Proceedings of the Standing Senate Committee on 
Foreign Affairs and International Trade

Evidence - May 2, 2007

OTTAWA, Wednesday, May 2, 2007

The Standing Senate Committee on Foreign Affairs met this day at 4:08 p.m. to examine and study international business policy (including bilateral and multilateral trade relations, softwood lumber agreement and others).

Senator Peter A. Stollery ( Chairman ) in the chair.

[ English ]

The Chairman: Welcome to this meeting of the Standing Senate Committee on Foreign Affairs and International Trade. The goal of today's meeting is to get an overview and gain a better understanding of Canada's international business policy, which includes bilateral and multilateral trade relations as well as investment issues.

This discussion will, I am sure, give us lots of food for thought on what I like to call Canada's prosperity agenda.

[ Translation ]

To this end, we are pleased to welcome three renowned experts, Stephen Poloz, John Curtis and Michael Hart.

[ English ]

Stephen Poloz is Senior Vice-President of Corporate Affairs and Chief Economist for Export Development Canada. He is responsible for, among other things, strategy planning, corporate communications, public affairs, government and stakeholder relations and international relations.

John Curtis is a Distinguished Fellow at the Centre for International Governance Innovation, CIGI, as well as a visiting professor at McGill University and Queens University. Prior to joining CIGI, Dr. Curtis held various positions at Foreign Affairs and International Trade Canada, including Chief Economist, as well as Senior Policy Advisor and Coordinator, Trade and Economic Policy.

Michael Hart is the Simon Reisman Chair in Trade Policy and a Distinguished Fellow of the Centre for Trade Policy and Law at Carleton University. He teaches courses on international trade as well as on emerging trade issues and the historical development of Canadian trade policy. He, too, is a former official of the Department of Foreign Affairs and International Trade, where he provided strategic advice during the Free Trade Agreement and the North American Free Trade Agreement negotiations.

I would like to add that the committee has a certain amount of expertise on the subject of Canada's trade relations. Three or four years ago, this committee did a major review of the Free Trade Agreement and NAFTA. We are quite familiar with it, at least up to about two years ago. As many people know, we have been working on Africa since we ended our review of the NAFTA.

Stephen S. Poloz, Senior Vice-President Corporate Affairs and Chief Economist, Export Development Canada: Thank you very much, Mr. Chairman. I would like to begin with a few remarks. I have made a submission to the committee entitled ``Financial Mediation under the New Trade Paradigm.'' I will underscore a couple of the implications of that new trade paradigm which I believe bear directly on the interests of this committee.

EDC Economics has just published its latest global export forecast, which is also available to you on our website at edc.ca. The forecast is entitled ``Adapting to the Evolving Trade Paradigm.'' One of the core results of that piece of analysis is that Canada's exports are unlikely to change over the next two years, 2007-08; there will be flat performance in Canada's exports for those two years. Given that we had a flat performance also in 2006, we sit here in the middle of three years of no increase in Canada's exporting activity.

That is, of course, a pretty significant result, considering how strong the world economy is and has been in the last couple of years and how it is likely to continue to be and also given how important trade is to the Canadian economy and Canadian prosperity. In short, we are losing ground in trade and we will lose more ground in trade over the next couple of years.

A convenient measure of this is to ask how important are exports plus imports — total trade — to the Canadian economy. It is a measure we commonly use as economists. If we go back to the 1960s, that ratio was about 35 per cent. Therefore 35 cents out of every dollar earned in Canada was in some way touched by international trade. By 1990 that had reached 50 per cent. Then of course there were the implications of the Free Trade Agreement with the United States plus trade liberalization around the world, and soon after that NAFTA took hold. There was an increase in the importance of trade to our economy reaching 85 per cent by the year 2000. Today that number stands at 70 per cent because of the ground that we have lost over the last six or seven years.

All this is happening while at the same time companies are trying to adapt structurally to this new trade paradigm. By that I mean that the world is flat, as Thomas Friedman says is his great book of the same title. The world has gone flat, which is to say that technology has made things much different for companies and how they work in the world.

We grew up believing in the power of vertical integration. Companies became vertically integrated to bring all those sub-processes into their company and gain from those synergies. In this flatter world, the benefits of vertical integration in effect disappear. The large companies are finding it necessary to vertically disintegrate themselves and disperse their operations geographically. New companies create themselves with suppliers scattered around the world all connected by logistics partners.

In effect, now we use international trade as a tool of production. We import the bits and pieces to make a BlackBerry, for example, which is produced in seven different countries even though it is a great Canadian product. All those pieces come together into the product we know and love.

Therefore, we import more so that we can export more, and the relationship is tied together with Canadian companies investing more in foreign countries to set up those global supply chains. That is the integrative trade paradigm, and we must adjust to it or else we would need to close up shop in many cases. As policy-makers, we need to help companies adjust to this new paradigm so that they can preserve and then create Canadian jobs in this new, more dynamic model of trade.

I would like to close my remarks by stating the things I perceive Canadian companies need and I feel are worthy of further study. First, obviously they need to invest in the new technology that does flatten the world. We see very good signs of this happening through strong growth in investment in our economy.

Second, they need to diversify their trade into the faster growing, emerging markets. We also see this happening. For example, last year our exports to emerging markets rose by 18 per cent. This year we forecast they will go up by a further 9 per cent, even while overall our exports remain flat, which tells what is happening to our major trading partners such as the United States.

We need more people to facilitate those relationships in those fast-growing, emerging markets, and more free trade agreements, or opening-up agreements if they are not all the way to free trade, with other countries to allow our companies to break into them.

Third, we need to encourage our companies to use trade as a tool of production not just as a sales tool. This duality is really what brings us to that new trade paradigm, using trade for two different dimensions of business. To illustrate, today the average manufacturer in Canada does $2.75 worth of international trade in order to create $1 of value here in Canada. Roughly speaking, that means importation of close to $1 worth of inputs, creating something in Canada and then exporting it for close to $2 ,so there is almost $3 in trade to create that $1 worth of value in Canada. That is the integrative trade model in action, and those numbers will go up much more over the coming years if we are to be successful at this. Today, 46 per cent of all the imports into Canada are goods that are partly finished — intermediate goods that go into the things that we actually produce here.

In order to accomplish this, companies will need to do more direct investment abroad — CDIA as we call it here in Ottawa — to build these global supply chains, and it will be especially important for our small business sector. I say that because as large companies vertically disintegrate, they are opening up links in their supply chains to the competition for foreign producers or, for that matter, domestic producers who are small, nimble and specialize in the one link in the chain rather than building themselves an entire hierarchy. This is an environment in which small is beautiful. It is the nimble, small, specialized company that will have the best chance of succeeding in this new paradigm.

Finally, the government's global commerce strategy is clearly a timely initiative. It is aimed at addressing many of these issues, putting more feet on the ground, targeting more strategic markets that are likely to offer stronger opportunities for Canadian companies, and as well negotiating more free trade or investment deals with these countries to open those doors.

John Curtis, Distinguished Fellow, Centre for International Governance Innovation (CIGI), as an individual: I will take very much the same approach, although I have organized my comments slightly differently. I think probably they will fit in with the comments of Mr. Poloz and Mr. Hart as well. First, I will give an overview as to how I see trade and trade policy. Second, I will summarize what we think we know both as professionals and as those who teach and do research in international trade and deal with the Canadian and international private sector. Third, I will identify three or four subjects that we do not know as much about as perhaps we should. That might help this committee begin to think of what its priorities and its future work might be.

