We're going to commence. We have up-and-comers like Mr. Bains here, so we need to get punctual.
This is the 27th meeting of the Standing Committee on International Trade. We are continuing our discussion of ongoing free trade negotiations between Canada and Colombia, with a focus on environmental impacts and human rights concerns.
Appearing as witnesses from the Department of Finance are Dean Beyea, senior chief, international trade, policy division, international trade and finance branch; and Maxime Lavoie, international economist, tariffs and market access, international trade policy division. From the Department of Agriculture and Agri-Food we have Denis Landreville, lead negotiator, regional negotiations, market and industry services branch. Returning again from the Department of Foreign Affairs and International Trade we have Cameron MacKay, director, regional trade policy division, Americas.
I think you're all familiar with the format. We are going to hear each witness's opening statement for ten minutes, followed by questions from committee members. We'll lead with the Liberal Party and try to keep the first round to seven minutes. Hopefully we'll get through it all.
With that, I thank our witnesses for appearing.
We'll lead off with Mr. Beyea.
Thank you, Mr. Chairman and members of the committee, for giving us the opportunity, my colleagues and I, to come here today to discuss the potential commercial benefits of the Canada-Colombia free trade agreement. We look forward to answering questions you may have on this issue.
Prior to answering questions, however, it would perhaps be best for me to start with some introductory remarks outlining where we see the main commercial benefits for the Canadian economy -- both from an agricultural and industrial/manufacturing perspective.
The Colombia FTA negotiation was launched together with the Peru FTA negotiation in June of last year with the twofold objective of creating new market opportunities for Canadian business and preventing Canada from being shut out of markets where our trade competitors are active negotiating FTAs.
As members of this committee know, Canada's main competitor in the Colombian market, the United States, has already completed an FTA with Colombia. As well, Colombia is also pursuing ambitious an free trade agenda with others, including the European Union, the EFTA countries, Chile, Mexico, and others.
In the case of the U.S.-Colombia agreement, the administration has recently sent the FTA implementing legislation to Congress for approval. It's now up to U.S. legislators to decide when they want to hold the vote on the passing of the U.S.-Colombia FTA.
The possibility that the U.S.-Colombia FTA enters into force, however--this is something I keep hearing in my discussions with our industry--continues to be an important concern for a number of Canadian exporters. What I'm often being told in this regard is that it would be difficult for Canadian companies to maintain their current share in the Colombian market if they were to face significant tariff disadvantage with their U.S. counterparts.
The reality is that Canadian exports, particularly commodity-type exports, are already at some disadvantage vis-à-vis the U.S. for geographic reasons, which translates into higher transportation costs to Colombia. If you add a significant tariff disadvantage to this, you risk seeing Canadian exporters being shut out of the Colombian market.
One of the best examples of this is wheat. Given its high quality, importers in Colombia are willing to pay some premium for Canadian wheat even if it means greater transportation costs than importing U.S. wheat. That said, with a 15% tariff advantage for U.S. wheat, importers may not be willing to pay an even higher premium for Canadian wheat, and Canada's $100 million of annual wheat exports to Colombia could be at risk. This is something we heard directly from Colombian importers when we were last there.
The same type of concern is also true for other products. Colombia is an important market for Canadian goods of traditional export interest such as barley, peas, lentils, fertilizers, paper products, and more advanced manufactured products such as mining machinery and equipment.
The bulk of these products are covered by significant tariffs and other trade barriers that would be eliminated for U.S. exports. For example, Colombia maintains tariffs averaging 11% on industrial goods and 17% on agricultural products, with tariffs being as high as 80% for some beef products and 60% for certain beans--two products of Canadian export interest.
On the manufacturing side we're talking about tariffs as high as 15% and 20% applied on Canadian-made cotton yarns and paper products. These are sectors that have experienced difficulties in recent years, due in part to a rising dollar, and they are actively seeking new market opportunities.
It's also worth noting that Colombia's bound tariffs are even higher than those I just mentioned, averaging 35% on industrial goods and 92% on agricultural goods. This means that without an FTA, Colombia can raise its tariffs on Canadian exports to these levels. These high tariffs are indicative of the magnitude to which Canadian exporters risk being disadvantaged in the Colombian market.
In comparison, the majority of what we import from Colombia can enter Canada duty free. In 2007 duty-free imports from Colombia represented roughly 80% of our total imports from that market, consisting primarily of coal, bananas, coffee, oil, and raw sugar. In that sense, an FTA with Colombia would establish a more equitable balance for Canadian exporters. It would provide Canadian enterprises with market access opportunities that are similar to the level of market access already enjoyed by the majority of Colombian exports to Canada.
