Good afternoon, everybody.
Thank you for joining us for what is our first formal meeting of the committee in this session.
As everybody knows, we've been tasked by the trade committee to review some provisions of some legislation regarding the free trade agreement that's pending approval by the House.
We agreed on some witnesses last week, and we've been fortunate enough to be joined today by officials from the Department of Foreign Affairs and the Department of Natural Resources.
Lady and gentlemen, thank you for coming.
We have, from Foreign Affairs, Steve Verheul as well as Zachary Archambault and Nicola Waterfield; and Jeff Labonté, from Natural Resources.
I'm not going to go on at all about the process, because all of you know it probably as well or better than the people around this table do. I'll simply say thank you for joining us.
Each department has up to 10 minutes to deliver remarks. I understand that Foreign Affairs is going to lead the way.
Mr. Labonté, you're going to wait until the question and answer session to make some remarks.
Mr. Verheul, I'm assuming you're going to start us off. The floor is yours.
Good afternoon, Chair and members of the committee. Thank you for the invitation to appear before the committee today. We look forward to answering questions regarding the outcomes of the Canada-U.S.-Mexico agreement, or CUSMA, following my opening remarks.
Signature of the CUSMA on November 30, 2018, followed 13 months of intensive negotiations. It brought together a broad range of officials and stakeholders, with a strong partnership between federal and provincial officials. That agreement achieved several key outcomes that served to reinforce the integrity of the North American market, preserve Canada's market access into the U.S. and Mexico, and modernize the agreement's provisions to reflect our modern economy and the evolution of the North American partnership.
On December 10, 2019, following several months of intensive engagement with our U.S. and Mexican counterparts, the three NAFTA parties signed a protocol of amendment to modify certain outcomes in the original agreement related to state-to-state dispute settlement, labour, environment, intellectual property and automotive rules of origin. These modifications were largely the result of domestic discussions in the U.S. However, Canada was closely involved and engaged in substantive negotiations to ensure that all of these modifications aligned with Canadian interests. Throughout the negotiations, Canadian businesses, business associations, labour unions, civil society and indigenous groups were also closely engaged and contributed heavily to the final result.
Just by way of context, we need to recall that the NAFTA modernization discussions were unique in terms of free trade agreement negotiations. First of all, it was the first large-scale renegotiation of any of Canada's free trade agreements. Normally, free trade agreement partners are looking to liberalize trade. In this process the U.S. goal from the start of the negotiations was to rebalance the agreement in its favour. The U.S. President had also repeatedly threatened to withdraw from NAFTA if a satisfactory outcome could not be reached.
The opening U.S. negotiating positions were, to put it mildly, unconventional. These included the complete dismantlement of Canada's supply management system; the elimination of the binational panel dispute settlement mechanism for anti-dumping and countervailing duties; a state-to-state dispute settlement mechanism that would have rendered the agreement completely unenforceable; a 50% U.S. domestic content requirement on autos, which would have decimated our auto sector; removal of the cultural exception; a government procurement chapter that would have taken away NAFTA market access, leaving Canada worse off than all of the United States' other free trade agreement partners; and a five-year automatic termination of the agreement, known as the sunset clause.
The U.S. administration also took the unprecedented step of imposing tariffs on imports of Canadian steel and aluminum, on the basis of purported threats to national security, but without any kind of justification. The U.S. administration had also launched an investigation that could lead to tariffs on imports of Canadian autos and auto parts.
In the face of this situation, Canada undertook broad and extensive engagement with Canadians on objectives for the NAFTA modernization process. Based on the views we heard and on our own internal trade policy expertise, Canada set out a number of key objectives, which can broadly be categorized in the following overarching areas. First of all, we wanted to preserve important NAFTA provisions and market access into the U.S. and Mexico. Second, we wanted to modernize and improve the agreement, where that was possible. Third, we wanted to reinforce the security and stability of market access into the U.S. and Mexico for Canadian businesses.
