AGRI Committee Meeting

37th PARLIAMENT, 2nd SESSION

Standing Committee on Agriculture and Agri-Food

EVIDENCE

CONTENTS

Thursday, April 10, 2003

Á

1110

The Chair (Mr. Paul Steckle (Huron—Bruce, Lib.))

Mr. Rory McAlpine (Director General, International Trade Policy Directorate, Department of Agriculture and Agri-Food)

The Chair

Mr. Rory McAlpine

Á

1115

Mrs. Andrea Lyon (Director, Tariffs and Market Access Division, Department of Foreign Affairs and International Trade)

Á

1120

The Chair

Mr. David Anderson (Cypress Hills—Grasslands, Canadian Alliance)

Mr. Rory McAlpine

Á

1125

Mr. David Anderson

Mr. Rory McAlpine

Mr. David Anderson

Mr. Rory McAlpine

Mr. David Anderson

Mr. Rory McAlpine

Á

1130

The Chair

Mr. Louis Plamondon (Bas-Richelieu—Nicolet—Bécancour, BQ)

Mr. Rory McAlpine

Mr. Louis Plamondon

Mr. Rory McAlpine

Mrs. Andrea Lyon

Á

1135

Mr. Louis Plamondon

Mrs. Andrea Lyon

Mr. Louis Plamondon

Mrs. Andrea Lyon

The Chair

Mrs. Rose-Marie Ur (Lambton—Kent—Middlesex, Lib.)

Mr. Rory McAlpine

Á

1140

Mr. Mike Jordan (Director General, Trade Policy and Interpretation Directorate, Customs Branch, Canada Customs and Revenue Agency)

Mrs. Rose-Marie Ur

Mr. Mike Jordan

Mr. Ignatius Leron (Manager, International Nomenclature Development Unit, Customs Branch, Canada Customs and Revenue Agency)

Mrs. Rose-Marie Ur

Mr. Rory McAlpine

Mrs. Rose-Marie Ur

Mr. Rory McAlpine

Mrs. Rose-Marie Ur

The Chair

Á

1145

Mr. Rory McAlpine

The Chair

Mr. David Anderson

The Chair

Mr. David Anderson

The Chair

Mrs. Andrea Lyon

The Chair

Mr. David Anderson

Mr. Rory McAlpine

Mr. David Anderson

Á

1150

Mrs. Andrea Lyon

Mr. David Anderson

Mr. Rory McAlpine

The Chair

Mr. Louis Plamondon

Á

1155

Mrs. Andrea Lyon

Mr. Patrick Hines (Senior Economist, International Trade Policy Division, Department of Finance)

Mr. Louis Plamondon

Mr. Rory McAlpine

Mr. Ignatius Leron

Mr. Louis Plamondon

The Chair

Mr. Claude Duplain (Portneuf, Lib.)

Â

1200

Mr. Ignatius Leron

Mr. Claude Duplain

Mr. Ignatius Leron

Mr. Claude Duplain

Mr. Mike Jordan

Mr. Claude Duplain

Mr. Rory McAlpine

Mr. Claude Duplain

Â

1205

Mr. Rory McAlpine

Mr. Claude Duplain

Mr. Rory McAlpine

Mr. Claude Duplain

The Chair

Mr. Rory McAlpine

The Chair

Mr. Claude Duplain

The Chair

Mrs. Rose-Marie Ur

The Chair

Mrs. Rose-Marie Ur

The Chair

The Chair

Mr. Leo Bertoia (President, Dairy Farmers of Canada)

The Chair

Mr. Leo Bertoia

The Chair

Mr. Leo Bertoia

Â

1220

Â

1225

The Chair

Mr. David Anderson

Mr. Leo Bertoia

Mr. David Anderson

Â

1230

Mr. Leo Bertoia

Mr. David Anderson

Mr. Leo Bertoia

Mr. David Anderson

Mr. Richard Doyle (Executive Director, Dairy Farmers of Canada)

Mr. David Anderson

Mr. Richard Doyle

Mr. David Anderson

Mr. Leo Bertoia

Mr. David Anderson

Mr. Leo Bertoia

Mr. David Anderson

Mr. Richard Doyle

Mr. David Anderson

Mr. Richard Doyle

Â

1235

Mr. David Anderson

Mr. Richard Doyle

The Chair

Mr. Louis Plamondon

Mr. Richard Doyle

Â

1240

Mr. Louis Plamondon

Mr. Richard Doyle

Mr. Louis Plamondon

Mr. Richard Doyle

The Chair

Mr. Claude Duplain

Â

1245

Mr. Richard Doyle

Mr. Claude Duplain

Mr. Richard Doyle

Mr. Claude Duplain

Mr. Richard Doyle

Mr. Claude Duplain

Mr. Richard Doyle

Â

1250

The Chair

Mrs. Rose-Marie Ur

Mr. Richard Doyle

Mrs. Rose-Marie Ur

Mr. Richard Doyle

Mrs. Rose-Marie Ur

Mr. Richard Doyle

Mrs. Rose-Marie Ur

Mr. Richard Doyle

Mrs. Rose-Marie Ur

Mr. Richard Doyle

Mrs. Rose-Marie Ur

Mr. Richard Doyle

Â

1255

Mrs. Rose-Marie Ur

Mr. Richard Doyle

Mrs. Rose-Marie Ur

Mr. Richard Doyle

The Chair

Mr. David Anderson

Mr. Richard Doyle

Mr. David Anderson

Mr. Richard Doyle

The Chair

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CANADA

Standing Committee on Agriculture and Agri-Food

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NUMBER 026

l

2nd SESSION

l

37th PARLIAMENT

---

EVIDENCE

Thursday, April 10, 2003

[Recorded by Electronic Apparatus]

Á  (1110)  

[English]

    The Chair (Mr. Paul Steckle (Huron—Bruce, Lib.)): Order, please.

    Pursuant to Standing Order 108(2), this morning we want to look at the whole issue of importation of dairy substitutes, butter oil-sugar blends.

    We have two groups of witnesses this morning, first from the Department of Agriculture and Food, and then from the Canadian Dairy Farmers. We want to begin with the departmental people. We thank you for coming. We have with us this morning Rory McAlpine, Director General, International Trade Policy Directorate. We have also with us, from the Department of Foreign Affairs and International Trade, Andrea Lyon, director of the Tariffs and Market Access Division, from the Department of Finance, Patrick Hines, senior economist, International Trade Policy Division, and from the Canada Customs and Revenue Agency, Mike Jordan, Director General, Trade Policy and Interpretation Directorate, Customs Branch, and Ignatius Leron, manager, International Nomenclature Development Unit, Customs Branch.

    Your presentation is anticipated to be how long, Mr. McAlpine?

    Mr. Rory McAlpine (Director General, International Trade Policy Directorate, Department of Agriculture and Agri-Food): Ten minutes.

    The Chair: That's wonderful.

    Mr. McAlpine, you're leading off.

    Mr. Rory McAlpine: Thank you, Mr. Chair.

[Translation]

    The issue of butter oil/sugar blends is a complex one with broad economic, international and legal implications. For that reason, several federal government departments have been involved in this file for the past several years. As you already said, I am accompanied this morning by officials from three other departments involved in this file.

    The objective of our presentation today is to provide you with background information on imports of butter oil/sugar blends and to outline the history of the file.

[English]

    Butter oil-sugar blends are mixtures containing approximately 49% butter oil and 51% sugar. They are used to manufacture economy brands of ice cream. As you know, the dairy farmers have also raised some concerns about imports of other dairy products, such as flavoured milk and whey protein concentrates, but by far their biggest concern relates to the rules regarding the import of butter oil-sugar blends.

    I'd like to begin by emphasizing how important the multilateral rules-based system is to Canada. A trading environment based on the rule of law and not the rule of might provides smaller countries like Canada with the opportunity to compete with the big players, the United States and the European Union in particular. As you know, the international trading system has worked very well for the Canadian agricultural sector. Over the past 10 years Canada's exports of agricultural and food products have doubled from $13 billion to $26 billion. Because the international trading rules are so important to Canada, we've worked very hard to ensure that other countries respect those rules, and we challenge them when they don't. Of course, that means we're careful to ensure that we abide by the rules ourselves.

