AGRI Committee Meeting

STANDING COMMITTEE ON AGRICULTURE AND AGRI-FOOD

COMITÉ PERMANENT DE L'AGRICULTURE ET DE L'AGROALIMENTAIRE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, November 20, 1997

• 0903

[English]

The Chairman (Mr. Joe McGuire (Egmont, Lib.)): Good morning, everyone. We'll call the meeting to order.

Pursuant to Standing Order 108(2) we shall consider the topic of the importation of butter oil and sugar blends.

This session is designed to be an information session. There's a lot of confusion surrounding the issue of the importation of butter oils and there are quite a few departments involved, so we will take the witnesses as they're listed on your agenda. First we will call upon the Department of National Revenue, Phil McLester and Anna Doucet.

From there we'll get as many people as possible involved. We'll have a question-and-answer period, during which I believe you can ask each other questions. We want it to mainly be the members and the witnesses who have the question-and-answer period.

We can start with witnesses from National Revenue. We'd like to see where the butter oils issue came from, what's the solution to it, and what the impact is on the community we represent here—the agricultural community and of course the processors and so on who are part of the agricultural situation here in this country.

We'll start with Mr. McLester, please.

Mr. Phil McLester (Interim Director, Nomenclature and Tariff Treatment Policy Division, Department of National Revenue): Thank you, Mr. Chairman.

I'd like to begin, if I might, with a brief description involving the classification of this product.

May I begin with a brief description involving classification in general, the tariff, and—

• 0905

The Chairman: You can proceed any way you want, as long as we can get clarification on the topic of why it's a problem on your end, why it's classified the way it is, and so on.

Mr. Phil McLester: Thanks very much. In doing that, I'll first describe some of the background to classification.

Classification is a very strict discipline. We begin with the customs tariff, which is our main tool. The tariff itself is essentially a commodity catalogue with descriptions, numbers, and rates of duty. This catalogue generally flows from raw materials through intermediate products to end products. It has 98 chapters, four-digit headings, six-digit headings, and the eight-digit tariff items. It's at the tariff item level that we're discussing this product, because that's where the rate of duty is assigned. It's a hierarchical system, which means that first you find a four-digit heading that's appropriate amongst all of those available and then you work down from there through the classification.

Our tariff is not unique to Canada. It's based on the World Customs Organization harmonized commodity description and coding system. We adopted this on January 1, 1988. We must use their six digits, to which Canada adds two more digits. We must use their rules and their system of classification with our extra tariff item digits.

The HS chapter notes, by the way, which are notes that go along with the harmonized system tariff, are Canadian law, so we must use them in their entirety. The harmonized system has supporting information for guidance—that is, the explanatory notes. There is a compendium of classification opinions. Quite simply, it is products that have been examined in Brussels at the World Customs Organization and classified. According to section 11 of the Canadian customs tariff, we have to take account of those explanatory notes and those classification opinions.

Classification simply starts with a complete and accurate description of the product. The most important factor I'd like to stress here is that goods are classified in the condition as they're imported, not as to what they might have been or as to what they might be eventually. That's a very important factor.

Then we go on to use the legal text—the notes, the rules, the explanatory notes, and classification opinions—to hopefully locate the most appropriate place to classify these particular goods. I have to say as well that the rates of duty are not a factor in our classification because we have to maintain consistency and we can't be swayed by that. Naturally, rates of duty are set by the Department of Finance.

The product at issue is the butter oil and sugar blends, with 49% butter oil and 51% sugar. We have been content—and I think certainly at one point the DFC I believe was content—that these products met the sub-heading text description for 2106.90. The heading itself says “Food preparations not elsewhere specified or included”, and this is another category, other than the proteins listed above. I think there was satisfaction with that point.

The question, then, is where they are classified at the eight-digit levels, since once we're at the six-digit level and comfortable with that, we go to the eight-digit level. We have item 95 and item 33 and 34. Now, 2106.90.33 and 34 are what was favoured by the DFC, and 95 is where our department has consistently classified these goods.

We hold no dispute that the product is proper to 95. That's in our first consideration of the classification. Naturally, though, we first took on considering 2106.90.33 and 34. In those descriptions, which I wouldn't mind just reading out briefly, they are much the same:

preparations other than of tariff item 2106.90.31 and 32, containing more than 15% by weight of milk fat but less than 50% by weight of dairy content, suitable for use as butter substitutes.

There are essentially four factors, excluding that reference to the tariff items. Two of those factors involve the content of the product being more than 15% milk fat and less than 50% dairy content.

• 0910

Regardless of whether this product meets or doesn't meet those factors, the important thing to first consider is this: is it a butter substitute? That's what we faced in the classification of these goods. To do this, we went by using common jurisprudence, meaning that in the absence of legislative definitions, what we and the courts applied—our decisions are taken before the courts—were the ordinary or common meanings of various words.

In this case, our investigations revealed that butter has three main applications. Of course, we're considering a butter substitute.

The first use of butter is as a spread. Second, it's a cooking fat. Third, it's a cooking ingredient. A substitute should be able to, in our estimation, satisfy all three criteria.

In the first case, we note that it isn't spreadable. It's a waxy, granular product. Therefore, we can't consider that it would work as a spread.

It can't be used as a cooking fat due to the presence of the sugar. Caramelization, or whatever, would occur. It couldn't be used in a similar fashion to butter in that regard.

The butter oil/sugar blend does, however, satisfy to a degree the aspect of being a cooking ingredient, but only when a very high sugar content is required. You cannot expect to use this mixture as a one-for-one replacement in recipes or other things for butter.

There were other factors. One was that it's not marketed or sold as butter. We asked our legal advisers to look into this. They noted that there was a considerably stronger position for a classification in tariff item 2106.90.95.

At the same time, we did prepare an extremely detailed review of the classification and presented it to DFC, and importers and producers as well. That has not been rebutted at all. Actually, there have been no efforts by way of a rebuttal. At the same time, expert witness reports from DFC were not forthcoming, whereas they were from the importers. That was in support of the classification under 95. That's the one that's not a butter substitute.

The Chairman: What year was that?

Mr. Phil McLester: That was July of this year.

I'm sure there are going to be questions as to the classification, but before going on to that, I just wanted to cover one other point. This has to do with our classification system.

The Customs Act provides a dispute-resolution mechanism for appealing classifications. Internally, there are at least two ways that importers can appeal a classification of a product they import. One way is to a designated officer. The other way is to our deputy minister, who by the way is ultimately responsible for any change that would occur as a result of an appeal. It's not the minister's task; it has been delegated.

Externally, and within our Customs Act, if anyone feels aggrieved at a classification by our deputy minister, that person can then appeal to the Canadian International Trade Tribunal. If they're upset with that decision, they can go to the Federal Court and Supreme Court of Canada. That's all in the Customs Act legislation.

In a general sense, even if sustainable within Canada, Canada is a signatory to the harmonized commodity description and coding system of the World Customs Organization. As such, any country could bring this matter, just for the classification alone, as a dispute to the World Customs Organization, and we would then have to defend it at that organization.

Of course, in our bailiwick, there's the possibility of the tariff aspect. That would involve a dispute to the World Trade Organization, but I would defer to our colleagues in the international trade area to deal with that.

I think I've covered, more or less, everything we have. I would be happy to answer any questions.

The Chairman: Thank you. We'll go to the other witnesses first and then we'll take you all on at that point.

From the Department of Finance, Darwin Satherstrom and Paul Robichaud.

• 0915

Mr. Darwin Satherstrom (Chief, International Trade Policy Division, Department of Finance): Thank you, Mr Chairman and honourable members. I should perhaps pick up on a comment from Mr. McLester. The customs tariff sets out the rates of duty that apply to imported products and the customs tariff is the responsibility of the Minister of Finance.

The rates of duty that are set out in the tariff are approved by Parliament, and in some cases the government has delegated authority from Parliament to lower rates.

Generally the ability to increase rates is circumscribed by our international obligations. Under the World Trade Organization, Canada and all other countries have agreed to bind their tariffs on agricultural products against increases.

In other words, a party or a country cannot increase their rate of duty unless it goes through a procedure in the World Trade Organization to renegotiate such a rate of duty.

The practice is that in order to do so, you must negotiate with any suppliers and offer compensation. The practice has been that such compensation would be requested and negotiated in closely related areas and has to be acceptable to the supplying countries. Failure to satisfy or to negotiate, and to increase the rate of duty without having successfully renegotiated it, invites retaliation from supplying countries.

In the case of imports from NAFTA or U.S.A.-originating goods, there is no ability to increase rates of duty. The NAFTA agreement does not provide for that. As of January 1, all goods covered by the NAFTA are going to be duty free.

Perhaps I could stop there, and if there are questions I'd be happy to entertain them.

The Chairman: We just want your point of view and the role the department plays in this particular case as it applies from the general to the specific.

We have Jean Saint-Jacques from the Department of Foreign Affairs and International Trade.

Mr. Jean Saint-Jacques (Director, Trade Controls Policy Division, Department of Foreign Affairs and International Trade): Thank you, Chairman and honourable members.

The Department of Foreign Affairs is essentially responsible for implementing and managing the tariff rate quotas that have been negotiated by Canada in the Uruguay Round and included in our tariff schedule that was approved by Parliament and then deposited with the World Trade Organization.

The administration of TRQs is a shared responsibility. Revenue Canada determines the classification of the products; it also administers the imports at the border.

The department is responsible for allocating tariff rate quotas to importers and then controlling the imports within that level. Importers who wish to benefit from the lower rate of duty provided for by the tariff rate quotas must have an allocation granted by the minister and must apply for import permits.

Essentially this is the function of Foreign Affairs, and I would be pleased to answer any questions on that. Thank you, Chairman.

The Chairman: We will go then to Mr. Mike Gifford and Mr. Steve Verheul of the Department of Agriculture and Agri-Food.

Mr. Mike Gifford (Director General, International Trade Policy Directorate, Market and Industry Services Branch, Department of Agriculture and Agri-Food): Thank you very much, Mr. Chairman and honourable members.

Agricultural trade policy is basically a shared responsibility among the relevant departments in Ottawa. That is, specifically on a tariff issue it is the Department of Finance; on trade policy generally it is the Department of Foreign Affairs and International Trade; and the agricultural aspects are under the Department of Agriculture and Agri-Food. It's been an interdepartmental framework ever since 1947, when the GATT was first established.

I would simply say, Mr. Chairman, that our particular expertise on this issue is that Mr. Verheul and myself were directly involved in the WTO negotiations in the Uruguay Round. This was in terms of the conversion from import quotas we had at that time to tariffs and tariff equivalents.

We would be very happy to answer any questions the committee may have, particularly on the negotiating history that relates to this item. Thank you.

The Chairman: We have Barron Blois, John Core, and Richard Doyle from the Dairy Farmers of Canada.

• 0920

Mr. Barron Blois (President, Dairy Farmers of Canada): Thank you, sir. We have a presentation to hand out, but before we do that I want to make a few opening comments.

Mr. Core will be making the presentation. Mr. Core has been working on this issue as the producer representative for a great number of months. This issue has been nothing that has been new. It has been here since April 1996 when we started to become aware of it.

Throughout the course of those following months, as we headed into the NAFTA panel challenge, we agreed to set aside our views on this until after the panel had passed judgment on the issue at that time. From that we believe there is great concern across this country on the part of producers. It has cost the producers millions of dollars to date, even in this year. What is probably more disturbing is that those processors and users of this product that are not using it today will most likely be moving towards it if there is not something done to correct this.