In terms of outcomes, Canada maintained NAFTA tariff outcomes, including duty-free treatment for energy products. We maintained provisions on the so-called chapter 19 binational panel dispute settlement mechanism for anti-dumping and countervailing duty matters. We preserved the temporary entry for business persons chapter and access. The cultural exception was preserved. State-to-state dispute settlement was not only preserved but also improved in the negotiations.
In the area of autos, changes were made to the rules of origin regime to encourage the use of more inputs from Canada, in particular by increasing the regional value content requirements for autos and auto parts and removing incentives to produce in low-cost jurisdictions. Together with the quota exemption from potential U.S. section 232 tariffs on autos and auto parts, secured as a part of the final outcome, these new automotive rules of origin will incentivize production and sourcing in North America and represent important outcomes for both our steel and aluminum sectors.
With respect to modernizing NAFTA, we modernized disciplines for trade in goods and agriculture, including with respect to customs administration and procedures, technical barriers to trade, sanitary and phytosanitary measures, as well as a new chapter on good regulatory practices that encourage co-operation and protect the government's right to regulate in the public interest, including for health and safety.
Commitments on trade facilitation and customs procedures have been modernized for the 21st century to better facilitate cross-border trade, including through the use of electronic processes, which will reduce red tape for exporters and save them money. New and modernized disciplines on technical barriers to trade in key sectors are designed to minimize obstacles for Canadians doing business in the U.S. and Mexico, while preserving Canada's ability to regulate in the public interest. The agreement also includes modernized obligations for cross-border trade and services and investment, including financial services, telecommunications and a new digital trade chapter.
On labour and environment, we have made important steps forward by concluding ambitious chapters that are fully incorporated into the agreement and ensure that domestic laws will not be deviated from as a means to gain an unfair trading advantage.
The outcome also includes a special enforcement mechanism that will provide Canada with an enhanced process to ensure the effective implementation of labour reforms in Mexico, specifically related to freedom of association and collective bargaining.
Finally, the outcome has advanced Canada's interest towards inclusive trade, including through greater integration of the gender perspective and better reflecting the interests of indigenous peoples, including through an exception for indigenous rights.
There were a few other outcomes of interest.
On supply management sectors, I'll start by recalling that the U.S. made an explicit and public demand for the complete dismantlement of Canada's supply management system, but in the end we preserved the three key pillars of supply management and granted only limited access to the U.S. The government has been clear in its commitment to provide full and fair compensation to farmers for losses in market access.
On intellectual property, certain outcomes will require changes to Canada's current IP legal and policy framework in certain areas, such as IP rights enforcement to provide ex officio border authority for suspected counterfeit or pirated goods in transit, as well as criminal offences for the unauthorized and wilful misappropriation of trade secrets.
In other areas, Canada has transition periods to implement its commitments, for instance, on the obligation to provide a copyright term of the life of the author plus 70 years. Again, it currently provides a term of life plus 50 years. We have a two and a half year transition period to implement this obligation.
Under the amending protocol, the parties agree to remove the obligation to provide 10 years of data protection for biologic drugs, meaning that Canada does not need to make any changes to its existing regime in this area.
With respect to energy specific obligations, the agreement addresses a long-standing request from Canadian industry to resolve a technical issue related to the use of diluents, a petroleum-based liquid that is often added to crude oil to ensure it flows properly through pipelines. This issue had previously added upwards of $60 million a year in duties and other fees for Canadian businesses.
We also addressed an issue of concern to some Canadians by removing the energy proportionality clause. It also recognizes the parties' interests in harmonizing energy efficiency performance standards and test procedures.
Canada and the United States also agreed to a bilateral side letter on energy co-operation and transparency. It includes provisions that will help provide Canadian stakeholders with more assurances and transparency with respect to the authorization process to participate in the energy sector in the United States. For example, Canada and the U.S. agreed to publish information, including the application process, monetary payment and relevant timelines related to these authorizations.