One can make the case, as implied by Mr. Poloz, that in a sense standard, orthodox trade policy is over. In the whole era of negotiating trade agreements, particularly with respect to tariff and non-tariff barriers, there are elements to clean up, some of which this committee will know and recognize well. Basically, however, the money is in the bank. Most of our trade policy, the golden era of the 1980s and 1990s, is now behind us. In effect, you have asked us to come at a very opportune time because that chapter is closed and we have to look ahead.

Much of the work that has been done in Canada over the last 50 years, and even beyond, has been focused through the various royal commissions, the Gordon commission in the late 1950s through the MacDonald commission in the 1980s. We have had nothing since, and in a sense preparatory work, commission work, has more or less ended except for work that this committee has done and others have done at universities and elsewhere.

There has been no concerted look at where the Canadian economy is and where it might go and how the foreign international sector fits into it. I think Mr. Poloz has summarized that very well. The problem is that the world goes on, and organizations and businesses are changing. In effect, government, through policy instruments, particularly trade agreements, be they multilateral or regional, is catching up, but it is not really forward-looking policy, if I may make the point very quickly.

This committee and the work you are proposing to do or you might be doing could help increase public understanding, because there is an awful lot of mythology and misunderstanding and really very unhelpful comments from time to time. A lot of it emanates from the south, but not all of it. As well, it could perhaps give new stimulus to looking ahead. I hope that is what your work will lead to.

What I think we know, briefly, is that our economy is performing as a whole very well. The macroeconomic performance of our economy — the rate of growth, the rate of employment, employment growth, income increase — is really quite strong. It is the envy of many countries. Yes, the export sector or the international sector is not performing as well as it might, but in effect the domestic part of our economy is growing very rapidly.

In fact, we have, in a sense, in communications terms, a difficult task. Perhaps members of this committee will sense that most Canadians feel that things are pretty good at the moment, and yet we analysts, looking at trade data and investment data coming in and going out, looking at all sorts of other data, productivity particularly, will say that, at the micro level, on the ground level, things are not quite so good. There is a bit of a dichotomy there that I think we will want to keep in the back of our mind.

Our external accounts are good. We have both a current account and balance of payments account surplus overall, particularly with the United States. We have deficits with the rest of the world, but we have basically a very good external account profile in front of us.

We know that there are shifts going on within Canada itself, both in terms of the regions of Canada as well as the sectors. There is a movement, as everyone knows, towards the west, in particular, and towards resources. I grew up worrying about being the hewer of wood and drawer of water. In fact, if you look at the numbers, the profile is reverting to that, which is not to say that it is good or bad, but that is what is happening at the present time.

A lot of what we are calling trade policy, what the government is doing over and above the global commerce strategy, is sort of fiddling at the edges. Some of it is defensive, trying to keep up to the free trade agreements that the United States or Europe or even some of our Asian trading partners are doing. We want the same treatment with other countries. Fixing up the border is important, as is fixing up infrastructure. There are still more red traffic lights on the Canadian side of the border, on Highway 401, than there are between Detroit and New Orleans, for example. We do have infrastructure issues to clean up, as well as regulatory changes that I know my colleague Mr. Hart has worked on. Some attempt has been made between our governments and with the Mexicans as well to work on regulatory convergence.

The other fact we know is that the United States remains the dominant, pre-eminent economic power. It has macroeconomic difficulties at the moment, and its focus on security is changing to some extent their day-by-day policy, which impacts on the movement of trade, goods, services, and particularly people. The fact is that most of our policy and most of our trade operations will be with the United States, because that is the country and those are the firms with which Canadian-based firms are most integrated, to pick up Mr. Poloz's point, expressing it in a different way.

Finally, we know that other parts of the world, particularly China and India for quite separate reasons, are growing very quickly. There are constraints on their growth, which we could discuss, but in fact they will be increasingly large participants in the global economy. We are seeing the introduction into the global economic community of hundreds of millions of people. The world is changing.

Perhaps I can summarize what we do not know quite quickly. We do not know the details of what Mr. Poloz was talking about. We do not have a clear idea as to how Canadian-based firms, irrespective of where they are controlled or of their asset profile, fit in statistically and factually in the global value chains. Our sense is that it is many sectors, and many of our firms are closely aligned or integrated into the U.S. production system, but we cannot really measure that.

This committee might want to focus on pressing Statistics Canada to change the way it gathers data. Most of the data collection is based on country to country, finished goods to finished goods, and some have said measuring intermediate goods, but one has to go to the large private sector and indeed some of the smaller firms to get a real sense of how they are fitting each service and each production element into the global value chain. That is the way the world is working now.

Second, and related to that, this committee might want to think seriously about how well our trade commissioners, our investment promotion people and our science and technology offices abroad are doing the job that is required in the future, if in fact it is not country to country and it is not looking at only what is happening now, but getting the sense as to where country ``X'' and company ``X'' and firm ``X'' will be three or four years from now. Do we have the right people? Are they deployed in the right places? What is the role of government in helping Canadian-based firms to be more active participants in the global value chain, or should it be left to the market and private companies to provide that service? That is a serious question regarding the role of government that we should reflect on as we look out five or ten years from now.

Third, the committee might want to keep the exchange rate issue in front of it, not so much where the Canadian dollar is today and where it was a decade ago and five years ago, but to help answer the question of whether this country is subject to what historically has been called the Dutch disease? Will the appreciation of the Canadian dollar, both in terms of United States dollars and to a lesser extent the euro and sterling and other currencies, affect the structure of the Canadian economy and particularly the manufacturing sector? Not to be alarmist, but there is a debate as to whether the Dutch disease is something we have to worry about and look forward to. It might be useful for public understanding for that to be a subject of your work here.

There are two more things you might think about that we do not know much about. One is modeling the impact of trade agreements and investment agreements and science and technology agreements. We know from our economic theory, history and experience that more trade, more investment, more technological exchange and more movement of people is basically a good thing. The institutes, the think tanks and even the universities have not been funded well enough to model some of these changes. Some of the public debate would probably be far better off and public understanding would be better in terms of how to deal with issues of globalization, income disparity, future of wages, what kind of jobs there will be if we had more accurate modeling. Maybe this committee could encourage that within government and elsewhere.

The final item to sort out as we look ahead is the likely impact of China, India and the other emerging economies, especially the larger ones, on Canada, our economy, our regions and sectors, and also on the international economic organizations that we are part of — the G7, the International Monetary Fund, the World Bank, the World Trade Organization. It is possible that these organizations will change because of the evolution of these large economies. Bear in mind that the international economic organizations date from the Second World War, when the victors — including us — put these institutions together. The question as we look ahead is whether these organizations represent the interests of China, India and others. If not, that will have major implications on how the world is governed and how we are part of that governance structure.

I leave my comments there, Mr. Chairman.

Michael Hart, Simon Reisman Chair in Trade Policy, Carleton University, as an individual: I will be a little more contrary than my two colleagues. Maybe it is because I retired longer ago than Mr. Curtis did and Mr. Poloz is still in harness. I am not as easily mesmerized by government handouts and spin and so on.

I have been working with students for quite a number of years. Mr. Curtis will remember I was quite contrary as an official, but I can be even more contrary now.

I am also very mindful of the fact that I just filed my tax return and, once again, the government put its hand deeply into my pocket in order to fund things — some of which are quite useful, many of which are not. As a government official, I learned how easy it is for officials to use the power of government in order to fund things that are very useful to them but not necessarily to the country as a whole.