However, as I said at the beginning of this statement, the commercial benefits of an FTA with Colombia are not only defensive; Colombia is an important market with more than 45 million people, and its economy has high growth potential. Colombia's sound macroeconomic policy and improved security under its current leadership have generated favourable economic conditions. Its GDP growth rate was 7.5% in 2007, and the IMF has forecast annual growth rates of 5% for the next five years. This has resulted, and we expect will continue to result, in stronger demand for imported goods, representing valuable opportunities for Canadian exporters.
Canadian total exports to Colombia are now valued at some $660 million, which is more than double their value five years ago. In the last year alone, our exports have grown by 30%, which has involved over 1,000 Canadian companies, many of which are SMEs. An FTA would clearly put these companies in an even better position to do business in Colombia and benefit from this dynamic and growing economy.
With enhanced security and important needs for investment in areas of well-known Canadian enterprise, Colombia is also a key destination for Canadian investments. Canadian investments in Colombia's extractive sector are already estimated by our embassy at more than $2 billion, and they are expected to increase in the coming years.
Investments by Canadian companies are associated with growing export potential for Canadian goods, services, and technologies. An example of the linkage between investment and trade is the strong increase in our exports of capital equipment to Colombia, which are now valued at more than $165 million, compared to only $50 million five years ago. Canadian investment in Colombia's extractive sectors have indeed led the way to growing exports of Canadian-made machinery, including mining equipment and heavy transportation equipment.
Sectors where import demand is also expected to grow in the coming years, based on strategic purchasing priorities identified by Colombia, include steel products such as pipelines and valves, chemicals, oil drilling services, civil works, and information technologies. These are all sectors where Canadian companies, including SMEs, have developed a world-renowned expertise.
An FTA with Colombia would obviously allow Canadian companies a better chance to bid successfully on various contracts that will follow the large investments that are planned for the coming years. Providing better market access conditions for Canadian goods and services is probably the best thing the government can do to assist Canadian companies in this fast-growing market.
I think that provides a quick overview on the commercial market access issues.
Thank you, Mr. Chairman.
My team and I are ready to answer any questions you may have, but perhaps before we begin with questions, I should note that the negotiation in the market access area with Colombia is still ongoing. We must be respectful of the confidentiality of the negotiating process, as well as not saying anything that could undermine Canada's interests in the negotiations.
That said, I think we can try to answer as best we can any questions you have.
Thank you very much, Chair.
I understand the legitimate point you raised at the end of your remarks about not commenting on the specific negotiations, but I think having these discussions in committee and talking about this does empower negotiators, because it shows the Colombian authorities and the Colombian government that we're very serious about this free trade agreement and that we have specific concerns.
You gave us an overview of the primary purpose of reducing tariffs and market access and how important that is, but we on this trade committee view trade in a holistic approach. Market access is obviously very important, but so are other considerations, depending on the nature of the free trade agreement, and specifically with Colombian human rights coming up time and time again.
So I want to understand from the department's perspective what political direction you've been given or what mandate you've been given to pursue a free trade agreement with Colombia and on dealing with Colombia. But before we do that, I just want to take a more macro-level look.
In dealing with countries, Canada understands with the Doha Round discussions that are taking place that if that doesn't work, we'll have to pursue bilateral free trade agreements. In doing so, we want to essentially look at emerging markets, because as a mature market we see benefit there. On the value chain, we can generally maintain a high quality and standard of life because we can work with those emerging markets to really benefit our local industries here. So we target key emerging markets, and I believe Colombia is one of those emerging markets.
In doing so, we also recognize that we have to address human rights, labour standards, and environmental standards. We can't simply look at just the trade of goods and services. So what mandate do you have when you deal with free trade agreements? Do you have a mandate that clearly gives you authority to examine those other aspects, such as labour, human rights, and the environment, and to what extent?
You didn't mention them at any great length, and I'm not sure if that was done intentionally or you decided to focus just on the tariff reduction side of it.
Good day, gentlemen and welcome to the committee. I'm sure some of you are regulars here.
The cautionary note that you sounded at the conclusion of your presentation reminds us, up to a point, that it is somewhat difficult to get an overall picture of the negotiations and especially of the potential repercussions of an FTA. Since parliamentarians will also be called upon to ratify the free trade agreement, the situation almost demands that we take a leap of faith, since we may never be privy to all of the details.
