SINT Committee Meeting

SUB-COMMITTEE ON INTERNATIONAL TRADE, TRADE DISPUTES AND INVESTMENT OF THE STANDING COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE

SOUS-COMITÉ DU COMMERCE, DES DIFFÉRENDS COMMERCIAUX ET DES INVESTISSEMENTS INTERNATIONAUX DU COMITÉ PERMANENT DES AFFAIRES ÉTRANGÈRES ET DU COMMERCE INTERNATIONAL

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 10, 2000

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[English]

The Chair (Ms. Sarmite Bulte (Parkdale—High Park, Lib.)): Good afternoon, ladies and gentlemen, and welcome to the Subcommittee on International Trade, Trade Disputes and Investment. Pursuant to Standing Order 108(2), this subcommittee is pursuing a study on Canada's economic relations with Europe.

We're privileged and honoured to have with us today Her Excellency Danièle Smadja, the Ambassador of the European Commission in Canada, and also Mr. Patrick Grady of Global Economics Ltd.

Your Excellency, welcome. We'd like to start with you.

Ms. Danièle Smadja (Ambassador and Head, Delegation of the European Commission in Canada): Thank you very much, Madam Chair and members of the subcommittee, for having invited me here today.

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As you have said, I am the ambassador and head of the Ottawa delegation. This will allow me to provide a perspective from the European side.

I would like to say right from the beginning how much I welcome the initiative of your subcommittee for undertaking this study on Canada's economic relations with Europe. I have seen the suggested action plan for your study, as well as the study's objectives, and I have to say that I share most of the concerns and questions therein. I hope your work will provide useful and timely input for the authorities on both sides of the Atlantic. However, I regret that your subcommittee will no longer be travelling to Europe. This doesn't make my task today easier, as I can obviously not replace first-hand information collected in Europe over a period of two weeks. But I'll do my best.

In preparing myself I read the transcripts of your previous hearings, and to tell the truth I was very tempted to articulate my presentation around the divergence I noticed between the statements made by many of your Canadian witnesses and the European view. But I guess that is normal.

Given the limited time I have, I will outline first my reaction to those issues, which seem to have a life of their own, and what I have decided to call the myths, which are often based on outdated perceptions. In so doing I hope to be able to convey to you some facts about the new Europe. Then I would like to share with you my view on how to better take advantage of the potential inherent in the EU and Canada trade and investment relationship.

I would like to start with the myths. A number of them about the European Union seem to exist, and I would like to address four here today. Let me start with the first one, which is the myth about the trade deficit Canada has with the EU.

Previous witnesses claimed that Canada has a trade deficit with the European Union in the order of $13 billion or $14 billion Canadian. However, when I use the data provided by the statistical office of the European Union, which is called Eurostat, in 1998 the trade deficit of Canada was only $2.1 billion Euro, or $3 billion Canadian. I am told, as you were by other witnesses, that our respective statistical authorities are working on identifying the cause of the divergence. Let me also add that Eurostat's statistics for 1998 show more than $10 billion total in trade in services, about $5 billion each way, which I think is an impressive figure.

Anyway, my point is not necessarily about the figures. It refers to the concept of trade deficits. In this era of globalization and of growing trade in services, the concept of identifying deficits in trade and goods between particular countries is not as relevant a concept as it used to be. In any case, I don't think it is sufficient to characterize a relationship between countries.

The second myth that seems to persist relates to the EU as a complicated bloc with which to trade. I'm not sure that this is the reality today in Europe, since we are not simply the addition of 15 member states. The reality in Europe today is, according to me, twofold: first, we have moved in Europe from a customs union to a single unified market from 1992 onwards. In anticipation of this date and since then, we have been working toward the elimination of internal borders and controls. We have achieved a large degree of harmonization of standards, procedures, and policies. We have created a truly integrated market with free movement of people, goods, services, and capital.

I daresay that trade within the European market is facing fewer internal barriers than trade within the provinces of Canada. Any Canadian exporter or operator has only to face one external EU border and thereafter can move its business around our single market without further complications. This is a feature of the new Europe that I think is unfortunately not well enough known in Canada and maybe could help explain some of the misperceptions regarding our market.

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Of course another plausible explanation may derive from what I will say is an unfair comparison with the U.S. market—a market that is so close geographically, basically at your doorstep, so similar in terms of culture, that one should wonder why take the pain of crossing the ocean. And so the myth goes. If this European market is so far away, it must be hard to get there, as it is composed of 15 countries with 11 different languages. Yet no one considers the U.S. market as a fragmented collection of 50 separate states.

The second reality these days in Europe is certainly one where the consumer has a bigger say. In that sense, we can say that the European market is sophisticated. In other words, it is not enough to expect people to buy what we produce; we have to get used to producing what people want to buy or feel safe to buy. I'm thinking in particular of genetically modified products, a sector where more information and transparency will help business to develop.

The third myth I would like briefly to address is what I might term the “don't worry, be happy” view of the EU as Canada's number two trading partner. The predominance of the U.S. position is a given. But we should not be complacent with the relative importance of the EU-Canada relationship. We tend to believe that with a market of 370 million people, soon to be 500 million people after our future enlargement, the volume of trade, services, and technology flows could be substantially increased. There too I'm not sure, personally, that Canadians are aware of the size and opportunities of the market Europe is offering.

I come now to the fourth and last myth, the agricultural subsidies. Why do I call this a myth, since these subsidies are real? The myth stems from the fact that the main element the EU tends to be associated with is this aspect of its policy. I will not go into too much detail, since I have prepared a number of tables for your perusal, which are quite concentrated on agriculture. But let me just make the following remark.

