenon was already taking place in British Columbia for example, but the slight change that you see on this graph is due to the problems facing the pulp and paper industry. Nova Scotia is in a similar situation. If you were to draw up ten tables, one for each province, you would see that the trend is more or less Canada-wide. All the areas of Canada are trading more today with the rest of the world than with the rest of Canada. If this trend continues, as CBC has reported, this disparity will continue to grow.

    Trade with the United States is also very geography-sensitive. This is clearly demonstrated by the little graph showing Quebec's foreign trade. In the case of Quebec, most foreign trade is with the neighbouring American States. This comes as no surprise. The same is true of Ontario and the other provinces. New regionally based trading blocks are currently developing. A case in point are the relationships between Ontario and Michigan and Quebec and New York State.

    Unfortunately, it's a great shame that this map is not in colour. You will have to take my word on that. It also means that I can tell you what I like and you will have to believe me. It's a shame because it was a Statistics Canada map, produced out of taxpayers' money. Consequently, you will have to take my word on what I'm telling you.

    Changes in trade have already resulted in a gradual shift in economic activity and population towards regions with the most developed transport links with the United States, and also towards major urban centres. We should not lose sight of the fact that major cities are very important engines for international trade.

À  (1055)  

    Think of all the intermediation services: Distribution, marketing, transportation, etc. So generally speaking, international trade also goes hand in hand with urban growth and you can see the shift in every province. The only exception might be Alberta because of the oil in the northern part of the province. But everywhere you can see the gradual shifing of the population toward the south. In Ontario, it is clearly the entire southern part that is growing whereas the north of Ontario is staying as is and will no doubt remain marginalized.

    You can see the same thing in the Atlantic provinces, where most of the growth is in the Halifax-Montreal and Halifax-Boston transportation corridors, with communities on the American border, such as Madawaska, seeing significant growth, whereas the northeast of New Brunswick is still encountering difficulties. Newfoundland, of course, also continues to be in a difficult situation.

    If we were to talk about the gap between the winning and losing regions, it will most likely be greatest in Quebec. In their particular case, you can see that any population growth, let's say since the last census, has occurred in the southeast of the province. In fact, in the case of Quebec, you can see that nearly all the growth is in the great plain around Montreal and a little in Quebec City as well.

    None of Quebec's so-called resource regions has seen any economic or population growth since the last census and the gap may widen. To put it in geographical terms, the Saguenay, the Gaspe and Abitibi are not exactly well situated for trade with the United States compared to other regions. It is always a question of comparative advantages.

    In conclusion, you can see that very clearly on the last graph where I indicated the most recent trends for jobs in the manufacturing sector in two of Quebec's border regions, namely the Eastern Townships and Chaudière-Appalaches which also includes the Beauce, regions that are often talked about. In other words, the fairly impressive recent growth in the Eastern Townships and the Beauce is not necessarily sheer coincidence. They are border regions and are situated along the transportation corridors with the United States.

    Since I was asked to be very brief, to summarize, the result of Canada's economy being integrated into that of the United States will be a gradual, not a hasty, reinforcement of certain geographic trends, and therefore, in some cases, the regional differences in Canada will become even more pronounced. But I must repeat that it will not be a rapid change, although they are foreseeable and we must recognize them.

    Thank you very much.Merci.

Á  (1100)  

    The Vice-Chairman (Mr. Bernard Patry): Thank you very much, Mr. Polèse.

    We will now move on to questions and answers.

[English]

    Mr. John Duncan: Thank you very much.

    When you were talking about Canada's geography being a determinant in the growth of our trade with the U.S., superceding our trade with each other in terms of provinces, it occurred to me that what we often blame on geography could be blamed on our lack of infrastructure. I wonder how much you took that into account. The last census showed that in almost all of Canada we lost population. Whenever we go north of the Trans-Canada, with minor exceptions and one major exception, which is the Edmonton-Calgary corridor.... The Government of Alberta has gone out of its way to build new highway infrastructure to link with the U.S. I think the real question sometimes is, which is the determinant?

    Mr. Mario Polèse: I think there are two elements. Even with the best infrastructure, you can't totally get rid of the effects of distance and geography. If you're further from the United States, from the main markets to which you're exporting, you're simply further. That's not going to change, so one shouldn't overestimate the impact of infrastructure. I don't think infrastructure is “the” major explanatory variable.

    However, where you're right--and this is not necessarily good news for outlying regions--is that there is a sort of “vicious circle” effect. To keep good infrastructure in place--we see the example recently around Murdochville in the Gaspé--you have to have a certain volume of travel. If you don't have the volume, you can't keep the infrastructure intact, whether it be railway lines or even maintaining good highways or airlines.

