[Recorded by Electronic Apparatus]

Wednesday, February 19, 1997

.1539

[Translation]

The Chairman: Order! We have a quorum and the witnesses are here.

[English]

Today we have another of our meetings bringing to the table several very distinguished witnesses. We have Mr. Simon Potter, a lawyer with Ogilvy, Renault; from University of Toronto, Professor Robert Howse; and from the Centre for International Business Studies, l'École des Hautes Études Commerciales, Mr. Guy Stanley, senior associate.

The order I have here is to invite Mr. Potter to take the floor first.

Mr. Simon V. Potter (Lawyer, Ogilvy, Renault): Thank you very much, Mr. Chairman.

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[Translation]

I will make my remarks in English, but I invite members of the committee to put any of their questions in French. I will try to answer them in that language.

[English]

I've prepared a few notes for your committee, Mr. Chairman. Having prepared them and had them circulated, I propose to follow them not very religiously. I hope not to confuse people, but I'd rather they listen to me and not simply read the notes.

I know your subcommittee is charged with looking at trade agreements, particularly the NAFTA, through the lens of sovereignty, among other things. I'm glad to go first because it gives me the luxury of making some general comments and allowing more experienced speakers on that subject to go into better detail on the question.

It strikes me that a comment that has to be made about this is that our traditional ideas about sovereignty are becoming dépassé, déclassé; they're old. We have to forget what we used to think of as sovereignty and we must think of this word in a different way, particularly in the area of trade agreements. I say this not too lightly, because what area has nothing to do with trade? Every area has something to do with trade. We might as well look at this question of sovereignty through realistic, cold eyes attuned to the 20th century rather than to the 18th century.

I believe that the way to look at sovereignty, a word which is so full of baggage that perhaps it's the wrong word, in the context of international trade is to say to ourselves that what we're trying to do is look at a country's margin of manoeuvre, a country's freedom of manoeuvre in trade areas. What is sovereignty in this area? I think it can be boiled down to the power to sign a treaty and the power to then break it or tear it up.

Of course, a country that is not run too much by emotion will look at the price of breaking that treaty. That raises the question of what is the price of signing the treaty in the first place and what is the price of not signing the treaty in the first place. Once we look at it that way, I think we must come to the conclusion that the price for Canada of not signing a particular treaty might be very different from the price for a country like the United States, for example.

I think we also have to remember that this sovereignty or this margin of manoeuvre that we're after is going to be very different depending on the eyes we're looking through. Through Canadian eyes, we know the interest is on cultural protection, protection of some Canadian culture, or on limits on foreign ownership, whether it be in the oil industry or the banking industry or the telephone industry.

It's very interesting that just recently Canada agreed to sign on to a new WTO scheme, which will indeed set different rules for foreign ownership as regards telephone companies on the one hand and cable companies on the other hand. That obviously was a decision to restrain our margin of manoeuvre, our sovereignty, in one area to a different degree than we agreed to in another area. In Canada we've also spoken of health services, of water; we want to keep our sovereignty, our margin of manoeuvre, over these things.

If we were Americans, we would see this thing sovereignty through completely different eyes. The United States sees sovereignty in terms of simply protecting national interest, doing what's necessary for national interest and seeing that national interest through particular lenses, one of which is a lens that creates an incomprehension that anything is not commercial. We see it as well through the lens of Helms-Burton, that the United States just finds it very difficult to comprehend that any treaty might prevent it from adopting the Helms-Burton legislation.

Now, with those remarks behind us, let's have a look at the NAFTA and at the WTO. Here my friends might disagree with me, but I think the overriding feature of the NAFTA for Canada is the dispute settlement process, which suddenly put Canada on a level with the United States and made us able to insist on the following of certain rules. That is to say, Canada agreed to have its margin of manoeuvre limited, but only in exchange for a real limiting of the margin of manoeuvre of the United States.

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To come back to the question of price, which I raised earlier, I would submit that Canada gained a lot more than the United States. Canada's margin of manoeuvre was limited anyway, because it lives next to an elephant, and the United States gave up a huge concession in agreeing to be bound by a rules-based system.

What did NAFTA do for us in those areas where Canada sees sovereignty as important? NAFTA only really paid lip service to cultural protection in Canada. It is true that there are provisions in NAFTA allowing Canada to take measures to protect culture, but they are offset by measures allowing the United States to take equivalent measures in retaliation. It was something the United States could have done anyway. I call that lip service.

We also have side agreements in the NAFTA, which we decided for political reasons to go after. We can say what we want about those side agreements - they may be good, they may be bad, they may be correct - but we must recognize that they did limit our margin of manoeuvre in the areas of labour and environment. It might have been right to do it; I'm not saying it was wrong. I am saying that we agreed to give up a little bit of sovereignty there.

In the final analysis, I think NAFTA has helped us push Canadian trade and improve the Canadian trade balance, but we are going to have to recognize that we did give up margin of manoeuvre. The question becomes whether we did the balancing act correctly. Did we give up only just enough in order to get the concessions we needed from the other side?

I see the WTO under a similar light. First of all, there's no cultural protection in the WTO. That's why the United States went to the WTO on the Sports Illustrated split run question and not to the NAFTA. We did get a dispute settlement that is suddenly freed of the political intrigue; that is to say, it's a much more rules-based dispute settlement under the WTO than under the GATT. I believe we got much better access for Canadian products into markets of other WTO signatories.

Putting all this together, I conclude, Mr. Chairman, that we should not see sovereignty as a good or bad thing to keep, nor should we see giving up sovereignty as a necessarily good thing or a necessarily bad thing. It is something that is just a fact of life.

After all, we became adults so that we could sign contracts, and the minute we sign a contract we know our freedom is limited. One contract is a marriage contract, and that limits our freedom rather badly or well, depending upon one's point of view. We become adults in order to lose freedom. That's what it's all about. The question is to lose it in the appropriate way and to organize our lives in the appropriate way. That is to say, we should give up our margin of manoeuvre to the extent that we get others to give up theirs in appropriate ways, in ways that are good for us.

Maybe it's also arguable that simply channelling our own freedom is good for us. I put three examples in my notes. The NAFTA required us to put in place procurement rules for NAFTA signatories. Canada decided to do it for everybody and we now have procurement review at the hands of the CITT, which I submit is simply good for everybody.

In order to defend ourselves before NAFTA panels, we also gave ourselves better administrative practices before various tribunals. That was good for everybody. Because we were so embarrassed to have a less difficult border between Canada and the United States than among the provinces, it pushed us to have an internal trade agreement, and I think that's probably good for everybody.

Of course, there's good and there's bad, and I've put in my written notes for your committee, Mr. Chairman, some bouquets and some brickbats under NAFTA and WTO. I come down generally on the balance of saying Canada has done remarkably well with not a lot of muscle to throw around. Canada has managed to cajole its trading partners and the trading world generally into a better rules-based system, which is only good for Canada, and has done it while making its own concessions quite reasonable.

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For example, Mr. Calder, the orderly disappearance rather than the very sudden disappearance of quotas, which frankly in a realistic world were bound to disappear one day anyway, has been good for Canada. It is a concession that has been well managed.

Now, what more could have been done? What are the weaknesses? I think the agreement with Chile has pointed the way. The Canada agreement with Chile simply does away with anti-dumping between the two countries. Frankly, though I make half my living from anti-dumping cases, I believe that anti-dumping cases are a burden on the economy for everybody. I wonder whether we shouldn't be a bit more imaginative about doing away with anti-dumping, at least around the edges, and even maybe unilaterally in order to encourage other people to do it.

I also think that now that we have these rules in place, and we've got other people to agree with them, we should be able to summon the courage to be a bit more imaginative about using the rules. I for one would like to see a bit more of an imaginative, perhaps even aggressive, utilization of those rules in challenging violations of those rules, which I believe are abundant in several countries, such as the United States.

To conclude, Mr. Chairman, I think that the Department of Foreign Affairs and International Trade and its predecessors have done us a remarkable favour. We're in a much better situation than we were ten years ago. We have a momentum going, which can only be good for Canada. It requires careful shepherding to make sure we lose nothing of what we've gained and that we push things in the same direction in the future.

Thank you.

The Chairman: Thank you, Mr. Potter.

Mr. Howse.

Professor Robert Howse (Faculty of Law, University of Toronto): I would like to focus my remarks on dispute settlement, particularly one aspect of dispute settlement that I think is quite crucial to Canadian trading interests. This is dispute settlement in the case of trade conflicts with the United States that have arisen out of anti-dumping and countervailing duty actions against Canadian exports to the United States.