    I'd like to explain to you the rules concerning the import of butter oil-sugar blends into Canada. Butter oil-sugar blends have never been subject to import restriction in Canada, so during the conversion of diary import quotas to tariff rate quotas in 1994, under the World Trade Organization agreement on agriculture, Canada did not apply a TRQ to those blends. At the time neither the government nor the Dairy Farmers of Canada, who were involved every step of the way during the Uruguay round, identified butter oil-sugar blends as a potential problem. However, shortly after 1994 imports of butter oil-sugar blends began to increase substantially, by 400%, from $2.6 million in 1994 to $18.7 million in 1997. The main suppliers of the product are New Zealand, the European Union, and Mexico. There are two reasons for this large increase. The principal reason Canadian ice cream manufacturers use imported butter oil-sugar blends is that the average cost of the butter fat in butter oil-sugar blends is significantly lower than the cost of butter fat purchased domestically. The other reason is that advances in technology made it easier for processors to use butter oil-sugar blends in the manufacture of ice cream.

    However, the use of butter oil-sugar blends has plateaued in Canada. Imports of these blends in 1997 were, as I said, $18.7 million, compared to $15.5 million in 2002. This was a volume equivalent of 8 million kilograms. According to the Dairy Farmers of Canada, the $15.5 million in imports translates into $27 million in lost sales for Canadian milk producers. This represents the difference between the import price of these products and the domestic price and compares to dairy farmers' total revenue of approximately $4 billion. The government has worked closely with the dairy farmers and has examined the issue of butter oil-sugar blends on several occasions over the past six years.

Á  (1115)  

[Translation]

    I will now give the floor to my colleague Andrea Lyon from the Department of Foreign Affairs and International Trade. She will describe the nature of these studies and their results.

[English]

    Mrs. Andrea Lyon (Director, Tariffs and Market Access Division, Department of Foreign Affairs and International Trade): Thank you, and good morning.

    It's important to recall that the dairy blends issue has been studied intensively over the years. The classification has been reviewed on a number of occasions by the competent domestic authority, Revenue Canada, as it was then known. As well, in 1997, in response to concerns from dairy producers, the government instructed the Canadian International Trade Tribunal, the CITT, to undertake an inquiry into the import of dairy blend products. The CITT examined the factors influencing the import of these products, the effect of these imports on the dairy processing and producing industry, and the legal, technical, regulatory, and commercial considerations relevant to treatment of imports. The tribunal was also asked to provide options for addressing any problems identified by the inquiry that would be consistent with Canada's international trade obligations. The CITT reported its findings to the government in 1998. I'll briefly summarize some of the key findings.

    First, as Mr. McAlpine pointed out, the factors influencing the import of dairy blends are cost savings, security of supply, competition in the ice cream industry, and certain technical benefits, such as a longer shelf life. The CITT anticipated that imports would continue to increase, although at a lower rate. In fact, as Mr. McAlpine noted, annual imports have levelled off at about 8 million kilograms in recent years. The CITT estimated that the maximum penetration level of butter oil-sugar blends would be 25%, that is, the maximum proportion of domestic butter fat that could be replaced by the butter fat in butter oil-sugar blends. This is because there is a limited application for these products in the manufacture of ice cream. These imports are used in the production of economy brand ice creams. Imports are not suitable for use in the production of premium ice cream, nor for small local niche ice cream manufacturers. The CITT estimated that revenues forgone as a result of these imports range from $12.8 million to $30.9 million, representing between 0.3% and 0.8% of the dairy farmers' total revenues of $3.8 billion in 1997.

    The CITT also reviewed the full range of international rights and obligations under the NAFTA and the WTO, noting that the disciplines are now, as a result of these agreements, tighter, more transparent, and enforceable. Consequently, the CITT noted that the types of action available to the government are constrained. The CITT noted that “these same rules, which apply equally to all members of the WTO, provide dairy farmers with increased certainty and protection.”

    Following receipt of the CITT's report, the government announced in August 1998 that the Deputy Minister of National Revenue had asked the CITT to review the tariff classification of dairy blends. The CITT's report of 1999 confirmed that this classification was correct. The Dairy Farmers of Canada appealed this decision to the Federal Court of Canada, which dismissed the case. The Dairy Farmers of Canada did not appeal this decision to the Supreme Court.

    The import of dairy blends continues to be of concern to dairy farmers. In August 2002 Ministers Pettigrew and Vanclief agreed to establish a federal working group to examine this and a number of other dairy issues. This working group comprised officials from a number of different departments, the Department of Foreign Affairs and International Trade, Agriculture and Agri-Food Canada, Finance, Canada Customs and Revenue Agency, and the Canadian Food Inspection Agency. The working group met with the Dairy Farmers of Canada in November and December 2002. Ministers have also had a number of meetings with the Dairy Farmers of Canada.

    The issues reviewed by the group are very complex and have important trade, legal, and economic implications, including international commitments with our major trading partners. In this latter respect, Canada's market access obligations are the result of international trade negotiations, which included extensive consultations with all stakeholders, including dairy producers.

    As ministers have noted in the House of Commons, the government is carefully considering options and recommendations, including proposals from the Dairy Farmers of Canada, and will make decisions as quickly as possible.

    Thank you, Mr. Chairman, for the opportunity to share this information with the committee.

Á  (1120)  

    The Chair: Thank you very much, Ms. Lyon.

    Does anyone else have any comments before we go to questioning?

    This should be a very spirited discussion we're about to engage in. It's an issue that has not gone away for a long time and is not about to go away for a long time, the way it looks.

    Mr. Anderson, for seven minutes.

    Mr. David Anderson (Cypress Hills—Grasslands, Canadian Alliance): Thank you, Mr. Chairman.

    Thanks for coming today.

    I wanted to challenge one of the statements both of you made, that the imports under the system have stayed basically the same over the last few years at 8 million kilograms. The graph we've got shows imports of butter oil-sugar blends as 6.5 million in 1998, 6.3 million in 1999, 8.4 million in 2000, 8.8 million in 2001. Are my figures accurate or are yours?

    Mr. Rory McAlpine: I have here some import figures, and we'd be happy to share these with the committee. I think our figures are consistent. What we were referring to particularly was the value trend. The figures show a peak level of imports at $18.7 million in 1997, then dropping down, then coming up a little bit, then dropping down a bit in value. According to these figures, the peak in volume was 8.9 million kilograms in 2001. So it's really a question, I think, of whether we're looking at volume or value.

Á  (1125)  

    Mr. David Anderson: The concern of the dairy farmers is that they do see that increasing. Whether or not the value increases, the amount of material coming into the country is increasing, and that's a major concern for them.

    I wanted to ask your opinion on why this issue has persisted. You seem to be indicating that the government cannot or will not do anything about it. What needs to happen to change the situation? If the government is not going to change the situation, what are you offering as alternatives to producers?

    Mr. Rory McAlpine: What I would emphasize is the efforts that have gone into the consideration of the issue based on the commitment that the minister made last year and the very productive meetings that occurred with the dairy farmer representatives last fall, as I believe Minister Pettigrew emphasized in response to a question in the House yesterday. The issues before the government are certainly complex and entail a number of legal, economic, and international trade considerations and implications. It's those issues that have been dealt with by the working group and now rest with the ministers for decision. So the process has moved to this point, and I think that's what we can share with you today.

    Mr. David Anderson: It's taken six years now, it's been resting with government bureaucrats and officials, and they want to see some resolution to this. To say that it's going to the ministers and is going to sit there again for another indefinite amount of time is not satisfactory to them. If you say there are international and trade restrictions or situations that restrict our ability to change this situation, how are you going to change it, and what alternatives are you offering to producers? It's been six years, and we're continuing to talk about it.

    Mr. Rory McAlpine: The issues have been dealt with, and the final decision is a prerogative of the ministers. We could perhaps help in sharing more information. As my colleague Andrea Lyon has explained, there have been several steps taken over the last six years, the work of the CITT, then a court process, and there are other aspects to the issue inolving the options with respect to amendments to tariff classification. We can certainly elaborate on any of those issues, so that the committee has a full understanding of all the aspects, but I'm not in a position to speculate on what ministers may decide to do.

    Mr. David Anderson: There has been a massive amount of time and energy put into this, but it hasn't made a difference for the producers at their level, and it needs to.

    Do you see this as being a bigger problem in the future? The technology is developing, there is more and more use for some of these products and an ability to use them and bring them in under those restrictions.

    Mr. Rory McAlpine: With respect to the butter oil-sugarblends issue specifically, we've discussed the import trends in respect of value as compared to volume. One fact I can note on this point is that there is concern in the dairy industry that there could be in future increasing imports of butter-sugar blends, which could go into the manufacture of premium brands of ice cream. If that were to occur, it obviously would be another significant element, but at this time we don't see that happening. I believe the dairy farmers will be before the committee, and they may want to explain that.