    To the extent that you find yourself marginalized, that you're in a region where trade is more difficult or volume is lower, the maintenance of infrastructure is lower. Then, of course, you have less trade, so you're going around in a vicious circle.

    This indeed is a problem. In the past we've made some pretty stupid decisions. For example, in Newfoundland the railway has been taken out; there is no railway any more in Newfoundland. In northern Abitibi we took away the rail lines too, because of low volume--brilliant, that was; just genius. It's clear you're in a vicious circle in a place like the Côte-Nord in Quebec. You're in a very difficult situation because you're in a dead-end line. It's very difficult to maintain infrastructure if you don't have the necessary volume.

    So you're right, infrastructure is a factor, but I wouldn't say it is “the” factor. It is a problem. In the case of Canada, it's a problem because of our incredible.... It's true in each province, with the exception of Prince Edward Island, that our distances are so vast and our density is so low that it's very difficult to maintain infrastructure without high subsidization. Subsidization is now out.

Á  (1105)  

    Mr. John Duncan: I think we're actually underestimating this impact. For example, I was driving across Canada on September 11 last year. I was going to do what a lot of freight traffic and a lot of passenger traffic does: once I left British Columbia I was going to travel through the northern States and come across at Sault Ste. Marie. That is done for practical reasons, because the U.S. highway system is better than the Canadian highway system.

    I've done that trip multiple times. Now, because the border crossings became so difficult on September 11, as you know, all those Canadian trucks that were going east-west or west-east through the U.S. and then back across stayed on the Trans-Canada. It was readily apparent in the traffic flow. What that translates into is a huge lost business opportunity, just from a transportation standpoint. But also what's clear to me is, when it's easier to ship to the U.S. than it is to other Canadian destinations, guess what? Business shifts to the U.S. instead of to other Canadian destinations.

    I think if we were to do--and I don't think it has really been done--a complete cost-benefit analysis of what a serious upgrade to just our national highway system would accomplish for Canada, we'd be surprised at the result.

    Mr. Mario Polèse: I'm not saying I disagree with you, but I don't think one should overestimate the impact. It may be very important in the west and in the prairies, which I'm less familiar with, but if you look at the tables here, you'll see that the same trend of increased trade with the U.S. holds true for Ontario and Quebec.

    I would venture to say the two provinces are fairly well linked by a transport system. It's not that difficult. The highway system between Montreal and Ontario is probably as good--I don't know, it would be interesting--as between Montreal and New York. But still, the traffic is moving increasingly south. It's simply that you have on the Boston-Washington corridor something like 50 million consumers.

    So I'm not saying we shouldn't upgrade our infrastructure. I'm all for it, and it might have an impact in the west. But I don't think it would radically reverse the trends we see from the data. The pull of that market is just so strong. If you want to sell and if you want volume, that's where you're going to sell. That's where the people are in a continental market.

[Translation]

    The Vice-Chairman (Mr. Bernard Patry): Thank you.

    Mr. Paquette, please.

    Mr. Pierre Paquette: I would like to ask a technical question, since we will no doubt be looking at these graphs and their content very carefully. There is the one describing exports to the United States and the one describing those to other provinces.

    Mr. Mario Polèse: Which one is it?

    Mr. Pierre Paquette: It is the bar chart.

    Mr. Mario Polèse: All right.

Á  (1110)  

    Mr. Pierre Paquette: Then there is the chart on exports expressed in percentage of GDP for Quebec. I can't quite understand why Quebec is barely above one in the chart on United States exports and those of other provinces, but when you look at the next chart, you can see that the exports in percentage of GDP... I just need an explanation because I probably have not...

    Mr. Mario Polèse: Very well.

    Mr. Pierre Paquette: I note that, in Canada, exports account for 20% of GDP, while around the world that figure is closer to 35%. Approximately 80% of our exports go to the United States. So shouldn't we be looking at 1.8...?

    Mr. Mario Polèse: That is a very good question. I would have to review the figures in greater detail. For Quebec, those would be 1997 figures. Proportionally, Quebec exports a smaller percentage of its total to the United States than does Ontario. I don't know exactly what our percentage is, but I think that two thirds of our exports go to the United States. After all, we are also a port, and can look at the other side of the Atlantic. Proportionately, we export more to Europe. But I see that you have been looking at the charts very carefully.

    Mr. Pierre Paquette: That is the job I used to do.

    Mr. Mario Polèse: I have to review the figures. However, part of the explanation probably lies in the fact that Quebec exports a somewhat smaller percentage of its total to the United States than does Ontario, which has neither a port nor direct access to a foreign country other than the United States. Provinces with ports are in a different situation.