It will be recalled that one of the main stated reasons for entering into a bilateral trade agreement with the United States, the FTA, of which the NAFTA is obviously a successor agreement, was to forestall increasing harassment of Canadian exporters by these kinds of unilateral trade actions in Washington where an American producer can essentially go to an administrative process and get retaliation in the form of duties against Canadian exports to the United States on the grounds that either they have been dumped - i.e., sold into the American market at something below the price in the home market, in this case Canada - or alternatively they've been ``unfairly subsidized''.

In fact, the Canadian negotiators of the free trade agreement came back empty-handed. The United States agreed to no substantive disciplines on these forms of trade harassment. Canada gave up significant sovereignty in the FTA and got very little in return on this crucial question of administered protection, these kinds of unilateral actions that were harassing our exporters.

What we did get was a procedure whereby binational panels could review decisions of domestic U.S. agencies that had imposed these duties. And similarly, if Canada were imposing the duties on American imports, then also there would be available this binational panel review.

What has happened is Canada has won certain cases, although there have been tremendous legal costs to Canadian exporters. Often their products have had to withstand these duties until these matters were resolved, and they've lost market share in some cases.

.1555

But at the end of the day, as the softwood lumber dispute demonstrates, this process is not working very well. That is to say, in softwood lumber Canada won and won and won on the law at these binational panels. At the end of the day, the United States Congress didn't like the fact that Canada won and changed the American law on the question. Therefore, we're back to square one, with our lumber producers having wasted millions of dollars in legal fees. It is my submission that this is not a very useful process, precisely because all it does is allow us to get a binational panel ruling on whether the Americans have obeyed their own law.

Secondly, the lumber dispute has focused on several main defects in this process that are calling into question its legitimacy in Washington anyhow. One of them is you have a binational panel where a majority of the panellists are from one of the two countries. What happens, as in softwood lumber, when three Canadian panellists decide in favour of Canada and two dissenting American panellists decide in favour of the United States? That doesn't look like an impartial process to an outside observer, especially on a highly controversial issue, and especially where Canadians are purporting to tell the Americans essentially how to apply their own law.

So softwood lumber has demonstrated that there are important defects in this binational panel review process that significantly will limit in the future its ability to constrain in any effective way U.S. protectionist actions against Canadian exports to the United States.

I believe, however, there is an alternative, which is to increasingly take these actions into the forum of the World Trade Organization rather than into the panel process under NAFTA. In the chart I've presented to you, which is taken from a paper on this subject which I think will soon be published by the C.D. Howe Institute, I've tried to show that virtually every issue in dispute where Canada had an argument in these binational panels could have been litigated had the WTO subsidies or anti-dumping agreements been in effect at the time under the WTO. So in effect we can get the same legal issues in play.

Now, the WTO does not say that the panel review is based upon whether a country is conforming to its own law. But since America's law, like Canada's, is largely determined by the rules of the WTO itself, it doesn't make any difference. Basically, the legal norms and benchmarks are going to be the same.

What are the advantages of going the WTO route? First of all, there's no private representation. It's not like when a Canadian exporter has to go to Washington. I was involved in a minor way in the softwood lumber case. I was there when the matter was heard before one of the panels in Washington, and there were almost a hundred lawyers in the room. A hundred lawyers! The clock was running on a hundred lawyers in this case. This is absolutely absurd. And the legal costs involved are immense in fighting these actions, because the procedures and the norms are the norms of the Washington trade bar. In fact, you can argue that the main advantage of the binational panel process is that it has increased the billings of the Washington trade bar.

In the WTO process, Canada's lawyers from the Department of Justice or the Department of Foreign Affairs or whatever take the carriage of the action before the panels. Private industry interests might want to engage consultants; they don't have to. It's much less legalistic. There are strict time rules to prevent delay under the WTO dispute settlement understanding. Furthermore, it has a lot more legitimacy, because instead of the panellists being from the two countries in dispute, the WTO rule is the much more sensible one, right? That is, you avoid putting people from the countries that are disputing on the panel. You get people from third countries, who have not only the reality but also the appearance of impartiality in the dispute.

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Last but certainly not least is the very important fact that these WTO legal rules on anti-dump and countervail are international legal rules. Therefore, the U.S. Congress cannot, after getting a decision the United States doesn't like, repeal them without in effect breaking a treaty to which virtually the entire international community is a signatory.

Furthermore, and this goes to legitimacy as well, the fact is that where an international panel is applying international law, it doesn't look the same in Washington as panellists from Canada under the binational process telling the Americans what their own law is. It's international law, and no one can doubt the legitimacy of an international body applying and interpreting that international law.

The conclusion of my presentation is that we perhaps have been sold a bill of goods if we made major concessions in order to get this kind of binational dispute mechanism on dumping and subsidies cases in the NAFTA. The best course of action for the future is to increasingly take these matters and have them settled in the World Trade Organization forum, where, I might add, there is now also an appeal body, which adds to the legitimacy and legal coherence of that process in Geneva.

Thank you.

The Chairman: Thank you, Professor Howse.

[Translation]

I will now give Mr. Stanley the floor.

Mr. Guy Stanley (Senior Associate, Centre for International Business Studies (CIBS), École des hautes études commerciales (Montreal)): Thank you for inviting me to share my views. I teach at a business school. So I will try to address the issue from a slightly different perspective, that is from a management or administration perspective.

[English]

I'm going to take a management look at this, because this is the way I have to do it in my courses.

I've developed for you a series of slides. The academic definition of an expert is someone with a deck of slides, so I brought some along. I would like to go through them very briefly, and you'll see where I come out, which is largely where my two colleagues have come out, with some differences but probably no serious ones.

I believe that what pass for trade problems are really industrial organization issues. They look like trade because we're looking at them through trade law glasses, but if we were to step back or take off the glasses we'd see them a little differently. The reason is that we don't make things the same way we used to. Economies and countries no longer share the same spaces. They overlap in lots of different ways. A typical modern enterprise is an integrated production platform across the borders. The value-added comes not on one side of the border or another, but in the network of enterprises or activities that make up a modern enterprise.

A modern enterprise is an agglomeration of different relationships. It can be a wholly owned family of companies or it can also include strategic alliances and partnerships and various informal arrangements. So we have a situation in which what looks like trade is in effect the allocation of activity around a network of production, which crosses borders many times.

Now, that's the production paradigm, but the good old political paradigm hasn't changed that much. Law is still attached to lumps of geography, and trade remedies are laws that apply only to things that cross borders, not activity that occurs within borders, despite the notion of national treatment. Also, governments engage in systemic competition; that is, we know from our discussion with our Asian partners that they have an entirely different take on how free markets should operate in their societies, and some other institutions as well.

We also know that companies engage in competitive rent-seeking in order to win at the political level what they've lost or can't make up in the marketplace. Now, trade law is essentially what we're using to try to control those forces at the international level, and what we use for trade law now, the instruments we have available, in my view, are rather narrow for attacking those forces.

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[Translation]

The question arises: are the trade dispute settlement mechanisms effective?

[English]

And that means can we enforce agreed-upon rules through an impartial and transparent system? If we're thinking of a rules-based method of settling disputes, we want them to promote frequent use, and then once the pattern becomes clear, once the rules are established, the number of cases should drop off theoretically, because we know what will work and what won't.

Then there's the issue of market efficiency and competition. We can go through all these procedures, but if at the end of the day the price goes up and it's just a mechanism for getting a few more bucks out of the consumer, maybe we need to add something to make the system work a little better in achieving the goals of free trade in general.

So whether these dispute mechanisms work or not, I think the answer depends on the rent-seeking ability of industries involved. If they're extremely astute, as the softwood lumber people were, they'll go through a dispute in the rules-based system, and when they reach the limits of that, they'll change the rules of the game so they get what they want at the political level.

The trade systems that we have, these agreements, are immensely pragmatic accords. They allow you to do all sorts of things. The main thing is that they are ways of keeping the flow going and they are essentially mechanisms for promoting negotiated settlements. If it's a second-order solution, that's better than a third-order solution, and some solution is better than no solution. So their perspective of these things is quite pragmatic.

Why is it so hard? What are these forces at work at the micro level, at the enterprise level, that are putting such pressure on countries and governments and all the public institutions that we have? I've put together three or four slides with the headings ``Globalization'', ``Shifting Global Production'', ``Growing Interdependence'' and ``Foreign Direct Investment''. I'll just mention one en passant, and that is the issue of growing interdependence.