At the end of the Uruguay Round, everybody left the negotiating table with a feeling of having achieved a good deal. Of course more could have been done, and that was the purpose of the negotiations planned for this year. Since then, what happened? The EU has stayed well within its Uruguay Round commitments, both in quantity of subsidized export and in the level of expenditures on subsidies.

Since 1992, when we started the reform of our common agricultural policy, the direction of the EU financial support for agriculture has been steadily downward and will continue downward until our program of reform, called Agenda 2000, agreed to last year in March by our heads of state and government. In contrast, the direction of the U.S. support for agriculture is on an upward trend, as shown again in the tables in front of you—let alone the fact that the U.S. sometimes uses somewhat less transparent methods to support agricultural exports, methods not necessarily disciplined by the WTO. For Canada, as well, the direction of support for agriculture has risen significantly.

I am of course at your disposal to answer questions on this subject, but I would submit for your consideration that the way the EU is portrayed, when it comes to agriculture, may be outdated, since it does not take into account the trend of our reform nor the fact that up to now we have stayed well within our WTO commitments and were ready at Seattle to agree on the agricultural text proposed for the next round of trade negotiations.

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Let me know turn to what I consider to be the most important issue in the EU-Canada trade and investment relationship: its unfulfilled potential.

At first sight it seems obvious: the EU is attractive for Canada because of its large, growing, sophisticated and wealthy market, while Canada, as a member of NAFTA, could serve European enterprises as a springboard or gateway into the wider North American market. Canada has also a lot to offer in the high-tech sector. This is what I hear when I talk to people in Europe or in Canada, and it makes sense.

So the question to be answered is why is this mutual attractiveness not being fully realized in the real world? Of course I don't have the magic answer, but my personal belief, after having been six months in Canada as the Ambassador of the European Commission and having travelled around the country, is that one of the keys is awareness-raising and information dissemination about the European Union.

What is the European Union? What are the possibilities in terms of two-way trade, direct investments, economic and commercial cooperation? We are the first ones to realize that the EU is not a simple organization to explain, let alone the fact that we are constantly evolving. And this is why the European Commission has decided to embark here in Canada on an ambitious plan in regard to the number of activities foreseen and the allocated budget, which will be implemented from the end of this year up to the end of 2002. And it will consist of a series of conferences, seminars, workshops across Canada on a number of issues relevant to fostering links between the EU and Canada in sectors such as the consequences of the Euro, the single currency, on e-commerce, competition, consumer protection, and on cooperation in science and technology.

Providing the business community with a practical tool box on the mutual recognition agreement that we have recently signed with Canada will also be included in this project, as well as other means to reach out to such a large country as Canada. And this will be in addition to initiatives that we have recently taken such as the creation of four institutes for European studies, which are located in Vancouver, Montreal, Toronto, and Ottawa, and which are not only aimed at academia but will also reach out to the business community.

Let me add that our member states' embassies and consulates are also very active in this context, together with their chambers of commerce and/or their trade commissioners.

Let's hope that together with what the Canadian authorities are doing in Europe and here, we will soon be able to change the trend or at least some of the misconceptions and myths. But I'm also convinced that this will not be sufficient. Other proactive moves are necessary. For example, let's refrain from overemphasizing always the darker side of our relationship. Yes, we have some trade irritants, and they are dealt with in the WTO. They often concern longstanding disputes, which seem to keep trade lawyers busy, but it will be interesting to quantify the actual economic impact of solving these irritants. And I'm not sure it would dramatically change the trade statistics.

Of course putting the emphasis on our convergences of view may not satisfy the media, as it is not juicy enough, but we should not underestimate the message we are sending to our potential importers, exporters, and investors on both sides of the Atlantic when we report on these irritants. Happily amplified by the media, they tend to create a self-fulfilling prophecy by projecting an image of problems and difficulties that is not conducive to cooperation. At the same time, public authorities should, in addition to their work in the WTO, continue to identify and eliminate technical barriers to bilateral trade and explore possibilities for additional mutual recognition agreements.

This is what ECTI, the Europe/Canada Trade Initiative, is about. I will not go into the details of this initiative, since I know that other witnesses have been talking about it. I would like only to stress that the European Union is very committed to its active implementation.

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Last but not least, despite the fact that our respective economic operators are evolving in a sophisticated environment, I believe they need some incentives to enhance their dialogue. This is why, despite the fact that we are convinced that it should be a business-driven process, we have been actively involved in the creation of CERT, the Canada/Europe Round Table—of which you have heard too, I'm told. We sincerely hope that this young organization, which we strongly support, will constitute a valuable forum for both European and Canadian business people.

I think it's time to conclude my presentation. What I've tried to convey to you is the following.

First, I agree with the need for Canada to be placed more squarely on the European radar screen, as it is indicated in your study objectives. I would add conversely the need for Europe to be more prominent on the Canadian radar screen.

Secondly, there is room for improvement, I believe, in the signals that we both give to our respective business communities in terms of encouraging more trade and investment and in indicating accordingly our trade priorities.

Thirdly, the EU should be considered not just as a market for Canadian exports, Canadian technology, and services, but also as a valuable source of investment and technology for Canadian entrepreneurs.

Fourth, the existing framework for the relations between the EU and Canada should be the basis for furthering the trade and investment links through a very active implementation and follow-up.

My fifth point is that trade irritants should be solved as quickly as possible and should not overshadow the potential of our respective markets.

Sixth, timely and targeted information on the European market, in anticipation of our future enlargement, would be highly desirable for Canadian economic operators to better position themselves to reap the potential additional benefits.