    Mr. Pierre Paquette: We are currently preparing a report of North American integration. What conclusions may we draw from the facts you have put before us? What recommendations should we make to the Canadian government and to the provinces?

    Mr. Mario Polèse: That is a very relevant question. First of all, we should accept that the trends we see today are probably irreversible, insofar as we remain integrated. From that, we can conclude that regional economic disparities in Canada, particularly in Quebec, will be not eliminated. Ironically enough, those disparities may be greatest in Quebec because of the province's geography. We are aware of this as a government, but we know that integration with the United States will not solve the regional disparity problem, even if some regions benefited from them more than others. For myself, I am generally in favour of free trade, but we must remain aware that the stakes will change.

    Take regions like Abitibi or the Saguenay, which are fairly well positioned in a country where integration runs east to west, but are far less well positioned to trade with the United States. If we want to export products other than aluminum to the United States, why set up a plan in Chicoutimi when we could set it up in Sherbrooke? This will lead to some changes in Canada's internal dynamics, and regional economic development policies should not be abandoned just because we now have regional integration. As the other witness said, transportation and infrastructure continue to be extremely important issues.

    The Vice-Chair (Mr. Bernard Patry): Mr. Paquette, do you have another question?

    Mr. Pierre Paquette: No, that's it.

    The Vice-Chair (Mr. Bernard Patry): That's unusual.

    We will move on to Mr. Eyking, and then come back for a second round.

    Mr. Pierre Paquette: I was taking notes.

    The Vice-Chair (Mr. Bernard Patry): Mr. Eyking.

[English]

    Mr. Mark Eyking: Thank you, Mr. Chair.

    My question is a little different, I guess. It's not Canada-U.S. and what's happening there; it's interprovincial. When you look at the graphs here, it seems to be staying quite constant, with 20% of the GDP interprovincially.

    I'm wondering, are the products changing a bit? I notice in my region we are buying way more dairy products from Quebec and we're selling more products to Ontario from Nova Scotia.

    Mr. Mario Polèse: Where are you from?

    Mr. Mark Eyking: From Nova Scotia.

    Is the product mix changing interprovincially? Are we getting more regionalized in certain products, or are we staying quite stagnant? We seem to be staying at that 20%.

    Mr. Mario Polèse: It's an excellent question. If I had been intelligent, I would have brought the Statistics Canada publication with me that would have allowed me to answer your question, but it's at home. If you wish to e-mail me or telephone me, it's easy.

    Mr. Mark Eyking: They have it all, do they?

    Mr. Mario Polèse: It's a StatsCan publication called Interprovincial and International Trade in Canada. For each province it shows exactly what you're exporting and importing to other provinces and what you're exporting and importing to other nations. So the data is there, but unfortunately I don't have it with me. It's a very easy question to answer, except I don't have the answer.

    Mr. Mark Eyking: Just to follow up, I guess why I'm kind of looking at that is if as provinces we're getting more specialized in products, it could also help us when we're selling to states down in the U.S., if that is a change that is happening.

Á  (1115)  

    Mr. Mario Polèse: I don't know if we're specializing, but what's clear is that in all trade, both interprovincial and international, it's less and less, say, first transformations or primary products. Increasingly, it's manufacturing products, that's clear, and even services. What's interesting also is the importance of distribution transportation services as one of the factors of trade today.

    It's often said in the newspapers, and it's true, that the rest of the world has a false image of what Canada actually trades. We're increasingly an exporter of fairly sophisticated manufacturing products. That may not be perceived by markets yet, but that comes out very clearly.

[Translation]

    The Vice-Chair (Mr. Bernard Patry): Thank you.

    Along the same lines, Mr. Polèse, your analysis appears to show that prosperous regions will continue to prosper, but there will be greater regional disparities. How can we try to manage those disparities? This is a very important issue for us in Canada.

    Mr. Pierre Paquette: Mr. Chairman, may I ask a question now?

    The Vice-Chair (Mr. Bernard Patry): Yes. We are amongst ourselves this morning. Go ahead.

    Mr. Pierre Paquette: Mr. Polèse spoke about regional economic development policies. In view of WTO and NAFTA regulations, I would have liked him to describe what those regional economic development policies could be.

    That is in line with your question.