[Translation]

The title in French is: ``La croissance de l'interdépendance''.

[English]

If you look at this, you can see that without exception, although the proportions are very different, the deltas are about the same - that is, the changes are about the same. From the early 1970s to the mid-1980s, when it suddenly became apparent that we needed to have all these new trade deals, the ratio of imports to domestic sourcing basically doubled in every major advanced country. In Canada it went to 50% by the mid-1980s, and in the U.S., where trade has never been such a big portion of its overall economy, it still doubled, from 7% to 13%, by the mid-1980s.

It's important, I think, to recognize that if you look at the Department of Commerce data on the activities of U.S. multinationals, most of the U.S. trade balance is determined by non-arm's length trade, somewhere between the high 60% range for imports and in the mid-80% range for exports.

So all this is to say that there is empirical evidence for what I am saying, that companies have changed the way they do things. They are much more interdependent, producing across borders.

If you want to get a sense of this in terms of its impact on an industry, we could do worse than to look at these famous models of Michael Porter, which have been around for quite a while but are nevertheless quite interesting. If you remember Michael Porter's models - since the government of Canada paid something like $1 million to have them applied to the Canadian economy - you will note that along this horizontal axis you have what are essentially the IO, or industrial organization, issues. Your relationship to your suppliers and your relationship to your customers, and whether you're fully integrated or partially integrated along that line, are what industrial organization is.

.1610

Now, imagine if you have one set of industrial organization behind a border that's relatively protected, and then that protection goes. Obviously that calls into question those arrangements and imposes an imperative to seek new ones in the wider and more dynamic marketplace, and this is precisely what happens.

Then the vertical axis: the threat of new entrants and the threat of substitutes. For our purposes, that captures the impact of technological innovation.

So we find that companies all over the world are obliged to survive in a tremendously dynamic and intensely challenging environment in which the relationships they had are no guide to the relationships they need to establish. What's a good way of imposing a little order and stability on this? The question also poses itself, where are the governments? Well, if you're having trouble adjusting, or if you want to create a barrier to your competitors' adjusting, you go to the government and you make the case you need to make. Often trade law is there to help you do that in a non-political, rules-based way, supposedly. And if it doesn't work, then you switch.

I've included some data on alliances and I've also included a picture of some telecom alliances. I put that in to indicate just how difficult it's going to be to apply all these concepts to a service situation. I did this slide for the first time a few months ago, and since then MCI and British Telecom, of course, have decided to carry their cohabitation to a new level of integration, and that's now before the court.

To summarize the argument, integration and strategy, we have this little slide here, and the point here is that we are moving from the multi-domestic arrangement with the good old firms of the 1960s and 1970s, where everybody had branch plants behind borders of various levels of protection, to a system of complex integration, distributed value chains, strong integration throughout the value chains, which require open multilateral trading arrangements, so that the value-added can be efficiently allocated.

So that is basically the environment, and the question about dispute settlement mechanisms is whether they can repair the contradiction between the business and the political paradigms. I had a few remarks on this and they are similar to those of my friends. Rules-based systems attract cases but can't stop some forms of cartelization - for instance, softwood lumber. The countervail - this is an area of policy privatization, where the industry gets to move things along at its own pace simply by the ease of entry and imposition of actions on its commercial rivals.

Now, if these systems were more than procedural gadgets, we would expect that somehow they would lower consumer prices and improve the efficiency of markets. There is no evidence that they do this and there is some evidence they don't. So people who look at this like I do - and there are a few people out there at the OECD and other organizations - have come around to the conclusion that we need to add to the arrangements we have something that deals with competition policy, some way to bring in efficiency arguments in addition to the arguments that are now used.

As my colleagues have suggested, within an open trading arrangement it is a huge contradiction to have a countervail activity, because assuming open access in the different markets, the difference between the dumped material should be arbitraged back to the sourcing market. This is a somewhat theoretical argument, I think, because there is an IO argument to the effect that you can get these cases occurring when there's overcapacity in industries or, for some reason or another, a shift in a demand curve, etc. That could have the effect of impeding the reimportation at lower prices and so on.

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But all this merely supports the argument for strengthening what we have with another line of attack, which includes efficiency arguments and competition policy tests.

Thank you very much.

The Chairman: Thank you very much, Mr. Stanley.

[Translation]

I give the floor to Mr. Sauvageau. I remind you that Mr. Howse must leave at 5 p.m. If you have any questions for Mr. Howse, bear that in mind.

Mr. Sauvageau (Terrebonne): I have three short questions for Mr. Howse, and if I have any time left, I will continue with the other two witnesses.

First of all, I would like thank you for your clarification and your brilliant presentation, which will certainly help the committee in its future work.

My first question is very simple, and you have answered it in part. In your view, what should the committee do with respect to current trade dispute settlement mechanisms? What should we propose to improve them and make them more efficient?

Secondly, if I've understood correctly, there are more and more bilateral trade agreements between countries like Chile, Israel, etc. You are saying that when there are disputes, panels should not be set up, as is the case with NAFTA, but instead WTO panels should automatically be used. Could you give us some clarification on that aspect? At first sight, I agree with you, but why does Canada still resort to NAFTA panels more often than WTO panels?

[English]

Prof. Howse: First of all, what can be done to improve the rules? Well, with respect to NAFTA I'm not terribly optimistic. I think one has to separate what I was speaking about mostly, which is the process that relates to reviewing anti-dumping countervail determinations, from the general dispute settlement, where what you're interpreting is provisions of the NAFTA itself.

But I think that with respect to the process for review of anti-dumping countervail actions, one improvement would be, if you could get the Americans to agree to it, to move from these ad hoc panels to some kind of standing appellate body or tribunal where, instead of trying to get four or five experts - which is often hard because you run into conflicts of interest or potential conflicts of interest on who they've represented as lawyers or consultants or whatever - you have a standing tribunal or court to deal with these issues and with specialized knowledge of them. That would be an improvement. It might be acceptable in Washington, I'm really not sure.

Another improvement that could occur just by virtue of expanding the NAFTA to include other countries so that it's a continental arrangement is that you might be able to have a situation where the panellists are from third countries, so that if the dispute is between Canada and the United States, you would ensure that neither country had the majority of the panel. You would get some Mexicans, some Chileans and so on, so that it would be truly an international arrangement.

Third is not to make a dispute settlement try to solve a problem that can only be solved by constraining the actual American and Canadian law on dumping and subsidies. But these negotiations to try to have some kind of agreement - for example, to move dumping towards more of a competition-based regime - have failed totally.

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So I think the bottom line is that our efforts are better put in the WTO. One effort would be to improve the WTO dumping codes so that like the subsidies code, it actually contains many more benchmarks and some principles of competition policy.

I think the general lesson is that we should be putting more effort into the multilateral process. This relates to your second question. We have these proliferating regional arrangements. There was a cover story in The Economist magazine called ``Too Many Cooks''. They had each regional arrangement represented by a cook and so on. The suggestion was, how can you have legal coherence when you have some continental arrangement in North America and then an Asia-Pacific arrangement with overlapping rules and norms? You have a mess, because some of these look very much like WTO rules, and some NAFTA rules will look like rules in some other regional arrangement.

How do you have coherence? Well, it seems to me the only way you can have coherence is by starting a process to harmonize these arrangements and to fold them into the truly multilateral framework of the WTO.

In particular, in any context, even in a regional context, where what's at issue is the set of rules that relate to the WTO agreements or the 1947 GATT - this is almost the predecessor, but still largely enforced under the WTO umbrella - you should have the possibility of referring them to a WTO panel. That way you don't get a NAFTA panel and then another panel from some Australian-New Zealand arrangement or whatever interpreting similar rules but coming up with different results. Where's the clarity and certainty of expectations that businesses can have?

The third question was why actions are still taken to the NAFTA panels. I think the answer here has to lie in the fact that the WTO arrangement is a relatively new one. I'm not sure that the industries in question or the Canadian government have been sufficiently sensitized to the extent to which the rules under the WTO would give us good opportunities to meet some of these challenges, which is the point of the paper I will soon publish through the C.D. Howe Institute. It explains in detail what's summarized in that chart - that is, you can get a lot of these arguments out by going through the WTO process.

It's a new process. Particularly on subsidies, there wasn't much there before that would help us out with the United States. Now there's a great deal there.

Thank you for your questions.

[Translation]

The Chairman: If I may, I have a sub-question; I will give the floor back to you right after it.