While Mr. Poloz may be very excited about the $40 million the government will spend on the global commerce strategy, I am excited too, but in the opposite direction. It will be another $40 million spent on a tremendous amount of activity that will not make an iota of difference on Canada's trade performance.

I will take that as a theme that I want to pursue with you, as to why I think that way. Part of it is for the reasons that both Mr. Curtis and Mr. Poloz have already outlined, which is the changing nature of the international economy and the changing nature of trade in the Canadian economy.

We have seen the end of the kind of trade with which we grew up, which was largely arm's length trade. It was very much based in our resource base, and it was between companies resident in Canada and unrelated companies resident elsewhere. That kind of trade is really quite unimportant now.

Now we have what has already been described as value-chain trade. It is Canadian companies participating in much more integrated networks, exchanging things back and forth across the border and with many partners in many parts of the world.

There are a number of illustrations that bring this out. The car industry is likely the best known from a Canadian perspective because it is probably the one that has the longest history of this kind of integration. The typical car now built in North America crosses the border six or seven times, back and forth. When we look at Canada-U.S. trade statistics, we should take them with a large grain of salt because we are counting not once or twice but sometimes six or seven times the same value as it moves back and forth. I am not saying that that is not important trade; it is very important trade but that is the kind of trade we now have.

Similarly, my colleague Bill Dymond came back last year with a new set of golf clubs that he had bought in China, which claimed to be Callaways. In November, we had to go out and test them because he could only make sure they were Callaways by the sound they made. We concluded that they probably were Callaways but he had not paid the Callaway price. They had been manufactured by the number four golf club factory in China, and that had been arranged for Callaway by a firm called Li & Fung (Trading) Limited in Hong Kong.

Li & Fung is the largest broker for manufacturing in the world. They bring name brand companies in Europe and North America together with no-name manufacturers throughout Southeast Asia. That is their job. When you buy something, for instance, which has the name GE on it, it is not made by GE at all. The only thing GE makes today are aircraft engines and large electricity generating turbines. The rest is all made for GE by all kinds of other companies.

That is the world in which we now live. That is what we mean when we talk about value-chain activities. The role that Canadians want to play in that is to get access to those value chains, to be participants in that, to have a slice of the production that takes place within the value chain. That is not old-fashioned trade; that is a new kind of trade.

For Canada, that kind of trade must largely be grounded in what we have achieved over the last 25 or 30 years in the Canada-U.S. situation. That is why Canada-U.S. trade grew rapidly in the 1990s, as we integrated into that economy, and that is still the basis of our future trade.

Within that reality, what does that mean for the trade policy challenges we face? First, I would deeply discount the Doha round of multilateral trade negotiations. That is a hard thing to say for a former official who participated in these kinds of negotiations and whose early bread and butter was to do that kind of thing. However, the reality is that the Doha development round is important for a number of developing countries who are not prepared to make it count, but it is not important for Canada, the United States or Europe because the areas where we can gain are the areas that are politically the most difficult.

As a consumer, I would like love to see this Senate committee take a bold stand and say it is time for Canada to get rid of supply management. However, I know you will not because the farmers will come in and spend a little time with you and remind you of how important they are, even though they are a dwindling herd. I see Senator De Bané saying yes.

Here is a fact for you. At the end of the Second World War, there were 500,000 commercially involved dairy farmers in Canada. Today there are between 16,000 and 16,500. It may not be long when we are down to about 5,000, which is what I think the economy can sustain, and then we can get rid of supply management.

That is about the only thing we can gain, in serious terms, from the Doha round. All those officials flying over there are doing very important work that will have no impact whatsoever on the Canadian economy as a whole.

Similarly, all the free trade agreements that we are busy negotiating are nice at the level of individual firms that may have a business interest in that particular country. They will benefit from that. However, the impact on the economy as a whole will be marginal — really not very much impact. The 85 officials who fly back and forth between Canada and Korea I am sure are doing the Lord's work, but their impact on the Canadian economy is pretty small.

What is big? What is big is the U.S. relationship; that is our bread and butter. We have made tremendous progress over the last 30 years in getting rid of the most important barriers between us, but we now face a new kind of barrier. We want to be able to convince investors that investing in the Canadian side of the border is a good bet. If you are an investor and you look seriously at servicing the world economy from a North American base, it makes more economic sense to locate in the United States than in Canada. Why? Because you have a bigger base to work with. You have 300 million consumers to work with inside the border, and in Canada you have 33 million to work with inside and 300 million outside the border.

From a Canadian business perspective, the border is a critical factor in their business decisions. They want to see the impact of that border reduced to the greatest extent possible. How do you do that? You look at what is done at the border.

The border serves two functions — a security function and an economic function. I understand the security function; I no longer understand the revenue or economic function that the border serves today in an era of free trade. I deeply resent that stupid question that each of us faces every time we cross the border: Did we buy anything while we are in the United States? Who cares? In today's world, with the nature of the economy, whether or not a tourist bought a new belt or a new pair of suspenders while they were in the United States is really irrelevant. We should not be employing government civil servants to be do that.

What else do we do with the border? As Mr. Curtis has already alluded to, we look at regulatory compliance. On the Canadian side of the border, Canada Revenue Agency or the Canadian Border Services Agency now ensures compliance with over 100 statutory instruments on behalf of itself and other government agencies. On the U.S. side, the U.S. Customs Service looks to ensure compliance with over 400 statutory instruments.

Do we really need to have people doing this at the border? Are there not better ways to check regulatory compliance; or even better, can we not move toward a higher level of regulatory convergence where we do not have to worry about whether or not a product made in Canada or the United States complies with U.S. or Canadian rules, whatever the case may be? Should we not be doing more work towards reducing that particular burden on industry?

Third, given the extent of integration and interaction between the Canadian and U.S. economies, do we have the institutional capacity to manage that relationship to our benefit? We have a much more extensive institutional network in place to govern the Canada-Europe relationship than we do the Canada-U.S. relationship, even though the Canada- Europe economic relationship is about one tenth of the Canada-U.S. relationship.

Does that make sense? If I were this committee, I would be looking at ways and means in which we can look at the way the world has evolved, where Canada fits into it, what role the U.S. relationship has in that, and are we doing the right things in order to get the most out of that relationship. The really happy thing you will discover is that if we get the U.S. relationship right, if we get the best out of that relationship, we will then do more across the Pacific and across the Atlantic because it is through integrated North American networks that we will do a better job of penetrating those markets.

Senator Downe: Mr. Hart, what are your views on the trade commissioners that the Government of Canada has in various countries and various cities? Do you think they perform a useful role?

Mr. Hart: My former colleagues in the department know my views well. The last substantive job I had in the department is one that Mr. Curtis has had also, which is the head the economic planning division. When I was the head, I had a young trade commissioner as part of my staff. He was there in 1992, which was the one-hundredth anniversary of the trade commissioner service. I asked him to do a paper looking at the past 100 years and what was the future for the next 100 years. He has not had a trade commissioner assignment since because it was quite a frank assessment. It was not well received by the people with whom I now play golf.

They are of the view that trade commissioner service is critical to Canada's performance because that is how they have been trained. As a matter of fact, though, I think they make at most a minor, marginal impact on Canadian trade levels. There are a few markets where government-to-government dealings are helpful, but the idea that trade commissions have a better idea of what a market is, how well it can perform and what a company should be doing, et cetera, I find very difficult to accept. I found it difficult to accept as an official; I find it even more difficult now.