I have had personal experience with this recently. One processor in the east has told me that if this matter cannot be fixed soon, that processor will have no alternative but to move away from using fresh grain to something of this nature to be able to compete in the marketplace with the other companies using this.

So the figures we have show that the problem is now, but the problem also is that it is going to grow significantly in the next number of months as other processors start to look at this too.

We believe that in our presentation we have an area we would like to show you. Coming out of the NAFTA panel we would like to talk about the fact that there is a strong reason this needs to be reviewed and addressed.

I will turn it over to Mr. Core for the presentation, and then we will be ready for questions.

Mr. John Core (First Vice-President, Dairy Farmers of Canada): Thank you, Mr. Chair. Just before beginning the presentation, I want to emphasize what Barron has said.

Across this country, if we have a meeting of milk producers at any time now, one of the key questions we are asked is, has the Government of Canada taken action on the butter oil/sugar issue? It is an issue utmost in producers' minds and it is one they want answers to. We are here today to try to provide some information so that ultimately we receive some answers on solving this critical issue.

The Dairy Farmers of Canada represent 25,000 Canadian milk producers who are currently losing close to $50 million of income annually because of this importation. For over 18 months the Dairy Farmers of Canada have been asking the federal government to stop the importation of these products.

There is no question that these blends were clearly designed—“designed” is the word—as an attempt to circumvent the current import controls on dairy products. The simple fact that butter oil is not a traditional ingredient in the making of ice cream and that the proportion of 49% butter oil and 51% sugar is not designed to meet the requirements of ice cream making are ample proof that importers' true motivation is to circumvent boarder measures and not to improve manufacturing processes.

As a consequence of the WTO outcome, and as a means of supporting its supply management systems, Canada established tariff item numbers for goods previously controlled by the import control list, as well as for goods that were designed to circumvent the intent pursued by these controls.

Butter oil is currently subject to a tariff rate quota. Sugar is also subject to some import control measures. The decision by Revenue Canada to classify the blends of butter oil and sugar in a catch-all tariff line that provides no import controls for food preparations defies logic and does not reflect the negotiating history of the tariff lines for dairy products.

When I stand up in front of a group of milk producers and they ask, how come butter oil is not allowed in tariff free, or nearly tariff free, and how come sugar is not allowed in without control, how come you can put the two products together and suddenly bring them in.... It defies logic; no milk producer can understand it. You don't need legal arguments and you don't need bureaucratic circumvention to explain it. It just doesn't make sense. You can't take two things that you can't allow in tariff free, put them together, and suddenly they are tariff free. It defies all logic.

Milk producers can no longer agree to have their markets and incomes eroded by these imports because of a lack of decisiveness on the part of the federal government. In the past the attempt by ice cream manufacturers to import similar blends composed of cream and sugar were stopped on the basis that these blends were circumventing the intent of the controls.

• 0925

When Diary Farmers of Canada originally requested that similar action be taken for these products, it became clear that Revenue Canada had no intention of taking action. We have now been transferred from Revenue Canada to Agriculture Canada to International Trade to Finance to the Prime Minister's Office and back to Agriculture Canada. In the meantime this government inaction has resulted in a 488% increase in these imports since 1995.

If these things were so wonderful, why weren't they being used in 1995 and prior to that? I think if you answer that question, you can answer this whole question of circumvention.

This cannibalized the national domestic market for industrial milk by 2.6% last year. An accelerating trend continues to cost producers millions of dollars in lost revenue every month. The government refuses to take action. The technical debate over this issue must stop. Every argument presented by Dairy Farmers of Canada has been rejected. We've now hired a trade lawyer and tabled to the ministers of Agriculture, International Trade, Revenue Canada, and Finance a legal brief, which we believe fully justifies immediate action.

The federal government has already established its policy that such products should be subject to import controls as they are designed to undermine the price stability objectives pursued by our supply management system. This was part of the NAFTA panel discussion and argument. With the implementation of Canada's new tariff rate quota, Canada specifically introduced new tariff lines to prevent circumvention by such blended products. These tariff lines were incorporated into Canada's final schedule of commitments in the Uruguay Round and consequently accepted by all the signatories.

The method and rationale used by Canada to establish these tariff lines were challenged by the United States during a recent NAFTA panel. Canada's approach to converting import controls under the import control list of tariffs, including the establishment of tariff lines to address circumvention, was validated by the panel. As argued by the federal government to the NAFTA panel, Dairy Farmers of Canada requests that imports of butter or sugar blends be immediately reclassified under tariff item 0404.90

Tariff line 0404.90 covers:

products consisting of natural milk constituents, whether or not containing added sugar or other sweetening matter, not elsewhere specified or included.

When challenged by the United States that this tariff line did not reflect import controls existing prior to the Uruguay Round agreement, Canada successfully argued that the removal from this tariff line of the previous 50% threshold was designed to allow, and I quote from Canada's submission:

Canada to respond to a problem that had been developed contemporaneously with the Uruguay Round: concerted efforts by some private firms to import mixtures specifically designed to circumvent the import controls on dairy products.

The government has therefore already argued that this tariff item had been designed to deal with mixtures similar to the current butter oil/sugar blends.

I have to point out that when we first began discussing this, we went to the various departments with the problem. In those discussions we did get into the discussion about butter substitutes and different tariff lines, but we ultimately were challenged to bring forth a legal case on this issue. We now have submitted the legal case based on tariff line 0404.9, so there have been some developments during the time we were in these discussions in trying to find where the proper tariff line for these products was.

There are only three approaches to resolve this situation: Dairy Farmers of Canada can present its case to the CITT directly, a process that would take three years before a solution could be implemented; the federal government can seek an interpretation by the CITT, a process that would also take three years; and the federal government can reclassify the product under 0404.9 and immediately stop the imports, leaving those who would circumvent the intention of Canada's border measures to argue their case in front of the CITT over the next three years.

The first two approaches should not even be considered as they will lead to a continued and unjustifiable erosion of Canadian markets and represent well over $150 million in lost producer income.

• 0930

The government is fully justified in taking immediate action on these imports since, first, the history of trade negotiations clearly indicates that such products would be covered by 0404.9; second, the U.S. has already challenged the coverage of these tariff lines and lost at the NAFTA panel; third, government policy is to support supply management and dairy products, which are being undermined by these imports; fourth, imports of these products are strictly designed to circumvent Canada's border measures in an effort to find lower-cost alternatives to domestic supplies of butter fat, even though ice cream products themselves are not competing with imports; fifth, the cost of butter fat in Canada has not increased since prior to the imports of these blends; and last, consumers did not benefit from the imports of lower-cost butter fat as evidenced by the fact that the consumer price index for ice cream has increased by 4.3% since January 1995, even though imports of butter oil/sugar blends have increased by 488% during this period. Domestic butter fat costs did not change.

DFC respectfully asks this committee to make whatever effort it can to persuade the government to use the tools it has at its disposal. Canada's milk producers are hurting and they are expecting quick action to resolve this matter.

Thank you, Mr. Chairman.

The Chairman: Thank you very much.

We'll now go to the processors and the representative from Unilever Canada, Mr. Don Jarvis.

Mr. Don Jarvis (Trade Consultant, Unilever Canada Limited): Thank you, Mr. Chairman and members of the committee. I'm here today representing the ice cream manufacturers. I'm trade counsel to Unilever Canada. Also with me are Kathryn Rowan, a vice-president at Nestlé Canada, and Jim Summers, director of research, development and quality assurance at the Good Humor-Breyers ice cream division. If there are any questions that I can't answer during the round table discussion, I'm sure you'll permit me to call on their assistance.

Not just Nestlé or Unilever are ice cream manufacturers. Quite a few other ice cream manufacturers have an interest in this issue.

Unilever Canada is part of the Unilever group of companies. Unilever's operating division, Good Humor-Breyers, manufactures packaged ice cream, frozen novelties, frozen yogurt, and frozen deserts, and distributes these products nationally under the brand names Good Humor, Popsicle, Breyers, Dickee Dee and Richard D's.

The Unilever company employs over 3,500 people across Canada and over 2,000 are in food processing. Nestlé Canada has very similar figures. I believe they employ 4,000 people, almost all in food processing. Good Humor-Breyers employs over 600 people just in ice cream manufacturing.

In the last three years the Good Humor company has made significant investment in the ice cream manufacturing industry in Canada. Several years ago they purchased the ice cream division of Beatrice Foods, and in the last three years the plant in Simcoe, Ontario, has received over $25 million of investment to upgrade that facility and make it a world class facility.

There are similar investment figures indicating that ice cream manufacturers continue to show their commitment in terms of the ice cream business in Canada. As well, these companies are major purchasers of Canadian dairy industry ingredients.

The ice cream manufacturers strongly object to any change that would raise import duties on this important ingredient. They support the arguments put forward, particularly by Revenue Canada, with respect to the current tariff classification.

This initiative by the DFC to change the tariff classification is aimed at preventing ice cream manufacturers from sourcing this important and low-cost ingredient. If the request is accepted it would be a unilateral action by Canada to impose a new trade restriction, as these goods were not subject to import controls prior to implementation of the World Trade Organization agreement in 1996.

Specifically, acceding to the DFC request would increase ice cream manufacturers' input costs substantially as there is at least $1 per per kilogram differential on butter fat between what we are buying this butter oil blend for now and what we normally would pay for butter.

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Simply put, I think that's the position of the ice cream manufacturers, and we look forward to the round table discussion.

Thank you.

The Chairman: Thank you, Mr. Jarvis.

Finally from the importers, Mr. Donald Kubesh.

Mr. Donald Kubesh (Acting and Partner, Stikeman-Elliott; International Dairy Ingredients Inc.): Mr. Chairman and members of the committee, I represent the importers, International Dairy Ingredients Inc.

International Dairy Ingredients—I'll call it “the importer” hereafter—is a firm run by Mr. Douglas McEwen, who has been involved in the food trade, importation and distribution, for the last 10 or 15 years. As the name suggests, the company specializes in the importation and distribution of dairy products in Canada.

What the importer has done is he has caused the blend, 49% to 51% butter oil and sugar, to be made in New Zealand and imported into Canada. It is imported into Canada primarily as an ingredient for the manufacturer of ice cream. It is a quality product, subject to New Zealand controls and Canadian import controls in terms of quality. Its major advantage is that it is a low-cost ingredient for ice cream and gives the processor an alternative to domestic supply at a lower cost.

What is the basic history of this product? It came in originally—as opposed to what some of my friends from the dairy farmers have said—in the early 1990s as one of a series of blends used as alternatives to domestic supply. The small amounts in the early 1990s are accounted for by the fact that there were a number of competing blends that came into Canada at that point. As you have heard from Mr. Gifford, in 1995 the WTO stopped the importation of a number of these other competing blends with high tariff rate quotas, which Canada agreed to in the WTO. However, this particular item, classified under tariff item 2106.90.95, did not get a high tariff rate quota. In other words, it was not changed in 1995.

At that point, because a number of the competing blends were stopped, the focus of the processor and the importer went to this untouched tariff classification item under 2106.90.95. Since 1995 we have seen, as Mr. Core has pointed out, an increase in the volume of importation of this blend.