In closing, I would like to underline that objectives for these negotiations were informed very closely by Canadian priorities and interests, close engagement with provinces and territories as well as a wide range of stakeholders.
This concludes my opening remarks. Alongside my colleagues, I would be pleased to answer any questions you may have.
Certainly, I'd like to thank you and your team. It's probably been a very challenging year or two now, and we're into the final steps of dealing with this agreement.
First, I have a notice of motion, which I'll read and will hand out copies. Apparently the Speaker turned down the request for the emergency debate on Teck Frontier, so the motion is:
That, pursuant to Standing Order 108(2), the Standing Committee on Natural Resources immediately undertake a study on the cancellation of the Teck Frontier Mine; that witnesses for the study include the Minister of Natural Resources and officials from Natural Resources Canada; that the study be comprised of no less than 5 meetings; and that these meetings be televised.
Obviously, we will have this conversation at a later date because it is just a notice of motion.
Now I'll head into my questions.
As you're aware, we're the natural resources committee, and we really only had a small section of the legislation referred to us.
I come from British Columbia, and for me, one of the biggest trade irritants for years and years has been softwood lumber. Was there anything that precluded the government from making that a priority in the same sense that it suggested that gender and some other priorities...? As the government went into negotiations, was it feasible for it to actually make that a priority as one of its objectives?
Thank you for being here.
I want to start with a natural resource that I don't think is covered in this agreement, and that's water. I know that, on November 30, when the agreement was signed, there was a side letter between Mr. Lighthizer and Ms. about water. That letter states, “Unless water, in any form, has entered into commerce and becomes a good or product, it is not covered by the provisions of the Agreement. Nothing in the Agreement would oblige a Party to exploit its water for commercial use....”
There's a lot of concern that I hear from some of my constituents about water as a trade good between Canada and the United States. It's my understanding that, for instance, we have companies like Nestlé that bottle water in Canada and ship it to the United States or abroad, I don't know, and we are essentially.... The amount we charge Nestlé, or whatever company it is, is more of an administration cost. We're not charging them for the water.
I'm wondering why we do that and what the risk to Canada and its water resources would be if we treated water like a product. Would there be some obligation that fell from that, and what are those risks? Why don't we charge more for our water resources?
Madame, messieurs, welcome to your House of Commons. It has been a real pleasure to hear you, and I appreciate your hard work. Through you, I want to pay my respects to all of our people on the team who participated in these huge, long and very exhausting discussions.
Behind you, I see a civil servant with a huge document. It's quite impressive. It reminds me of the famous quote by John Crosbie, who once said that he signed the deal, but he didn't read it because it was a little bit too heavy. Mr. Crosbie said that he sold dictionaries but he never read them. That was quite interesting.
My thanks to you all. Let me remind this committee that, as a free trade party, we are clearly in favour of free trade and of agreements that are positive for Canada.
We recognize that nothing in this world is perfect, but we still want to point out that a number of our members have gone to Washington in recent years to make Canada's case. Our two leaders—our interim leader, the Hon. , and the current have advocated for Canada at those meetings, representing our party, as Canada's official opposition.
I would like to address the issue of aluminum. As you know, in Quebec this is a very big issue. Aluminum was everything but the winner in these negotiations, to say the least.
The situation has changed a lot since the first free-trade treaty in 1988. Everyone recognizes that. Everyone knows that, at the time, Mexico was not the port of destination for Chinese products.
However, this is the reality of the day.
I would like to express everybody's concern about the fact, and everybody recognizes it, that the deal is not very good for us, not very good for the aluminum producers, and especially those from Quebec, because we produce the cleanest aluminum in the world.
My questions are quite simple.
How can our companies ensure that Chinese products, which will literally be dumped in Mexico, can be considered in the same terms as the green products made in Quebec?