[English]

There is a wide perception that multilateral agreements tend to rely on the lowest common denominator and that you can do better by dealing bilaterally. How do you react to that?

Prof. Howse: I and my colleague Michael Trebilcock recently gave a paper at Harvard and at a university in Finland where we actually looked at the NAFTA and compared it with the WTO exactly on this hypothesis. We were looking at areas such as intellectual property rights, services, investment and so on. We were trying to actually test the hypothesis that you got more integration through the regional arrangement.

We found it wasn't true, certainly not in intellectual property. With respect to investment and services it looks like a lot more, but then when you consider all the reservations and the way some national policies are treated in some Canadian provinces and U.S. states...and as I say, factor in all the reservations and exceptions that are in the annexes.

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In order to read the NAFTA properly you have to spend a lot of time reading the hundreds of pages of annexes and reservations and exceptions and so on. At the end of the day, probably the multilateral arrangement is as integrating, and on some issues actually is more integrating, than the NAFTA if you read the fine print in the NAFTA.

The Chairman: Thank you. Mr. Sauvageau.

[Translation]

Mr. Sauvageau: I have two other questions. The first is again very simple. Could you send us the studies you were talking about? They would certainly be of interest to the committee. I am referring to the one that has already been published and to the one that has yet to be released.

Secondly, you talked about setting up a standing tribunal rather than special ad hoc panels. If a standing tribunal were to be created, and my question is hypothetical, which body should Canada give precedence to in settling trade disputes? The NAFTA or WTO standing tribunal?

[English]

Prof. Howse: I think then we would have some options. It might depend on the individual dispute. For example, I think on subsidies I would still want to go to the WTO on most disputes, even if you have this improvement I've spoken of. I think the WTO subsidies code really does contain a set of benchmarks that can be used in, for example, a case like softwood lumber to challenge what the U.S. agency has done, whereas on anti-dumping we might want them to go to this improved NAFTA process simply because the WTO anti-dumping code that came out of the Uruguay Round does not offer the same opportunities.

But it would depend on the dispute. I think the more controversial the dispute, and the more likely that the United States is going to throw its weight around, even if you had a permanent tribunal it would be an improvement. Still, there is the advantage of going to the multilateral forum. There the United States has to walk away from the decision of the international community. It's not just refusing to give in, so to speak, to a smaller country.

The Chairman: Just to clarify the vision you're putting before us, when you deal bilaterally with the United States, at times you have allies in the American lobbies. Would that be a factor that would influence your judgment on whether to pursue the multilateral course or the bilateral course?

Prof. Howse: Yes, I think that's the kind of factor you would want to weigh in the balance. As I suggested in answering the previous question, I think where you thought that the domestic American lobbies were extremely powerful - that is, the lobbies that were in favour of the protectionist measure against Canada - that's particularly a case where you'd want to go to the multilateral process. If it was more evenly balanced and you could do more transboundary diplomacy, so to speak, then you might want to stick with the bilateral one.

But it has to be said that, as the example of the American-Japanese auto accord shows, the great thing about the WTO process is that it does include several steps of conciliation or arbitration where you can start out by a bilateral negotiation, and if that fails it goes to a genuinely multilateral dispute process.

[Translation]

The Chairman: Thank you very much. Mr. Sauvageau, one short question, please.

Mr. Sauvageau: Mr. Howse, you have some reservations, even with the standing tribunal. Could Canada simply propose that all panels set out in bilateral agreements be abolished and that all trade disputes be referred to the WTO? Would that be possible?

[English]

Prof. Howse: Yes, absolutely. I think it would be possible, but the question is whether we would actually have to get a change in the dispute settlement understanding of the World Trade Organization itself to allow that organization to assume jurisdiction. Normally, it would only assume jurisdiction if some rules of the World Trade Organization were at issue. So we could put in the NAFTA, or the successor to the NAFTA, that any dispute that involves WTO rules must be referred to the WTO. But I don't think the WTO dispute settlement body would take jurisdiction, so to speak, over a matter where they were just interpreting some rules that were in a regional agreement, as opposed to rules in the WTO itself, in one of the WTO agreements.

.1630

The Chairman: Mr. Penson.

Mr. Penson (Peace River): Thank you, Mr. Chairman.

I've enjoyed the panel here today because I think I've heard more common sense in about an hour than I've heard in a lot of the discussion on this issue for a long time.

Mr. Howse, you talked about the WTO being a body that we could probably use more effectively in some cases, and you referred to the softwood lumber issue. When the softwood lumber agreement came up, that Canada was going to limit exports into the United States, it was done on the basis of the industry asking government, or cooperating with government, to do this. I was in contact with a lot of the industry players and I was astounded to learn that they didn't seem to know that the WTO was really a different process than it was a few years ago after the last Uruguay Round of the GATT. So I agree with you that there needs to be more awareness made throughout the industry, and I guess they will get that.

In order to help me understand this a little bit better, the other thing they tell me is that we couldn't go to a NAFTA panel because the United States changed their domestic legislation, which would probably mean we would lose. First of all, I'd like to know how they can do that. I guess it was when they implemented the WTO regulations, but I'd like to know a little bit more about that. Secondly, the other point was made that the reason they didn't want to go to the WTO was that, even if they won, the United States may have the option of opening up some other market and wouldn't have to abide by the ruling of the WTO on softwood lumber.

Can you help me understand that a little better?

Prof. Howse: Yes, sure. As you know, part of the problem is just sensitizing the industry and its lawyers to the opportunities available.

Secondly, how can the United States change its own law after a ruling? Well, the answer is that they're doing nothing wrong. The fact is we got so little in FTA and NAFTA that if a panel rules against them in terms of how the U.S. agency is interpreting its own law, there's no impediment to Congress changing the law so that it now, on its face, conforms to the preferred interpretation of the U.S. agency. In other words, that's totally permissible under the NAFTA. There is some kind of notice requirement, I think, but we didn't get any limitations on their ability to do that. That was a failure of our negotiators at that table.

On whether the Americans would comply with a WTO ruling on this issue, that's a very good question. There have been some empirical studies that suggest that under the GATT, the predecessor to the WTO, there was a mixed record of compliance.

It seems to me there are a couple of factors at issue here. First, I think they're more likely to do it because they would be walking away from a decision of a genuinely international body; second, partly under American insistence or pressure, there's now an appeal body attached to the WTO, so they could appeal the decision. I think if they lost the appeal, the U.S. administration would look very bad if it were to walk away from the decision. But ultimately, if they were to walk away and not implement the ruling, you're right to say that at the end of the day all Canada could do is get a retaliation authorized, and that might affect some other sector and shoot us in the foot.

My sense is that the United States, under the Clinton administration, is increasingly concerned about its reputation in international, particularly multilateral, institutions. And American industry itself benefits from these rules because this is not just governing trade with Canada, but with Japan, the European Union and so on. If people in the world at large don't have confidence that the United States will play by these rules, then the U.S. economy and its major trading interests will ultimately suffer. So for the sake of a particular industry, to walk away from that kind of decision of that kind of body, I think, would have very significant costs and would be perceived by the administration to have those costs.

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Mr. Penson: I have another question, Mr. Chairman, for Mr. Stanley. Regarding the competition policy that's being discussed at the WTO level in order to have some kind of standard for competition policy, how would you see institutions such as the Canadian Wheat Board, for example, being affected in the next phase of trade negotiations as we move toward getting some kind of standard in competition policy?

Dr. Stanley: To tell you the truth, I hadn't thought about the Canadian Wheat Board.

Mr. Penson: Just so you know, it's a monopoly situation in terms of -

Dr. Stanley: I've heard about it, yes. I'm not totally unfamiliar with it, but I hadn't considered the Wheat Board from that point of view before coming here. In fact, I hadn't thought about the application of this to agricultural issues generally, at least not at the commodity level, so I can't give you a considered response on that. So I won't try.

Mr. Penson: Maybe I can just move away from the Wheat Board issue itself. Would you agree that there is a general recognition of the need to have some kind of international standard in competition policy and it is something that will probably be coming forward in the next round or next negotiations at the WTO for various reasons, such as monopoly situations in a country or state trading enterprises that inhibit trade?

Dr. Stanley: I think that's right, although I'm not sure I would.... There would probably be standards of transparency and a look on a case-by-case basis of the effect on cross-border trading for different arrangements. I'm sure you don't mean to imply there be would be a one-size-fits-all competition policy, but I think the issues have to do more with the transparency matters and understanding what countries are doing or not doing that prevents industries from reorganizing themselves.