    Mr. Mario Polèse: Thank you. It is, as you say, in line with it. We have to be very careful with the word disparity, or inequity. The word inequity can be quite explosive. There are in fact two kinds of problems here. There is inequity, which as defined by economists means unequal income. I cannot say that everything is fine in that regard, because there are problems. However, things in Canada are much better now, and will doubtless continue to improve in spite of the mild stagnation we had recently. The real problem, and the problem that could have political repercussions, is the imbalance. Canada is very different from the United States in this regard. Because of its geography and integration, we see that Ontario will continue to have the same weight. This situation is very different from what we see in the U.S., where there has already been a shift from the northwest to the southwest. Here in Canada, Ontario will remain the major province, and its relative significance may even increase further. By contrast, Quebec will decrease in significance. This will be a long-term shift as the country evolves. And even though these are continental trends the significance of Saskatchewan and central Canada may be reduced, though it may not be possible to attribute that to continental integration with any certainty. In a nutshell, the dynamics of Canada as a whole are being threatened, one might say.

    My next statement could be considered more delicate, on a political level. We have just completed a study on Quebec's outlying regions and have observed that population shifts are also altering the balance among communities.

    In northern Quebec, which includes Abitibi, the North Shore and Saguenay, I have heard people saying outright that they are going to lose their land. As you probably know, in Gilles Vignault's village of Natashquan, 80% of the population is now aboriginal. As people of primarily European origin—I think this is the politically correct way to put it—slowly begin to migrate south, the percentage of people who are primarily of aboriginal origin will increase. This is a trend and a completely indirect and unwanted effect of the changes underway. There are significant repercussions to those changes.

    Now, let us move to Pierre Paquette's question. Aside from regional economic development policies, there are no real measures we can take, since as you quite rightly point it out the WTO and NAFTA are imposing increasing limitations.

    Unless I am mistaken—and I could be mistaken since I am not an attorney specializing in international law—policies aimed at assisting regions in difficulty will always be in order, even under WTO regulations. What we cannot do, however, is subsidize one specific industry. But subsidies that target a given region are, as far as I know, still permitted.

    Allow me to change the subject for a moment. In my view, our ally in all this should be Mr. Fox, President of Mexico. I have maps of Mexico, and the regional effect there is much clearer than it is here in Canada. It is dividing the country into three parts. Southeastern Mexico is becoming marginalized, and from a political standpoint, it is clear that Mexicans intend to implement a type of regional fund like Europe's, a type of regional adjustment fund.

    But I don't think the U.S. will ever buy that, though perhaps by entering into a coalition with...

Á  (1120)  

    Mr. Pierre Paquette: The Liberals won't buy it either.

    Mr. Mario Polèse: The Liberals won't buy it either, and that's a pity, but...

    Mr. Pierre Paquette: I put this into my minority report...

    Mr. Mario Polèse: It's a pity, but I do believe it's unrealistic. By working together with our Mexican colleagues, we might find a way of implementing something similar if we can adjust it or call it something else. But it is perfectly clear that at some point, the U.S. will become aware that continental integration will be a problem for its two partners, particularly for Mexico, and that something will have to be done. In Mexico, some disparities are increasing, and we can see it very clearly. The data are there, and Mexicans are extremely concerned. Perhaps another name should be found, rather than “regional adjustment fund”. There are other ways of doing the same thing. I am talking about the fund because I am working with Mexico.

    The Vice-Chair (Mr. Bernard Patry): Mr. Polèse, later on would it be possible to have copies of your maps of Mexico? They could be very helpful to us, because we are talking about North American integration.

    Mr. Mario Polèse: Those maps are in Spanish only.

    Mr. Pierre Paquette: I speak Spanish very well.

    The Vice-Chair (Mr. Bernard Patry): To follow up on Mr. Paquette's question on a regional policy like the one implemented in Europe, which brings together regions within member countries and which is very advanced there, could we not consider something along the lines of Europe's approach here? It is something we should consider.

    Mr. Mario Polèse: I don't know how far we should consider it. I would rather not answer that. Yes, we should look at it, but unfortunately if I supported it, I would also be...

    The Vice-Chair (Mr. Bernard Patry): Realistic.

    Mr. Mario Polèse: Yes. Unfortunately, I am somewhat skeptical about its chances for success. And we should bear in mind that Canada's and even Quebec's regional policies have not always been successful. This is something we should openly acknowledge.

[English]

    The Vice-Chair (Mr. Bernard Patry): Are there any other questions, Mr. Duncan, Madame Carroll?

    Merci beaucoup, Monsieur Polèse.

    Mr. Mario Polèse: Excuse me for being late. The times got mixed up.

[Translation]

    The Vice-Chair (Mr. Bernard Patry): You do not have to apologize. You are not responsible for that misunderstanding; it is our fault as well. We thank you very much for coming here this morning. Our discussions are always very interesting. Thank you again.

    The next meeting will take place on Thursday morning. The meeting is adjourned. Thank you.