It's a great discussion. I really appreciate your being able to join us on short notice. It's my first opportunity as a parliamentarian to thank all of you for the hard work you've done on behalf of Canadians and Canadian industry. We certainly do appreciate it.
You talk about how this agreement has been modernized and improved. No doubt all of us at the table will see where that has occurred in many different sectors. We also talk about how you've been able to maintain the regulatory piece that has allowed Canada to be successful on certain industry fronts, although we know there was tremendous push-back by the United States. Like every agreement, there are always going to be questions and wondering whether we could do better in certain sectors or in other sectors.
I'm going to continue on the aluminum front. When I look at the agreement, I look at it from a little different perspective than some others in the room, but certainly I understand the points that are being made. It was my understanding that there were about 230 or more tariffs on aluminum going into the United States, and you guys were able to successfully negotiate those tariffs away. I'd like to know what that actually means for the industry in Canada. Surely it must mean an opportunity to grow the aluminum industry and to be able to see those sales increase, not decrease.
I know you responded to my colleague with regard to the guarantee that 70% of that aluminum would be in North America. His question regarding Mexico and the import from China is a very important one. I would like to know, even with that 70% guarantee, if there is any provision within the agreement that would allow Canada to maximize our productivity on aluminum and the use of aluminum under that agreement from where it is today going forward.
While it may not be the 100% that we were looking for or it may not have the origin as specific as we were looking for, do you see how it's going to project further growth and further opportunity in Quebec and in Canada by that account because of those two particular changes in the agreement?
Yes, I think there are two elements of particular interest here.
First, because we were able to negotiate an outcome to this agreement, we then subsequently managed to have removed the national security tariffs that the U.S. imposed on both steel and aluminum, the 15% tariff on aluminum in this case. Those countries around the world that don't have any kind of an agreement with the U.S. are still facing those tariffs into the U.S., so we have an advantage over those other countries.
We also have the provisions in relation to autos. As I mentioned, the 70% requirement does exist. As I explained a bit earlier, we have also introduced a requirement that means much more of any automobile manufactured in North America has to be produced from North American sources.
The fact that we have gone to 75% means there is a much stronger incentive to use products like aluminum for engine blocks, for other parts of cars, to have them come from North American origin because there are certain elements of cars that are not produced within North America. I have mentioned before in other committees that the screens we have in all our cars these days are not produced in North America. They are imported.
A number of products in a car have to be imported. That squeezes it even more. Every manufacturer is looking to use as much North American content as they can because they don't have a lot of flexibility. Between the removal of the 15% tariff on aluminum and the incentive to use further aluminum that's now contained in the agreement with respect to autos means that we do have incentives to use more Canadian, Quebec, aluminum in the production of cars and for other purposes.
I think the proportionality clause is one of the clauses in the existing NAFTA, and one that's been around for quite some time, with different interpretations from different perspectives. There's a perspective that would suggest that it ties Canada's hand in some way, shape or form by having that particular clause, and that it prevents us from being able to sell energy goods to other countries, if you will, under certain circumstances.
In fact, I think the clause was drafted originally as something that the United States was seeking and Canada provided in the original negotiations. The clause allowed and provided that we would sell it at market rates. The loss to Canada, if that clause were ever to be used, would have been the ability to sell something at a market rate to a particular partner that we had to sell it to at a certain proportion. It was already constructed in a way that was market-based, which means that the risk, if you will, to Canadian producers and Canadian energy companies was that they would have a market to sell their goods at a market rate. They just had to have a particular dance partner, if you will, should that clause ever be put in place.
From Canada's perspective, removing it means that's no longer the case. Of course, we sell our energy goods at market rates, and our ability to move those goods to other parts of the world.... In other parts of the world, demand and interest in Canadian energy goods are rising as different supply-and-demand dynamics around the world change. As cleaner energy and lower-emission energy become part of that supply mix, and the push to meet those commitments is made around the world, Canada's energy products have different opportunities to fare better, based on some of the circumstances under which we produce our goods and the fact that we have very rigorous environmental regimes that document, monitor and account for our ability to produce goods and to be able to present that data in very transparent ways.