What are some of the approximate numbers in terms of importation? Before 1995 the importation was approximately less than 1,000 tonnes, depending upon the price, the world market—up to 1,000 tonnes sometimes but generally less. In 1995 it was approximately 2,000 tonnes; in 1996 approximately 4,000 tonnes; and in 1997, this year, we say it will max out somewhere around 8,500 tonnes, no more than 10,000 tonnes. Probably the maximum usage for this blend for ice cream in Canada is 10,000 tonnes. Why? As I understand it, processors will only use this ingredient to a maximum of 25% in any manufacture of an ice cream lot. We use the numbers of approximately 48,000 tonnes of butter fat that go into Canadian production of ice cream on a yearly or an annual basis. If you use this number of 48,000 tonnes, a quarter is obviously 12,000 tonnes. We will not import a quarter.

• 0940

There are a number of reasons for it. A number of processors will not use the blend. They have the niche customer base that requires certain types of ice cream. What we can possibly supply in terms of Canadian production is probably a maximum of 10,000 tonnes, more likely somewhere between 8,000 and 9,000 tonnes.

What does this mean in terms of the Canadian dairy industry? You folks know this industry at the factory gate is an $8 billion or $9 billion industry. We have done the calculations for the cost to the dairy farmers in terms of butterfat of this blend. Taking the worse case scenario, or the best case for the dairy farmers, these are our figures.

If you take the figure of 10,000 tonnes of butter oil and you substitute it with these imports and you take a figure of approximately $6.30 for domestic butter oil fat price, it would be a loss of $31 million to the dairy farmers in terms of their butterfat market. As I said, this is their best case scenario. You have to do another calculation there as far as we're concerned.

If we are replacing that amount of domestic fat with the imports, what you do with your domestic fat is you export it and you export it at world prices. The exportation of that replaced domestic fat would probably bring the dairy farmers somewhere around $18 million. You then have to subtract your $18 million from your $31 million loss, and this gives you the net real loss to the domestic manufacturers.

So what we are talking about here is not a major trade loss—not at all—not in terms of a domestic industry with $8 billion or $9 billion at the factory gate.

I want to say a couple of words about the classification issue. As I mentioned, we started to bring this blend in among other blends with sugar in them in the early 1990s to service the domestic processing industry, to provide them with low-cost alternatives to domestic supply. In order to do this we have to be careful. My client, International Dairy Ingredients, has to be careful.

We went to Revenue Canada and we obtained opinions saying that the products we were bringing in were correctly classified according to Canadian and international classification law. It was on the basis of those opinions that we brought in this butter oil blend in the early 1990s.

After the World Trade Organization was completed, with all the changes and tariff rate quotas and all the prohibitions that were added at that point to protect the domestic industry.... They were substantial protections, because as I've mentioned, a whole group of competing blends were prohibited from coming into Canada after 1995, leaving only this one butter oil blend without a high tariff rate quota.

After 1995, on advice, my client went back to Revenue Canada and we got two more opinions on this butter oil blend saying it was classified properly under 2106.90.95. On that basis I advised my client that he had a legal right to bring that blend into Canada. On that basis he proceeded to build up the small business I mentioned previously of 8,000 to 9,000 tonnes in total, of which he imports approximately 3,000 to 4,000 tonnes on a yearly basis. Other importers, other processors, make up the difference.

So we have done all that is required of us. We have built up a business, we have provided a low-cost alternative, and it is not a major trade.

• 0945

What are the dairy farmers, in our opinion, attempting to do with the reclassification? Obviously, if this is reclassified into a high-tariff rate quota line, it will become commercially unfeasible to bring this blend in—absolutely.

Depending upon what it costs in terms of world trade, depending on the demand for the Canadian dollar in Canada, the margins—you heard from my colleague, Mr. Jarvis—are a dollar. Right now, the difference between making a domestic product, which is exactly the same as our imported blend...and our imported blend is 50¢ Canadian because of the fall of the Canadian dollar and the rise of dairy products on the international market.

So we're not talking about huge margins here. We're not talking about elaborate profits; we're talking about small, normal commercial profits on any importation. The reclassification into any tariff rate quota line, as requested by the dairy farmers, would completely wipe out this alternative of importation.

What are some of the other consequences of this? If we reclassify at this point, we suggest and submit that we will have a problem with some of our major freight partners both on the NAFTA and the WTO level. Why? Because this product is being made in New Zealand, the United States and in Europe. All of them are watching the American action in the WTO on dairy that Mr. Gifford has referred to. There is a challenge here to the Canadian revised system of supply management.

If we add a new prohibition to this, I know as a fact that the Americans will take it seriously and look into it as part of their general objection to the blocks of Canadian supply management to their products. The same is probably true for New Zealand. In other words, what we have here is a potential trade problem.

Putting it all together, what do we have? We have a legitimate import; we have it correctly classified. It's a low-cost import. It takes about 15% to 20% of the Canadian ice cream, butterfat supply. Consumers save on it. If it is blocked, we may run into certain trade problems.

Thank you very much.

The Chairman: Just a point of clarification before we go to Mr. Penson, this imported product is not 100% from New Zealand. Are you saying it is from the United States also?

Mr. Donald Kubesh: It is from the United States, Mexico, Europe, and New Zealand.

The Chairman: So it affects the World Trade Organization and the North American Free Trade Agreement.

Mr. Donald Kubesh: Absolutely.

The Chairman: Is any of the product you are importing made in Canada?

Mr. Donald Kubesh: No.

The Chairman: Thank you.

Okay, Mr. Penson.

Mr. Charlie Penson (Peace River, Ref.): Thank you, Mr. Chairman. I would like to welcome the panel here this morning. It's an interesting mix in the panel, which makes for a good debate.

With all due respect to the dairy farmers, it isn't any real surprise that we're going to have this kind of action considering our supply management system. I'm wondering how we're going to spend our time constructively.

In the run-up to the next World Trade Organization talks on agriculture perhaps we should be spending our time a little more constructively looking for access into the United States market. We should be talking about the restrictions we have there so that we have the ability to trade freely across the 49th parallel, rather than the kind of action that is being undertaken here.

We have international trade obligations. Canada has tabled our tariffs, and I want to explore that a little bit more with the finance and revenue departments.

We've tabled our tariff schedules at the World Trade Organization, as all the other countries have done. If we make an attempt to change that now, it's going to cause further friction.

To that end, I would like to ask Mr. McLester from the Department of National Revenue and Mr. Satherstrom from the Department of Finance about what our obligations are internationally once we have tabled our tariff rate schedules. If all countries started to say they're going to have a look at this, where are we at? Doesn't that break down our international agreement? I want to know the process.

• 0950

First of all, what's our commitment at the WTO after we have put these tariffs in place and had them looked at by their countries? What's the process in trying to change them now and what are the implications? I'd like to have Finance and Revenue answer that.

Mr. Darwin Satherstrom: Essentially, if we were to increase a tariff rate on an item that was bound against increase in the WTO—and all agricultural items are bound against increase—we would face retaliation from our trading partners, unless we had first renegotiated such an increase. To go through a renegotiation you have to follow a process in the World Trade Organization. You have to notify them. You have to offer suppliers compensation. You have to sit down and actually do a negotiation.

If you fail to resolve or get a resolution on your renegotiation and you go ahead and implement, they can ask for a right to retaliate against you on your exports to them. From my experience, from what I've seen other countries do, they normally target products in related areas if possible.

Mr. Charlie Penson: In related areas such as dairy in this case?

Mr. Darwin Satherstrom: That's been my experience in what other countries have done when they've been affected by measures taken by another party. If they feel they've been aggrieved and have been unable to resolve it, then they retaliate. They would do so in a related area and try to catch the attention of the offending party in that way.

Mr. Charlie Penson: Just to follow up, I think it was you, Mr. Satherstrom, who talked about the fact that we have basically no tariffs in NAFTA at the moment. How would you see this being affected if we were to change our tariff rate quota? Would that open up the area for agriculture under NAFTA?

Mr. Darwin Satherstrom: I would assume it would. The NAFTA, as you know, excludes certain products from its coverage. Those items or those products were defended in the supply management panel. All other products that are covered by the NAFTA and that originated in the United States are subject to no tariff or very low tariffs in 1997 and as of January 1, 1998, they will be tariff free. If you change the status of a product from a low tariff or a duty free product to basically an excluded product, it would change the rules of the game as far as the U.S. was concerned, and anybody else, I'm sure.

The Chairman: Do you want the dairy farmers to respond to that?

Mr. Core.

Mr. John Core: Mr. Chairman, we're not asking the Government of Canada to do what Mr. Penson has suggested. All we're asking the Government of Canada to do is put it on a different classification line. We're not asking to change our tariff offer or the offer we made to the WTO or anything else. We're simply saying the product is on the wrong line.

The answer has been about the question of changing our tariff offer, and that's not what we're asking to be done in this situation.

As far as being progressive and looking at other issues in supply management facing the future, the Dairy Farmers of Canada are making huge strides in changing the system. What we're asking the Government of Canada to do is to live up to the trade deal it signed. We're not talking about what's going to happen in the next trade deal or anything else; we're talking about the one that's been signed. It's in place. Canada has to defend what in fact it negotiated.

If this discussion were taking place in the United States and you had a group of dairy producers before a Senate committee, the first thing they'd do is shut the border down and then ask questions. That's what we're pointing out. We want Canada to enforce what was negotiated, not what's going to happen next time.

In the dairy industry we've made huge changes in what we're doing in competitiveness and flexibility and those types of things. As far as gaining access to the U.S. market, when the U.S. decides to dismantle its subsidies on agriculture then Canadian milk producers will compete.

Mr. Charlie Penson: Mr. Core, I'm suggesting that maybe our time could be spent more constructively trying to get that kind of access rather than fight a rearguard action. You're suggesting that all you want to do is change the tariff line. The effect is the same thing as what I'm talking about. It just seems to me that it's an action that is designed for failure and it is not a constructive use of the time of the people who are involved.

• 0955

Mr. John Core: Mr. Penson, I respect your viewpoint, but my concern is this. You've heard that the ice cream manufacturers are claiming they've topped out their importation at 10,000 tonnes. I found out yesterday that a processor of processed cheese in this country is now using a butter oil/sugar blend imported from Mexico.

Mr. Charlie Penson: You shouldn't be surprised.

Mr. John Core: It is a much broader issue. What will it be tomorrow?

I go back to what Mr. Kubesh said. He said he went to Revenue Canada in the early 1990s and asked them whether a 49% or 51% was acceptable. If he'd asked them if a 51% butter oil, 49% sugar was acceptable, they would have said no, but because it was a 49%-51%, they said yes. Designed to circumvent? Completely! It was designed to circumvent in 1990. It's designed to circumvent in 1997.

The Chairman: Thank you, Mr. Core.

Mr. Benoit.

Mr. Leon Benoit (Lakeland, Ref.): Mr. Core, I believe it was you who said the technical arguments surrounding this issue mean nothing to dairy farmers, and I can understand that. You're saying it doesn't make any sense to them when you say you can't import any of these products individually, yet you can put them together and you can import.

I've been frustrated many times by a government when a common sense argument has been put forth but the change isn't made. In this case, though, it's complicated by international trade agreements—the NAFTA and the WTO—which this government has signed. They've signed the agreements. That certainly complicates it further and makes it more difficult to make a change, even if the will is there.

I think we've had it outlined already that there is this one product. The importers say this is the only product that could be imported with blends. I want to ask you if there are concerns there might be other products processors can blend to import, or is it restricted to this one product? If it is restricted to this one product, by challenging it, are you not opening yourself up to major challenges from the United States and other countries, challenges that may do more damage than allowing this one product to stay?