Finally, and this will not come as a surprise, credit should be also given to the European Union for what it has already done in the sector of agricultural subsidies and for its readiness to enter into serious negotiations in the agricultural sector in the framework of a future comprehensive round of multilateral trade negotiations. This too will help Canadians to discover the new Europe.

Thank you very much for your attention, and of course I'm ready to answer questions you may have for me.

The Chair: Thank you very much, Your Excellency. Perhaps we'll have Mr. Grady speak and then we'll all ask questions at the same time.

Mr. Grady, if you could follow please.

Mr. Patrick Grady (Consultant, Global Economics Ltd.): Thank you, Madame Chair.

First, I'd like to thank the committee very much for giving me the opportunity to appear before you to share some of my ideas on Canada-Europe trade relations, some of which I just formulated today.

Last November, before the Seattle fiasco, Katie MacMillan and I published a book entitled Seattle and Beyond: the WTO Millennium Round. It doesn't have much to do with Canada-Europe trade relations, but I just thought I'd mention it anyway in the hope that I could sell a few more copies of it.

Seriously, though, the WTO agreements form the framework that governs our trade relations with Europe, and there is still much that needs to be done there, particularly in the area of agriculture and services, that can improve our trade relations with Europe.

Katie explained very well why there wouldn't be much for Canada in a Canada-EU trade agreement when she appeared before you two weeks ago. There's no point in me going over that ground again, since I really don't have anything to add to what she said. Instead I'd like to step back and try to provoke you with a few controversial observations on our overall trade strategy. I'm not even sure I agree with everything I'm going to say myself, but since I don't have a boss and can't get into any trouble, here it goes.

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This committee has heard some striking testimony from Bob Keyes, of the Chamber of Commerce. I will summarize and hopefully not do too much violence to what he said. I think Mr. Marceau also summarized, so I'm relying to a certain extent on his summary as well. I think it corresponded to what he said.

While Bob acknowledged that it would be good to diversify Canadian markets, he stressed that we live next to the biggest, most dynamic market in the world, with which we already have a trade agreement. Consequently, in his view, our first priority should be the United States and our trade with them. After that come multilateral agreements, such as the WTO agreements, and then, only then, bilateral agreements with other countries or regions, such as Europe. I share this view. I would like to be more specific about what I think it entails.

The FTA and NAFTA have been successful in establishing free trade between Canada and the United States in all areas, except in some areas of agriculture. A free trade area, though, is the weakest form of economic integration, where tariffs are abolished between trading partners.

The next higher stage of integration is a customs union, where a common external tariff and commercial policy are established. Then comes an economic union, which allows for the free flow of people as well as goods and services and capital, and seeks to harmonize regulatory and tax policy. Finally, there is an economic and monetary union, where the partners establish a common currency as well. This is the stage the European Union is now embarking upon, and it has already prompted some debate in Canada about the wisdom of a North American monetary unit, or NAMU, but I'm not going to get into that issue today.

Economic integration is something that needs to proceed sequentially. You have to be able to walk before you can run. Europe is a good example of the long-term evolution of economic integration. It's taken almost 50 years to get where it is today. Whether we will ever reach that point with the United States is still very much an open question. Many don't even think it would be desirable if we could.

At least one thing is clear: regardless of the ultimate objective, we can still benefit from stronger economic links to the United States formed by deepening our existing trade agreement with them. Most obviously, this means bringing agriculture into the agreement fully and dealing with the many complex domestic regulatory issues that have become central to trade policy now that tariffs have been eliminated between our two countries. More controversially, it could also mean beginning discussions about the establishment of a customs union with the United States, which would be the next logical step in this process of integration.

There is a major stumbling block here that has to be acknowledged. Canada could not reasonably expect to have much say in the level of the common external tariffs in a customs union with the United States. It's like the mouse telling the elephant. I do not see this as a big problem, given that tariffs are low in both countries and that the differences are not all that large for most items.

The big advantage of a customs union is that it would enable us to abolish the complicated rules of origin that require the maintenance of border controls and that hinder the free flow of goods between the two countries. Anyone who has been to Europe knows that most of the internal border controls there have largely been eliminated or are in the process of being eliminated.

Another aspect of deepening would be the liberalization of the rules governing the movement of people to provide these goods and services. The labour mobility provisions under NAFTA, which are relatively minimal, leave much room for improvement.

The progress in increasing economic integration between Canada and the United States, which was launched in 1988 with the free trade agreement, was sidetracked in 1994 with the establishment of the NAFTA. Many of the possibilities for deepening economic ties between Canada and the United States, two countries that had approximately the same level of development, were ruled out with the addition of Mexico, a developing country that had many problems of its own, to the trade pact. The U.S. has a wide range of concerns about dealing with Mexico on many issues, running from illegal immigration, health and safety regulation, and transportation regulation to drug smuggling, that make them reluctant to negotiate any deepening of NAFTA that involves all three partners.

The question is this. Does this make NAFTA a dead end for Canada, or are there some creative ways to extend the agreement in asymmetric ways? That's a question that I leave for the committee. In my view, Canada needs to find a way to deepen its trading relationship with United States and to achieve a higher level of economic integration if it is to get more benefits from being part of North America.

Another big issue is whether NAFTA means anything at all in our dealings with the rest of the world. If it doesn't, is there anything we should be trying to do about it?

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In contrast to NAFTA, the EU has been pursuing a systematic trade policy strategy with respect to the rest of the world. It can be summarized as divide and conquer. The EU seems to be willing to negotiate a free trade agreement with almost any major country in the world, except of course us and the Americans, New Zealand, Japan, and Taiwan, the international leper.