I imagine that you analyse the agreement, from both a quantitative and qualitative standpoint, to determine the positives and negatives. As with all economic agreements, both parties must emerge as winners. Therefore, at some point, they must be prepared to make some sacrifices. Often, it is pretty hard for us to get an overall sense of how the negotiations are going. Perhaps we could get some idea if we looked at the tariffs, although they do not always indicate what impact this is having on our various industries or the advantages and disadvantages of the agreement for other sectors.
Considering all of the work that you will be doing to get the parties to potentially sign an agreement, ratification is also an important step. Since there are some details that negotiators are unwilling to disclose to us, is there some way to bring parliamentarians into the loop so that they can make an enlightened decision when the time comes to ratify this agreement that is currently being negotiated?
I'll start off and then ask Denis, my colleague from the Department of Agriculture, to cover anything I've missed.
I think the biggest one is the one I gave in our opening statement. The U.S. has negotiated the immediate elimination of the wheat tariff; that's $100 million of wheat exports. We've talked to the importers in Colombia, who said it's a lot cheaper to buy wheat out of Houston than out of the west coast of Canada, but that they're willing to pay the premium. But 15% is 15%, and they'll stop buying Canadian wheat, they say, the day that comes into effect. That certainly makes you stand up and take notice.
We've also heard from the paper industry, which is facing tariffs of up to 15%, and from machinery and equipment. Another issue is for pulses, where tariffs are 15% on lentils and peas and up to 60% on beans. The U.S. has gotten a good chunk of that free immediately. It puts you at an immediate disadvantage. There's potash, copper wire, barley; these are all our primary exports to the region.
There's another industry, interestingly, that you don't often hear about: we have strong interest in the market from some of our textile and yarn exporters. Like most countries, Colombia maintains high tariffs in this area. The U.S. will be at a significant advantage right away, and they're anxious to get into that market.
Those are a few. I don't know whether Denis can add to that.
Dean has spoken to some of the specifics, touching on wheat, barley, and peas and lentils. There are also products such as pork. We've been a consistent supplier of pork to Colombia, accounting for about one-third of their imports. We compete in that market with potentially preferential suppliers such as Chile and the U.S. We would be one-third of the market, but the only one without preferential access.
Dean mentioned that the average tariffs are around 15% to 20%. Roughly 93% of our agricultural exports to Colombia are in that tariff range, which, in the case of their preferential suppliers, would give us that type of price margin.
Also, 60% of our trade to Colombia faces what is called a price band, which allows them in times of low world prices to increase their applied rates above the 15% to 20% range to their bound rates, which are much higher than their applied rates. The 15% to 20% is day in, day out, but in the case of low world prices, if that ever happens again, such agricultural products as wheat, barley, pork, and canola would see an increase above those tariffs in the case of those price bands being applied.
Those are the kinds of situations that, even without a U.S.-Colombia agreement, put us in an uncompetitive position in that market, with some of the other preferential suppliers they already have.
Thank you very much for coming before us today.
I want to come to the issue of dispute settlement in this proposed agreement. We had testimony last week from the Department of Foreign Affairs and International Trade on how the dispute resolution process would work. Essentially, quoting from one of the witnesses who spoke last Wednesday, “An investigation is made and a report is written that can lead to ministerial consultation.” If the problem is not solved, a dispute resolution panel is formed. They study the cases. If there is non-compliance, the panel “...can then report and then impose financial penalties of substantial amounts to be deposited into a cooperation fund. Then that money can be used to resolve the matter at hand.”
As far as we understand from that testimony last week, the dispute settlement mechanism would function exactly the same way for commercial disputes and non-commercial disputes, such as human rights, for example. Human rights is a major concern in Colombia, given the fact that another trade unionist has disappeared, even since last Wednesday. The head of the public servants union of Bogota has disappeared.
So is it correct to say that the dispute settlement mechanism functions exactly the same way for commercial disputes and non-commercial disputes, such as gross violations of human rights?
But the question was directed and the answer did come back. I'm asking for more details—not being told it's different, but being given specific details as to how it might be different. Otherwise one can assume it is very much like what we heard last Wednesday, which is, in the case of human rights issues, kill a trade unionist and pay a fine. I don't think that would be acceptable to most Canadians.