The Chairman: Briefly, Mr. Core, and then we'll go to Mr. Chrétien.

Mr. John Core: The Government of Canada had already made the arguments when they tabled their tariff offer at the WTO; made these arguments in the NAFTA discussion and tabled the tariff offers with the full understanding that they were designed to prevent the circumvention. This product is a circumvention. The Government of Canada made that argument in the NAFTA panel, and the NAFTA panel agreed and turned down the U.S. request at the NAFTA panel.

Certainly, we're concerned about other designer blends. When the negotiators came back to us from the GATT negotiations, the one thing they said was they had clearly put in place the necessary controls to prevent circumvention by the use of blends. They came back and told us that. Now we're asking the government to live up to the commitment they made.

The Chairman: Mr. Chrétien, you have 10 minutes.

[Translation]

Mr. Jean-Guy Chrétien (Frontenac—Mégantic, BQ): Yes, thank you very much, Mr. Chairman.

Mr. Chairman, this morning we were faced with a major problem which is hitting milk producers all over Canada hard. When we look at the quantities of this mixture of butter oil that we have imported over these last three years, we note that in 1995-96, we doubled the amount of imports, and from 1996 to 1997—and 1997 is not finished, Mr. Chairman—we have more than doubled our imports. So, if I make a projection, four or five years from now, we will have eroded some 20% of the quota of the milk producers. This is very worrisome and they are worried about it. The value of their quotas could go down and their production and revenues of course, will be greatly affected.

Mr. Chairman, when Canada joined the WTO in December 1993, we had set tariffs to keep our domestic market, under what we usually call supply management.

• 1000

The Prime Minister, it seems, defends this very vigorously. The Minister of Agriculture of the 36th Parliament, Lyle Vanclief, also committed himself yesterday to defending the status quo and the Minister of International Trade has adopted a similar position. And we realize, through a subterfuge, that there is a bad classification that is of no help at all to us, the farmers.

We have reached the point where we've been doubling imports of butter oil every year for the past three years. I'm astonished this morning, Mr. Chairman, to see that there are high-level officials from four departments here. And moreover it is surprising to note that the Department of Health is not represented this morning.

Eighteen months ago, the processors' association stated before the Agriculture Committee that it did not want any BST in its products. The Canadian Consumers Association did not want any BST in its products either. What guarantees are you giving us this morning that when you import 8,500 tons of butter oil, there is no BST in it? Are you shoving ice cream with BST in it down our throats? Is this ingredient listed on the containers?

I have three children and so we are a family of five. We buy different kinds of ice cream. Sometimes we buy house brands that are sold under the supermarket chain's name, and three times out of four, it ends up in the garbage. Of course, it is a bit less expensive, but we feed the garbage can and it never thanks us. And for a few cents more, we can buy a recognized brand; and that's good ice cream.

I do not know whether this ice cream sold at a lower price is made with butter oil, but I can guarantee that there are certain kinds of ice cream on the market that are of a mediocre quality. And I am convinced that the Consumers Association, who represent those who are most directly affected, will condemn you; I'm convinced of that.

So, here is my question: can you guarantee to us that the ice cream you have been feeding us every day for the last few years is absolutely BST free?

[English]

Mr. Don Jarvis: Yes, I think I understand the question with respect to the BST issue, but perhaps we should have someone from Health Canada here today to go through that particular issue in detail.

The Chairman: We'll take the butter out.

Mr. Don Jarvis: I think we should.

The Chairman: But I think the question....

Mr. Chrétien.

[Translation]

Mr. Jean-Guy Chrétien: I'll put my question to you again: can you guarantee to us that in the butter oil you are importing there is no BST? Yes or no? I will have other questions.

[English]

Mr. Don Jarvis: What do you mean by BST free?

[Translation]

Mr. Jean-Guy Chrétien: In Canada it is forbidden to use bovine somatotropin injections to make our cows yield more milk, because, we are told, Health Canada has not yet made up its mind about it under overall quality standards for milk. Our milk producers have disciplined themselves and bovine somatotropin is not being used to increase our revenue. But if, on the other hand, we are importing products containing BST, Health Canada could stop them at customs.

[English]

Mr. Don Jarvis: Mr. Chrétien, I understand it's a naturally occurring hormone that is prevalent in all dairy products, so I don't understand the exact nature of the question. That's really a completely different matter.

[Translation]

Mr. Jean-Guy Chrétien: But, 18 months ago, the processors' representatives were objecting to the use of BST.

• 1005

I believe that you are representing the same processors.

[English]

The Chairman: Maybe Mr. Gifford would shed some light on the question.

Mr. Mike Gifford: Thank you, Mr. Chairman.

My recollection is that BST is not permitted to be used in milk production in either the European Community or New Zealand. It is permitted in the United States.

The Chairman: Mr. Chrétien.

[Translation]

Mr. Jean-Guy Chrétien: Mr. Chairman, now I'm going to address the two representatives of Revenue Canada.

The problem which is arising is obviously one of classification, so it is a question of periods and commas. You seem to be saying that it would be possible to bring back the classification of butter oil to a point—I don't have the exact figures, but I think that it's 90 and 35—and that the tariffs would be much higher. At that point, according to Mr. Jarvis, it would be less profitable for the group which he represents to import.

Is it some political will that is preventing you from acting? If it is political will, explain it to us as clearly as you can, and we'll see how we can move our milk producers in this direction and do the necessary work.

For the last few months, I have been assailed almost every week by milk producers whenever I go down to my riding. This is a major problem; it must be settled and in a hurry because I must remind you that the figures are doubling all the time. Your department is chiefly responsible for this. When in December of 1993 we signed the accord that became the WTO, it had been agreed that we were keeping supply management for chicken, milk products, and eggs.

[English]

Mr. Phil McLester: Thank you, Mr. Chrétien.

With respect to the classification of the product, it's our policy to classify according to the law. I do recall Mr. Core, whom we've spoken with many times before, indicating that because of the mixture there was a circumvention of the intention of the negotiations and our WTO obligations thereunder. At the same time, I should point out that we are an administrative department, and for something of this nature to be against our rules it would have to be a circumvention of the law.

For example, it's relatively unusual but it does happen that we have a product with a carrier and three different polymers in small proportions, and it has been classified according to the one that predominates and that is at a higher rate of duty. The importer, if they can create a product out of that using a different polymer at a lower rate, will do that. They engineer that product and import it.

As I indicated earlier, we must classify goods based on what they are when they come across the border. Regrettably, or happily, intent is not something we can take account of.

With respect to the classification of 2106.90.95., we've indicated that we feel quite strong on this point, and I note that the DFC have mentioned they are now pursuing classification 0404. We just received a very large submission from the DFC and we intend to review it very carefully. However, I can indicate that with respect to 0404, the matter has already been raised with the World Customs Organization by another country, and that organization has ruled that the goods are not natural milk constituents because they're processed to get butter and butter oil. So it's not a basic constituent if you separate it in the normal fashion.

So the goods were ruled 2106.90. That being the case, while we will review this matter very seriously, I must indicate that there will be a decision in Brussels that Canada will be directed to follow based on our obligations under the HS convention.

The Chairman: Mr. Core.

• 1010

Mr. John Core: I have two points. We'd love to see this agreement in Brussels. It's been alluded to many times but we've never seen it. We don't know what it is.

The second point is that if it's not a milk constituent or ingredient, why does it say milk ingredients on all the ice cream packages in Canada? It doesn't say anything about butter oil. I defy you to find a package of ice cream in this country and its listed ingredients say butter oil/sugar blend. It doesn't exist. It says milk ingredients, so it must be a milk ingredient.

[Translation]

Mr. Jean-Guy Chrétien: Mr. Chairman, I'd like to remind you of the fact that something is being done indirectly which cannot be legally done in a direct way. It is as if, for example, we were not allowed to import a 40-ounce bottle, but if we imported two 20- ounce bottles, then we would be respecting the law. This reminds me a bit of that.

Now, I'm coming back to my processors, because you are my whipping boy this morning. How can you explain, for example, that you are saving a great deal by importing butter oil, while the price of ice cream has nonetheless increased by 4.3% over these past few years, when to the contrary, it should have gone down?

[English]

The Chairman: Briefly, Mr. Jarvis.

Mr. Don Jarvis: I don't think I can comment on specific ice cream prices, but I can assure you that it is a very competitive marketplace.

The best response to your concern about whether the individual manufacturers are trying to achieve the lowest price is that many ice cream manufacturers are now using this blend. The primary reason they're using this blend, which has been discussed, is that it is lower-priced ingredients.

The Chairman: Is the price of ice cream going up or not?

Mr. Don Jarvis: I don't know.

The Chairman: You don't know?

Mr. Harvard.

Mr. John Harvard (Charleswood—Assiniboine, Lib.): Thanks, Mr. Chairman. I appreciate the witnesses coming today. I see this as an information session and I would hope that I can ask a couple of questions that would help us better understand the challenge before all of us, and perhaps some of the possible options. I underline “possible” because it seems to be a difficult issue.

My first question will go to one of the government representatives—I don't know whether it will be Mr. Gifford or someone else—and it's based upon a declaration made by Mr. Core of the Dairy Farmers. I hope I am quoting him correctly. Mr. Core said there was a tariff line the government could use. In other words, he was more or less saying that the government is simply using the wrong tariff line, and if another tariff line were used this problem could be solved.

Could you address that, Mr. Gifford or Mr. McLester?

Mr. Phil McLester: There certainly is the other tariff line, which is now being suggested by the Dairy Farmers in chapter 04, our dairy products chapter. There is also the one addressed by ourselves, which is 2106.90.33/34. Certainly that tariff line has a description, and in reading that description we have to classify the goods there. We must satisfy all the precepts of the description, in this case the products being a butter substitute.

As I indicated earlier, all our legal advice, interpretation, World Customs Organization explanatory notes that give us guidance and that we must follow in our interpretation of the tariff lead us to believe that this product is in no way a butter substitute. So in that sense there is not an existing tariff line we can use. As you suggest, I would think a tariff line would have to be created legislatively.

Mr. John Harvard: Mr. McLester, in the case of certain dairy products—

The Chairman: John, do you want another response to that?

Mr. John Harvard: If it's short.

Mr. Barron Blois: What we ask is to look at the findings coming out of the NAFTA panel decision. We ask to look at that in the light that Canada successfully argued, that in areas where products were put together to circumvent a tariff they could be put under the tariff item 0404.90. We've asked the department to look at that.

• 1015

Mr. John Harvard: Mr. McLester, as I understand it, in the case of certain dairy products such as whey and buttermilk the tariff lines specify that these milk by-products continue to be considered as such even when sugar is added. So why do the tariff regulations leave out this detail in the case of butter and butter by-products?

Mr. Phil McLester: With respect to the classification in butter and butter products, in chapter 21 we're already into a residual heading indicating milk, cream, or butter substitutes for 31 through 33 and 34 and other products for 95. We have here that food preparations not elsewhere specified are included, which means that it's somewhat of a residual placement for these products. The mention in chapter 04 is actually the inclusion of sugar, and it is a legal mention at that point as well.

Mr. John Harvard: When Mr. Core was speaking he spoke with some incredulity, suggesting that we have import controls when it comes to dairy products, we have import controls when it comes to sugar, yet these blends have both dairy and sugar and for some reason they can't get caught. Can you reply to that incredulity he expressed?