It's the EU trade agreements with developing countries in Africa and the Mideast that cause the most trouble for Canada and the other countries on the outside looking in. It's there that the potential for trade diversion is greatest, with third-country tariffs often in the mid-double-digit ranges in some of these African and middle eastern countries. But the agreements with the EU candidates in eastern Europe also lead to trade diversion. The EU is putting in place exactly the sort of hub-and-spokes model that scared us into the NAFTA negotiations back in the early 1990s, except they're doing it on a much grander scale.

What's sauce for the goose apparently isn't sauce for the gander. After watching its own trade with Mexico dwindle in half after NAFTA came into effect, the EU began to see trade diversion from quite a different perspective. It didn't waste much time whining about it, though. Through its recent agreement with Mexico, the EU has succeeded in undoing much of the advantage that Canada and the United States have gained in the Mexican market, while creating a whole new set of problems for us with respect to rules of origin that would be applied to imported Mexican goods.

Conrad Black has recently argued that there should be a free trade agreement between the United Kingdom and NAFTA. Could you imagine the EU standing by silently and allowing this to happen, while Mexico's trade agreement with the EU isn't really all that much different? What's the point of bringing Mexico into NAFTA if they're going to let the EU in through the back door? The NAFTA would be a much more meaningful agreement if all the partners had to agree before one of the partners could enter into a major agreement like this with another country that nullifies the benefits of much of the agreement for the other partners.

The same argument could be applied to Canada's efforts to negotiate a bilateral trade deal with the EU. It is not seemly for us to be begging the EU to deign to look at our proposal and then rejoicing when Pascal Lamy is at best noncommittal about it. It should be obvious that we're wasting our time. The EU isn't eager to negotiate with us because it has very little to gain. Tariffs between Canada and the EU are already low for most goods.

In my view, a united front would be the obvious way to get the EU's attention. We should go to our NAFTA partners with a proposal to make NAFTA a greater force in the international trading arena by giving it some real institutional bargaining clout in dealing with our non-NAFTA trading partners, most notably Europe. This would mean convincing Mexico to back out of its recently concluded deal and establishing a negotiating mandate for NAFTA-EU free trade negotiations.

Unless Canada can face the EU as part of a united NAFTA front, it risks being left out as the United States and Europe resolve issues bilaterally. For instance, the Transatlantic Business Dialogue is currently viewed by many business people as being the most effective institution for dealing with the key outstanding regulatory issues between North America and Europe. Canada is not represented at this table. Only some select Canadian companies can manage to get in by playing on their U.S. connection. They're practically U.S. firms, firms like Seagram, for instance. This leaves most Canadian companies out in the cold.

Another regulatory issue where we share a common interest with Americans that could be jointly pursued is genetically modified food, such as canola and hormone-treated beef. We have been successful in using our NAFTA membership to attract European foreign investment to Canada. We need to find a way to form a united NAFTA front to lever our bargaining clout in trade negotiations with the EU, including the next round of WTO negotiations, as well as any bilateral negotiations.

Thank you.

The Chair: Thank you very much, Mr. Grady.

We'll open the floor for questions.

[Translation]

Do you have any questions, Mr. Marceau?

Mr. Richard Marceau (Charlesbourg, BQ): Yes. First of all, I would like to thank our two witnesses for coming to tell us what they think about this subject. I am wondering whether it would be possible to get your notes. We will have them translated, unless you have a French version, which would be most agreeable. You don't? Well, you will have to give us the text, because under our rules, untranslated documents must be given to the committee, which gets them translated. That is how we operate.

It is most interesting to have you here, Excellency, particularly given that yesterday was the 50th anniversary of Robert Schuman's statement, which was seen as the starting point for the building of Europe.

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Yesterday was also the day on which the French National Assembly began its debate on chairing the European Union, something France will be doing for the next six months. There were speeches by Lionel Jospin, the former president, Valéry Giscard d'Estaing and the former prime minister, Alain Juppé, among others. Their comments on Europe were very interesting for Canada, particularly as regards the desire for enlargement rather than enhancement. Although some people, including Valéry Giscard d'Estaing, would prefer enhancement to enlargement, the fact remains that Europe has opted for enlargement, and I trust you will correct me if I am wrong. That tells me, as a Quebecker, that the European Union's priority is not North America or the world but rather its own enlargement. That means that the European Union seems to be concentrating its efforts on developing relations with Eastern Europe, which is waiting to enter the EU. Am I mistaken in this rather brief analysis of the European Union's situation and priorities?

Ms. Danièle Smadja: In my view, you are mistaken, if I may say so. I think you are underestimating the energy that exists in Europe. We maintain that we can work on several fronts at the same time. So, you are right to the extent that, within the Union, there is a very strong priority in favour of enlargement, and this is motivated both by internal political factors and reasons of stability in the larger region known as Europe. However, this priority for enlargement is internal, within Europe.

At the same time, there is the enlargement-enhancement debate within the Union, which, obviously, varies from one country to the next, and sometimes even within countries, such as France, as you mentioned. So there can be differing views. The fact remains that the Union as a whole has opted here again for both, enlargement and enhancement, in that at the same time as we are engaged in enlargement negotiations with Eastern and Central Europe, we have undertaken institutional reform. We have what is known as the Intergovernmental Conference, which is meeting at this time. Its objective is to do some internal housecleaning in Europe, to use a trivial expression, that is to enhance our modus operandi before enlargement. The idea is to ensure that enlargement does not result in bureaucratic inefficiency. These are internal priorities.

As I was saying, we do have a great deal of energy, and we also have some outside priorities. Since I am here before the committee, I will mention at least two of these priorities.