    There are other issues that you may be aware the working group has addressed, based on concerns the dairy farmers have identified beyond the butter oil-sugar blends issue. I believe you've had information on some of the other issues, the other dairy substitutes, pizza kits, standards and labelling. Those issues are relevant to the broader question of imports of products dairy farmers are concerned about, but just with respect to the butter oil-sugar blends, I don't think we have any new information now to suggest that on that issue alone there is a significant indication of rapidly growing imports.

Á  (1130)  

    The Chair: Mr. Anderson, your time has expired. We'll come back to you in a moment.

    Mr. Plamondon, for seven minutes.

[Translation]

    Mr. Louis Plamondon (Bas-Richelieu—Nicolet—Bécancour, BQ): Thank you, Mr. Chairman.

    From your presentation, I understood that if there was a decision to make, it would be a political one, and it would therefore fall to the minister to follow up on your recommendations. In fact, an interdepartmental committee was struck last August, and after study and consultation, you say that you submitted a report to the minister. Can you give us a summary of the recommendations you made to the minister?

    Mr. Rory McAlpine: Thank you for the question, Mr. Chairman. We are not in a position to share the recommendations with you, since it is a confidential matter. The advice provided to the minister by officials is confidential. We are therefore not in a position to tell you.

    Mr. Louis Plamondon: I expected that answer, sir, but there is always a rumour after recommendations are made and according to one of these rumours, there are three options, including going back before the tribunal, which is not the preferred option of dairy producers.

    According to another rumour, the safeguard measures contained in the WTO's Agricultural Agreement would be applied. This means that a temporary tariff would be imposed and once the problem is solved, we would revert to the former regulations. I think those are the safeguard measures.

    Have you often appeared before the tribunal to ask that safeguard measures be applied? How often did you win your case?

    Mr. Rory McAlpine: Mr. Chairman, perhaps I could ask my colleagues, beginning with Andrea Lyon, to explain the concept of safeguards. I would also ask my colleague Mr. Jordan to explain another aspect of the matter, namely the process involving the tribunal inquiry.

[English]

    Mrs. Andrea Lyon: There is provision in international law and with our international trade obligations under the World Trade Organization to take global safeguard action. This would be following an enquiry by the competent domestic authority, in this case the Canadian International Trade Tribunal, which would undertake an examination to determine whether or not imports were causing serious injury to domestic producers. The procedure for the CITT investigation is set out in legislation. I believe the time limit for conducting an investigation initiated by producers is 180 days. At the conclusion of the investigation the CITT would make recommendations to the government on the action necessary to remedy the serious injury. If they do make a positive determination of serious injury, it's then up to the government to determine what action would be necessary.

    The WTO procedures also indicate that this safeguard action can be taken for a period of up to four years. It can be extended for an additional four years if it is determined that the serious injury continues to exist. If the safeguard action is in place for a period greater than three years, the country that takes the safeguard action is required to provide compensation to those countries whose imports are affected by the safeguard action. That would summarize the safeguard process.

Á  (1135)  

[Translation]

    Mr. Louis Plamondon: Thank you. I am surprised by Canada's attitude: it seems that we are walking on eggshells, afraid to upset anyone.

    Last March 6, the American Congress tabled Bill 1160 to establish new tariff quotas for casein and dairy concentrates and proteins.

    Is the American tariff system more flexible than the Canadian one, which would mean that they can make changes more easily, or is there another reason why we always seem to be walking on eggshells?

[English]

    Mrs. Andrea Lyon: Indeed, there has been legislation introduced at various stages of the congressional process to apply new tariff rate quotas on the products you mention. There are many pieces of legislation that are introduced in Congress, and as you know, not all of them end up becoming law, and this is the case with this particular piece of legislation. My understanding is that a similar piece of legislation was introduced in the previous Congress, but it did not proceed past the committee stage. My understanding is that this particular piece of legislation was introduced in January and has not at this point proceeded any further. The United States, like Canada, would need to go through various procedural steps to ensure that it complies with both its domestic obligations and its international obligations were it to proceed with this piece of legislation.

[Translation]

    Mr. Louis Plamondon: Therefore, in your opinion, given past experience, Bill 1160, which was tabled in Congress, will not pass.

[English]

    Mrs. Andrea Lyon: I can't predict what the U.S. Congress will do, I can just report on what's happened with previous efforts to pass legislation of this kind.

    The Chair: Thank you.

    Ms. Ur.

    Mrs. Rose-Marie Ur (Lambton—Kent—Middlesex, Lib.): Thank you, Mr. Chair.

    I can't believe we're still at this table discussing this subject after this many years. I thought we were a little more aggressive in resolving some of these matters. There are enough problems in the industry, and we're adding to their problems. I really feel badly that we're still here.

    The department of the day was Revenue Canada, and they confirmed that butter oil-sugar was classified under tariff item 2106.90.95. Therefore, the product could be imported without an import licence and was not subject to a prohibitive tariff. It goes on to say in my article:

The problem posed by blends containing dairy products seems to be one of interpretation. When they go through customs, butter oil-sugar blends are considered not sufficiently dairy, and therefore not viewed as a butter substitute, but when they're mixed with ice cream, manufacturers are required to describe them as “milk components”.

A miracle happened here somewhere, because the bureaucrats, for tariff purposes, see this as not a form of butter oil, but somehow, once it's blended, it becomes dairy. Is the problem that so many departments are working on this that they can't understand where to put it? We need to get to this. I'm quite serious about this, it needs to be resolved.

    Mr. Rory McAlpine: I would first emphasize that we do have good interdepartmental coordination, particularly through this working group process. But I think I would turn to Mr. Jordan to comment on the technical aspects of the tariff classification.

Á  (1140)  

    Mr. Mike Jordan (Director General, Trade Policy and Interpretation Directorate, Customs Branch, Canada Customs and Revenue Agency): From a customs perspective, we must classify goods in their condition as imported. As mentioned, these goods are imported, and we must classify them at that time. We offered an opinion, as you rightly pointed out, and that opinion, based on the wording of the legislation--again, this is wording in legislation--went to the CITT and then to the Federal Court, and they upheld our decision.

    Mrs. Rose-Marie Ur: Apparently, the criterion in your department is that “such blends cannot be spread or caramelized when used as cooking fat. Therefore, despite their name, they are not a butter substitute”. Is that the only criterion you judge that on?

    Mr. Mike Jordan: I'll pass it to my colleague, who has more technical expertise.

    Mr. Ignatius Leron (Manager, International Nomenclature Development Unit, Customs Branch, Canada Customs and Revenue Agency): The decision is based on the interpretation of a tariff that provides for milk, cream, and butter substitutes, and everything hinges on the interpretation of “butter substitutes”. The term is not defined in the customs tariff, and as is usually the case in such instances, we refer to the common meaning of the word, the dictionary meaning of “butter substitutes”. We focused on the word substitute, and the common thread that seems to prevail in all the definitions is that we consider something a substitute of another if it has the ability to stand in place of another. Can butter oil-sugar blends be considered a substitute for butter? The decision we came to was that they are not; although they perform some of the functions of butter, they do not perform all. That was our interpretation, and that interpretation was confirmed by the Canadian International Trade Tribunal and the Federal Court.

    Mrs. Rose-Marie Ur: What have Agriculture Canada and International Trade recommended to the minister and the working group on this particular matter? What options are available?

    Mr. Rory McAlpine: The options that are being considered, as I mentioned earlier, are confidential recommendations to the ministers.

    Mrs. Rose-Marie Ur: How long have they been considered? When are we actually going to get to it? How long are we considering this?

    Mr. Rory McAlpine: The working group, as was explained, finished its work, and the recommendations were forwarded to ministers, so the matter rests with the ministers. I'm not in a position to speculate on the timing, but I think I can say ministers have been clear about intending to make decisions and announcements in the near future.

    Mrs. Rose-Marie Ur: I'll wait now till the second round.

    The Chair: Perhaps at this juncture I'll ask a question. Are butter oil-sugar blends an invention by design? Is this something totally new that the people, when they were negotiating these lines and the products on those lines, didn't anticipate? Is this something that has come into being since we've done the WTO, or what has happened here? If the Americans can have a bill claiming that there may be damage done by an import product under a tariff line that is, in their opinion, too low, why aren't we doing it? I guess the question remains, and it's been brought up by other members of the panel, why we are moving ever so slowly. Have we attempted to create another line where we would be able to take this into consideration? Farmers are asking the question, and this is the reason we're holding these hearings, to find some conclusion, a positive one, we hope, for the producing community.