Mr. Penson: I have more, but I'll get to it in the next round, possibly.

The Chairman: Perhaps Mr. Calder would be a bit patient before I give him the floor. We never gave Mr. Stanley and Mr. Potter the opportunity to react to what Professor Howse was saying. Is there anything in response to an earlier question from Mr. Sauvageau, any comment you would wish to make?

Mr. Potter: Thank you, Mr. Chairman. I've been burning.

Some hon. members: Oh, oh!

The Chairman: I saw it in your eyes.

Mr. Potter: I don't mean to say I disagree with everything Professor Howse said, far from it. I agree with much of what he said. However, I suppose I approach it more from the point of view of a practitioner. I'm a practising lawyer and I have clients who have to deal with these things, and I think perhaps I see things in a different perspective. I agree with Professor Howse that the WTO offers now, with this new arrangement they have, several advantages that have to be considered, depending on the case, depending on the issue, depending on the product, depending on the opponent. However, we have to recognize that it is new. It is new and it is better in large measure because the NAFTA dispute settlement was there. In fact, the WTO dispute settlement now is in many regards a copy, a borrowing from the NAFTA dispute settlement.

I think the answer to your question, Mr. Sauvageau, as to why people use the NAFTA binational panel dispute process when there are vastly superior WTO processes there, is that private parties have an automatic right to have access to those things. Therefore, if they want to go and get binational panel judicial review on anti-dumping or countervailing questions, they just go and get it, whereas to go to the WTO we must grovel and beg and plead with the Department of Foreign Affairs to kindly go and plead our case for us. Even if we succeed, we then have to persuade them to plead it the way we want them to plead it. I think that's a major difference and, for a practitioner, a very major point to bear in mind before we decide which forum to go to.

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Another point I'd like to make - and I say this because I've sat on two panels under chapter 19. I also represent the Quebec softwood lumber industry, and I know something about this. I would caution you against jumping from the softwood lumber case to the conclusion that the NAFTA dispute settlement system is not working or that it somehow appears biased. Nearly all of the judgments in the binational panel have been rendered not along national lines.

Now that we have Mexico in the NAFTA, we do have multinational membership there. I frankly think it would be marvellous if we had more multinational membership in the binational panels, but it is not so. It has always three Canadians rendering a judgment in favour of Canada and three Americans rendering a judgment in favour of the United States.

The softwood lumber case is an anomaly. It is true that Canada won two cases - some argue three - and then wondered are we going to try again. What happened was not a failure of the NAFTA binational panel process, it was a failure of nerve in Ottawa because everyone decided not to call the American bluff but to agree to a system of quotas. I'm not saying that was a wrong decision. It was perhaps a correct decision. But it is not an indication of failure of the binational panel process; it is an indication that in one very large case worth $50 billion to the Canadian economy over the course of this agreement, the decision was made to go and get a quota system, mostly under pressure from British Columbia. I don't think that is an indication of failure of the binational panel process.

That being said, I agree with Professor Howse that there are many advantages to the WTO. I think the conclusion to take is that we must continue to play in both fora and use the one when it is advantageous and the other when it is advantageous.

Your question, Mr. Sauvageau,

[Translation]

was: how can we make things more efficient? I have a rather quick answer to that: Canada should unilaterally decide to no longer have anti-dumping cases for products that are not in a value-added sector. We should allow low value-added products into Canada, even if they are dumped, so that we can transform them into products that we could subsequently export to the United States in order to take advantage of the Free Trade Agreement.

[English]

The Chairman: Could you hold back, because Mr. Calder has been very patient. If you have questions to put, we'll be back to you.

Mr. Calder.

Mr. Calder (Wellington - Grey - Dufferin - Simcoe): Thank you, Mr. Chairman.

Professor Howse, I was very interested to hear you say there is no real reason for the smaller bilateral, trilateral, whatever, that there is no real reason for them, and we should be dealing with WTO.

Try this scenario - and this is the way I basically see it as working right now. We have the WTO rules, which are basically the old GATT rules, and that's the major umbrella for all the global community to trade underneath. From that you have either GATT green, GATT amber, GATT blue, as to how those trades are carried on. I believe there are always going to be subagreements, and NAFTA is a beautiful example, because here we are in the North American continent sharing the same geographical space, and we are dealing with a trading partner we've had for years, the United States, and now Mexico has been brought into it.

As long as the rules within NAFTA, which is like a subagreement underneath WTO rules, comply and are GATT green, there shouldn't be any dispute at all. It's a much cleaner process. We've already seen that with the dispute we went through with the United States on supply management within, for instance, the poultry industry, where they said under article 302 of the NAFTA we were totally wrong in our application of tariffication. We in turn used article 702 - which is a carry-over of article 710 out of CUSTA - to say that in fact our application was right. We pointed to different instances within the United States where they had used the same type of trade application under tariffication - an American idea in the first place.

.1645

I think these subagreements are going to exist. I don't think there's any way around them. Obviously it's to the benefit of the countries involved more than to the benefit of the rest of the countries of the WTO. So if they are going to exist, how would you envision them being set up underneath WTO, or should it stay the same as it is right now?

I have another question along that line. When we went through this panel under supply management, I felt that some of the things the United States did were unconscionable. For instance, they basically printed the results before the August preliminary date in Inside U.S. Trade. They did that in July. On top of that, they printed the names of all the panel members. I'd like your comment on that as well.

Prof. Howse: I agree with you that there will always be some regional or bilateral agreements. While I think it's advantageous to deal with many issues multilaterally, I agree with you that there are some that are simply too specific.

The problem we face now is that it's not as if these regional or bilateral agreements are dealing with, say, matters that are too specific, or where it isn't possible to have multilateral rules. They're dealing with similar subject matters. The rules are overlapping and complex and sometimes confusing. You have very similar sets of rules being interpreted by both WTO panels and regional dispute settlement mechanisms.

So if it were the case that these regional agreements were limited to matters that could not successfully or usefully be negotiated multilaterally, then we wouldn't be in such a bad state. What to do about it? I think there are a couple of things.

One, there should be much greater scrutiny by the WTO of the provisions of these arrangements and their consistency with multilateral free trade. There is a provision in the 1947 GATT that has been retained within the WTO umbrella that provides for a review of these arrangements by the member countries to ensure their consistency.

There are a couple of areas where I think we have to be really quite worried. One is what's called ``rules of origin'' - that is, regional arrangements will not create rules that prevent third countries from competing effectively within that free trade area. It's easy, for example, to sign a regional agreement that you have mutual recognition of industry standards, or something like that, between the members of the agreement. If you're on the outside, from a third country, and your industry isn't conforming to that particular standard or norm, that's a way of shutting you out of the market or making it harder for you to be competitive. This is the strategic use of regional arrangements to skew competition from other countries in the world.

That's a very important concern. I think it has been underestimated by most trade experts, who have thought of the problem much more in terms of diverting trade due to tariff preferences. Well, the game today isn't so much tariff preferences. As Professor Stanley has suggested, it's in areas such as services and investment, product standards and so forth. So we have to make sure these rules aren't being tilted in such a way as to disadvantage third countries. That's true whether the arrangement is within North America or Europe or wherever.

.1650

You also bear the risk that in a regional arrangement the industries of the largest country in that arrangement - if you're dealing, for example, with industry standards - will say, well, we're the largest market, we're the largest country; therefore, adopt our industry standards. So if that country's industry is already conforming to those standards, it's already at the norm for the region, and then what happens to the other countries? You can create a competitive edge by regional harmonization in that way for your own industries.

At the multilateral level there's a balance, because you're not dealing usually with one large country and some smaller countries, you're dealing with the EU, Japan, the United States. All these are large countries with sophisticated negotiators who will be very savvy and very skeptical when U.S. industry interests say they want to harmonize their standards as the international ones.

Mr. Calder: Thank you, Mr. Chairman.

Prof. Howse: I'm sorry, you wanted me to comment on the tariffication dispute.

Mr. Calder: Yes.

Prof. Howse: I have to say that I actually acted for someone in relation to that dispute. My only comment would be that the kind of aggressive behaviour that the U.S. displayed is not entirely surprising to me. Again, I think they would have been much less discourteous in a forum like the World Trade Organization, where the scrutiny of all these countries of their conduct is there.

Mr. Calder: In fact, they lost ground on that because yogurt and ice cream was put back on the import control list and the dispute panel held it there.

Prof. Howse: Yes.