I'll move on to another commercial aspect of the agreement, and that is the impact on the Colombian economy. As you know, under NAFTA there's been a meltdown in the Mexican rural economy, with over one million jobs lost. The last tariffs were taken off goods into the Mexican market on January 1 of this year, which has led to demonstrations and more lost jobs across Mexico. There are major concerns about the impact of NAFTA on the rural economy in Mexico.
So I'd like to know from the ministry's point of view what studies you may have done as to the impact of Canadian exports on the Colombian rural economy, particularly when we talk about foodstuffs, such as beans, going into the Colombian economy. Of course this has been a major concern to people in the Colombian rural economy, who could well see the same impact of Canadian goods in Colombia that we've seen from U.S. goods in Mexico, which has been a horrific meltdown in their rural economy. Have you done any studies to indicate what the impact would be?
Being new to this committee, I'm still trying to understand what my responsibilities are. Some of the other members have talked about needing to understand the free trade agreement enough to be able to decide whether this is one to support or what the concerns are, and how we can make it better.
This is a great introductory context and understanding, but to be able to say “Yes, this is a good agreement, I support it”, or “Here are some specific ways that it could be improved” is very difficult to do on the basis of general background information even though you have some specific figures.
This is what comes to mind for me, having been in negotiations for the Kyoto Protocol in 2001 in Marrakesh. There were also a lot of ways Canada didn't want to tip its hand, and those were also complex negotiations. But the delegation was privy to much more detail than what we're seeing here. So I'm wondering if we're going to get more detail or if it's possible to use a format similar to those negotiations, where there were very specific files that different negotiators were advancing. There was a much clearer idea as to the rationale for the push-back from the other negotiating members.
When there is a high tariff on a particular good, I don't know whether that is because they see that good to be receiving agricultural subsidies here, so they need to protect it there, or what the reasons are for it. The explanation that we don't want higher tariffs than our neighbour is a good one, or that we don't want to have tariffs on our goods when our trading partner doesn't have tariffs sending goods into Canada. I understand those generalities. But I would like to see much more clarity about the measures of success you have as negotiators. So that's my first question.
Do you have some measures of success that can be shared with us as to what you're looking for? What would make this a successful free trade agreement, from your perspective as representatives of Canada at the negotiating table? What would be the measures of success?
And secondly, how would we be able to know, say five years down the road, whether those measures were being met or not?
I'm looking for a better understanding as to what the components of the negotiation are, what we need, from Canada's perspective, for this to be an effective free trade agreement. And this is on the commercial side that I'm directing my questions.
Thanks very much for the questions. Maybe I can try to be more specific.
Certainly our objectives going into these agreements have been twofold. I touched on them earlier. One is defensive vis-à-vis the United States. We're hoping to achieve market access, certainly with respect to what we're already exporting to Colombia, on a level that's on par with the United States. That's an overriding objective. I think it's safe to say that it's difficult in many areas to do better than the United States, given the size of the economy and the weight they have in negotiations vis-à-vis what we do. So we certainly don't want to come out worse.
I think some of the sensitivities in Colombia--if you want something more specific--are a result of their agreement with the United States. They've just opened their market to the largest economy in the world, and are nervous about opening it some more, or potentially opening it some more.
I don't think any of these issues are unresolvable. Our goal is generally to get rid of the tariffs, as much of them up front as we can, and then try to balance import sensitivities on both sides by reducing tariffs over a longer period of time. Hopefully we can minimize those on both sides so that we can each enjoy the benefits of free trade as quickly as possible and not fall behind either what Colombia has done with the United States or will do with respect to Europe and EFTA, and Mexico in particular.
So from a market access perspective, that's what we're doing. Then where you come out is that you end up with a few problem areas: we'd like quicker and faster market access, they'd like a slower and more delayed entry into the market, and vice versa. That's perhaps where we've gotten to in this negotiation. We're trying to find a mutually beneficial balance of interests that will create a good economic agreement for each of our industries.
Maybe I can just add to that a little bit, about the measures of success.
What we're going for with Colombia--we do this with all of our free trade agreements--is to look for a comprehensive, ambitious FTA that creates new opportunities for Canadian businesses doing business abroad. Reciprocally, of course, our trading partner is looking for opportunities here. We want to level the playing field with respect to that country's other trading partners, particularly those with whom they have preferential trading agreements, such as the United States in the case of Colombia.
We're trying to build on multilateral commitments. That is to say, take the WTO commitments that we have all made with respect to trade in goods and liberalization of services, etc., and build on those. Expand on them in the case of investment, for example, which isn't covered by the WTO. Ultimately the measure of success, broadly speaking, is are Canadians--that is to say, Canadian businesses, private citizens, SMEs, big businesses, NGOs that have a varying range of concerns about our FTA agenda--broadly satisfied with what we've negotiated?