Mr. Phil McLester: That's quite true, Mr. Harvard. We do have butter products that would, by themselves, go into a TRQ item at an extremely prohibitive rate of duty. As well, sugar has a number of constraints on its import.

As I first mentioned, we classify goods based on their condition as imported. This means that if these two products are blended, for instance, if you add another twist and you have chocolate added to the mixture, then we would probably be in a different chapter in the harmonized system based on the current law and our international agreements. I'm afraid that is the law in this situation.

For instance, if it were a situation where circumvention by way of mixing products that were later separated or something of this nature were the case, then of course I think agriculture would also be involved in investigating this.

This doesn't happen to be the case here. It's my understanding that butter oil is used as is in the process. As such, there's no attempt at deception by mixing two otherwise difficult-to-import products into one that is less difficult, so that would be a different question.

Mr. John Harvard: You said earlier that these things can't be measured by their intentions. Is there not something, though, that reflects breaking the spirit of a treaty, of a trade deal? If something clearly is done in a fashion that doesn't violate the articles of the law, but to some right-thinking people it certainly violates the spirit of a deal, is there no avenue there?

Mr. Jean Saint-Jacques: Mr. Harvard, in terms of my understanding, and I would defer to my colleagues here, the binding commitment is contained in the tariff submitted to the World Trade Organization.

As Mr. McLester explained with respect to classification, Canada is also a party to the World Customs Organization, which determines rules for classifying products.

I don't know if any of my colleagues wishes to answer that.

Mr. Mike Gifford: Mr. Chairman, in terms of circumvention, we've had experiences like this in the past where a product, for example, is not an official product—golf balls and milk powder. Clearly, the idea is to import the mixture of golf balls and milk powder, to extract the golf balls, use the milk powder, and send the golf balls back.

You think that's an amusing, artificial example, but I'll give you an even better, real-life example as well. It is something that used to be called a soup mixture, which was rock salt and powder. This mixture was imported. The salt was physically separated and sent back. Basically this salt went back across the border.

• 1020

That circumvention, which National Revenue would regard as a circumvention, is an artificial product. My understanding of the customs interpretation, though, is that when it's not an artificial product, it must be classified according to the normal classification practices. That is the conundrum.

Take another example; frozen pizzas. Clearly the cheese on a frozen pizza is subject to a high tariff under a tariff rate quota, but when the cheese is imported as a frozen pizza, it's classified as a frozen pizza. That is the dilemma we're in today, Mr. Chairman.

The Chairman: Thank you.

We'll go now to Mr. Bachand for five minutes.

[Translation]

Mr. André Bachand (Richmond—Arthabaska, PC): Thank you very much, Mr. Chairman.

Mr. M. Jarvis, finally, should we understand that the famous mix we're talking about this morning only goes into the manufacture of ice cream and that it has absolutely no other applications other than the one which we know about today? Is that true?

[English]

Mr. Don Jarvis: Yes. For example, Unilever Canada uses this blend purely in its manufacture of ice cream. I must emphasize that it's a small proportion of the ingredients. It's only a small amount of all the ingredients they use in their manufacture of ice cream. Most of the ingredients in their ice creams are in fact sourced here in Canada.

[Translation]

Mr. André Bachand: Earlier, it seemed that we had understood that there was a maximum relative to what is presently being produced in Canada. We're talking about a maximum of mix on the order of 10,000 tons. Is that also true?

[English]

Mr. Don Jarvis: Mr. Kubesh provided the universal figure, but I do know from Unilever that they have stockpiled this product this year. It happens depending on when you purchase it. Their plans are to actually purchase less next year, so on average I believe the expectation is that it will max out at 8,000 to 10,000 tonnes.

[Translation]

Mr. André Bachand: Agreed. There is a great deal of work to be done with customs, customs tariffs and external trade. Could the industry which is importing this product make a commitment today to import a maximum quantity, for example a maximum on the order of 10,000 tons? Or would you be ready to make such a commitment today according to the testimonies you have heard?

[English]

Mr. Don Jarvis: I can't speak for the industry.

The Chairman: I guess there's no answer.

[Translation]

Mr. André Bachand: I am not an expert on ice cream or milk products. But when we have figures on the table, we should trust that they are good. We're talking about a maximum quantity of 10,000 tons. Imports of the order of 10,000 tons have a direct impact on our milk producers in Canada, and more specifically in Quebec. So, what I want to know is whether this figure is serious or not, or if in five years, we will find other uses and increase this maximum quantity to 15,000 or to 20,000 tons. In the meantime, —and on this point I raise my hat to them—there are wise guys who find ways to get around the customs system; this is a fact that we must be aware of.

What I would like to know is whether the industry is ready to live with those figures, and to commit itself to importing a maximum of 10,000 tons, at least until other solutions are found, be it through Revenue Canada, dairy producers or international trade.

[English]

Mr. Donald Kubesh: Mr. Bachand, I gave that figure, so I guess I should answer.

What I said was that my client is importing for the ice cream manufacturers. We looked at the total volume of butterfat, which is about 48,000, and at how the processors are using it right now, and we determined that they're not using more than 25% in any lot. We said that a number of processors won't use it for a number of reasons. So we had a maximum of 12,000 tonnes. We reduced that to 10,000 tonnes as a ceiling. The imports this year are about 8,000 tonnes. That may grow to 8,500 tonnes, but probably not with the prices that exist right now.

• 1025

Can we guarantee that? No, we can't guarantee that. It would be wrong of me to say we can guarantee that.

We can't guarantee it will go down either. If world prices go up, this thing becomes commercially unfeasible. Therefore, if we have a rise in dairy prices on the world market, the imports will go down. It's not automatic in which direction it goes. It depends on market forces. It's as simple as that.

The Chairman: We will go now to Mr. Calder.

Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you very much, Mr. Chairman.

Maybe for Mr. Chrétien's information, he should go and take a look at Statistics Canada.

As for the figures here right now on the imports that came in, butter oil is included in this tonnage. From January 1996 to June 1997, nearly 15,000 tonnes was brought in. It was 14,911 tonnes. Of that, the biggest source was the United States, at 9,621 tonnes. That's for your information.

What I would like to deal with here, though, is a letter I received from Unilever Canada. It was dated September 30, 1997. It was written by Mr. Bruce Mactaggart, Unilever's vice-president, general counsel, and secretary. The last half of the last paragraph is what I'm interested in. It states:

In addition, acceding to the DFC request would increase our input costs substantially as there is about a $1.00 per kilogram differential on butterfat between what we are buying this butter oil blend for now and what we normally pay for butter. This increase in turn would eventually be passed on to our customers.

Right now, you are buying an ingredient that's cheaper than what you could buy here. Yet I'm confused. If I take a look at the Dairy Farmers of Canada submission, you've been importing this since January 1995. There's about a 488% increase, yet the price index has also increased by 4.3% since January 1995.

In fact you are buying this stuff right now at an estimated difference of about $1.50 per kilogram of butterfat, yet the price index since January 1995 has moved from 116.3 to 121.3 in September 1997.

My question is, if it's going to cost the customers more for you to have to source that product here in Canada, how come the price of ice cream has been steadily going up with you already sourcing a cheap input cost? It almost sounds a wee bit like price fixing here.

Mr. Don Jarvis: That's a very good question, Mr. Calder. Indeed, specifically with Good Humour-Breyers, they only began using this blend this year. So their pricing function in terms of 1995 and 1996 and the rise of their ice cream was based on all-Canadian dairy inputs for all their products.

Mr. Murray Calder: Mr. Chairman, I wonder if I could get a comment from the Dairy Farmers of Canada.

Mr. Barron Blois: Our figures show that ice cream prices have gone up by 4.3% over the last while, while butterfat prices in this country during that period of time have not changed. So clearly it is our view that this product coming into the country has not returned a benefit to consumers.

• 1030

What I want to get back to, if I have a minute here to talk quickly about this, is that yes, we have two processors here today, but there are many other processors of ice cream in this country who are not here to speak about this issue. As I said in the opening remarks, I have personally spoken to a few of those individuals who find this very difficult, who are working within the system, using fresh cream for their ice cream mix, and are competing in the marketplace, selling to the retailers with a product of a blended mix, a butter oil and sugar mix. It is becoming more and more a problem for them to compete in selling to those retailers.

They are telling me that if you can't have this situation fixed, we will have no alternative but to try to source this. That will then escalate the amount of product coming into this country, and that further takes it down the other road where we then have to reduce quotas. That then turns around and puts a lower amount of volume of milk out there. That would not only affect the ice cream producers but would affect all the other manufacturers in this country, particularly cheese manufacturers.

The Chairman: Thank you very much.

Mr. Don Jarvis: Mr. Chairman, could I just finish my response to Mr. Calder?

The Chairman: Okay.

Mr. Don Jarvis: You have to understand that the butterfat content of an ice cream product is only a small portion of the total cost of the product. I understand that the butterfat content makes up about 10% to 15% of the total cost of that product.

There are the other ingredients in the product. There is the packaging; there are the distribution costs. There are probably about 10 other cost factors beyond the butterfat content. You can't take the dairy ingredient cost and extrapolate that into the finished product cost.

The Chairman: Thank you very much. As you can hear, the bells are ringing for an unscheduled vote. It's a 30-minute bell with 25 minutes remaining, so we can go for a couple more rounds here before we have to go.

Mr. Benoit.

Mr. Leon Benoit: Thank you, Mr. Chairman.

The dairy farmers seem to be saying that the problem was caused by a bit of an oversight when the GATT was signed and that oversight has allowed for this classification to be used to import the blend. Is that the case?

Mr. John Core: We don't believe there was any oversight at the time the GATT deal was signed. We believe that the oversight is that the product was put on the tariff line. We think the tariff structure is there. It provides for the proper tariffication for this product. It's just that it was subsequently put on.

I find that there were two requests for Mr. Kubesh to verify whether or not after 1995 this product met the requirements. There was a prime opportunity for Revenue Canada to make it clear at that point in time that it should have been on tariff line 0404.90.

Mr. Leon Benoit: Yes, and this product was coming in, it sounds like, before that. If Revenue Canada was aware of the classification, is it possible they thought that classification should be as it is?

Mr. John Core: I believe, as I said previously, if Mr. Kubesh had approached them in the early 1990s and asked them whether or not a 50:50 product was permitted, the answer would have been no. So he asked whether or not a 49:50 one was permitted, and the answer is yes.

When we then subsequently negotiated the WTO agreement and submitted our tariff offer, which included 0404.90, that should have been a clear indication to Revenue that this product should then have gone on that tariff line, particularly when Mr. Kubesh asked for two clarifications.

There is this argument about whether or not this is a milk constituent or not. I will refer the committee to what I understand is the textbook of dairy science in this country, called Dairy Science and Technology: Principles and Suggestions. On page 229 it gives this definition for butter oil: “Butter oil is a term used for pure fat extracted from milk.” Well, if that isn't a milk constituent as referred to in 0404.90, I don't know what is. It's 99-plus percent butterfat. If butter oil isn't a milk constituent, I don't know of anything that is a milk constituent, quite frankly.

Mr. Leon Benoit: To ask a follow-up question, you're saying that Revenue Canada knew before, when they were going through the classification procedure, and decided on this classification. If the classification is changed and the Americans challenge, which they probably would, and their challenge is successful, wouldn't they be able to retaliate in other products? What could be the damage to the dairy industry if they did retaliate?