The first is a new round of WTO negotiations. We are continuing to devote a great deal of energy to this priority. Of course, in addition to the priority and energy we attach to multilateral trade, we also have a whole series of bilateral trade priorities.

I would like to say—and it's not just because I am appearing before the committee—that one of bilateral priorities is definitely North America and Canada. Like your committee, we too are thinking about how we could improve these relations.

So, to summarize, it is true that enlargement takes up a great deal of our time and our energy, but this process does not mean that we are inward-looking. We still have a desire to be open to the rest of the world.

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Mr. Richard Marceau: Thank you.

Mr. Grady, I listened very carefully to your presentation, in which you were advocating a customs union with the United States. You were calling for greater labour force mobility between Canada and the United States and you were saying that there should enhanced economic integration between Canada and the United States. However, at the same time, you seemed reluctant to talk about a monetary union, which is one of the corollaries of a fairly integrated economic union, particularly in light of the fact that—and I'm quoting here from memory—the percentage of trade among European countries... Let me start over again, because this is rather complicated. On average, trade among European countries compared to their trade with other countries accounts for approximately 63% of the total, whereas close to 85% of Canada's exports go to the United States. That means that Canada's economic integration with the US is greater than that among the European countries.

Why are you so hesitant about taking the step toward a monetary union, whereas you are in favour of a customs union and a more mobile labour force between the two countries?

Mr. Patrick Grady: I am here to talk about trade, not the monetary issue. I am advocating the next step in the integration process, which, in my view, is the establishment of a customs union between the two countries.

We are not yet ready for complete integration in the area of immigration, because at the moment, there are too many political differences between the two countries. I am referring only to measures to facilitate the temporary movement of people between the two countries. I was not talking about immigration. That could only come much later. At the moment, our taxation rate is different from that of the United States, and our standard of living is lower than that of the US. Complete integration of the labour market could cause some fairly serious problems for Canada.

Mr. Richard Marceau: One of the Canadian government's priorities seems to be the establishment of the Free Trade Area of the Americas, the FTAA, that is one of the priorities of the Canadian government. You say that Mexico should reconsider the free trade treaty it signed with the European Union last year. That is the first time I've heard such a thing. Can your vision of NAFTA be reconciled with the vision of a free trade area of the three Americas? Do you see this FTAA as an economic union in the broad sense, something that would offset the growing power of the European Union in world markets?

Mr. Patrick Grady: That is a possible interpretation, but my fear is that the addition of many South American countries, which are less developed than Canada and the United States, might cause some problems with respect to the growing integration between Canada and the United States. Canada would then have to focus on its relations with all the Latin American countries, rather than concentrating on its relations with the United States.

Mr. Richard Marceau: In other words, as the head of Global Economics Ltd., your priority is integration with the United States. Would your next priority be integration with Europe or with Latin America?

Mr. Patrick Grady: Then, multilateral trade will be discussed at the next round of World Trade Organization negotiations. And further, I don't know if we will have to, up to a certain point, take part in negotiations on the Free Trade Agreement of the Americas. I don't know how far we can go with that.

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Mr. Richard Marceau: Europe does not seem to be very high on your list of priorities.

Mr. Patrick Grady: No, that's not necessarily the case. Europe covers a vast area and is a very important economic entity, and our trade relations in terms of imports and exports are fairly modest given the size of Europe. However, I believe it would be difficult to directly enter into a bilateral agreement with Europe. North America as a whole must negotiate with Europe as an equal partner in order to improve relations.

Mr. Richard Marceau: Thank you.

[English]

The Chair: Mr. Shepherd.

Mr. Alex Shepherd (Durham, Lib.): Mrs. Smadja, you made the passing comment that consumers in Europe are more sophisticated than their Canadian counterparts. Is that true? When it really gets down to it, Canadians have to look at this, the number of issues that come out, the GMO and agricultural issues, and multi-functionality. Is it generally a true statement that they are more sophisticated, or is it just a handy thing to have so that you can embargo our trade?

Ms. Danièle Smadja: First of all, I didn't say that European consumers are more sophisticated than Canadian consumers. I said the European market is getting more sophisticated than it used to be.

I illustrate that by saying that people are not just buying what they find, what the others are producing, and the producers are more and more obliged to produce what the consumer wants to buy or what the consumer feels safe to buy. So in that context, the European market has become more sophisticated than it was.

I have to say that has been the result of a number of problems. When it comes to food safety, we have had a number of problems in Europe, whether BSE, or the contaminated blood, and then recently, the dioxin. So now, whether we like it or not, whether some people believe they are well informed or not, whether some people believe they are sometimes manipulated, the fact of the matter is that consumers have a bigger say than before, and the regulators have to take that into account.

But what I've seen in this country since I've arrived is that there is a change, a growing change, and a fast trend of change. I see that the debate in this country concerning, for example, genetically modified food has also increased dramatically. This issue is really at the centre of a number of discussions now, whereas two or three years ago that was less the case and it was already the case in Europe.

Correct me if I'm wrong, but I would say that in Europe the debate about GMOs started almost eight to ten years ago, and then five or six years ago it was really in the public domain. At the same time, in your country it was not, but it has come now.

Mr. Alex Shepherd: I guess the issue for a lot of people is that the whole genetically modified organism thing seems to be a bit of a red herring. Seemingly, the way I believe our government approaches this thing, the question is whether it is safe to consume. Is it safe to eat? The issue you allude to is the process in which it was created, which seems totally illusory to me. Why does anybody care what the process was? The ultimate judgment is whether it is healthy and safe to consume.