We can never make everyone happy all the time, but we do our best. The ultimate measure of success is when we submit the FTA that we as officials have negotiated with this other country. When we submit it to the government, then on to Parliament, to the members of this committee and the other members of Parliament, to pass the bill to implement the FTA, it ultimately comes back to you to decide if we have achieved what Canada should have achieved in this negotiation.
I think that overall, as always, when the government launches a free trade agreement, they do a broad consultation, a call for comments. But in thinking of potential questions today, I thought I would maybe write down the industries and sectors that have contacted me, and which certainly have an interest in the FTA, primarily an export one.
I know that Denis talks to the entire agriculture industry at least once a month, so I'll let him add his specifics, but we've certainly heard from the paper industry in Canada, the forestry sector—in fact, someone with an interest from Quebec; the auto sector; the beef industry; the pork industry; the chemicals industry; textiles and apparel; and we've spoken to the footwear people as well; the liquor industry; the grains industry; the mining industry; the sugar industry and the flour industry. Those are the ones I can list off the top of my head. Some of them call me weekly and some once a month, all with good interests in seeing this negotiation advanced and coming with terms pleasing to them. So we have ongoing consultations with them.
I know that the Department of Agriculture has a very formal process for doing this, and maybe Denis could speak to that.
Perhaps with respect to your other questions and the broader issues—which all seemed to be about whether there was market confidence in going into Colombia, whether we've seen changes in security and concrete facts on that—I thought that maybe one of the best ways to address these was to quote third parties. So I have a list of documents here.
The Economist from March 22, 2007, calls it the “Uribe effect”, a function of rising GDP since the time he came into power, referring to the decline in murders, the increasing gross fixed investment as a percentage of GDP, etc.
Over the last year, Standard & Poor's, Fitch Ratings, and Moody's have all upgraded the credit rating of Colombia.
Business Week in May 2007 called Colombia “The most extreme emerging market on earth”, saying:
The growing confidence in Colombia brings a new set of challenges. The streets are safer, and citizens are road tripping again. Export-import activity is steadily growing. Tourism has nearly tripled in five years, and beach-lined, historic Cartagena is among South America's most expensive real estate markets.
The Guardian, the U.K. paper, says:
In the space of just five years something remarkable has happened—the cities have become relatively safe. Murder and kidnapping rates have plunged, and there are no more bombs. The only explosions are in property prices.
Forbes Magazine calls Colombia a “key ally and fast-emerging global player”:
Last year, for the third year in a row, Colombia's economy grew by 5% and registered a surge in investment.
As well, Foreign Direct Investment Magazine, a journal of the Financial Times, refers to Colombia coming out of the shadows, and says that:
Colombia has been fighting to prove that it is a safe and worthwhile investment destination and has now put itself firmly back onto the investment map.
I think the other issue I have is more of another macro-issue, if you will. It's the general effect of a free trade agreement on Canada's competitiveness and in particular on our competiveness in the western hemisphere. We've signed five free trade agreements since NAFTA, I think, including NAFTA. The U.S. has signed 20-plus, Mexico has signed 40-plus, and Chile has signed 50-plus. We're being left out of the market and left out of the economy if we don't play some catch-up ball here, to use a worn-out sports analogy.
I would worry a lot more about what would happen to our economy if we continue not to be a player. Compared to the rest of the world, we've generally taken very modest steps in looking at free trade agreements in the last 15 years. If our economy's going to continue to flourish and continue to grow, we need to have free trade agreements. We need to be able to compete with Colombia on an equal footing.
The last time I checked, our farmers in western Canada need to sell wheat, because if you can't sell it, there's no point in growing it. It's as simple as that. And if there's a 15% tariff on wheat, then we're leaving ourselves out of a marketplace that for all intents and purposes is a burgeoning marketplace with great potential--and furthermore, with great potential for the people of Colombia, as tough as things are. There's still violence and there's still not the society we would like to see, but in comparison....
I only have a few Colombian friends, and they left Colombia because of violence as teenagers. Now all of a sudden they're looking at Colombia in a totally different light, having been educated abroad. A number of them married people abroad and are not liable to go back, but there is opportunity in Colombia again today. That's something we didn't see in the past for probably more than a decade. Is that too general? I'm making a statement more than a question, but I think those statistics are important.