Senator Downe: Would your view be that the company-to-company relationship is more important and valuable than having officials?

Mr. Hart: Yes.

Senator Downe: Mr. Curtis, in your presentation you talked about how good things are in Canada now and how well the economy is performing. Are you concerned about the high debt load of business and consumers?

Mr. Curtis: The Department of Finance people would know about that better than I do, but the answer is no, not particularly. The level of investment in the money markets is such that I think we are fine. I worry about the U.S., especially the housing side, but I think we are all right in Canada.

Senator Downe: That is my next question for the Export Development Canada. Dollar-wise, what percentage of our trade market value is still with the United States?

Mr. Poloz: When we include services, it is approximately 81 per cent with the United States.

Senator Downe: There have been many attempts over the years to diversify to other countries but with limited success given this percentage number. Why is that?

Mr. Poloz: The answer is where we began. We began with a very high integration with the U.S. economy. Long-term projections, with the emerging world growing at double the speed of the developed world — which is a very conservative assumption — and our trade growing on average twice as quickly as GDP growth in the world is also a historical relationship.

Even by 2020 we would still be 65 per cent linked to the United States and the other 35 per cent would be the others. That diversification would be very successful diversification though. Besides which, the U.S. economy is a highly global economy, so, as has been discussed by my colleagues, when you are part of a global supply chain of say GE, you are connected to the world but it looks like you are doing just U.S. trade.

For instance, a good percentage of a Boeing 777 is of Canadian value. That is a global market, and a very healthy one in fact. We have over 40,000 people in the aerospace industry in Canada and most of them produce parts for that business. They are global companies, even though all they have is a small link in a very big chain.

Senator Downe: Of course the concern would be that all our eggs are in one basket. If the American economy tanks because of their high debt loads, not only in housing but in other areas, will that not have a tremendous impact in this country?

Mr. Poloz: Indeed, that is exactly what we see in our forecast, that the U.S. economy is slowing now and we will have at least one solid slow year and another one perhaps next year, so Canada's exports are forecast to be flat even though they continue to grow quite rapidly in the emerging market world.

Senator Downe: Did you indicate that the increase in the emerging markets was 18 per cent?

Mr. Poloz: Yes.

Senator Downe: What is the dollar value percentage?

Mr. Poloz: That is approximately 6 per cent or 7 per cent of the total, which is approximately $30 billion.

The Chairman: I wish to mention that last night we had the softwood lumber people here and of course the collapse of the U.S. housing market has created a difficulty in the lumber sales to the U.S. and a re-emergence of the softwood lumber issue.

Senator Di Nino: I wish to follow up on my colleague's question. Mr. Hart, you have made some pretty strong comments on the trade commissioners or folks we send to other parts of the world to help us promote and produce trade opportunities for Canada. I confess that I have some agreement with your thoughts. I am not sure, though, that I am quite as critical of the individuals as you are. Are we are sending the wrong people? Do we really not need the people? Or is it that we are sending people who have not been properly trained and who do not really have an effective mandate to do a job?

Mr. Hart: None of the above. The people we send out as trade commissioners are well trained. They are very capable people, they work very hard and they are engaged in a tremendous amount of activity. Much of that activity does not really have much impact on our trade performance. It may have an impact at the margin for some individual firms, but the overall impact that their activity has on our trade performance is quite small. I am not denigrating what they as individuals do; I am saying that as a government I would not put my money into that kind of activity. I would put it into other kinds of activity.

Senator Di Nino: Can you give you examples?

Mr. Hart: I would spend a lot less money on that and reduce taxes. The most important thing you can do for the private sector is reduce the tax loads. When you do that, the private sector will spend the money where they need to in order to make business more effective across the globe. I doubt if many boardrooms are worrying about whether we have enough trade commissioners around the world. Many companies, if you ask them, will say sure, keep them there, because they do not think directly about the tax load they carry and this particular expense. However, it is one of the expenses that the government makes and I feel it has a very marginal impact on the overall performance of the Canadian economy.

Senator Di Nino: My next question deals with the integrated trade that all of you have talked about in one form or another. Has the Government of Canada, through all its resources, prepared itself to deal with this in the manner we should? Are we doing a good enough job in your opinion? Are we competitive in this new kind of trade?

Mr. Poloz: I believe that understanding it is our first important task, and it is becoming much more understood. That means, for instance, understanding that the ability of a Canadian company to invest in a foreign country in order to build itself an actual niche in the market is critical to the integrative trade model, whereas in the past we might have attempted to discourage that company from doing that and actually help them to stay here and invest here instead, which is a recipe for a high-cost structure and an unsustainable business model. He needs to be able to grow his jobs here by combining the low costs from other areas for certain parts of his business. That realization has become more widespread, as you are hearing today, and that is a very positive step. In my own institution, we now do a lot more facilitation of that kind of transaction on behalf of Canadian companies — close to $6 billion worth last year alone. We know that foreign investment creates trade today and is important for our prosperity. If the trade commissioner does only a little bit of assistance at one end, say in India, and that doubles our trade there, it may be from a small base, but $300 million or $500 million is worth having to many small companies.

Mr. Curtis: I certainly agree with the openness of the investment market, both outward and inward. Many of us grew up worrying about the outward, and it is certainly not helpful in today's world. It does raise domestic taxation issues and regulatory issues, so much of our success will not be border and beyond but in fact will be the quality of our domestic economic policy in terms of the success of Canadian-based firms to become increasingly involved in what is going on.

We do not really understand, we have not got good statistics, as I mentioned before, and we do not really know. I am sure that Toyota in Japan knows the entire supply chain from beginning to end, but I would be surprised if a Canadian-based firm, particularly a Canadian-controlled firm, would know the same thing. I suspect we have a real statistics shortage in that area.

To add to the comments on trade commissioner investment and science and technology, I think it will require slightly different people and training, namely, those who know the firm level and sectors well and who will be able to know not only what is going on today and what went on yesterday and who is coming to shake hands with whom today, but what sector, what firm, and what country will be interesting and important to a Canadian-based firm five years from now. I am suggesting more analytic, more future-looking trade and investment officers as we look ahead.

You were asking my colleague what he thought. I think it would be helpful for this committee to urge the government to develop quantitative indicators to be able to measure a little more carefully, because one could make the case that it is marginal or that it is an activity the government should no longer be involved in. In fact, you can go to private-sector, service-related trade and investment specialists and it would be cheaper for the economy in the long term than having government undertake this function into the future.

Mr. Hart: How well do we understand it? Well, we understand it better than we did three years ago, but nowhere near well enough. Mr. Poloz's organization has done a lot of work in disseminating the ideas behind global value chain developments and so on, but much more work is required.

We sponsored a conference last fall on that. In fact, you might want to get this from the Department of Foreign Affairs and International Trade, because it has the conference papers in it, including one by Art Ridgeway from Statistics Canada indicating the kinds of difficulties they are having in trying to measure the extent to which we are involved in this new kind of trade, as well as a good paper by a specialist at the Massachusetts Institute of Technology describing the nature of integrative trade. There is very good work being done, but we are only beginning to scratch the surface as to what that means for Canada.