Á  (1145)  

    Mr. Rory McAlpine: I believe there have been imports of butter oil-sugar blends since the 1980s, but at the time of the creation of the tariff rate quotas, there was no issue identified by either the government or the industry with respect to a need to particularly address butter oil-sugar imports.

    We've gone a bit this morning into the past process of inquiry by the CITT and the outcome, and you've heard an explanation of some of the technical considerations concerning the tariff classification CCRA is responsible for. But maybe it is important is to explain a bit more the international trade obligations, and perhaps Andrea Lyon could explain that.

    The Chair: I don't want to take away time from my colleagues. Mr. Anderson, do you want to get in right now? I don't want to take away from your time.

    Mr. David Anderson: I don't mind a short answer.

    The Chair: Okay, can you give us an answer? Perhaps it's appropriate that you respond to that question.

    Mr. David Anderson: Some of these answers are getting dragged out. I have a feeling they're putting us off here, but....

    The Chair: Okay, let's listen to the answer.

    Mrs. Andrea Lyon: I'll try to keep it concise.

    Essentially, as Rory pointed out previously, the product in question has been entering Canada freely since about the 1980s. Consequently, in the context of the Uruguay round, we did not subject it to import restrictions, as it had never been subject to import restrictions. It is a bound tariff. That means, were we to increase it, we would be obliged, under our international trade obligations, to notify the World Trade Organization and enter into negotiations with countries that would have a substantial interest in that product, the notion being that you must maintain an overall balance of concessions. Negotiations would be undertaken with the principal supplying countries to provide offsetting compensation. If there's no agreement on the level of compensation, the affected countries have retaliatory rights that can be exercised within a certain period of time. So there are a number of procedural steps that need to be entered into.

    The Chair: Thank you, Ms. Lyon.

    Mr. Anderson, five minutes.

    Mr. David Anderson: I'm going to follow-up on one area of that a bit. I'm wondering why we're so shy and cautious about being aggressive on some of these trade issues. We look at the EU and the U.S., and they have crossover programs in all kinds of agricultural sectors, things like their rural development programs, green cover programs, forage programs, school milk programs, food aid, and basically dumping food on a certain market to try to get rid of it, and they influence the market by that. Why aren't we more aggressive in challenging our competitors? They seem to be coming at us regularly, and I don't know that we've launched a challenge. If we have, we certainly haven't publicized it or let our producers know we're protecting them. Why are we sitting so quietly? You've got a couple of people here from the trade division who could answer that, I think.

    Mr. Rory McAlpine: Without elaborating too much, what is very important to Canada is respect for trade obligations by our trade partners. We could point to various incidents where we have taken that approach. But what's particularly important for us now is to address these measures, particularly the trade-distorting support and the market-access barriers, that negatively affect the Canadian agriculture sector through the WTO agriculture negotiations. As I'm sure the committee knows very well, we have a considerable amount of effort in place to negotiate much better rules and level the international playing field through that forum, recognizing, as I mentioned in my opening remarks, that as a relatively small player globally, Canada depends very much on the effectiveness of those multilateral rules.

    Mr. David Anderson: New Zealand is a small player as well, Mr. McAlpine, but they're willing to challenge us on the things where they feel we are in contravention. We sit and wait. The United States in many areas, it seems to me, has to be crossing over those programs. There have to be places where we can go in and say, you're subsidizing your producers, we're not doing that in our country, we expect you to stop that immediately. We're doing nothing. They've launched programs on malt exports, they're going after the wheat board, which some of us don't support, but don't think it's their place to change--we'll change it ourselves--but we sit and do nothing. I think it's time to get a lot more aggressive in these areas. Supply management is one of those sectors where we need to look at other countries, their dairy industries, and what they're doing. We have people here from Finance and Foreign Affairs and International Trade. I'd like to hear from them. I'm confident they have problems in their programs, and we can't find them. If we go to WTO, we're going to be there for years, the way the negotiations are going right now.

Á  (1150)  

    Mrs. Andrea Lyon: With respect to practices by our trading partners, as Mr. McAlpine pointed out, we certainly do support and uphold the principle of the rule of law. We seek to ensure that our trading partners likewise abide by those obligations they've entered into under the WTO, under the NAFTA, and under any other regional trade agreement we may have negotiated. We certainly scrutinize carefully the practices of our trading partners to ensure that they are in full compliance with their international trade obligations. I would just point out briefly that Minister Pettigrew issued yesterday Canada's international market access priorities report, which outlined the various trade policy priorities from a market access perspective the government will be pursuing over the course of the next year. That includes those measures that have been problematic from the Canadian perspective and we continue to examine.

    Mr. David Anderson: It's frustrating for producers, because we sit and watch the U.S. put up to $40 billion into rural development and agriculture programs, while our government is putting $2 billion into it. Supposedly, theirs is all green, that is what you're saying, and we find that with $2 billion, some of it's yellow and people are able to challenge us. They have a myriad of programs, and we don't challenge any of them. I find it hard to believe every one of their programs is free of these problems.

    I'd like to go back to this technology and trade thing. It's a big issue, and it's going to get bigger. We've already seen it with GM products, the trade restrictions that come out of that. GMO wheat, we're in a discussion on that. There are changes in milling technology in wheat, changes in the dairy technology as well. Are we prepared to deal with the collision that's taking place between technology and the trade issues? Are we ready for that in the negotiations? Are we ready for that in our country as well?

    Mr. Rory McAlpine: I think these are very important points. It's certainly the case that changing technology, changing consumer attitudes, changing environmental measures, and so on are very much having an impact on agricultural trade and the ability to gain access to markets. The government has been doing a number of things in these areas from the perspective of both the regulatory agencies, such as CFIA, that deal with these issues and Agriculture and Agri-Food Canada, Health Canada, and so on.

    The so-called technical barriers to trade are subject to disciplines under the WTO agreements, be they traditional technical barriers or sanitary and phytosanitary measures. Canada is a very active player in all the issues that are being addressed in those committees, as well as in a number of multilateral fora, such as the Codex Alimentarius, which sets the standards related to food safety, quality, labelling, and these sorts of things.

    As the committee knows, under the agriculture policy framework there is an important new thrust Canada is embarking on to raise the bar with respect to standards for food safety, quality, innovation, and environment. We will be building on that in our international efforts to try to achieve better market access where these sorts of technical trade barriers arise.

    That's just to speak of the technical issues, but the government is seized of the matter and has put considerable new effort into addressing those challenges.

    The Chair: Thank you.

    Mr. Plamondon, five minutes.

[Translation]

    Mr. Louis Plamondon: But there is something which I do not quite understand. When you classified these blends, you said that they are dairy products because they cannot be spread. However, the Fédération des producteurs de lait du Québec met yesterday. The parliamentary secretary was offered a product which came from Ireland and which was very spreadable. The product came into the country easily. We asked the parliamentary secretary whether he wanted to taste this product, but we told him to watch it, because we could not guarantee that it had cleared the usual safety standards. He refused to eat it and can tell you so himself. So, as you see, our border is very open, too open. Something is not right.

    There is another issue. When they cross the border, these products are not considered as being butter substitutes. However, once they are sold in our country, their label has to read "dairy product". When they clear customs, they are not dairy products, but when they are sold, they are. That has got to change.

    I know that one of your options are safeguard actions. When I was asking questions a little earlier, I asked you whether Canada had already applied safeguard measures and, if so, how often it had won its case. I did not receive an answer to that part of my question.

Á  (1155)  

[English]

    Mrs. Andrea Lyon: My apologies. The answer is that safeguard actions have been taken, I believe, on two occasions of late, on boneless beef back in the early 1990s and more recently on steel. With boneless beef, I believe there was a serious injury finding. On steel, I'm not sure if my colleague from Finance wants to comment.

    Mr. Patrick Hines (Senior Economist, International Trade Policy Division, Department of Finance): It's ongoing.

[Translation]

    Mr. Louis Plamondon: With regard to the first part of my question, how do you explain that when the products cross the border they are not considered dairy products, but when they are sold, their label must read "dairy product"? Why do they suddenly become dairy products once they are in the country?

[English]

    Mr. Rory McAlpine: I think we can say it is considered a dairy product, but it's a question of tariff classification. I think I should ask my colleagues from CCRA if they want to address that issue.

    Mr. Ignatius Leron: As Mr. Jordan explained earlier on, a determination is made at the time of importation. We classify goods when they enter the country. In this case, what happens subsequent to importation is not a consideration. Again, I must emphasize that our job is to interpret the legislation as written, and it is on that basis that at the time of importation we make that intervention.