Mr. Calder: So it was about a 15% trade gain for us.

The reason I left up at the end of tariffication is that I wanted to lead into a question forMr. Potter. I don't know whether you would call me paranoid or not, but just reading through here I see: ``Orderly disappearance of silly quota régimes''. As a poultry farmer, it gets my blood pressure up a wee bit.

We replaced import quotas under article 11.2(c)(i) of the GATT with tariffication underneath the NAFTA process and actually WTO too, and with that, as I see it, quota systems within the country of Canada are not going to disappear. What they're going to do is follow the rest of the countries down on a level playing field.

What I mean by that is that underneath the GATT agreement, underneath the Uruguay Round, we are decreasing tariffication protection and subsidies by 15%. Therefore, underneath tariffication, also the protection at the border...instead of an import quota, tariffication is being lowered by 15%, and when we get to the next round, we'll see what we're going to renegotiate that way.

If you take a look at the United States, for instance, they're already incorporating a system of planned production or supply management, whatever you want to call it. The State of Wisconsin, for instance, in their eastern dairy compact, has, on a state version, exactly the same as what we're employing here right now underneath tariffication and import quotas. They also do the same thing with peanuts. In fact, they increased their tariffication level in April 1995, setting a tonnage level so that we can't ship any more than that into the United States - and also on sugar, on which our own suppliers are running into a problem right now over the 10% content.

So I'd like your comments on that, Mr. Potter.

Mr. Potter: Yes, Mr. Calder. First of all, I'm glad that you quoted my notes correctly. I did not write that poultry producers are silly.

Mr. Calder: No, no, just quota regimes.

Mr. Potter: Quota regimes are. I'm glad also that you mentioned the sugar regime. I think it's pretty clear that there's no one more embarrassed about the sugar regime than the American administration. They've got themselves into an awful tar baby and they can't get out of it. It has created its own constituency, which has argued year after year for sillier and sillier provisions, designed to bolster a system that has no justification. In fact, the American sugar program works an enormous evil not only on American consumers across the board but on economies that are sugar-reliant surrounding the United States, which really can't survive properly without being able to sell sugar into the American market.

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So I think those systems are silly. I agree with you that Canada's decision to switch to a tariff system and to reduce gradually...you say in line with other countries. Some people would disagree, because a 250% duty rate on some things perhaps doesn't look like equilibrium with other countries. But never mind, it's something that's going to be reduced in an orderly fashion, and this has now been successfully defended in a dispute with the United States, and that's the way to go. The point in my notes is simply that Canada has succeeded in balancing these margins of manoeuvre about which I spoke a few minutes ago in order to give as little concession as possible.

As well, you bring me back to my previous comments. What Canada ought to be doing is attacking those American programs you've been mentioning. We should not be leaving them in place.

Mr. Calder: In fact, last year I had the privilege of debating Pat Roberts on that exact issue and did have the pleasure of attacking him and sending him packing on it, too.

I believe that if you take a look at the supply-managed commodities here in Canada, which are currently grossing $2.6 billion, for instance, out of the poultry industry alone, and if you take a look at what we are putting on the retail shelves here today, we have in fact one of the cheapest, if not the cheapest, meat commodity on the retail shelves. It just goes to bode for the efficiency of the supply-managed commodities. I am personally taking the same farm gate price now as I was taking ten years ago. It takes the dips and dives out of the boom and/or the bust of product coming along, and I know the people who are in the value-added sector appreciate that very much, because they have a uniform-sized product that's coming in for them to turn into a value-added product.

The Chairman: No comments on that statement?

Mr. Potter: It's not my area of expertise. However, I do know that I pay more for those products in Canada than I would in the United States, and that brings us back to Mr. Sauvageau's question of efficiency. But you're right, there are values in this thing, but there are problems too.

The Chairman: We're back to you,

[Translation]

Mr. Sauvageau. Do you have any questions?

Mr. Sauvageau: Mr. Potter, on the topic of the WTO and the NAFTA tribunals, you said that it would be easier for a company to demand to be heard before a NAFTA panel than to beg and plead with the Department of Foreign Affairs.

Would it not be better to beg and plead in hope to get a hearing and having the decision respected, rather than getting a hearing before a panel but running the risk that the decision won't be respected?

Mr. Potter: Yes, no doubt, Mr. Sauvageau, but it is not accurate to say that the decisions of these bilateral panels are not respected. In fact, if you look at it from the perspective of some American senators, the loss of American sovereignty is enormous, because we talk about sovereignty these days. Senator Max Baucus and several others are constantly complaining about the loss of sovereignty created by NAFTA and the dispute settlement system.

The decisions rendered on pork and softwood lumber, mainly, that Canada has won, have prevented American action. It is true that there were problems, because the Americans launched several appeals, but the decisions of the bilateral panels still stand.

It is not true that the Americans have flaunted them or have refused to comply with them. All I can say is that when my clients want to attack an American decision, they do not normally waste their time - there are exceptions - asking the Canadian government to decide if it will take the case to the WTO and wondering if it will plead the case as it should. They simply file a request with the binational panels.

I think that is going to change, for the reasons outlined by Professor Howse. It will change gradually, and I think that both scenarios need to be kept running at the same time.

.1700

The Chairman: I apologize for interrupting you. Should we take seriously the suggestion that the provisions for dispute settlements in the free trade agreement with the United States, and subsequently in NAFTA, are unconstitutional in the United States.

Mr. Potter: I think that when the argument was initially put forth, it needed to be taken somewhat seriously. It is an argument that was put forth several years ago, but that has not gone anywhere since then. Over time, I personally take it less and less seriously. I am not an expert on the American constitution, but I see that the Americans have accepted it, and have left the system in place despite those arguments. The arguments were debated by a tribunal in New York in a case launched by a group of customs consultants and it was rejected.

The Chairman: I give the floor back to you, Mr. Sauvageau.

Mr. Sauvageau: I would like to hear both of you on Professor Howse's proposal regarding a standing tribunal rather than ad hoc panels. Do you think that the committee should suggest creating a standing tribunal for trade disputes? You are a lawyer and in practice, but theoretically speaking, what do you think about the idea of creating a standing tribunal?

Mr. Stanley: If a multijuridictional North-American legal framework were to be developed, I think there should also be a permanent framework for expertise. That will perhaps reassure the Americans, who have concerns in that area; it would be a rather objective and more professional framework. In additional, there's a small administrative problem in the way the Americans view conflict of interest. The only way to solve that problem would be to agree to a standing tribunal.

Mr. Potter: I agree. I think we will eventually end up with a standing tribunal. However, before that, it must be noted that the experts working in the field who are occasionally called upon to serve as members of these committees are different from the judges who sit as permanent members of a tribunal. They are experts working in the field and they are very different from the judges. They are not as afraid. They delve more deeply into the issues. They are perhaps more inclined to go after the problem in the American issue and try to reverse the decision of such a tribunal that has already rendered poor decisions in some of their cases.

So I think that for some time, it would perhaps be in Canada's best interest to preserve a system where the panels are made up of experts in the field, at least in part, to safeguard to some extent the will to intervene when necessary.

The Chairman: You have an opinion on the possibility of negotiating such a setup with the United States. Do you think that the American side would promptly refuse to set up a standing tribunal?

Mr. Potter: I think that in several regards, it would be more in favour of it than we might think, for the reasons outlined by Professor Stanley. The Americans are very concerned with conflict of interest, with reason to some extent, I must say, because the pool of Canadian experts is rather small. In choosing Canadian experts to sit on these panels, it will be difficult to find someone who doesn't have the slightest conflict. The American perception of conflict goes very far, geographically and in time, for the past and the future. In addition, it makes life very difficult for an expert working in the field. Once I have sat on a panel, I carried this conflict with me for a long time, as do my associates.

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I think that the United States would perhaps be open to the idea, but it is certain that they will not want to talk about it before any major negotiations. So it will be during the next discussion on the new entrant, whether it be Chile or another country.

Mr. Sauvageau: It is hypothetical, but in the event that the standing tribunal is created, not with three countries because there will be a problem, do you think that it will be possible to have the cases studied by a third party, by eliminating the parties concerned?

Mr. Potter: There are no reasons that could prevent that. And why not have a tribunal made up of three countries? Mexico is already in NAFTA. There are already panels where the members come from three countries rather than just two. In the best case scenario, with NAFTA made up of five or six countries, there could be panels made up of three people who would not come from the two countries involved. Why not?

[English]

The Chairman: Mr. Penson.

Mr. Penson: Thank you.