Officials are now lauding Mr. Emerson's speeches with references to value chains, but I do not think they really know what they are talking about. We are at the beginning of understanding what this means for Canadian companies and what the policy implications are, because the policy implications of value chains mean that we have a different trade policy challenge than we did in earlier years. There are not the old issues of border measures such as tariffs and subsidies and quantitative restrictions and so on, but there are domestic policy measures of how well we are positioned to attract slices of production in Canada that can then be integrated in much broader global networks, and that involves looking at domestic policy issues, from tax structures to ownership requirements to the way we deal with the infrastructure in cities and so on. It is a very different challenge than we faced 20 or 30 years ago.

Senator Mahovlich: I do some work with the Agriculture Committee. How important is agriculture to Canada? I always thought it was very important. This is a large country. Around the Barrie area, we have the Holland Marsh, and a farmer told me that within 10 square miles we could feed the whole of Canada. The country is so rich there and the vegetables grow. The other day I was at a committee meeting, and one of the witnesses mentioned that if we had to depend on feeding ourselves, we would be in deep trouble.

Mr. Hart: In many ways, the story of agriculture in Canada is a success. If you go back 100 years, it took 70 per cent of Canadians to till the farms and bring in the food and all that. The whole agricultural sector involved about 70 per cent of Canadians. Today, it involves 2.5 per cent. Those 2.5 per cent are able to feed not only us but also many people around the world. It is a very successful sector of the economy. However, it is an increasingly smaller sector of the economy. As a share of economic activity, it represents 2.5 per cent in terms of its employment, its contribution to GDP, its share of international trade and so on. It is a shrinking share. That is not bad; it just means that many of the other sectors have grown to point where they have a much larger role to play.

The same is true in the United States and Europe. The agricultural sector is a smaller and more declining part of the economy, and that is one reason governments are prepared to continue to subsidize it, because the overall cost is not all that great, and so the political benefit of wasting that money is quite high.

Senator Mahovlich: We should be subsidizing our farmers.

Mr. Hart: No, we should not.

Senator Mahovlich: Why does America?

Mr. Hart: We do it too. We just do it differently

Senator Mahovlich: We do not subsidize. I have been out to the farms, and they are all complaining.

Mr. Hart: I just went to the store this morning with my wife to buy a lot of cheese for a party she is having on Sunday. We spent $75 on this cheese. Do you know what the tariff on cheese is?

Senator Mahovlich: Where was it from?

Mr. Hart: Some was Canadian and some was imported. The tariff on Canadian cheese is 238 per cent. That has an impact on prices. It may not be a government subsidy, but it is a government-mandated consumer subsidy. Similarly, we spend a lot of money in the grain sector and the poultry sector and so on, paying for all kinds of things. The Canadian subsidy level is lower than that of the U.S., but it is not negligible.

Senator Smith: The question I had in mind was touched on by both Mr. Curtis and Mr. Hart in part, but I will rephrase it. When you were speaking — I think I am referring to Mr. Hart here — I was thinking that part of your view of the value of trade commission bodies around the world might be influenced by the cost-benefit perspective, which is the question of how justifiable is it in many cases. If you did reduce the number of bodies that we had by 100 or 200, I do not think it would be an appreciable impact on taxes, because you were talking about getting the taxes down.

I understand the philosophy there, but to the extent that there is a pie, a budget, in terms of cost-benefit and productivity, which I am big on, what should be the priorities for whatever number of bodies we have around the world to maximize a real, meaningful value to those people being there? I know you have touched on that, but I would like to hear your thoughts on what the priorities should be for whatever budget it is — whatever pie, however big it is. What is the most effective way to have those dollars spent?

Mr. Hart: In the large scheme of things, the cost of a trade commissioner is not that high, although they are not cheap. To keep a trade commissioner abroad at a post, in addition to the salary, there is a lot of infrastructure that goes with this. You are looking at $250,000 per trade commissioner.

Mr. Curtis: Minimum.

Mr. Hart: That is not peanuts. In many posts, they do a lot of useful work reporting on stuff that just goes into the bin and not much is done with it.

If I were given the position of minister and I would not have to report to cabinet, I would reduce the trade commissioner service to about one third of what it is now and redeploy those same resources into a department of North American affairs. I think that is where we have some real challenges to face that are not being faced. We are doing stuff at an incremental pace — little bits here, there and everywhere — but we do not have a concerted, coherent, well-developed plan for dealing with the challenges that we face in the United States.

Those challenges are real; and they may very well become more real if we have an incident that closes the border. I think we have some real challenges to work with the Americans to ensure that the border between us is not a hindrance to trade and investment between our two countries. That requires some serious work that goes far beyond what is being done in the Security and Prosperity Partnership Of North America. That is where I would put my resources.

Mr. Curtis: I would not necessarily reduce it by one third or two thirds or abolish it entirely and privatize that function. I am glad to hear you say you believe in cost-benefit. I think it would be useful as a first step to try to model what the value added is not only of trade commissioners but also of investment promotion people as well as our science and technology officers. Whether that is a function that is best done by government is one question. Whether it is in the parts of the world where it is more necessary than in other parts of the world would be part of the calculus and the study that I think would be useful to proceed with. We could then end up with perhaps more political and economic officers to work on the U.S. file. I certainly share Mr. Hart's view; but before I come to those conclusions, it would be fair for all to have it studied properly, because it has never been studied.

Senator Smith: Do you want to comment on that, Mr. Poloz?

Mr. Poloz: I would add that international trade sounds like a theoretical thing that happens between Canada and say India, but it does not. It happens between two people — two individuals, two companies — and finding one another is not a simple thing. It is very difficult finding that niche where you are going to play.

In my experience — I do not visit every market in the world, but I visit lots of them in my job — those trade commissioners are instrumental in getting the job done for us and for the Canadian companies that we represent in those regions. There was a 48 per cent increase in our trade with India last year, and I can point to the transactions that were successfully completed that underlie those figures. That is because of the people we have on the ground in India.

Senator Smith: I do go to India a lot. I am on a bank board in India so I am very familiar with that trade.

Getting back to the American emphasis, I am sympathetic to what you say about the concentration there and the dollar volume. Prior to coming to this place five years ago and my current role, previously as part of my law firm, I used to go to Washington often — on softwood in particular, and for various interests. The frustrating thing there was that spending time talking to U.S. government officials was almost a total waste of time. You really had to do the rounds with various congressmen and senators. All the time, you were up against that gang of those big six forest products, all based out of Atlanta — the funding that they had and the slew of lawyers, and all the money that was going from all the stuff they were creaming from us to pay those guys. One of the big ironies was that to the extent that we were able to make the case to American politicians to get the cost of lumber down by having more imports, one of our biggest supporters was Home Depot, which was based in Atlanta.

I would be interested in whatever comments you have about how frustrating it is. At this stage in his second term, I do not think the President would be able to do much with very many members of Congress. To the extent that the President has some political muscle, and wants to get some of these members of Congress and the Senate, I do not think he was prepared to waste one ounce of energy or use up his political IOUs for the Canadian lumber thing. Those are my musings. I would be interested in your reactions.

Mr. Curtis: The point we are trying to make today is that politics are important and state-to-state relations are important, but ultimately it is firm-to-firm that counts as we look ahead. That is partly what Mr. Poloz and Mr. Hart are saying. To the extent that we can, we want to be more certain as time goes on about how to help Canadian firms participate in the international markets, either through the U.S. or directly, recognizing that economic growth in India is responsible for a lot of that increase. It is not necessarily the trade commissions; it is person to person, firm to firm. That is really what we are all trying to reinforce.