As the world moves in that direction, if you can imagine that we don't have the proportionality clause but we have an ability to move more goods to as many places as we like, the market will still demand and drive what the returns in revenues will be for those products. The cost of transporting those goods is also factored into the returns that come. If you can move it somewhere closer to home, it's generally a little less expensive to do that. The infrastructure enables us to move it, by and large, to different places. With some of the things that are under way within the industry, we're seeing movement of the goods in different directions. We actually take in some of the U.S. energy now, more than we used to before, because it's actually less expensive for Canadians to consume that energy and it allows us to export more goods from other parts of the country to the United States.
We have a very integrated relationship. One of the key things on the energy side of the equation is to maintain the integration between the energy systems. It benefits both nations, because we're able to trade those goods where it's most cost-effective for particular regions, but it also creates a degree of resilience, particularly in the electricity transmission sector. When renewables are coming online in different parts of the country, the hydro load and ability to produce energy from hydro sources that are much more prevalent in Canada than in the United States provide a bit more base to the United States grid. By the same token, at certain points in the year Canada needs more electricity energy and the United States fills the void. There's a lot of integration between the two countries.
We've maintained that in the agreement. That was one of the objectives of the team, recognizing the sheer volume of the amount of energy being traded. It is one of the largest commodities in our trade circumstances and a place where Canada has a lot to offer the world. Again, that's something that was part of the agreement. The agreement has less ties, if you will, to our ability to move it around, so we have a much more flexible and broad ability to do that.
Mr. Verheul, I am sure that you are going to forgive me for being fixated on aluminum, but I want to go back to it.
When the first agreement, NAFTA, was signed, we know that Canada, because of Quebec, was one of the world's leading producers of aluminum. Now, we produce almost nothing in comparison with what China is doing. Market access is therefore essential for the aluminum industry. Something we do not understand seems to have slipped into the agreement: the privileged status given to steel, but not to aluminum.
On that subject, when the agreement says that 70% of parts have to be produced in North America, we forget steel parts have to be smelted and poured in North America, which is not the case for aluminum parts. The most telling statistic on the matter comes from the market itself. From May to July 2019, exports of aluminum wheels from China fell by 60%. At the same time, those from Mexico increased by 240%. Today, they are apparently hovering around 260%. The big problem is that Mexico doesn't produce aluminum. As we are well aware, they get it from China.
If we are not able to plug that entry point for Chinese aluminum, the aluminum industry in Quebec is pretty much bound to disappear or to lose essential market shares. Could you clarify that? As you understand it, is the status of aluminum in the agreement similar to the status of steel?
There is certainly a difference between the treatment of steel and aluminum.
There is one difference between the treatment of the two, and that came about as a result of the agreement to the protocol on December 10. As you know, at that point there was a requirement introduced that steel would have to be melted and poured within North America in order to qualify for this 70% provision as it relates to purchases by auto manufacturers.
No such requirement exists for aluminum, that it be smelted and poured in North America. We did propose that, but didn't successfully achieve it. As I indicated earlier, this is not something that we consider to be a closed issue. We are going to be monitoring closely imports of aluminum, and we're very much aware of the situation you described with respect to China. We will be looking to build the case that we need to have the same treatment in aluminum as we have on steel, if we do see that the trend continues with respect to imports from other countries.
There are several measures in place against imports from China of both steel and aluminum, for anti-dumping reasons. There are broader discussions going on with respect to China's overproduction and overcapacity of these products. With respect to this issue, there are also discussions happening internationally.
We are approaching this issue from a number of different directions, but overall, there is a greater incentive in this agreement than existed in NAFTA for aluminum to be used in the production of cars.