[Translation]

    Mr. Louis Plamondon: I will quickly conclude by asking you if, tomorrow morning, for breakfast, you would eat the spread which Mr. Duplain refused to eat yesterday?

[English]

    The Chair: Thank you, Mr.Plamondon.

    We'll now move to Mr. Duplain for five minutes.

[Translation]

    Mr. Claude Duplain (Portneuf, Lib.): I would just like to add that, as a consumer, when you talk about serious injury, indeed, the product spreads easily. When I saw the crap they add to ice cream, I felt that serious injury had been done to me, the consumer. I have been eating ice cream for a long time, but I will not eat any more and would tell all consumers not to eat ice cream made with that product.

    I will get back to my questions. I was not here in 1990, but at that time representatives from the Canada Customs and Revenue Agency said that the agency was closely monitoring the imports of these blends.

    How often are butter oil imports monitored to ensure they are within the standards? Are tests carried out frequently and if so, how often? As well, have you ever rejected any blends which did not respect the 50% limit?

  (1200)  

[English]

    Mr. Ignatius Leron: Could you repeat the question, please?

[Translation]

    Mr. Claude Duplain: I have notes which say that in the 1990s, the Canada Customs and Revenue Agency said that it was closely monitoring the imports of these blends. My question is as follows: how often did the agency test the butter oil products imported under tariff line 2106.90.95 to ensure they respected the standards? Further, have you ever rejected any blends which exceeded the 50% butter oil threshold?

[English]

    Mr. Ignatius Leron: If I do understand you correctly, we do monitor imports, and to the best of our knowledge, we have not rejected any import of that product.

[Translation]

    Mr. Claude Duplain: How often are the products tested?

    Mr. Mike Jordan: We do not have that information with us. I do not have those figures. I do not know if I can get them, but I will try.

    Mr. Claude Duplain: Over the last few years, have other products, which we could more or less qualify as dairy products, such as butter oils, been specially designed to circumvent tariff lines?

    We get the impression that this butter oil was specifically created to circumvent tariff lines. This product never existed before. At a certain point, restrictions were imposed, but suddenly a new product appeared. However, given today's technology, many more such products will be developed.

    Do you think that other such products may enter our market and replace dairy products?

[English]

    Mr. Rory McAlpine: Certainly, these sorts of issues arise. I think we can find examples in many countries where there have been tariff restrictions in place. It's been the case often that private sector traders try to find ways to circumvent those rules through different types of product mixtures and so on. That's a reality that Canada has faced with measures other countries have in place. It's always a concern and a challenge for customs administrators and for departments of finance that are establishing tariff classifications to keep up with technological change and products composed in a way that may have the effect of circumventing a measure. As I mentioned, the process we've gone through has so far been one that has taken into account those sorts of issues through the CITT inquiry. Again, to emphasize, any decisions are always based on the concerns as expressed by industry. At the time Canada created these tariff quotas in 1994, these particular issues were not identified. I think that's the best explanation I can provide.

[Translation]

    Mr. Claude Duplain: I have a final question. When there is a problem—and I do believe that dairy producers have a problem—the longer you wait to solve it, the greater the damage.

    You were on a committee which made some recommendations. When you made your recommendations, you surely studied all potential repercussions. Today, in 2003, if we changed the tariff line and included a special tariff line to prevent these products from entering the country, what repercussions would there be abroad and domestically if these products were prevented from crossing the border? Did you analyze this situation?

  (1205)  

    Mr. Rory McAlpine: I just want to clarify one thing. Are you talking about the economic impact?

    Mr. Claude Duplain: I am referring to the economic impact and the socio-economic impact which would occur if these products were prevented from entering Canada.

    Mr. Rory McAlpine: There are several aspects to the issue, but I would like to highlight one in particular. There would certainly be repercussions for the processors or manufacturers of ice cream, which currently use these imported products. It would definitely affect their production costs. Therefore, if they cannot import these products any more, their production costs will be affected and the impact will ultimately be felt by consumers.

    Mr. Claude Duplain: Have you calculated the impact such a measure would have on consumers?

[English]

    The Chair: Our time is done. Do you have a final comment, Mr. McAlpine?

[Translation]

    Mr. Rory McAlpine: We don't have any figures for that. Perhaps we can find more information with regard to that issue, and I would suggest that industry representatives explain their point of view on the matter and on how production costs would be affected.

[English]

    The Chair: We'll conclude with those comments. We'll be speaking to the industry in a moment, and we'll probably be hearing some of the responses you've just suggested we might hear.

    Mr. Duplain, you have a point of order?

[Translation]

    Mr. Claude Duplain: Yes, I have a point of order. Because I feel this is an extremely important meeting and that we lost some time at the start, I was wondering whether we could not extend the meeting, because I know that Ms. Ur also had questions. If the room is still available, we could perhaps extend this meeting.

[English]

    The Chair: We have another group. We're meeting with the Dairy Farmers of Canada. In fairness to both parties, we want to divide the time. I've given more time to this group than I'm going to be giving to the other group. So we'll move on, unless you people have some pressing comments you want to leave with us before we conclude this meeting, or unless there's a pressing question a member wants to put before the panel.

    Ms. Ur.

    Mrs. Rose-Marie Ur: I had some questions that I guess we can send on to the witnesses.

    The Chair: The Dairy Farmers are here. I want to be fair to both parties.

    Mrs. Rose-Marie Ur: I'd like to make just one statement. The question was asked of CCRA what they were doing, the system they were using, whatever. There seems to be a lack of information on the process they were using to identify. I think it would be good for this committee to get some detail on what exactly that department does.

    The Chair: What we often find frustrating when we have you people coming here is that we seek from you direction and information, and often it's not forthcoming. We have a job to do, we have many issues that come before the table, and we need to use our time as wisely as possible. We would expect from you people at least the best information available, or at least to have it provided to the table shortly after the meeting has been called. This is a very serious issue, something that is likely not going to be resolved today, but something we're going to take very seriously towards finding a resolution, because we have to live with the consequences for both the producers and the further processors.

    Thank you very much for appearing this morning. We look forward to having you come before the committee again at some future time.

    At this time we'll ask the Dairy Farmers to take their places at the table so we can continue our discussions regarding this issue.

  (1210)  

---

  (1216)  

    The Chair: We'll begin our meeting again.

    Thank you for appearing again. This is something that has been frustrating for us as members of Parliament who represent rural constituencies, particularly dairy farmers, and for you who are representative of the dairy industry. We certainly want to resolve this, if not right now. At least, we need to put a conclusion to this as we go into the next round and conclude our WTO.

    We have with us today Richard Doyle, who is no stranger to this committee, the executive director of Dairy Farmers of Canada, and Leo Bertoia, who again comes as the president and also as no stranger here. Thank you for coming.

    Mr. Bertoia, are you the one who is going to speak?

    Mr. Leo Bertoia (President, Dairy Farmers of Canada): Yes, I will make the opening remarks.

    The Chair: Can we do it in 10 minutes or less?

    Mr. Leo Bertoia: I will do my best. I'm sure I can.

    The Chair: We want to conclude by one. If we have urgent issues, we may continue, but let's try to conclude by one.

    Mr. Leo Bertoia: Thank you, Mr. Chairman.

    I want to thank the committee for the opportunity to appear here today and discuss the issues of the butter oil-sugar blends. I think there have been examples passed around to show you exactly what the product is. It is a long-standing issue, and I would have to agree with some of the comments made earlier.

    I think it was in 1996 that Dairy Farmers of Canada became aware of this blend of 49% butter oil and 51% sugar being imported into Canada without restrictions. In 1997 we went before the International Trade Tribunal, and it examined the impact of these blends on the Canadian dairy industry. Also, in November we appeared before this committee. In 1999 the CITT issued a classification decision on the blends, after which Dairy Farmers of Canada took the issue to the Federal Court.

    In 2002 Minister Vanclief and Minister Pettigrew established a working group on dairy supply management to address producer concerns about the erosion of our markets. These ministers were unconditionally supportive and promised Canadian milk producers that this working group would find solutions to problems facing the Canadian dairy industry. Of course, the implication of butter oil-sugar blends was one of the many important issues discussed with the working group. At that time we were told we were to be made part of that working group. At the end of the discussions we were told we would not be part of the report, which left us with a very sour taste in our mouth. We were told the report would come forward in the very near future. We are still waiting for the results of that report. We were told it would be available in February, we were told it would be available in March, it is now April, and we still do not have the report.