That particular case you refer to is highly political. We know that; but that does not define all of Canada's trade and investment performance.

Senator Smith: I know.

Mr. Curtis: We are trying to help the committee — to the extent that we can, because we come from different perspectives — by suggesting that this is not so much a trading nation but a nation of traders; and the traders are the people and the firms.

Senator Smith: Do you want to react, Mr. Hart?

Mr. Hart: What you just said is very interesting. The United States, as a market, is one of the easiest markets to penetrate. There are lots of customers, as well as ease of language, business practice and so on, so Canadians have done very well. However, the United States, as a political market, is one of the most difficult in the world.

When your competitors in the United States are able to use that huge juggernaut in Washington to frustrate you, that is where you get into trouble. Softwood lumber is the long-standing example. It goes back to 1841, when we had our first softwood lumber dispute with the United States, and they have been using it ever since.

That tells me that we need to devote the resources to make sure that we know how Washington works, who is doing what in Washington, and that we have rules and procedures in place to overcome these problems when we can. The Free Trade Agreement did a lot of that, but there are other issues need to overcome, and I think we can overcome them.

The current phase of the softwood lumber issue goes back to 1982. We have had our ups and downs over these years. I am not one who thinks we have come to that issue with totally clean hands. Some of the U.S. companies that have complained have had a reason to complain. Be that as it may, that issue is now teetering as to whether or not it will stay resolved. You talked about that yesterday, and I do not want to take time on it.

We had a similar problem in 1985 with BSE. We were able to resolve that in 18 months, and it stayed resolved even though we have had more cases since. Why? Because we were able to use the network and expertise that we have to build a set of rules to overcome this particular problem. Now, it created a real hiccup over the course of those 18 months, and many beef farmers lost some very serious money, but the problem was resolved, and trade between Canada and the United States is back to full, normal conditions. We need to do that across the whole spectrum of Canada- U.S. trade and build in rules that will allow these things to be resolved at the technical level rather than at the political level.

The Chairman: The committee has learned that an interesting solution to the beef producers' problem is that they now have 50 per cent of their exports going to Asia. They have diversified to an enormous degree, the beef producers have told us.

Senator Merchant: You said that Economic Development Canada's support was proportionate to all of our trade, 81 per cent to the U.S.

Mr. Poloz: No, it is far from this. The EDC specializes in emerging markets trade, in particular where companies perceive that the risks are higher. They are looking for insurance products, in particular, to deal with companies farther out in the world.

We have huge volumes of trade into the United States. The United States is a risky market. More companies die or have a corporate death there as a percentage than in any other country in the world each year. There is a new birth of companies there every year too. Often those companies owe a Canadian company money. That insurance is important. Approximately half of our business is in the United States, which compares to 80 per cent or more for Canadian trade. For us, the emerging markets are about 25 per cent of our business, which compares to about 6 per cent or 7 per cent for Canadian companies. We are much more weighted towards those elements of business. Approximately 90 per cent of our customers are the small or medium-sized companies. We are weighted in those directions where we are most needed.

Senator Merchant: Is your cost to customers higher outside of the U.S.? Are your losses proportionally higher?

Mr. Poloz: The underlying insurance premium that we would charge is a commercially driven price, and that would contain elements of risk. If we are insuring a statistically riskier market than the United States, we charge a higher rate for that. Normally a company will have customers in a variety of countries, and we will blend a single price and cover all of their exports across their entire customer set, so then they just declare their shipments on line and it is automatically covered. The pricing, if you like, is customized by customer, depending on the portfolio of markets they are dealing with. On average, the price in the United States would be probably lower than in a country like Mexico, for example, or China, but it is rare that it is a one-off comparison of that sort. It is a risk-related price.

Senator Merchant: Should you just function, then, as a banking institution, like a money store, or should social and national aims be considered? For instance, would you help a country in the developing world, such as Botswana, even though your level of risk is high?

Mr. Poloz: Well, yes.

Senator Merchant: Should you just serve as a money store?

Mr. Poloz: In order to be compliant with WTO guidelines, it is important that our lending or our insurance rates be commercially driven. Nevertheless, we get very enthusiastic when a high-risk opportunity comes along because, in those opportunities, it can truly make a difference for Canada, for a Canadian company, in a market to which other institutions may not be willing to go.

The answer to your question is a complicated one, but everything we do must pass a Canadian benefits test. Therefore, it must be provable that it benefits Canada and that we are actually generating increased incomes for Canadians or jobs; put it in whichever form you wish.

Last year we did business in 184 different countries; there are not very many countries that are not on the list. The answer to your question is that we will go almost anywhere, unless for some reason our colleagues at Foreign Affairs and International Trade Canada have said that we are not to go there.

Senator Merchant: Mr. Hart, do you have a comment to make about how the EDC functions?

Mr. Hart: No, the EDC has not ever been part of my beat.

Senator Merchant: Oh, darn.

Mr. Hart: I can study up on it and come and beat up on them, if you would like, but it would not be fair right now.

The Chairman: I think that you have all more or less agreed, although I do not want to put words in anyone's mouth, that Canada's international trade is basically flat at this point. What happens if you take out our exports of petroleum from the tar sands? I looked through the figures, and of course the U.S. is our biggest market at 86 per cent, although it goes up and down a little bit. If you take out the tar sands, every single export that I was able to identify was in a slight decline. Am I wrong there?

Mr. Poloz: I hesitate to say, ``Yes, sir.'' If we refer to 2006, for instance, that year our total exports were basically flat. They rose by 0.5 per cent. The energy sector did not contribute to growth last year, even though we were putting out lots of output from the energy sector. On average, prices were slightly lower in 2006 than they were in 2005, so the value of those exports was basically unchanged. The leading growth sectors were in the base metals, ores and metals. The agri-food sector grew well. Chemicals and plastics had strong growth. Machinery and equipment continue to grow, as do telecom, aerospace components, and I could go on. We do have strong sectors.

The Chairman: You have made your point. When I looked at the year before. If you take the last ten years, it seemed to me that the direction was not so good other than in energy.

Regarding the U.S., Mr. Hart, you have said that we should deal with the border issue. Our trade with the U.S. is at 86 per cent or 87 per cent — I suppose with the rising dollar it may drop a little bit — but the committee determined when we examined the free trade agreement that the exchange rate was an important factor in our exports to the U.S. Have we not got out of the U.S. about as much as we are going to get? Is it realistic to think that the border situation is going to be improved?

I had an experience going to Washington a week ago. Somebody misplaced my passport — I was in Toronto — and like a lot of other people, I was surprised. I had to go to Buffalo, because you can still cross the border with your driver's licence, and I sort of investigated the thing. They say that in two years — and I am sure there will be pressure to make it —

Senator Downe: It will take you two years to get a new passport.

The Chairman: It may. It is hard to believe that the border will get easier. Wherever you go in the world, you see that for the flights going to the U.S. — whether from Europe or from here — there is a huge lineup. It is not getting easier because of the security concerns.

I guess I am asking two or three questions at once. Where do we go? We have 86 per cent of our trade with a country. First, is there any reasonable prospect that that will increase? Maybe it will even decline a little bit if the exchange rate goes up. The Americans cannot raise their interest rates because of the housing collapse. Presumably that is affecting the Canadian dollar and their dollar vis-à-vis all of the other currencies. It is hard to see the border getting easier.