Given that we have this historic trade relationship with the United States, and that they're our biggest trading partner and growing all the time, looking ahead 20 years we've heard the suggestion of the tribunal that might work out in place of the panels. We've heard Mr. Howse talk about referring some cases to the WTO rather than NAFTA, as the case warrants.

I'm just wondering if both our guests here today would speculate on how we might improve trade rules to take forward for another round, to try to improve our access so we wouldn't have to accept export caps. We have a free trade agreement with the United States, and yet we see that we have to limit exports in terms of softwood. We had the same thing with wheat a little while back, and there's more talk about that. It's becoming a more integrated economy all the time.

Are there ways we can deal with these trade disputes, to look at resolving them before they happen by setting up rules? I'd like to hear how you see this coming down in the next 20 years.

Dr. Stanley: Well, I think you have to make a distinction between the sports coverage approach, where the guys wearing the Canadian T-shirts ``lose''. In my opinion, the softwood industry won and the consumer lost. That was the whole point of the exercise, and it worked fabulously well. I think every time you have these quota arrangements you're getting to managed trade as opposed to free trade, because the industries involved suffer from some structural problems that they're not willing to resolve. So we get into these informal cartels.

I would say that the issue of the NAFTA and Canada-U.S. trade relations is probably less benign than the discussion so far has indicated, in the sense that NAFTA for Canada was kind of a loss of the privileged position it had in the previous trade agreement. We have a bit of a hiatus now because the financial collapse in Mexico and the consequences are the worst economic disaster that country has had in some time, and they've had a hard time getting back.

But I think we have to see that the centre of gravity in North American economic activity over the next ten or twenty years is likely to shift away from, let's say, the Great Lakes towards the Texas-Mexico border. That's going to make things easier and harder for Canada, and I think it's going to change the complexity of the disputes and all these kinds of things that are going on. I'm not sure how the industries around the Great Lakes are going to react to that. If the past is any guide to the future, it will be by trying to come up with more managed trade arrangements. We don't really have a procedure for preventing them from doing that, because we don't allow efficiency tests into any of these measures. It's not obvious how we can get those things in there.

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Mr. Potter: From the point of view of the practitioner, again, I think a lot of these disputes arise on questions of either dumping or countervail. I think we should aim, as did our negotiators when they originally negotiated the first free trade agreement, Mr. Penson.... The dispute settlement was put there as a kind of short-term mechanism in abeyance, waiting for a new regime; and the new regime would be one in which we could maybe get rid of countervailing cases altogether by just having rules about which kind of government help is allowed and which kind is not.

If we could get back to that kind of approach we might save ourselves a lot of these problems. Softwood is a problem. Pork is a problem. Pigs were a problem. We have to come up with rules that tell us which kinds of things are allowed and which aren't and do away with countervail altogether.

I frankly would also try to do away with a good bit of anti-dumping, which to my mind is purely uneconomic to anyone.

Mr. Penson: I thought I heard you say earlier we should maybe even consider doing it unilaterally.

Mr. Potter: Yes, I think it's worth thinking about that. Many studies, American studies and Canadian studies, show that anti-dumping proceedings are a drain on the economy in one way or another. I can tell you, though our cases don't have hundreds of lawyers in them - only American cases do - the cost of these things on the public purse and on the private parties is enormous. If you add to that the cost of uncertainty in the economy and of upstream producers having to pay anti-dumping duty rates, which I can tell you bear very little relation to the real world, that's an enormous cost. I would give serious consideration to unilaterally deciding not to institute anti-dumping proceedings in the lower end of value-added. Save it just for the high-value-added goods.

The Chairman: We were dealing with that last fall when we were reviewing the Special Import Measures Act. If you had the opportunity to read the report of the committee, there was provision for taking care of the public interest, which is not unrelated to some of the things you're saying.

Mr. Potter: You're quite right, Mr. Chairman. That is there in SIMA, and there are public interest hearings. Speaking again from the point of view of a practitioner rather than as someone who drafts the legislation and hopes it works out all right in the end, and from the point of view of my clients, who have to deal with this, I have to say it's not always closely tied to the real world. There is an institutional bias once there is a finding of dumping, and once there is a finding of material injury, not then to say, oh, by the way, we don't want the prices to go up in the Canadian market. So with respect, and certainly in regard to the intent of that recommendation, I don't think it really covers the problem, particularly for the low end of value-added goods.

The Chairman: Perhaps I should invite your comments on some of the information we received during these hearings on SIMA. There was a body of opinion suggesting that while it makes eminent economic sense to do away with anti-dumping and countervail and to rely more on the competition regulations or laws, the point of view was that this was not negotiable with the United States for the foreseeable future. Would that be a judgment you would share?

Mr. Potter: That's probably true. The United States dearly love the way they do their business in Washington with these countervailing cases and the anti-dumping cases. There's an enormous political impetus for it in Washington, the very trade bias Professor Howse was mentioning. If we decided to go down this line that I'm suggesting needs to be looked at anyway, we would have to do it because it's simply good for us.

Dr. Stanley: Of course that holds for most supposed concessions that are made around the bargaining table. It's a mercantilist process, but the benefits are from liberalization, so it's not much of a concession when you're doing yourself a favour. It's just the way the system is organized.

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Actually, I'd like to ask my colleague here a question. I haven't had a chance to try this one on him. With the discussions of constraints on ability of parties to modify their laws and so on, isn't there a non-violation avenue in the NAFTA? Article 20 has a nullification element to it, does it not? Couldn't we make creative use of this to pursue, downstream, events that go to the principles contained in the agreement?

Mr. Potter: Yes. The answer is yes. We're not using the NAFTA with enough imagination. This is one of the points I wanted to make today, and I tried to earlier. We have to be more aggressive in using the rights that are there.

The Chairman: Mr. Penson.

Mr. Penson: Mr. Chairman, I have a point I'd like to ask Mr. Potter for clarification on, if you don't mind. It was earlier, during the softwood lumber debate awhile back, that I think you said it was a failure of nerve by the Canadian government to take this case forward. Maybe I misunderstood you.

Mr. Potter: No, that's what I said.

Mr. Penson: What I'm getting at is this. Isn't it really a matter of the industry taking cases to the NAFTA panel rather than the government? This is exactly the same case Mr. Howse was making earlier. If there's a case to be made at the WTO, it has to go through our federal government, but can't industry take cases directly to NAFTA panels?

Mr. Potter: This is correct. But what we ended up with was a Canada-United States agreement. This Canada-United States agreement could never have been signed if the Canadian government had not wanted to sign it but had decided we should go to the dispute resolution. Ottawa made a decision, for reasons that may be very valid. I'm not attacking the decision, I'm simply making the point that the softwood lumber case cannot be used as an example of how the binational panel system is failing. The softwood lumber case is an example of how a country decided not to use it. It was there and we decided not to use it.

Mr. Penson: But surely if an assessment was done by the United States on changing their domestic legislation, the likelihood of our winning this would no longer be very high. Wouldn't that have an impact? In fact, I thought we should have gone the WTO route and settled this issue once and for all. I think Canada would have won. But if we had not won, at least we would have had an international body saying Canada is not living up to what they signed at the WTO in terms of subsidy on softwood, and then we'd have had to make this change domestically.

Mr. Potter: Mr. Penson, though I wasn't involved in the file then, I can tell you that exactly the same argument you have made was made by several people. The response to it came - on this point you're right as well - from the industry, particularly from British Columbia.

In the meantime, they said, what is going to happen? In the meantime, all our chains of supply into the United States are disrupted. By the way, we're selling x percent of our product into the United States. In Quebec, it's a healthy percentage. In British Columbia, it's a healthy percentage going into the United States. In the meantime, all this is disrupted. We don't know how long it's going to be disrupted for, and we certainly don't know what the light at the end of the tunnel really is. Let's sign an agreement.

Mr. Penson: Yes, this is similar to 1992, when they were subject to a countervail, and then eventually they got it back, as we won this case. This would probably have been the outcome here. They would have been hit with a countervail in the meantime.

Mr. Potter: They were certainly going to get hit with a countervail in the meantime. There is no doubt about that. Their only question was how long. And by the way, the WTO is a brand-new animal, as it was at that time -

Mr. Penson: Generally it is a one-year process.

Mr. Potter: But you have a brand-new animal, a case that is going to be pleaded only by Ottawa and not by you. They said let's just take an agreement. They may have been right, they may have been wrong. My only point is this is not an indication of weakness of the system.