    We believe action is needed now. Imports have grown by 557% since 1995 and already have replaced 25% to 30% of Canadian butter in the making of ice cream. This is far beyond the access to the ice cream market to which Canada was committed in the Uruguay round of the trade negotiations.

    The effect of the blends on primary processing in Canada is significant. In Canada 20,500 were employed in the primary processing sector in 2001-2002, and the import of blends is estimated to cost 328 jobs at this level. In addition, there is the loss of milk production, which is equivalent to 270 farms or more than 800 producers and farm workers. Ladies and gentlemen, this removes the province of Saskatchewan totally from milk production in Canada. The job loss resulting from imports of butter oil-sugar blends is more than 1,000. These blends have cost the Canadian dairy industry approximately $27 million in lost butter fat sales.

    What is more alarming is a recent trend of importing butter-sugar blends made from 49% butter and 51% sugar that are now more easily used to replace Canadian butter for ice cream and confectionery manufacturing--I think there's a label in your kit. These blends are poised to displace even more of the Canadian market for butter fat. If the current pattern continues, it will not be long before most of the ice cream market is lost to these imported blends.

    Butter oil-sugar blends are classified under the tariff item 2106.90.95, which is for “other preparations containing, in the dry state, over 10% by weight of milk solids but less than 50% by weight of dairy content”. Imports classified under this tariff item are subject to a low 8% rate of duty and not subject to tariff rate quotas. The problem is that the Canadian Customs and Revenue Agency is unable to properly classify these blends under a tariff item that is subject to a tariff rate quota, notably tariff items 2106.90.33-34, which are for “preparations containing more than 15% by weight of milk fat but less than 50% by weight of dairy content, suitable for use as butter substitutes”. The CCRA is unable to classify butter oil-sugar blends under this tariff item, because the blend is not currently considered suitable for use as a butter substitute, because it does not replace butter in all applications. The CCRA classification is based upon the determination that butter oil-sugar blends are not suitable as butter substitutes, because these blends can not be substituted for butter “in substantially all respects and substantially all conditions”.

  (1220)  

    This requirement that a product must be capable of replacing butter in all applications in order to be considered suitable for use as a butter substitute was created by the CCRA bureaucrats in the absence of legislative or ministerial direction to define it otherwise. In examining the butter oil-sugar blends issue, the CITT observed that the phrase “suitable for use as butter substitutes” exists in Canada's Custom's Tariff, but is not defined there. The phrase does not even appear in the explanatory notes or the classification decisions under the International Harmonized System for Customs Classification. In fact, there is no legal basis for requiring that a product must be suitable for use as a butter substitute in all or virtually all possible uses of butter in order for the product to be considered suitable for use as a butter substitute. CCRA bureaucrats are merely using their definition because they have not received direction to do otherwise.

    Despite CCRA's views of the matter, butter oil-sugar blends are currently being directly substituted for Canadian butter fat. This interpretation operates to undermine the integrity of Canada's dairy supply management system and the access commitments Canada made at the Uruguay round of trade negotiations. If the definition of “suitable for use as butter substitutes” were clarified by the government to include preparations suitable for use as a substitute for butter in one or more uses, the CCRA would have the direction it needs to properly classify butter oil-sugar blends under tariff items 2106.90.33-34.

    The Canadian government can make this change. It must be clarified that the phrase “suitable for use as butter substitutes”, as it is used in tariff headings, covers products such as butter oil-sugar blends that are being used as substitutes for butter in some products, regardless of whether the product is a substitute for butter in all uses. Two adjustments are necessary to achieve this. First, the description of goods in tariff items 2106.90.33-34 must be changed to read:

Preparations containing more than 15% by weight of milk fat but less than 50% by weight of dairy content, suitable for use as a substitute for butter in one or more of its uses within or over access commitments.

The Minister of Finance has the authority under section 13 of the Customs Tariff to amend by regulation the description of goods in a tariff item. Second, customs memorandum D10-18-4, which deals with the importation of agriculture products and the import control list, must be amended to reflect this clarification of the meaning of the phrase “suitable for use as butter substitutes”.

    During the working group meetings the Department of Finance officials suggested that section 13 of the Custom Tariffs is limited to the correction of typographical errors and does not provide the Minister of Finance with the power to make changes to the tariff item we have suggested. These officials indicated that pursuing our solution would be tantamount to the increasing rate of duty on tariff items 2106.90.33-34, something the minister does not have the power to do under section 13. Dairy Farmers of Canada provided the working group with a legal opinion confirming that amending the description of goods as per DFC's suggestion is within the purview of section 13 and that nothing in the language of section 13 limits the powers of the minister to correcting typographical errors. In fact, the Minister of Finance has used section 13 to introduce substantial non-typographical amendments to the description of goods for tariff items. In at least one case these amendments have altered the subsequent tariff clarification and treatment of goods. This legal opinion has been provided to you in your kits.

    It is crucial that the committee understand we are not asking for an increased rate of duty in a tariff. We are asking for clarification of a definition of “suitable for use as butter substitutes”, a term used in the description of a tariff item. Any subsequent reclassification would be the responsibility of CCRA and would be independent of the action the Minister of Finance would take under the Custom Tariffs.

  (1225)  

    In conclusion, we would like to stress that at the Uruguay round of trade negotiations the intent of the Government of Canada was to negotiate limited access to the Canadian ice cream market. By allowing the unlimited import of butter oil-sugar blends, the Canadian government has already given away 30% of our ice cream market. Import controls were set up to protect supply management. If they can be circumvented, then one of the pillars of supply management is undermined and the total system is at risk. In the case of butter oil-sugar blends this circumvention is being facilitated by an inaccurate definition of “suitable use for butter substitutes” that has no grounding in Canadian or international law. The government has the power to resolve this problem by implementing the changes we have outlined in our presentation. These changes are consistent with Canada's understanding of its WTO rights and obligations in respect to dairy products, including its right to maintain supply-managed systems. Effective border measures do not cost the government anything. By making the changes we have suggested, this government will have shown support for supply management and support for Canadian dairy producers.

    In closing, I'd like to say since 1995 prices of dairy products in Canada have risen in general by 15%, for fresh milk 18%, butter 17%, cheese 10%--ice cream has increased by 19%. So consumers in Canada are not benefiting from this product coming into the country. Other dairy products have increased by 14%.

    Once again, I want to thank the committee for the opportunity to speak to you today on this issue. We would be pleased to answer all the questions you have to the best of our ability. I do have some technical staff with me to help in that area.

    The Chair: Thank you very much, Mr. Bertoia. We look forward to the questions now.

    Mr. Anderson for a round of seven minutes.

    Mr. David Anderson: Thank you, Mr. Chairman.

    Mr. Bertoia, I was appalled to hear the parliamentary secretary say he thought that Canadian ice cream was crap. You wouldn't consider ice cream made from your milk crap, would you?

    Mr. Leo Bertoia: Not from my milk, but I think from this product it definitely is. I do not buy low premium ice cream any more, because I don't like the taste of it.

    Mr. David Anderson: Ten years ago the PC Party started the process of dismantling the supply-management system. Over the last ten years the Liberals have further eroded your system. They seem to be content with giving it away, without providing any other options or opportunities. They're dismantling it step by step, and you're getting nothing in return. I find it interesting that the Alliance Party is the only party that has a written policy supporting a viable supply management system. Over the last six years why has the Liberal government failed to address your complaint? How long are you expecting to wait for the ministers to address this and to move on the issue?

  (1230)  

    Mr. Leo Bertoia: As far as the Canadian Dairy Producers are concerned, our time has run out and we're very frustrated. I think it was shown at the meeting yesterday in Quebec that time has run out for getting some answers, especially in respect of this issue. We would like answers. We were told at the end of the discussions with the working committee that we would have the answer in January, it is now April, and we are still waiting. The frustration is growing, and if something doesn't happen very soon, there will be action taken by the dairy producers in this country.

    Mr. David Anderson: Would a simple yes or no be better for you than the eternal wait you're going through?

    Mr. Leo Bertoia: The unknown factor is always a big issue, but definitely a yes or no. Yet with the statements made by the Minister of International Trade and by the Minister of Agriculture that they're behind supply management 1000%, we would hope for some positive results on this issue.

    Mr. David Anderson: Do you think this government needs to go after other trade issues more aggressively? I addressed that a bit before with the bureaucrats. There may be a number of areas where they could. Do you think they should be doing that? What are some of the areas, if you do, you think they should be pursuing?