Mr. Hart: Let me try. First, on the statistics, the trade statistics go up and down and have for many years. That is not terribly significant. To look at it one way, which Mr. Poloz already alluded to, as a result of the free trade agreement, there was a tremendous reorientation of the way we organized our business affairs. Interprovincial trade over the last 25 years has been largely stagnant, and Canada-U.S. trade — north-south trade — grew.

That signified a higher degree of specialization in Canada and a larger participation by Canadian firms in North American value chains. How do we know that? One clear indicator is the extent of the import content of our exports, which Stats Canada looked at.

In the 1990s, the import content of our exports rose steadily, which some people thought was worrying. What it really signified is that we were becoming more specialized. We were getting rid of the things we were not very good at and importing them from the U.S. We were incorporating them in something we did and re-exporting that back to the U.S.; these things go back and forth across the border as part of integrated value chains. It is within that context that you have to look at the border — not in terms of trade flows and shares of the U.S. market.

The newspapers worry that China will overtake us as the U.S.'s number one trading partner. Who cares?

Senator Mahovlich: They already have.

Mr. Hart: For one month they did, but only on the export side, not on the overall trade when you combine imports and exports. When you combine total trade, goods and services, Canada is by far the U.S.'s number one trading partner, but who cares? What is important is whether trade is contributing to a prosperous Canadian economy.

Over the last 10 years we have seen a tremendous increase in demand from the U.S. Over the last few years we have seen an increase in demand in Canada, so the share of trade has gone down a little bit. These things go up and down. The dollar is an important contributor to that. Energy prices are a contributor.

It is important to look at the overall pattern of what are we doing and how well are we are doing it. We need to look at how well we are integrated into global markets. For Canada, that means how well we are integrated into the U.S.- based suppliers of global markets, whether Boeing building Dreamliners or Bombardier building its new global business. For instance, the jets that Bombardier builds have somewhere in the neighbourhood of 25 per cent to 30 per cent Canadian value added. The rest is imported content. Is that bad? No, it is very good. It means that we are doing in Canada what we are best at and importing what other people are best at, and therefore participating in global value chains. It is in that context that we need to look at the border.

To what extent is the border an impediment to Canada's participation in wealth-creating, investment-creating activity? In that sense, the border will be an increasingly important impediment.

You have to divide the border then into the people issue, which we all get frustrated by, and the goods and services issue. The people issue is being handled through how we will deal with it, whether through passports or smart cards or what have you. I think the passport issue that we now face will be gone in five years and most Canadians, particularly those who travel a lot, will be carrying a biometric smart card. In fact, many people who travel a lot already have taken advantage of CANPASS or a similar program, which allow you to pass through much more quickly.

Who was it who was frustrated by the border? Get one of these little cards.

The Chairman: It was not so much that I was frustrated, but I saw the other day 1,000 people lined up.

Mr. Hart: They do not have the little card.

The Chairman: I guess they do not, but, realistically, will they?

Mr. Hart: If they stand in that line often enough, they will, because that is the solution to that particular problem.

From a trade perspective, we need to consider the extent to which the border does frustrate trade. That is a different issue than how it frustrates people movement.

Canada Revenue Agency and now the Canada Border Services Agency have done a tremendous amount of useful work in moving things away from the border — in doing preclearance, in improving the information flow and so on. The U.S. has done some of that but is nowhere near as developed as we are in dealing with those kinds of issues, and we need to work with them in order to get that done. They would like to, but it is not high enough on their agenda.

Senator Smith referred to the problems in getting the softwood lumber issue resolved, and the President was not interested in helping us solve it. There were a number of reasons why the President was not interested in helping Canada. We do not need to go into that, but it is part of a broader pattern that if you want to do well in the U.S. you need to deal with the whole of the U.S., not try to solve isolated problems here and there. If we want to solve problems with the U.S., we need to do it in a coherent, well-thought through, consistent manner. That would be our number one foreign policy agenda, in addition to our number one trade policy agenda.

Senator Downe: I think there is a misunderstanding, though, concerning the power of the United States President. People think they are dealing with a Canadian Prime Minister. If a Canadian Prime Minister wakes up today and says we should have 40 more tanks, the Minister of Defence is agreeing by suppertime and the tanks are ordered by tomorrow morning.

The American President has a lot of moral persuasion, but he is prepared to spend — in a host of issues that we can relate to — very little capital solving somebody else's problem unless it solves a problem for him. That is the first point I want to make.

Where the Canadian government fails to understand the American system in some detail is the lack of resources they put into the United States. We heard today, and we have all known for some time, the importance of the United States for trade, for the prosperity in this country. However, when you look, for example, at the number of diplomatic missions Mexico has compared to Canada, the expenditures are completely out of whack. They are three to four times our investment and they have them scattered throughout the U.S., which is the key, in my opinion.

The local American politician, senator or whoever has to be influenced by how these issues in Canada affect them. We do a lot of trade with the Americans, but they do a lot of trade with us. Many of their jobs are dependent on our economy. The significance of that should be emphasized to the local and regional American politicians; that is, the impact policies are having on their economy and their area should be pointed out. I am dumbfounded that that has not been a priority. There are some trade partnerships between U.S. states and Canada that are very labour intensive. That is more of a comment.

Mr. Hart: To add an illustration, I was in Missouri a year ago as a guest of the Consul General of Canada in Chicago to give a speech at the university. He said, ``While we are here, why do we not also call on the staff of senator so and so?'' I said, ``Fine. Happy to oblige.'' We called on the senator's staff. That is an example of the kind of work that is done by consulates general, which is not well appreciated. They were building a relationship that can be used later to deal with little problems that may come along in the senator's staff by ensuring that the senator's staff in Missouri was aware of Canadian problems. That is what those 47 consulates general from Mexico do. We have about a dozen with a few satellite offices for a total of 15 or 16. That is not trade commissioner work; that is relationship building work. That is a different kind of work, which is very important in Washington. Because of the highly decentralized way in which decisions are made, the President is basically the most influential player but not the most powerful one.

Senator Di Nino: Thank you for the opportunity of a second round, Mr. Chairman, although I thought you would go one question on that side and one question on this side.

The issue of regulatory harmonization was referred to by Mr. Hart as regulatory convergence. It has been described at other times as another form of protectionism, in effect. To some degree, we have used it ourselves in our own country with interprovincial trade. The best example I can give is the beer industry.

Would our witnesses be kind enough to give us some idea of how big this problem is? I do not mean only to the U.S., because it is an issue in our relationship with the European Union as well. As well, do you have some suggestion as to how to deal with it?

Mr. Hart: It is a huge issue. You used the example of Europe. Europe negotiated their common market in the 1950s. By about the mid-1970s, that movement had run out of steam because they had done everything possible in the conventional trade policy sense. They had removed barriers and made it easier for things to move back and forth, but they had not tackled the regulatory differences between the member states.

The big thing they did in the 1980s was known as the Single European Act and its purpose was to deal with the issue of regulatory divergence within Europe. They put a tremendous amount of resources in it. First they tried to harmonize regulations and they found out that that really was a tremendously difficult and unnecessary task. Instead, they wanted regulatory convergence — that is, to use other kinds of techniques from mutual recognition to reducing regulations, and so on, but in order to reduce the impact of regulatory differences rather than to try to remove them all together. They have made a lot of progress over the years, and the result of that is a much better integrated market.