The Chairman: I suppose you would add, if asked, that this is only one round. Since the agreement has a termination date, perhaps the bilateral agreement will be extended, but could it flow back into the dispute settlement mechanism?

Mr. Potter: Yes, it could, simply by the parties not agreeing to extending the agreement, or not agreeing to sign a new one. The Americans would have the same old threat they had two years ago. Then we'd have to screw up our nerve again or make the same practical decision.

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The Chairman: Mr. Calder, do you have other questions?

Mr. Calder: No, Mr. Chairman. Thank you.

The Chairman: We still have a few minutes. I would like to return to the cultural exemption, Mr. Potter. You made reference to it. Basically, you were saying the cultural exemption is not much of an exemption because it does not protect us from retaliation. This, of course, is true. However, it enables the Canadian government to alter policy in whatever way it wishes without any violation of NAFTA and the earlier FTA agreement.

Do you think there should be negotiation with the United States, and now Mexico, to define parameters to the cultural exemption that would protect us from retaliation?

Mr. Potter: Frankly, on this issue I think it is something that does have to be done multilaterally, although I'm not sure just what the prospects are of getting something done in the short term there. But we're obviously much better off approaching Washington as many countries rather than one, pointing out to them that what non-Americans see as culture is not necessarily what Americans see as pure commerce.

I don't really see us getting much more than we got out of NAFTA on a purely bilateral basis. You're asking me to crystal ball the thing, and this would be my initial reaction. Though I might have approached things a bit differently, going to Europe, as one of Canada's ministers did a few weeks ago, to start this multilateral ball rolling is probably the correct approach.

The Chairman: Well, the old GATT had a special regime for agriculture. I suppose it could be argued that perhaps since cultural products are not widgets the international community should look at a special regime for cultural products. How would you react to this?

Mr. Potter: I'm going to turn the matter over to Mr. Stanley, who obviously is more courageous than I am on these things. But I would say the WTO people have a lot on their plate. They've just done telecommunications. It was not easy. They're now embarking on financial services, which is not easy. They have some other things up their sleeves, including the competition business Mr. Penson was interested in.

I think the idea of suddenly getting a new Uruguay Round or a new discussion on cultural protection in the very short term is not very realistic. But it has to be done that way - multilaterally.

Guy.

Dr. Stanley: Well, I think it's probably a bad idea, as Simon has said. There is already a provision to allow for subsidies for cultural purposes in the WTO, so this isn't really the issue.

The issue is all the panoply of programs and special pleadings that constitute what we've build up over 20 years and maybe a little bit longer for Canadian cultural industries. I'm not sure the premises of this policy were ever very good, but even if they were, I'm not sure they still hold. There are millions of ways for Canadians to communicate with each other now that didn't exist even10 years ago.

The issue of spectrum allocation and so on, which is the basis for a lot of the broadcasting stuff, is pretty much a museum piece. So I think before we did anything like this we'd have to really rethink the whole basis of our approach to this issue. I think we should.

The Chairman: As a lawyer, Mr. Potter, can you frame in your mind the difference between a cultural product and a cultural service, which would be treated under different regimes internationally?

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Mr. Potter: I'd like a bit more time to be able to give you a legal opinion. I'm not used to doing this without issuing a bill.

Some hon. members: Oh, oh!

Mr. Graham (Rosedale): And you'll expect we'll get all the opinion without paying the bill. We'll get enough to suck us in.

Mr. Potter: I will suck you in, Mr. Graham, to this extent. We bandy about the word ``culture'' a bit too much in Canada. We ought to be a bit clearer about what we're talking about when we raise this. Are we talking about just distributing videos or distributing reels of film to movie houses? Is that culture? Is the vehicle by which the culture goes also culture?

We should be subdividing and categorizing and having a different approach, depending on what we're talking about, rather than blithely throwing the word around and complaining that the Americans are being overbearing.

The Chairman: Thank you very much.

Mr. Graham, thank you for joining us. You have an opportunity for about three minutes to put a question.

Mr. Potter: I thought Mr. Graham already knew it all.

Mr. Graham: I finished the chapter in our book, Mr. Potter, so I don't have to get any free advice from you for that, at least. At this point it's too late to get it to the editor. It's too bad we didn't have this meeting before.

You touched on the issue of culture, but since you're here, I might ask you about the WTO dispute resolution matter - it's something that has come up quite a bit recently - as to the end result of a dispute at the WTO vis-à-vis NAFTA. Ultimately, a dispute resolution system is only as good as its execution mechanism, or its enforcement procedures may give the results of any decision some type of executory or effective result.

In your view, now that we have the WTO mechanism in place, which is much more sophisticated than the old GATT mechanism, is the WTO mechanism as sophisticated or as good for Canada as, say, chapter 20 of NAFTA in general dispute areas? I'm not talking about chapter 19, because it's a discrete system. If not, what are the differences we should be aware of, particularly from the point of view that, in the end, in all trade disputes, if one party doesn't want to adhere to the decision, all the other party is left with is some form of retortion or retaliation? How effective is that as a way of ultimately deciding disputes?

Mr. Potter: My immediate answer - and this is another one I'd like to think a bit more about; I'm sure Professor Stanley has a well-thought-out and articulate response to this one - is that on paper the NAFTA chapter 20 is slightly superior. On paper, the dispute settlement panel can be asked to more or less set what would be the appropriate retaliation so that you don't get into a round of retaliation and counter-retaliation.

However, that is only on paper. As a practical matter, our political masters - quite rightly, I believe - are loath to ask that question of a panel and like to keep to themselves that discussion as a matter of eventual bargaining, perhaps, in light of the judgment of the panel. As a practical matter, then, you end up more or less kif-kif whether you are WTO or NAFTA.

That would be my off-the-cuff reaction.

The Chairman: Professor Stanley.

Dr. Stanley: I don't like to disappoint my friend, but I'm not sure I have a great deal to add to that reflection. The ability of private people to use the NAFTA system for practical purposes offers the promises of an easier, more flexible system.

You asked the question more or less in terms of the final.... The problem with dealing with the United States on any of these issues is the political configuration that goes into some of the disputes. Unless we do more to reinforce the pro-free trade interests in the United States - and all the NAFTA partners do that - it's going to be a constant struggle.

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I also think it may not be strictly accurate to think of these rules-based dispute settlement mechanisms as discrete from the negotiating ones. They are a sort of mix of the two. The system is designed to be a mix of the two.

So in the end one is forced to rely on one's friends across the border. But because of the cascading effect of a skewed judgment, a lot of people are very concerned that the rules-based system work, and that it work in such a way that it will provide political cover for people who are in favour of open markets.

I should say also that in our focus on this we may be losing sight of the somewhat new ideological component of American foreign policy, which is to use the trading system bilaterally and multilaterally to promote so-called ``American values'' of free enterprise and so on. Obviously if there's too flagrant a contradiction between their pronouncements and their rulings, that won't work.

So there are some fairly powerful levers we can use to reinforce these if we set our minds to it.

Mr. Graham: May I ask one quick question? By way of introduction, it seems to me one of the problems with the decision-making system in NAFTA is its ad hoc nature in both chapter 20 and chapter 19 panels. When we now have a system with Mexico, Canada, and the United States, and therefore the Spanish language, the English language, and the French language all being involved in the decision-making process, and three distinct legal cultures involved in the process, it would seem to me one of the big flaws of this process is that we don't have a permanent panel, a permanent court - I don't say following the European model, but certainly a permanent body - that would be looking at these disputes and that would be tripartite. Again, it seems to me a great failure of the system that when Canada and the United States are going at one another, they go on a bilateral panel and the Mexicans have no say in it, and vice versa if it's a U.S.-Mexican thing.

Would the experts agree it would be in Canada's interest to argue in favour of a permanent court to replace these ad hoc tribunals, or do you think the present system is...?

Mr. Potter: I think it's fair to say both the panellists agree that's where we are headed and we should be headed. I expressed the view that perhaps we shouldn't go there too quickly, because in the meantime we have practitioners on our panels and that has proven generally to be to Canada's advantage because of their greater interest in digging through the file and finding a way to overturn a judgment. If we could -

Mr. Graham: You declared your interests as a practitioner, as one of those panellists, did you, before you gave that opinion?

Mr. Potter: I thought carefully of that. Yes, I did. It was an interest I disclosed.

The Chairman: This will have to bring to a close this very interesting session. On behalf of all the members, I wish to thank our witnesses. We are enlightened.

We'll meet next time at the call of the chair.

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