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Ms. Danièle Smadja: If I may disagree, I will say that's not enough. At least in Europe that is not how we approach it. We don't just approach GMOs as safe to eat; we look also at GMOs as safe for the environment. So we have two concerns: the concern when it comes to public health, and the concern when it comes to the protection of the environment and the impact on the environment of the GMOs and the seeds or the product itself. So we have these two aspects in mind, not just one.

The question is whether we have enough science or not, whether we have assessed the risk sufficiently to feel safe, to recommend that it be put on the market. There, the problem is that science is evolving, and what we are doing in Europe is applying the precautionary principle, which is a well-known principle that is applied in your country too, in the field of the environment. We are applying it also to the field of public health. We believe it is a very important principle, to the extent that when we last amended our founding treaty we put this principle, the principle of precaution, right in the middle of our primary objective.

Mr. Alex Shepherd: Okay, you use the precautionary principle, although many genetically modified foods in fact are less injurious on the environment, in that they require less pesticide, require less fertilizer to grow, and so forth.

Ms. Danièle Smadja: We don't know that—

Mr. Alex Shepherd: But getting on to the whole issue of multi-functionality in the agricultural sector, if you had to link everything you do to another vocation, another study, the multi-functionality in the agriculture industry... As I understand it, the way this is interpreted in Europe is that these agricultural communities are important because people like to go and visit them; it's a great place to travel, there's the bed and breakfast industry, and therefore we can justify all kinds of subsidization to this because it's not just agriculture. It serves a wider purpose of tourism or maintaining neighbourhoods.

I think that is where Canadians have a lot of trouble with the Europeans, because things don't seem fixed in stone anywhere. If you want to ship your product based on the fact that it's healthy in Canada, that's not good enough; you have all these other determinants. By the time you're through with all your determinants, there aren't any products you'll accept from us.

Ms. Danièle Smadja: I have to say, I'm very surprised. This is the first time I've heard that multi-functionality had anything to do with tourism and bed and breakfasts on our farms.

Multi-functionality is about recognizing that agriculture has not just one function. Agriculture is not just for food. The agriculture sector and farmers do play a very important social role. They do have a role in the protection of the environment. They also have a role to play when it comes to the organization of the soil, aménagement du territoire.

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This notion of multi-functionality is not something we have invented overnight. It is a concept that characterizes very old functions of agriculture. In fact, according to what I see in this country, whenever I talk with people in Canada, whether from agriculture or even from this House, they recognize that in Canada farmers do have these social functions as well. They have also this role in maintaining the land. They have this function in protecting the environment. They have this function about the aménagement du territoire.

It is not because of multi-functionality that we maintain export subsidies. That is a shortcut, which may be a little bit of a caricature.

Mr. Alex Shepherd: You'll have to excuse me, because I farmed for a while too, and I can tell you that before we farmed this land, the land took care of itself. So we find that kind of difficult. The only reason people farmed originally was sustenance, to sustain themselves. And some of their practices were good and some of them were atrocious. But saying that therefore we have to maintain these farm communities because they somehow are good for the land seems absurd to us. If you really wanted to help the land, maybe you'd let the land go back to its natural state.

The point is that you're using the word “multi-functionality” to subsidize agriculture.

Ms. Danièle Smadja: Well, I disagree.

I would like you to look at the table I brought for you. If you look the first table, the first blue box, main products in 1998, you will see that in 1998 Canada exported almost $2 billion of agricultural products, while Canada imported only about $1 billion from the EU.

We don't prevent things from coming into our market, whether by using tricks—

Mr. Alex Shepherd: Well, we're not talking specifically about that kind of trade. We're talking about the impact of subsidies on international trade, on the other markets we compete in, Canada and the EU.

You have also a chart here showing support per farmer: Canada $6,428; European Union $7,800. Does that include your concept of multi-functionality, or is that just direct support for farmers?

Ms. Danièle Smadja: This is direct payment per farm. Multi-functionality has not a price. It's not a new subsidy. It has no price attached to it. It's not a subsidy.

What I wanted to show here is that Canada is, as I said in my intervention, on an upward trend also when it comes to supporting its agriculture. This table is showing that when you look at the support per farm, it's less in Canada than in the EU, but I wanted to show that the difference is not so great. At least the difference does not deserve so much criticism of the European Union, like we are the only ones to do this dirty business of subsidies. Look at the last table. Look at the trend in the U.S.

Mr. Alex Shepherd: I've been told, and you tell me whether it's true or not, that the EU budget—not the individual countries' budgets, but the budget of the EU—is something like 60% allocated to agricultural subsidies.

Ms. Danièle Smadja: Again, this is—

Mr. Alex Shepherd: What is the percentage allocation?

Ms. Danièle Smadja: You have it here. I prepared it because I know this is one of the misperceptions of the old Europe. Where is it? Percentage of agriculture expenditure. There it is. You see the trend. It used to be 80%, and in ten years...

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As I said, there are a number of things that are changing in Europe. On top of that, our agricultural budget has been capped, whereas our global budget of course will expand because of our needs. Every budget has a tendency to increase to face new challenges, but the agricultural budget has been capped by our reform program, Agenda 2000. That is very important.

This is why I wanted to give you a couple of facts of this new Europe. First I gave you some basic agricultural statistics for the EU, U.S., and Canada, because I think it is also important to see the number of farms, the numbers of exports, and so on—and also the size of the farms—to understand a little bit better.

Then you see this trend also—which is going downwards—which is the share of our agricultural expenditure by comparison to the total budget.

You see also—I find this is personally quite interesting—a table called “EU Budgetary Expenditure in Agriculture”, where you see the different sorts of support. You see that the export subsidies—the ones that concern you the most—are really decreasing, whereas the direct aid is increasing.