It was a much more difficult task in Europe than it is in Canada and the United States because between Canada and the United States we have had a market-driven regulatory convergence. Differences between Canada and the U.S. are quite small. Our regulatory regimes serve similar purposes and work similarly, but there are enough differences to keep people employed. You have the idea there. I would not call it protectionism but it is a kind of rice-bowl issue. There are enough people whose livelihood depends on these small regulatory differences that it is very hard to overcome them without strong political leadership.

For example, if you fly between Ottawa and Newark on Continental, you fly in one of the Embraer jets. That jet has been used between Canada and the United States for a number of years. Until a few years ago, it was used only by American airlines. It was fully certified by the FAA to be used within North America. But when Air Canada bought a number of these jets, they had to be recertified for use in Canada by a Canadian carrier to see whether it was airworthy. I am sure this is very important to the airworthiness inspectors of the Department of Transport, but it was the same airplane that had been flying into Canada and carrying Canadians for a number of years already.

You can multiply this over the many regulatory regimes that we have between Canada and the United States. The one that I like to use is very emotional. Whenever I use it in one of my classes, the students get very upset with me. It is the business of drug approvals. I am of the view that Canadians and Americans are probably biologically very similar and that we probably react to drugs in similar ways. When Canadians are down in Florida for the winter they go to American doctors and American hospitals and swallow American pills without thinking about it. Yet we have two separate drug approval regimes. In the U.S. they have 10,000 people in the FDA doing it; we have 985 people doing it here. Who do you think is doing the better job?

The Chairman: Probably here.

Mr. Hart: You would be wrong. Our process takes twice as long and is not as effective as that of the U.S. In 99.9 per cent of the cases, we reached exactly the same conclusion as the United States does, but six to 12 months later, which means that Canadians have been denied that therapy. Do we make mistakes? Yes. Do they make mistakes? Yes, but rarely. In fact the American regime, because of the high level of liability tort legislation, and so on, often catches a mistake much more quickly than we do in Canada. What would we lose by moving towards a more convergent regulatory regime between Canada and the United States?

The Chairman: They live three years less than we do.

Mr. Hart: That is because they have guns.

The Chairman: No it is not. Their life expectancy is three years less than that of Canadians.

Senator Di Nino: This has been fascinating and truly informative.

Senator Mahovlich: Do our tax regulations for corporations favour the United States over Canada?

Mr. Curtis: Tax rates are lower in the U.S.

Senator Mahovlich: The tax rates are lower in the U.S.?

Mr. Curtis: Not much, but a little.

Senator Mahovlich: As far as trade goes, what about corporations going back and forth?

Mr. Hart: The Department of Finance is acutely aware of the tax regime in the United States. When they look at corporate tax matters, they want to ensure that we are not at a disadvantage in the North American context. Rates and structure, and so on, are competitive between Canada and the United States. The U.S. income tax legislation makes Canada's Income Tax Act look like a fairly simple piece of legislation.

Senator Mahovlich: On free trade, the Softwood Lumber Agreement and NAFTA, it cost Canada over $1 billion for this settlement. You were saying that Canadian farmers took a beating on BSE. Has there ever been a settlement where Canada has won or has it always cost us gazillions of dollars to make a settlement? Can you recall?

Mr. Hart: It depends on what you mean by ``settlement.'' In the case of softwood lumber, the Americans had collected a punitive countervailing duty and, in order to get the refund, we agreed to leave a certain amount on the table. I am not sure that that was a tax paid by Canadians; that is another issue.

On BSE, what the United States did in closing the border was exactly what Canada did nine months later when the first BSE case arose in the United States. We did exactly the same thing, mandated by an international agreement that when you had a case of BSE, the first thing you did was make sure the border was closed. It then took a year and a half to find the regime that was satisfactory to both sides to reopen the border. We both closed the border. American farmers were also hit by it. This was a question of a health risk being addressed in a way that perhaps was more punitive than it needed to be, but those were the rules that were in place.

Senator Mahovlich: When it went to the courts, we won four or five times. The Americans decided to go back and fight it all the way, until finally we gave in. If we had waited, would we have been better off?

Mr. Hart: On softwood lumber?

Senator Mahovlich: Yes.

Mr. Hart: If we had cleaned up our act in the 1980s, we would have been much better off.

The Chairman: Thank you very much. It is said by U.S. trade negotiators that we have only a half dozen trade disputes, which is a relatively small number. They nearly always involve naturally produced products, either agricultural or forestry, and they are unsolvable. They are the most unsolvable trade disputes that the Americans have. Remember the Byrd Amendment. They had a hard time getting rid of the Byrd amendment. The administration, I think, wanted to get rid of it, but it took them a long time.

This has been a very interesting meeting, and it was the first meeting on this issue. It is a complex but vitally important issue for the standard of living of Canadians.

Mr. Curtis, you said that there are the micro and the macro. We are doing okay, but down there, there are problems. This committee has a bit of a background on the subject, and I think we are in a position to look at these problems.

I thank you all on behalf of the committee.

Honourable senators, I hope that we can continue on this subject if it interests members.

Senator Di Nino: This is fascinating.

The Chairman: I want to tell everyone at this point that I will be resigning as the chairman of the committee.

Some Hon. Senators: No, no.

The Chairman: Yes, yes. We can do this without getting too formal. We all know each other. I nominate Senator Di Nino as the chairman. I want to say this while everyone is here. It would be useful if the deputy chairman — Senator Di Nino and I have talked about this — could deal with the research staff, because we have a procedure we have been using. That would be very useful. There are arcane rules around here that research staff deal through the chair, but I would like to make that the chair and the deputy chairman.

Senator Di Nino: I would go a little further. As far as I am concerned, it should be every member of the committee.

The Chairman: We have our little meetings.

Senator Di Nino: Not only the research staff, but the clerk.

The Chairman: They are not exclusive meetings, as everyone knows. We are into this subject, and it is important. Senator Di Nino and I have certainly been looking into it.

I nominate Senator Di Nino as the chairman, and I am now resigning.

Senator Corbin: You have to get out the chair to resign.

The Chairman: I am resigning, and I am nominating Senator Di Nino.

Senator Corbin: You cannot do that.

Senator Stollery: I cannot?

Senator Corbin: Clerk, why is the chair empty?

Senator Stollery: Our rules expert will conduct the negotiation.

François Michaud, Clerk of the Committee: For the record, I do not fire the chairman and I am not plotting a coup.

The chair being vacant, it is my duty as the clerk of your committee to preside over the election of a new chair. I am now receiving nominations.

Senator Stollery: I nominate Senator Di Nino.

Senator Andreychuk: I second it.

Senator Corbin: Who currently is the deputy chair?

Mr. Michaud: There is no deputy chair.

Senator Corbin: Who was?

Mr. Michaud: Senator Stollery used to be the deputy chair back then.

Senator Corbin: Fine.

Mr. Michaud: It is moved by Senator Stollery that Senator Di Nino be chair of this committee. Is it agreed?

Hon. Senators: Agreed.

Senator Di Nino: Do I have to go sit there?

Some Hon. Senators: Yes, you do.

Senator Consiglio Di Nino ( Chairman ) in the chair.

The Chairman: I understand it is in order for me to receive nominations for the deputy chair.

Senator Andreychuk: I nominate Senator Stollery for deputy chair.

The Chairman: It is moved by Senator Andreychuk that Senator Stollery be the deputy chair. All in favour?

Hon. Senators: Agreed.

The Chairman: As my second official duty, I will adjourn the meeting.

The committee adjourned.