• 1035

Mr. John Core: Let's make it clear. If the Government of Canada changes its classification, I am sure the people represented here will be at a CITT hearing challenging Canada in its reclassification. That would be the first step. We're saying that we believe we can win those arguments before the CITT. The only argument the Americans could make would be the same one they made in the NAFTA panel, and they lost that argument. So we don't believe there would be any retaliation by the United States because Canada would simply have to re-argue exactly what it argued in the last NAFTA panel.

Mr. Leon Benoit: I think this is a critical—

The Chairman: We'll have to go to Jean-Guy Chrétien.

[Translation]

Mr. Jean-Guy Chrétien: Thank you, Mr. Chairman.

This morning, our committee met to discuss the import of butter oil. This is extremely important to dairy producers, most of whom are in Ontario and Quebec. But unfortunately, Mr. Chairman, the meeting was suspended because of a vote.

[English]

The Chairman: I think the bells have stopped. Apparently they are voting now. I'm not really sure what's going on over there. The vote is taking place now apparently, so we'll just continue.

[Translation]

Mr. Jean-Guy Chrétien: It's a 30-minute bell. What I want to say pertains to dairy producers in particular. There is a motion before the House to convey our best wishes to the Queen of England on the occasion of her golden wedding anniversary. I would have liked this to wait until the end of our committee meeting, since our proceedings are extremely important, particularly to dairy producers.

So I would beg my colleagues who represent all dairy producers to excuse us, or at least to excuse some of the committee members.

For Mr. Calder, I'll go back to the table provided by Canadian dairy producers. The table clearly indicates that imports have more than doubled since 1995. I used to teach mathematics, and I know that when you double something year after year, it doesn't take long to become a millionaire. On the other hand, you can find yourself without a bean just as quickly. This is extremely worrying for dairy producers.

My colleague Mr. Bachand asked a very clear question. He wanted to know whether you were ready to establish a maximum threshold and self-monitor. You did not go so far as to take a specific stance on behalf of the people you represent.

I have a question, which I will ask because we must act, and act quickly. A little earlier, Mr. Core asked what indications you put on containers of ice cream made using butter oil. I'd like to be a bit more specific: could you please name the brands made using butter oil? We will organize a very impressive boycott. You won't need to self-monitor, because you simply won't be selling the stuff.

[English]

Mr. Don Jarvis: All I can say is that all ice cream products manufactured in Canada conform to the Food and Drugs Act and regulations. The ingredients listing conforms with that act, and Health Canada ensures that all products manufactured here conform to all standards set down across Canada. Those plants are all inspected and continually monitored, and Canadians are getting the best and safest ice cream in the world.

• 1040

[Translation]

Mr. Jean-Guy Chrétien: Could you please tell me the name of the brands of ice cream you produce? You must know what brands they are. If there are seven of them, please name all seven. That information will be entered into the committee proceedings. If you refuse to tell me what these brands are, I will ask my research staff to find out, and that will hurt more. Everything we say here will be contained in our committee proceedings.

[English]

Mr. Don Jarvis: I think in my introductory comments I listed some of the brands produced by at least one ice cream manufacturer.

The Chairman: Do you want to send the list to the committee?

Mr. Don Jarvis: I think you'll see it in the letter that Mr. Calder already referred to.

The Chairman: Mr. McCormick.

Mr. Larry McCormick (Hastings—Frontenac—Lennox and Addington, Lib.): Thank you, Mr. Chair. I want to thank all the witnesses for being here at this information session, which we probably all need to get us together.

I would like a point of information on the bells, Mr. Chair, just before I proceed.

The Chairman: They are voting. There might be an election next week, but they are voting right now.

Mr. Larry McCormick: Well, there will be one party that.... Anyway, we'll see about supply management.

I would like to have each party answer my question, except perhaps the importers. Why would this product, the butter oil/sugar blend, be such an untouchable at the time of the signing of the tariffication process? I would expect that each party here, including DFC, was at the table. It's almost like everybody is blaming everybody. Why wasn't it looked at when these people asked if it was okay to import this?

To my thoughts, if something is 51% to 49%, I would think a flag would go up if you had time to look at this. What would happen if somebody changed it a little bit to a 50:50 or 49:51? That wouldn't be a great change and yet we, whoever it was, just left it and didn't touch it or acknowledge it.

That's my first question. I have a couple of others, Mr. Chair.

Mr. Mike Gifford: Mr. Chairman, we have to go back in history a bit to understand the relevance of this 49:51. Prior to the introduction of the World Trade Organization on January 1, 1995, Canada restricted the importation of dairy products through the Import Export Permits Act. It was a legal opinion provided to the Department of Foreign Affairs and International Trade that the import control list it had could not include products that contained less than 50% dairy ingredient. That was the old rationale for this difference between 49% and 51%.

Even under the old legislation, the Import Export Permits Act, the Department of Foreign Affairs and International Trade, under its own statute, could not apply a restriction if the product came in at 49% dairy and 51% something else.

In the conversion from these import quotas that we had maintained prior to 1995 to tariff equivalents, we sat down with our advisers from the private sector, including dairy representatives, to go through on a line-by-line basis and get their advice on the conversion from the old import control list, which was not specified in terms of tariff items but simply named products, to a new system that was based on a tariff description. I think it's fair to say that we spent considerable time discussing this with a representative of the dairy industry. At the end of the day we came out with a list of products and tariff descriptions that was supposed to correspond to the import restrictions we had prior to tariffication. That, Mr. Chairman, is the schedule that was submitted to the WTO in 1994.

The question will rise in your mind as to what could be done in the way of tariffication. Basically the guiding principle for all countries in this agricultural agreement under the WTO was that you were entitled to place tariffs on those measures you had in effect prior to the conclusion of the negotiations.

• 1045

We did argue successfully before the NAFTA panel that Canada had gone slightly beyond that. The point was made, but I would suggest, Mr. Chairman, that you should be very careful in drawing conclusions from the NAFTA panel. The NAFTA panel confirmed Canada's right to maintain tariff rate quotas on imports of dairy products from the United States under the terms of NAFTA, but it did not rule on the question of the composition of the tariff rate quotas. That would be a separate panel.

In the absence of anything else, the United States would expect that Canada would classify the entry of goods into Canada on the basis of the appropriate international guidelines, such as those of the world Customs Co-Operation Council.

Basically there are two issues here, Mr. Chairman. One is the issue of the appropriate classification of the good in question. It's not an artificial good; it's a legitimate good for the purposes for which it can be used in and by itself in the further manufacture of, say, ice cream. One question we therefore have to face is, what are the obligations of the Department of National Revenue in classifying this particular good?

If a policy decision is made that the government wants to provide additional protection to this good, if National Revenue does not classify it under a tariff rate quota, then, as I think our colleagues in Finance were saying, the government has only one choice. If it wants to expand the coverage of the tariff rate quota system, we would have to initiate article 28 negotiations in the WTO to increase the tariff protection on this good.

Then, as has been pointed out, to do this we would have to negotiate with our trading partners and pay compensation. Probably most important this is a WTO obligation, but under the NAFTA we would have no right to increase tariff protection on a good that's not currently contained under a tariff rate quota.

The Chairman: Thanks, Mr. Gifford.

Mr. McCormick, we'll have to go now to Mr. Coderre.

Mr. Denis Coderre (Bourassa, Lib.): Mr. Chairman, the question you're asking was to both the government representatives and Dairy Farmers of Canada.

The Chairman: The way we had this little arrangement set up in this committee....

Mr. Larry McCormick: May I have that answer, though?

The Chairman: We'd like to get the answer, but we have only five minutes on the second round. Mr. Gifford took up well more than five minutes already, so we're getting into what people consider to be their time....

Mr. John Core: Mr. Gifford referred to the fact that he'd been into discussion with dairy representatives during those discussions. Mr. Doyle is that person and he's here, and I was going to ask him to give his view of that response.

Mr. Larry McCormick: A point of order.

The Chairman: We can come back to Mr. Doyle. If Mr. Doyle wants to go to the table, we can come back to him after we go to Mr. Coderre.

[Translation]

Mr. Denis Coderre: I'd like to begin by thanking you. You have expressed a viewpoint which is extremely important to Quebec. Obviously, this issue requires in-depth study.

There are some considerations I do not understand. Mr. Gifford, in 1993—when we were signing the World Trade Organization agreement—did we know about butter oil and sugar? Or was what happened in 1995 a complete surprise? Did we already know about butter oil when the list was prepared, and the product classification established? And after you deal with the question, I would also like very brief answers from the dairy producers.

• 1050

[English]

Mr. Mike Gifford: Mr. Chairman, I guess it was shortly after the end of negotiations in 1993 when we had to convert our negotiated commitments into a legal tariff schedule.

We sat down and tried to figure out how to make this conversion from an import control list that was not based on tariff lines into a question of tariff lines. Our overwhelming constraint was that we were not supposed to convert into tariff equivalent those things that were not previously subject to import restrictions.

We did try to ensure that where we drew the line, we drew the line in the most favourable way to the Canadian dairy industry. There were a lot of judgment calls being made, and at that time it was my recollection that we had advised the representative at the SAGIT, with whom we discussed this, that basically the line we were drawing was the most favourable we could provide in terms of our international obligations.

That's as far as I can go, Mr. Chairman.

The Chairman: Mr. Doyle.

Mr. Richard Doyle (Executive Director, Dairy Farmers of Canada): Thank you, Mr. Chairman. Since I was in Geneva at the time, maybe I can do my little recollection.

The issue of blends of products and the fact that Canada was stuck with a definition of 50% being a dairy product, a definition imposed by another law, which was not true for any other countries, is not a new issue. The United States had no problem with 15% content being a dairy product, but from a legal standpoint we were stuck, and that's what we were trying to resolve.

The way the design and the discussion has taken place might reflect the discussion. There was clearly the intention at that point to try to get rid of all these products that were strictly designed to be 49%:51%. In fact, we introduced a new tariff line, which was cream and sugar. That was what they were importing at the time, because that's the primary product for ice cream. That was stopped, and it was stopped basically because we had introduced a new tariff line.

The reference to the NAFTA panel, 0404.90, is strictly because it reflects what DFAIT says was the history of the trade negotiation, why we put 0404.90. It is not subject to the 50%, and now we're being told, oh no, but butter oil is not a constituent. I don't know what the heck 0404 covers, if it's not butter oil and sugar.

See, we're not stuck with this catch-all 2106, food preparation not elsewhere specified. Please read 0404.90, because that's what the history of the negotiation is. It pertained to it.

[Translation]

Mr. Denis Coderre: I don't want a monologue about what happened then. I asked a simple question, and I will have other questions after that, Mr. Chairman. So I don't want us to spend too long on this one.

At the time, Mr. Doyle, did dairy producers know that the butter-oil-sugar blend was going to show up like that?

Mr. Richard Doyle: I would say no, even though blends were in the planning stages. I'm trying to explain that butter oil specifically was not used, although dairy product blends—49% and 51% with sugar, salt or something else—were at the heart of discussions being held with the negotiators of the day.

Mr. Denis Coderre: I see. My second question, Mr. Doyle. At the time the 50%-and-over line was established, was its intent not to protect Canada's dairy producers? At the time the tariffs and classification were established, to protect supply management and minimize potential damage, this 50% line was decided on. Have I got it right?

Mr. Richard Doyle: No. The 50% line existed before the GATT negotiations. The application of tariffs and tariff lines submitted by Canada in fact solved the problem of that limit, which was imposed by our own legislation before the GATT agreement.