The other table—the one after that—is also very interesting and confirms the downward trend. When you see the EU export reform from 1993 to 1998, despite the fact that in the middle... Don't forget that in 1995 we had an enlargement, three new countries; Finland, Sweden, and Austria joined the EU. We had to spend more also for them. Despite the fact that we had a larger community, again, the trend is downwards.

I thought you would be interested also in kinds of products, so we have also prepared tables where you actually see the situation in 1995-96 for a number of commodities. In Agenda 2000, when we will do the reform that is embodied in this agenda, you see the difference.

As I was trying to hint, we are not perfect, since we are not living in a perfect world, but we are doing better by the day, while at the same time others are getting worse. I have here the figures for the U.S. support. It's just incredible. The support per farmer in the U.S. was the equivalent of $2,000 U.S. in 1996, and today it's over $12,000 U.S., while at the same time the EU payment per farmer has remained stable at around $5,000 U.S.

As I said before, what is more worrying is the fact that the Americans are not using methods that are all disciplined by the WTO. They use export credit guarantees, which are not disciplined by the WTO, and they use food aid. In that context, I know that the Canadian Wheat Board has recently asked the Canadian government to place some sort of demand to the U.S. to complain that they're doing something that is not the best thing to happen.

The Chair: Mr. Speller.

Mr. Bob Speller (Haldimand—Norfolk—Brant, Lib.): I just want to take this opportunity to thank the ambassador for coming. I will be able to have dialogue with her on this issue in other fora, so I don't think it's appropriate today for me to engage in this, but to certainly thank her for her remarks.

As you know, we hold very dearly our trading relationship, and we hope we can expand it. We hope that this coming summer, when we sit down and meet, we can work out ways to further our liberalization in international trade. Hopefully we can work together at the WTO to bring a quick resolution to some of the difficulties we find, and I'm sure you find and the Americans find, in terms of countries using things like export subsidies and other trade-distorting measures.

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Mr. Grady, I have a question for you. You mentioned our friend Conrad Black and his idea of this free trade deal between Great Britain and Canada. In fact that's something that was being pushed by our former trade minister and now our high commissioner to Great Britain, Roy MacLaren, who used to always talk about that. I'm wondering what you see that we could do between Canada and Europe in terms of opening up more trade. If it weren't a free trade deal bringing Britain into the NAFTA, do you see any value in a free trade deal between Canada and the European Union? I think most would suggest it's probably an impossibility. Do you see any value in that? If so, what steps might we take to move toward more open and free trade?

Mr. Patrick Grady: There are small things you can do and there are large things you can do. We've heard from officials from the Department of Foreign Affairs and International Trade, the trade people, on the concrete actions they're taking to improve trade with Europe. Those are all very good, and I think they're probably working to a certain extent.

There's been talk about possibly a Team Canada mission to Europe. It seems to have worked in other areas of the world, and I'm sure it would be helpful in improving trade with Europe. There is a lot going on there. The fact that you don't have a trade agreement with Europe doesn't necessarily mean that nothing's going on and that nothing can be done. In fact very much is going on. There hasn't really been an increase in the amount of activity in trying to promote trade with Europe. It's been maintained at more or less a constant level, although in the early years there actually were cuts, particularly in the trade commissioner service.

I guess I wouldn't expect to see any dramatic breakthroughs resulting from the ongoing activities of the trade department, although it should be helpful in some smaller ways.

Whether or not it's productive to try to have an agreement, as I said in my remarks, it's almost like Brian Mulroney's comments, “You have to dance with the one that brung ya”. By trying to get a deal with the EU, in effect you're weakening NAFTA. I think that any deal that has to be reached with Europe has to be reached within the framework of the WTO negotiations, which are ongoing. I think there could be some real breakthroughs there in the area of agriculture. The Seattle meetings seem to be going relatively well on the agricultural front in terms of having a draft statement coming out of that. The Europeans seem to be willing to sign on to it. It would have been very helpful from a Canadian point of view. Services is certainly an area where there would be improvement.

I have brought along a table I guess I could pass out. It shows the tariffs and non-tariff barriers. The EU is the second line there, and you can see that they're product-weighted. This is data that comes from the OECD study that was done on indicators of tariff and non-tariff trade barriers, which was updated in 1997. You can see that the product-weighted applied... The most-favoured-nation tariff in Europe is 7.7%. That's significant. That certainly could come down a fair bit.

More importantly, on the frequency of non-tariff barriers—that's the fourth column—I think you'll see that the EU has significantly higher non-tariff barriers than we do, and even than the United States does. So 19.1% of imports would be affected by some sort of non-tariff barrier.

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These tariffs and non-tariff barriers are the issues that would be addressed within the context of the next WTO round. That's why I think it's important that the round be launched, so that we can make some further progress in improving trade. A lot of the harder issues have to do with regulatory barriers to trade that were only first addressed in the last round. A lot of progress can be made in the next round, hopefully.

The Chair: Thank you very much, Mr. Speller.

Just before we finish I have a couple of questions. Don Johnston, the Secretary-General of the OECD, was in town last week and spoke at a breakfast meeting of the press club. He spoke on the work the task force on biotechnology at the OECD is doing. Interestingly enough, he found that food safety was not the number one issue. It was concern for the environment. Are you involved in this task force? That's question number one.

Yesterday Mr. Caccia of the Canada-Europe Parliamentary Association held a special meeting on biotechnology and had members of the European Union speaking. One of the things that came out loud and clear was that the precautionary principle didn't appear to be defined in Europe in the same way it seems to be defined here in Canada. That then gets back to Mr. Grady's point that perhaps the solution here is to get these things ironed out at the WTO. Also, we seem to face a difference in the way we regulate in Canada and the way you regulate in the European Union.