    Mr. Richard Doyle (Executive Director, Dairy Farmers of Canada): There are a number of issues we feel the government needs to pursue and challenge on the application of rules by other countries that, in our view, are not legally in line with the WTO. We are currently in discussions with Agriculture and International Trade on a number of issues to be looked at with regard to practices in both the U.S. and New Zealand. Mr. Chairman, if this committee is interested, we'd be more than happy, in the month of May particularly, to come back and outline case by case where we feel programs of the United States and New Zealand fail to meet their WTO obligations.

    Mr. David Anderson: What are some of those issues, for the record now? We will be meeting with you in May.

    Mr. Richard Doyle: Some of the Farm Bill, some of the subsidies of the United States, some of the pricing issues. In New Zealand you have a regulatory transmission of benefits to industry to gain access to certain markets they wouldn't otherwise have. There are quite a number of cases.

    Mr. David Anderson: Thank you.

    This has been around for a couple of years. Do we have a domestic industry in this product? Does anybody in Canada manufacture it?

    Mr. Leo Bertoia: No.

    Mr. David Anderson: The blends are 49% dairy products, are they?

    Mr. Leo Bertoia: That's what we're being told. I don't know. We haven't tested them ourselves, and I was very surprised to hear that the customs people haven't been doing the monitoring they should of this product either. We just took it for granted that this was being let into the country under certain specifications.

    Mr. David Anderson: I know this is displacing some of your market as well, but there's an 8 million kilogram market here in Canada. Why hasn't the industry looked at developing that aspect as well? I understand that it's displacing some of your product, but there is also a market there for product.

    Mr. Richard Doyle: The product is substituting for butter. The manufacturers would rather have cream or butter for making ice cream, but it's all a question of price. You've got to understand that these food preparations are artificially designed only for Canadians as a substitute for butter fat in ice cream.

    Mr. David Anderson: I understand that. I also understand that if the government does not move to shut this down, you have the opportunity to take some of that market. I know what you're doing, I know what you're giving up, but you're also giving up the market without aggressively trying to take it away from people who are shipping their product thousands of miles to take the market from you.

    Mr. Richard Doyle: All I'm saying is that I wouldn't do it. The manufacturers of ice cream would rather have butter than butter oil. Sugar is cheaper in Canada than what is imported. So importing 51% sugar, when sugar is available more cheaply in Canada, is only a way to circumvent the TRQ on butter and butter oil we have.

  (1235)  

    Mr. David Anderson: I addressed the issue earlier of development of technology in the industries and that kind of thing. Do you see this as a growing problem in replacement of your industry with some of these other products, but also with countries being able to circumvent trade restrictions to come in? Do you have any specific concerns you would like to lay out for us with that field?

    Mr. Richard Doyle: I think you're absolutely right, they will continue to increase, there is no way that technology advancement will slow down, nor should we try to slow it. The adequacy of the tariff system we have with customs controls is really going to be a problem at those particular levels of ingredients, where you're going to have substitutions. We have problems with, for example, whey protein concentrates and whey protein products. Casein has increased several hundred per cent, the whey protein products have increased 1,600% in imports. That has created a major displacement of the structural surplus. Again, the consumer doesn't benefit from this, this is a fallacy, that's clear. You just have to check the retail price, and we'd be more than happy to give you all the retail price surveys we do. The replacement with these products only indicates the inadequacy of some of the import controls we've established. Because they were not a problem in 1993, when this deal was made at the Uruguay round, that doesn't mean they are not going to be a problem in the future.

    The Chair: Thank you.

    Mr. Plamondon, seven minutes.

[Translation]

    Mr. Louis Plamondon: Thank you.

    You heard what the senior officials said a few moments ago. People always say that ministers come and go, but senior officials stay in place. We had the impression we were confronted with a brick wall, because every time we proposed a solution, it was rejected outright. Those people seem to be focused on the legal aspects of the issue, rather than serving the public and producers.

    With regard to potential solutions which could be announced by the minister within the next few weeks, perhaps you have some inside information gleaned from unofficial meetings, which would have given you a clue as to what decision the minister will take.

    One of the possible solutions which has been bandied about and which I mentioned earlier concerns safeguard measures. What is your opinion of these safeguard measures? Do you reject them out of hand? I met with dairy producers from Abitibi early this morning and they did not seem to like the idea. What is your official response to this alternative?

    Mr. Richard Doyle: Thank you. Yes, we reject out of hand the approach involving safeguard measures. First, they represent a short term solution. They may be renewed, but only for a maximum allowable time, and once that time is up, they cannot be applied to the same product again.

    Second, there is also a technical aspect to the matter. Imports of butter oil-sugar blends rose sharply between 1995 and 1997. Over the last three years, butter oil-sugar blends peaked at between $8 million and $9 million and stabilized during those three years. If you want to apply a safeguard measure, you must demonstrate that there was a sharp increase in imports over a short period of time. If we had decided to go that route in 1997, it would have made sense, but it does not make sense anymore in 2003. Over the last three to four years, those imports reached a substitution rate of between 25 and 30% for the fat in ice cream. In fact, these figures were presented to the Canadian International Trade Tribunal in 1997 by the processors themselves. They pegged the top rate for butter oil substitution at 30%.

    But butter oil is not perfect. It's a matter of taste. You have to mask its taste with a strong chocolate flavour.

    As Mr. Leo Bertoia told you, the problem is that in 2002, a labelled product was brought in from England. It is now available and contains a butter-oil blend. This butter-oil blend does not present the same problems, nor is its use as limited, with regard to processing. One day, this product could potentially be a substitute in 100% of cases. It may be years before we get the statistics, but we are afraid...

  (1240)  

    Mr. Louis Plamondon: That it might happen.

    Mr. Richard Doyle: But it is too late to resort to safeguard measures. As it now stands, that approach is not feasible anymore.

    Mr. Louis Plamondon: So if we cannot use safeguard measures, what measures can the minister take to implement the recommendations which were made to him? We could ask the tribunal to examine the issue once more, since the original ruling was not unanimous, by invoking the arguments made by the dissident judge. But this may be an extremely lengthy process. A third solution may be the one suggested by the producers. In other words, we don't have a dozen options to choose from.

    The solution lies in the political willingness of Canada to act, as other countries have done on occasion, and this would be the right way to go since the issue does not involve the United States. Most of the products involved come from New Zealand, Australia, the United Kingdom and Mexico. This type of approach therefore makes sense, and I wonder why the senior officials were saying that we must be cautious.

    Other countries, such as the United States in the case of softwood lumber, will take their cases before trade tribunals. That was done for steel and for various other products.

    So, why should Canada not be more—not aggressive—but forceful and decide to press its case? The process will run its course. It may take a tribunal five or six years to reach a decision, but in the meantime, we will go on living and will develop our arguments should we have to plead our case before a tribunal. But the least we can do is make a decision. Is this your viewpoint, with regard to the minister?

    Mr. Richard Doyle: You are perfectly right. We have the same problem as you: we are trying, we are waiting for the government's reaction. We were told that we would have a reply within the next two weeks. We are waiting impatiently.

    It is a strictly internal decision. I certainly hope that the government will agree to define that product as a butter substitute. It is a matter of process, whether you are dealing with safeguard measures or returning before the committee without a change in the regulations. We did not recommend a solution which could necessarily be carried out in 24 hours. We are asking for the regulations to be changed. We know that will take some time.

    We are asking the government to make a decision and take measures reflecting its policy, which is to keep the supply management system in place, and to work with industry to achieve that goal.

    This must be done in a manner that respects our rights and the leeway for action we have both legally and internationally.

[English]

    The Chair: Thank you, Mr. Plamondon.

    We'll move to Mr. Duplain for seven minutes.

[Translation]

    Mr. Claude Duplain: Thank you, Mr. Chairman.

    I would simply like to clarify a point raised by my Canadian Alliance colleague. I usually agree with what he says, but he seemed to have understood that the word I used to describe ice cream applied to dairy products. But that was not the case. If he does not agree with my description of the product in question, I would invite him to eat his spread sample, which he has not yet touched.

    Since you have spoken to the ministers and their assistants, you must realize that if we go ahead with this procedure, there will be repercussions. I asked the question earlier. Do you know what repercussions it would have? We have been waiting a long time for this problem to be solved and it is growing every day. If this measure is implemented, what impact will originate from outside the country? How would it affect us domestically?