[English]

The Chairman: Thank you very much. We have to go now to Mr. Penson and then we'll go back to Mr. McCormick.

Mr. Charlie Penson: Mr. Chairman, I think what we're trying to get at here is that we've heard clearly that this is an important issue for farmers. I agree 100%.

I think we look to government—and I say “we,” because my family and I operate a 2,000-acre grain farm in Alberta—to do some of the things we can't do. We produce grain; we supply milk. Those are the types of things we do. We produce. When it comes to covering our interests in the trade area, we look to government.

So I think we have a long-term interest—and I stress long-term interest—in making sure our industries are looked after.

• 1055

It seems to me that we also have some credibility at stake as a country, and it isn't just agriculture. We have a big trade relationship around the world. We signed a big trade pact at the GATT and now the WTO is administering it. We have NAFTA. We have some credibility at stake. It seems to me that if we sign these deals we have to live with them.

We had a chance to put our tariffs on the table and let people look at them. It seems to me that we could move beyond that in many areas—in grain, oilseeds, and beef—to try to get market access and lower subsidies in Europe. That's the type of thing that I look to government to help us with.

Today we heard the argument from the dairy farmers that they want this reclassified into a different tariff line. I think Mr. Gifford has suggested that the tariff line was there before and the intent was not to put things into new tariffs that already existed in the tariff line.

To our people in Revenue, International Trade, and whoever else is involved there, what are the implications of changing it to a new tariff line?

Mr. Phil McLester: If we change the tariff line indiscriminately at this time to satisfy the DFC, we can expect an instant appeal to the CITT by importers who need but import a small quantity of the product. In the estimation of our legal people and others, with expert witnesses from both sides, we feel it is very unlikely that we would win such a case.

The CITT, as it was mentioned in other cases earlier, has to be a three-year period and somehow supply protection.... An appeal to the CITT could last three months or six months. At the same time, whatever we do is in the public eye because it's before the CITT and it goes in the Canada Gazette. Our trading partners and the international organizations we are committed to have the opportunity to observe what we're doing.

That's as far as we go.

Mr. Charlie Penson: We've had a response earlier from Mr. Benoit to essentially the same question. We didn't have Foreign Affairs answer and we didn't have—

Mr. John Core: I'll raise a point of order.

Mr. McLester admitted earlier that he hadn't even read our presentation on 0404.90, so how can he say expert witnesses have said we're going to lose? He hasn't even read it.

The Chairman: I understand that it's still under consideration from his first answer.

Mr. Satherstrom, did you want to respond to that?

Mr. Darwin Satherstrom: I just want to indicate that if an exporting country feels we have raised a rate contrary to our obligations, they would have the right to take us to the GATT. If we were to lose any such case at the GATT, they could retaliate or ask us to withdraw the measure and compensate. So there are consequences to increasing rates of duty that others feel are contrary to our obligations.

Mr. Charlie Penson: Changing the tariff line—that's what that might do?

Mr. Darwin Satherstrom: The exporter could argue that they had an expectation that the goods would be subject to a rate of duty, and if the government was to increase the rate in any manner, then their rights have been violated.

Mr. Charlie Penson: Does Foreign Affairs...?

Mr. Jean Saint-Jacques: Mr. Penson, I would have the same answer as my colleague from Finance.

The Chairman: You are now dealing with a request from the Dairy Farmers of Canada, I understand, but no decision has been made yet. So where everything sits right now is that a request is coming in for a clarification or change to your previous ruling, but you haven't yet decided what that ruling will be. Is that where everything sits at this moment?

Mr. Phil McLester: I suppose that's a matter of interpretation from the standpoint of the revelation that we haven't changed the classification. It can also be interpreted that we are maintaining the status quo and that we have consciously decided to do so.

With respect to the comments from Mr. Core, I understand where he's coming from with respect to his latest submission. One of my officials has indeed read the presentation, so we are familiar with it. Earlier I indicated that we haven't studied it in depth, but on that brief reading we were able to comment briefly on that classification in 04. Certainly, we intend to study it further.

• 1100

The Chairman: There are firms in Canada that have made a request for you to change your previous decision. That's the status of the situation right now.

Mr. John Core: We were specifically asked by the Minister of Agriculture and Agri-Food Canada to submit our legal arguments on this issue. We submitted those on November 7, requesting them around the issue of tariff item 0404.90. We've had no response from any government group, except to acknowledge that they've received our request.

The Chairman: Okay.

Mr. McCormick, did you want to ask Mr. Doyle a question?

Mr. Larry McCormick: I just have a couple of short snappers.

For the Dairy Farmers of Canada, you informed us of this legal brief you tabled with the ministers. Have you shared it with your directors who were asking about it? I would also like to see that, if you have it with you.

I have another short question for the producers. If you could not get this product, what could you use?

Somebody mentioned cheese here today. In eastern Ontario five tractor-trailer loads of this product came in from Texas recently to a cheese factory. I understand it has been stopped now, but of course the concern was very serious. Would this product be used in cheese? Doubtful. So my question is whether or not each shipment is tested as it comes across the border.

I think the most powerful player here in this room today is Ben & Jerry's ice cream out of Vermont. They started with $5. They've taken the rBST issue to Bay Street. It has just started, ladies and gentlemen...to we're going to hear.

I am in favour of the industry, and we can all be winners here. I buy your products, but the question is whether or not we want to bring this rBST in here when Ben & Jerry's are going to launch a multi-million dollar advertising campaign against rBST.

Thank you, Mr. Chair.

The Chairman: Do you want to respond to those questions?

Mr. Phil McLester: I can't respond to the question on cheese, because I don't know whether or not this product can be used to make any sort of lower-grade cheese, as it is in ice cream.

With respect to the question about coming across the border, certainly we don't check every shipment that is made to Canada, but we do monitor shipments and changes in amounts of certain products going to certain places. Sometimes we key our monitoring activities. From time to time, products are sampled, but they are sampled essentially to take account of the proportions indicated of the product.

For instance, the butter oil content of 49%, the sugar content of 51%—that would be the type of sampling we would do. It wouldn't be for health reasons, or otherwise.

The Chairman: Okay.

Mr. Chrétien.

[Translation]

Mr. Jean-Guy Chrétien: I'll be asking several short questions which, I hope, will require only short answers. But before I do, Mr. Chairman, may I suggest we arrange another committee meeting for next week, in order to finish dealing with this issue? We could invite agriculture and health department officials, as well as representatives of the Consumers Association of Canada. I hope, Mr. Chairman, that you will take note of my suggestion.

My question is to the two witnesses representing dairy producers, and is perhaps in line with Mr. McCormick's point. Would it be possible—and I hate to think it would—to run the butter oil—which according to my friend from the Department of Revenue is imported quite legally—through some sort of centrifuge—I'm afraid I've forgotten my physics—and separate the sugar from the cream. The sugar could be used to make Jell-o powder, and the cream to make cheese or butter. Could we do that with modern technology?

• 1105

[English]

Mr. John Core: We understand it would be possible with the technology available today.

[Translation]

Mr. Jean-Guy Chrétien: So with a butter oil which is imported, we could potentially make real butter, ice cream—of course— cheese, yogurt, or almost anything?

[English]

Mr. John Core: We understand it can be separated with the technology that's there, and once it's separated it could go anywhere.

[Translation]

Mr. Jean-Guy Chrétien: Well, my friends...

[English]

The Chairman: Mr. Chrétien, Mr. Kubesh would also like to respond to that.

Mr. Donald Kubesh: Very quickly, it can be done, in my understanding, but to do it would be against the law. We have jurisprudence from the Federal Court of Canada that says you can't do it. Nobody is doing it, and nobody would do it, because it's against the law. That's the end of the matter.

[Translation]

Mr. Jean-Guy Chrétien: I am very pleased to see what a law- abiding man you are. If my fears are ever realized, supply management in the dairy industry would be seriously jeopardized. Our dairy producers would be forced to consider new ways of making a living, or to go on welfare. There's nothing complicated about this, it is going to happen. And I see you nodding over there, which is very worrying indeed. Mr. Chairman, the matter of butter oil imports is much more worrying than I thought when we first brought up the issue at the steering committee.

I think it is urgent that our committee meet next week. I would invite the Canadian dairy farmers to shake things up, because in this day and age a six-month period is roughly equivalent to a 20-year period at the turn of the century. So let's get on with it, because we are going to lose our supply management in the dairy industry.

Thank you, Mr. Chairman.

The Chairman: Mr. Coderre.

Mr. Denis Coderre: Thank you, Mr. Chairman. I would like someone from the government side to quickly tell me whether signing the Uruguay Round agreement really gave us the best we could get, and really succeeded in protecting Canada's dairy farmers from a supply management standpoint.

[English]

Mr. Mike Gifford: Yes, I think I can give that assurance. It was our considered judgment, in consultation with the advice of the agriculture and food members, that what we did in terms of protecting supply management was the maximum that could be accomplished given our international rights and obligations.

[Translation]

Mr. Denis Coderre: In that case, would changing the classification have a direct effect on other dairy products, and are we basically trying to win a battle when we should perhaps try to win the war? Would saying that we are going to specifically address the issue of butter oil have an impact on the other products and truly result in an economic disaster for dairy producers?

[English]

Mr. Mike Gifford: If Canada unilaterally changed its tariff classification to include this mixture under a tariff rate quota, in theory the other countries would have to take their case to a WTO dispute-settlement body as WTO members. In the past, before the rule of law did govern agricultural trade, there were cases where governments simply acted unilaterally, outside of the rule of law.

I think it is perhaps a point worth mentioning that we are able to defend our supply management system before NAFTA and now in the WTO because our trading partners are signatories to contractual trade agreements. It's that rule of law that gives us a defence against economic superpowers. The trouble is that if we act outside of the law, we leave ourselves extremely vulnerable.

[Translation]

Mr. Denis Coderre: In the context of the question that I have asked, I would like to ask one question of the dairy producers. When we talk about salvaging what we can, I agree with my friends Mr. Chrétien and Mr. Bachand that we must save our dairy producers, but we also have to be realistic.

• 1110

So shouldn't dairy producers act on this opportunity and also become butter oil producers, because we are talking about melted butter? Mr. Jarvis, since you get your butter oil elsewhere, would you be prepared to buy the butter oil produced here?

[English]

Mr. John Core: I don't think there's any question that we have lots of primary processes in this country. So if there were a demand for a butter oil/sugar mixture, they could produce it domestically. The question here is an issue of price.

Quite frankly, the ice cream manufacturers would prefer to use cream. That's their preferred choice in the manufacture of ice cream. The only reason they're using the butter oil/sugar blend is that they've mentioned it is $1 per kilogram cheaper for butterfat.

It's a price issue. It's not a—

Mr. Denis Coderre: Did you consider producing it?

Mr. John Core: Oh, we'll produce it, but we'll price it domestically.

Mr. Denis Coderre: Would you be ready to do so?

Mr. John Core: At domestic price.

Mr. Denis Coderre: Mr. Jarvis, we might have a deal here.

A voice: When?

Mr. Don Jarvis: Mr. Coderre, when the domestic price is competitive with the price at which we can legally obtain a product elsewhere, then we would purchase that product.

Mrs. Rose-Marie Ur (Lambton—Kent—Middlesex, Lib.): I'll just start with that end point, where you can obtain it legally priced. I am a past small business person, and the bottom line is dollars. But to me as a consumer I also think quality ranks as a top priority, and I think we should be looking at that.