I was interested, Ambassador Smadja, in hearing you say that regulators must take into account essentially what civil society is saying. On the other side, Canadians seem to be saying that what we need to do is to get the message out about our food safety. There seem to be misconceptions out there by certain groups, which are fearmongering a lot, and our role is to get the information about our food safety out to Canadians and to the rest of the world. So there's a difference in philosophy. Maybe you could comment on how we could reconcile that.

Last but not least, you also mentioned, Ambassador Smadja, the Canada-Europe round table and how you find that to be very useful. One of the criticisms we've heard in speaking with associates is that may very well be, but the price of belonging to that is so outrageous from a membership fee point of view that it really doesn't give a chance for all business, especially small and medium-sized enterprises, to participate.

Ms. Danièle Smadja: Thank you for your questions. I'm going to try to take them one after the other.

On the precautionary principle, you're right, there are differences in the way we view it. This is why recently—I think it was around mid-February—the European Commission decided to issue a very important document on how we view the precautionary principle, how we have applied it in the past, and how we would like to apply it in the future, so that, first of all, for transparency reasons our partners see more how... I would not say it's a guide, but it's very much guiding our partners. Secondly, it's also to prompt some discussion so that we could refine the way we apply it, hoping that in the meantime we will make some progress in the international arena.

One of the first indications of progress, I think, that has been achieved in this context was here in Montreal when the biosafety protocol was negotiated. For the first time in an international environmental agreement there was something quite important, which was the precautionary principle and how it applied in the decision-making process. Let's hope that this agreement will be signed and of course implemented. That will be definitely one of the milestones on the road.

Of course, in the context of the new round of the WTO, this will come on the table. Let's hope also that some progress in clarification could be made. I think you're right that we should be having a common way and a common understanding in the way the precautionary principle is applied.

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Yes, as a member of OECD, we do participate very actively and I hope constructively in the work of the OECD. These too are places where, little by little, a consensus will emerge on a number of issues, and that will be very good.

On what you say about the differences in philosophy concerning food safety, yes, I feel it. What you are doing here we are doing also. In fact we are at the moment consulting at large all the stakeholders in Europe, because we have issued a white paper on food safety and would like to create an independent agency, and yes, we will then use this agency to work as you work.

As for the round table, yes, it is expensive, but it is not us, the public authorities, who have decided to fix the price. As I said, it's a business-driven process, and they have decided on this price.

If you'll allow me, Madam Chair, I would like to use this opportunity to answer Mr. Grady. In his introduction he was mentioning the transatlantic business dialogue, and he was saying the Canadians are not there, except for the American subsidiary or mother or sister companies. This is exactly why there was this decision to create CERT, so that the Canadians and the Europeans could meet together, with the same sort of objective, with the same sort of relationship with the public authorities, in order to relay a number of their concerns so that we could improve in both the regulatory and the non-regulatory areas.

If I may continue, Madam Chairman, I would like to come back to the free trade agreement with the European Union very quickly. The table Mr. Grady has circulated illustrates exactly the position of the EU. It has been our... I will not say doctrine, but our way of dealing in international relations, especially when it comes to trade relations, that there is not really very much point in having free trade agreements with industrialized countries, given the level of the tariffs.

Between industrialized countries the tariffs are quite low, normally thanks to WTO negotiations or GATT negotiations in the past. As a matter of fact, the average tariff between the EU and Canada is 4%. What is a free trade agreement going to do to that that a WTO negotiation will not? However, when it comes, for example, to Mexico—and this is the reason we did an agreement with Mexico—the average tariff is 24% or 26%.

Your table shows also why the free trade zone was not our first choice, because free trade agreements do not necessarily solve the problem of the non-tariff barriers. The problem we have in the relations between EU and Canada, as we have in many other EU-industrialized country relations, is the non-trade barriers. These are normally not addressed by a free trade agreement.

However, since we feel the Canadians feel very strongly about this idea of a free trade agreement, we don't want to say no all the time. Maybe there are elements we have not looked at carefully. This is why Commissioner Lamy, when he first met Mr. Pettigrew in December, said “Okay, it is not our normal practice, but if you have a business case, please show it to us; share it with us”, because as I said, maybe there are elements we have not seen.

The Chair: Thank you very much, Your Excellency.

Thank you very much as well, Mr. Grady, for coming.

We welcome your comments. You're actually our last witnesses before we do our interim report.

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Colleagues, just before you leave and we terminate, I've spoken to our researcher, Peter, who believes he can probably have a copy of a draft report next week. So I would ask that you please review it, and then on May 31 will be the meeting that we actually sit down to discuss it.

When we talked about travelling again, we felt there just wasn't enough time to put together the travel plans and the proper appointments for the beginning of June. We just didn't have enough time. So we are left with the possibility of travelling in the fall.

What I would like to do—and again, I want you to think about this, and we perhaps can talk about this the next meeting—is I would also like to see this report tabled, even if it's an interim report at this time, so that we have something to put forward before the House closes. Then we can do a follow-up report with the travel in October. But before we end this session, remembering we must bring this report back to the main committee, I'd like to be able to table the report. So I'd like you think about that. We would then come back with a final report, following the travel in October.

I will also give you a heads-up that the draft report will be circulated next week so that we have some time to discuss it before we meet on May 31. Next week the Minister of Foreign Affairs is coming before the main committee on the main estimates, and that's when we'll be having that meeting. That's a heads-up.

Thank you very much, colleagues.

Thank you again, Your Excellency and Mr. Grady.

The meeting is adjourned.