With respect to that same question, you stated earlier that you're stockpiling. Why are you stockpiling?

Mr. Don Jarvis: I'll answer the last question first. I think “stockpiling” is an ill-advised word. What happens is that you—

Mrs. Rose-Marie Ur: But you used it.

Mr. Don Jarvis: —purchase the product in quantity; that's all. You also make your purchases based on changes in world price. You purchase on the basis of a number of factors, and that's why you buy in quantity.

Right now we're at the end of 1997, so we pretty well know how much we're going to buy in 1997, how much we have in place now, and how much will be used.

Mrs. Rose-Marie Ur: When I hear the word “stockpile”...it's something down the road that may happen and you're trying to circumvent a situation that you may foresee is coming. It's not so much what your product may require.

Mr. Don Jarvis: I don't think that's the case in this situation.

On the other point of quality, I don't think there's a quality issue here.

Mrs. Rose-Marie Ur: Can I just interrupt there? I'm really concerned about that, because my honourable colleague from the Bloc raised a most interesting question that never crossed my mind until this morning when he spoke regarding the rBST.

Farmers in my riding are mixed on that emotion. What is your percentage then from the imports from the U.S.A. on this product? The U.S.A. uses rBST.

Mr. Don Jarvis: I can only speak specifically with respect to Good Humour-Breyers, and they are not using a blend imported from the U.S.A. They're using a blend imported from New Zealand.

Mrs. Rose-Marie Ur: What about other companies then?

Mr. Don Jarvis: I can't speak for other companies.

Mrs. Rose-Marie Ur: Mr. Gifford.

Mr. Mike Gifford: On the basis of 1997 imports, imports by volume from the United States accounted for 6%, those from New Zealand 52%, those from Mexico—which we assume to be largely oceanic products—30%, and those from the European Union 12%. Basically the United States dropped from 82% in 1996 to 6% in 1997. There's been a shift away from the United States to presumably lower-cost supplies.

Mrs. Rose-Marie Ur: I think it's been stated quite frequently around the table that the dairy farmers want to increase the tariff. I don't think that's the question here at all. It's been stated by the officials there time and time again. I don't think that's the point here.

I'll give my time to Mr. Core. He wanted to respond and he didn't have time. Being the kind person I am, Mr. Core, I will let you respond and take my time.

He's a constituent.

• 1115

Some hon. members: Oh, oh!

Mr. John Core: Thank you, Rose-Marie, but I believe Mr. Doyle did respond to that question in his subsequent answer.

The Chairman: Do the Dairy Farmers of Canada agree with the monetary figures of loss that were given here early in Mr. Kubesh's presentation? He was saying $23 million.

Mr. John Core: From the perspective of the actual butterfat, it's in the range of $20 million to $30 million. When we reduce our quotas as a result of having less butterfat, we also have less total solids to produce because we reduce our quotas. When you add the value of the solids and the value of the butterfat that's no longer part of the domestic market, it's closer to $50 million to $55 million.

So we're not disagreeing with Mr. Kubesh's specific comment on the butterfat, but we reduce our quotas globally, so that's all milk constituents, which brings us up to the $50 million to $55 million mark.

The Chairman: The final questioner is Mr. Bonwick.

Mr. Larry McCormick: I have a point of order, Mr. Chair.

I am in favour of the dairy farmers in this country because this 2.5% or 3% cut in the quota amounts to $2 million less being spent in my riding.

Did Mr. Core want the opportunity to answer my question about whether this legal document would be available for myself to read?

The Chairman: How about for the committee?

Mr. Larry McCormick: Fine. Thank you.

The Chairman: The request has been made to table your document to the committee.

Mr. John Core: Mr. Chairman, we can give you extracts of the document. The problem with it is that when the minister asked us to bring forth the document, we actually created the legal case that would be taken to the CITT if in fact the Government of Canada acted. If I were to table that CITT case now, that's long ahead of when a CITT panel would be held and it might change the way you could argue at the CITT hearing.

We're quite prepared to give you the sections that refer specifically to this issue surrounding the NAFTA panel arguments. I have some selected pages of it and we'll provide that to the committee members.

The Chairman: Is that document considered a public document yet, or is it still private?

Mr. John Core: It's on a confidential basis.

The Chairman: It's a confidential document right now, but you can give us the general arguments you've used?

Mr. John Core: Some excerpts from it, yes.

The Chairman: Could you provide the committee with that information then?

Mr. John Core: Yes, we will.

The Chairman: Mr. Bonwick.

Mr. Paul Bonwick (Simcoe—Grey, Lib.): Thank you, Mr. Chair.

This question is more for clarification of Mr. Coderre's question to Mr. Gifford. I don't think you answered it clearly, and maybe the rest of the committee didn't understand your answer either.

Are you suggesting that if reclassification did take place it would jeopardize the entire agreement in the strict sense of the law? Please don't use the argument that other countries will step outside the legal bounds. To me, this is a shallow threat and it's fearmongering to suggest that they may align themselves and step out of the legal text and say it compromises. In the strict legal sense, does it compromise the entire agreement based on reclassification simply of this?

Mr. Mike Gifford: There are two processes. One, which is based in Canadian law and backed up by international law, is how National Revenue should classify a product. Under Canadian statute, that department is required to classify products according to certain procedures. That decision is challengeable before the Canadian Import Tribunal by dairy producers. Rather than taking three to four years, three to six months has been suggested by National Revenue as being the appropriate time period. National Revenue simply administers the customs tariff. It makes decisions on classification.

On a policy issue, the Department of Finance and other government departments need to take a decision. Are we prepared to increase protection on this blend if National Revenue concludes it is appropriately classified and the government nevertheless wants to take import protection? Our only avenue under the WTO is to do it under article 28, which is to basically increase tariff protection and pay compensation to other countries. That works for everybody except the United States. We are obligated under the terms of NAFTA to give duty-free entry to the United States for this blend as it's currently classified.

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Mr. Paul Bonwick: I don't know that I'm getting a clear answer on this. I may be missing it. Is this specific going to jeopardize the entire agreement? It's a yes or a no. Does it impact the entire agreement or not? It's very simple.

Mr. Mike Gifford: If the government acts outside our international obligations, there will be consequences, as our colleagues from Finance have suggested.

Mr. Paul Bonwick: So you're suggesting that it could compromise the entire agreement legally.

Mr. Mike Gifford: Which? The entire Uruguay Round agreement?

Mr. Paul Bonwick: Yes.

Mr. Mike Gifford: It doesn't compromise the entire agreement, but certainly you leave yourself open to challenge and counteraction—

Mr. Paul Bonwick: On that specific.

Mr. Mike Gifford: —on that specific issue.

Mr. Paul Bonwick: That was the answer I was looking for. Thank you.

The Chairman: Mr. Coderre would like to have a small....

[Translation]

Mr. Denis Coderre: I agree with my colleague from Frontenac that we must also examine the issue of health.

In conclusion, I have a question on the composition of ice cream. The Department of Agriculture and Agrifood has very strict standards for making ice cream. Does using this new mix of butter oil and sugar, which is made up of sugar for the most part, have an impact on the actual composition of the ice cream? And finally, has Agriculture Canada been monitoring the making of ice cream more closely since using this mixture has become so commonplace?

[English]

Mr. Mike Gifford: Mr. Chairman, as has been mentioned previously, the definition of what constitutes an ice cream is in the Health Canada regulations. Agriculture Canada, now the Food Inspection Agency, is responsible for monitoring and ensuring the quality of dairy products as they're manufactured in Canada, so once a product enters Canada and goes into an ice cream factory, it will be subject to inspection by the Canadian Food Inspection Agency.

I think, as has been pointed out but perhaps has been forgotten, there is a differentiated market for ice cream in Canada. There are quality ice creams, which are sold at relatively high prices; the manufacturers of those ice creams would simply not use anything less than pure cream and it would be fresh cream. This product is entering, as far as we can ascertain, the so-called low end of the market; these are ice creams that basically a supermarket would have on special at a low price. In the past, prior to the introduction of this particular mixture, those kinds of ice creams were never made from fresh milk but from milk powders and other alternative sources.

So there is a differentiated market for ice cream in Canada, with the top end continuing to use fresh milk and fresh cream and the bottom end using all kinds of combinations and mixtures of powders, butter oil, sugar, and God knows what else. They are all consistent with the definition of ice cream as defined by Health Canada.

The Chairman: Mr. Harvard would like one final question.

Mr. Bonwick, what was your point of order?

Mr. Paul Bonwick: My point of order was with regard to my final question. I just wanted to make sure what Mr. Gifford said was clear on the record. He stated that in his opinion reclassification or correction of an error would not compromise any other aspects of the agreement, that it was open to challenge only on this specific.

The Chairman: Thank you.

Mr. John Harvard: Thanks, Mr. Chairman. I'll try to make this extremely short. The question is for Mr. Core.

Mr. Core, I'm seeking clarification. I think this session has been quite informative for us. I need your help on this one point.

It's not unusual for products, whether they're inside supply management or outside supply management, to come in various forms and have various standards of quality. It appears in this case that you people, the dairy farmers, would prefer to serve the upper end of the market and you've chosen for whatever reason not to serve the low end of the market.

We've been told by Mr. Gifford that just in the last year—I suppose it's price-driven—imports of these blends from the United States have dropped from a high of over 80% to 6%. If you were to choose as an industry, as dairy farmers, to serve this so-called low end of the market...I guess there are two questions. One, why don't you do it? Two, could you not just beat the New Zealanders or the Mexicans?

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Mr. John Core: Your question goes to the heart of whether or not this government continues to support supply management in this country. It is government policy, as I understand it, to be supportive of supply management. With that support comes a commitment by government to enforce the tariffs that have been negotiated at the border.

Mr. John Harvard: I think I understand that, Mr. Core. I want to know why the farmers—notwithstanding supply management, and I am a supporter of supply management—why as an industry you do not just take on those imports and grab the business for yourself?

Mr. John Core: Because if you continue to design products to circumvent the border protection, ultimately you reach the point where you conclude that if everything is competitive with the United States because nobody wants to enforce the border restrictions, we'll have to reduce all our prices to the American prices. If you carry that argument to its end, you simply abandon your support for supply management.

As part of supply management the government has said that if Canadian producers will practice supply control, the Government of Canada will give two things back in supply management. First, they'll give you border protection, as negotiated at the WTO—we're asking for no more and no less than what was negotiated—and secondly, they will give us an opportunity to have domestic price product in Canada. That was the commitment of the Government of Canada. We're quite prepared to supply the butter for these low-quality ice creams that we were providing in the past. The only reason processors are not using the butter is that it is priced domestically. They have circumvented those import restrictions and have put in place a product that is $1 a kilogram cheaper.

I'll ask you this question. Who owns the ice cream industry in Canada today? If the dairy farms in our country supply the butterfat for ice cream, those profits accrue to the Canadian dairy industry. The major ice cream companies in this country are now owned by two foreign companies. Where do the profits go if they are able to make another few cents a litre on ice cream? They leave Canada.

Who are we here defending, the Canadian dairy industry or foreign ownership of companies that own the Canadian ice cream industry? I think it is a simple question.

The Chairman: Thank you.

Thank you all for coming this morning. It was an information session and a lot of information has been gathered. I think we will have to study the transcript and wait on Revenue Canada's decision on the request of the Dairy Farmers of Canada.

Thank you all. We may see you in the future.

This meeting stands adjourned to the call of the chair.