    You said a little earlier that the price of ice cream increased by 19%, as has the price of dairy products, which surprised me. A few moments ago, the officials said that the product in question was cheaper and that, as a consequence, the price of ice cream was lower. But if on the contrary the price increased, it means that someone is pocketing fat profits.

    So what repercussions would this measure have, repercussions coming from other countries? As you know, Canada is an exporting nation. People ask us why we are not doing anything, whereas the United States are always taking action. But it is precisely because we are an exporting country. This is why we negotiate from a position of strength at the WTO. We have to take that fact into account. Do you think the other countries would retaliate? What do you think of when there is talk of potential retaliation from abroad?

  (1245)  

    Mr. Richard Doyle: An exporting country could easily argue that the Canadian government, if it took that approach, was violating its obligations. In that case, the country could go through the trade dispute settlement mechanism. It could take its case before a tribunal. The tribunal would have to rule on whether Canada had the right to take that action.

    It is hard to say whether such an act would necessarily lead to an international trade dispute. If so, there are trade dispute resolution mechanisms. However, instead of ending up before the Canadian International Trade Tribunal, which would see the industry and processors squaring off against the government, arguing over the 30% market share of substitute products used in the production of Canadian ice cream, they would all be on the same side, squaring off against other countries in the interest of defending our rights. That is all we are asking for.

    We are not afraid of going before a tribunal or any other world trade organization panel. If need be, we will go, be it before a NAFTA tribunal or somewhere else. But it would not be a NAFTA panel, since this issue does not really involve the United States.

    Therefore, it would be best to opt for something which is within our rights. If the importers want to go after us, we will defend ourselves by turning to the appropriate mechanisms, which are clearly spelled out.

    Mr. Claude Duplain: What would the potential impact be inside Canada?

    Mr. Richard Doyle: Not only has the price of ice cream kept pace with that of other dairy products, it is in fact the dairy product which has seen the greatest price increase over the last seven years in retail sales. Let me give you the figures. We got them from Nielsen; I am not just pulling them out of my hat.

    So, obviously, it reduces costs. That is what we are trying to show, that it reduces costs, but that the price reduction is not being passed on to consumers, not at all. Therefore, if the price of other dairy products which are made with primary products such as butter only increased by 14% between 1995 and 2002, why has the price of ice cream increased by 19%?

    Mr. Claude Duplain: We have heard all kinds of things since the beginning of this debate.

    As late as this morning someone argued that if we close the border to butter oils, dairy quotas will go up again because the demand for dairy products will go up. If quotas go up again, it will be even more difficult to transfer farms.

    What is your response to this argument?

    Mr. Richard Doyle: We have just increased the quotas on February 1 and the price per quota went down. If people are making that argument, it is because they do not understand how the quota system works.

    I do not think that if we recaptured the domestic market it would affect the value of quotas.

    Mr. Claude Duplain: You described a new product which is imported from England. Are there many such products that could crop up?

    Mr. Richard Doyle: As I said, I think that those two products were specifically designed to fill a need. Whether the food preparation tariff lines could include other blends to precisely replace dairy products used in cheese and eventually in other foods is something which scares us, even though we cannot predict how the situation will unfold.

    This is a potentially huge problem and if the interpretation is so broad as to allow blends for cheeses... Last week, we came before your committee to discuss the issue of blends and I feel we gave a good overview of the situation. The previous witnesses said that the new agricultural framework will result in higher quality and safer products, but if you look at the regulations dealing with blends, it is the exact opposite.

    It is obvious that the more flexible the regulations, the more people will use imported products in their food preparations, because that is just the way things are. The names of more and more modified dairy substances and other such products will appear on ingredient labels because processors are not using milk in traditional dairy products anymore, but rather formulas.

  (1250)  

[English]

    The Chair: Thank you, Mr. Doyle. Thank you, Mr. Duplain.

    Ms. Ur, for a question or two.

    Mrs. Rose-Marie Ur: Correct me if I'm wrong, Mr. Doyle, but we don't make or produce butter oil-sugar blends here in Canada. If there is such a demand for it, why does the dairy industry not pursue that?

    Mr. Richard Doyle: As I said to Mr. Anderson, there is demand for butter oil-sugar blends only if they replace butter. It's a butter substitute. I don't care what people are saying, it is designed to substitute for butter.

    Mrs. Rose-Marie Ur: But they're using it in ice cream.

    Mr. Richard Doyle: They're using it in ice cream instead of butter because it's cheaper, not because they like the product.

    Mrs. Rose-Marie Ur: But there's still a market there for it, because it's cheaper than putting in butter, is there not?

    Mr. Richard Doyle: But why would I create a product to compete with a premium quality product domestically at an imported price? I will then replace 100% of the butter fat for a lower quality product at a lower price, and the farmers would have to accept that they would lose 100% of the butter fat use in that product.

    Mrs. Rose-Marie Ur: Are you sure this product is only used in a cheaper grade of ice cream?

    Mr. Richard Doyle: That was said at the CITT, I think in July. It is clear from the discussions we had with the manufacturers that the butter oil-sugar blends would create greater savings in premium ice cream, because it tends to be higher in fat.

    Mrs. Rose-Marie Ur: I see.

    When you were discussing the Uruguay round, you said it didn't make sense then to include this, but things have changed over the last several years with the great amounts of butter oil-sugar blends coming into Canada. And in your presentation you stressed that at the Uruguay round of trade negotiations the intent of the Government of Canada was to negotiate limited access to the Canadian ice cream market. So was there some knowledge that this might happen? Was Dairy Farmers of Canada at those negotiations? Did you not have any input? Did you raise any red flags on the issue?

    Mr. Richard Doyle: I was there personally, so I can respond to that.

    Mrs. Rose-Marie Ur: I'm glad to hear that. We'll get it from the horse's mouth.

    Mr. Richard Doyle: I want to comment on something a previous witness indicated. In 1993, when the Uruguay round was in Geneva, the schedules tabled were very broad, containing all the products. With dairy, you had the main products, butter, cheese, ice cream, and so on and you had TRQs. The whole issue of the ingredients was really dealt with between January and the signing of the Marrakesh agreement, which was in April 1994. So you had a very short time period. There was a huge debate within the industry with the trade negotiator and the departments that were here before with regard to the blends, food preparation, and so on. The butter oil-sugar blends were not known elements. We were concerned about blends of butter fat with other things.

    If you go back before 1994, the major concern was mostly with blends with protein, the sugar-skim milk powder blends, the rock salt and skim milk powder people were sifting and shipping back as a means of replacing the protein. We were asking at that time whether or not these products on the butter fat side were covered, and we were told at that time that they were covered under 0404.90. In fact, when we went in front of the CITT in 1994 and 1995, both the Dairy Farmers of Canada and the importers were concerned. These butter oil-sugar blends at that time were covered by 0404.90. In fact, there is correspondence to that effect from the importers themselves, who were expressing concern to DFAIT that they couldn't import these products any more because they were covered under 0404.90. So there was huge confusion. This is not a tariff line for butter oil-sugar blends imported, it's a food preparation tariff line, a catch-all. It could be anything under that. We found out about the real issue in 1996.

  (1255)  

    Mrs. Rose-Marie Ur: So it was not a known blend at that time. Did you argue that point?

    Mr. Richard Doyle: At the CITT?

    Mrs. Rose-Marie Ur: Yes.

    Mr. Richard Doyle: Absolutely. We knew there were blends. I heard somebody say they have been imported since 1980--they didn't tell us. When we were asking for the list of ingredients, we knew there were a number of food preparations that would not be covered. We were stuck with a situation at the time where Canada had, after 10 years of fighting, the interpretation that the import control list should not be limited to 50% content. The department kept thinking they had to limit it to 50% content. De facto, they dropped the 50% content when they did the schedules for the Uruguay round, because we now have products with 15% content that are covered under TRQ, which is supposed to be a transition of an import control.

    The Chair: Thank you very much.

    Mr. Anderson for the last question.

    Mr. David Anderson: I just wanted a clarification on what Rose-Marie brought up. You said butter oil would replace butter across the board if the opportunity were there. I guess I would agree with what I thought Rose-Marie was saying, that it would not if it's the inferior product we seem to think it is. Is there a market for those lower-value products, while you can still maintain the premium markets with the butter? Also, is there an export market for this product? Are we missing an opportunity because we have not been manufacturing it and competing? If other people are shipping this stuff all over the world and taking our market away, isn't there a market there for us as well?

    Mr. Richard Doyle: We produce butter fat, that's what producers do. Butter oil is 99.5% butter fat, butter is 82% butter fat. So if you're asking the farmers to offer butter fat at a low price for the making of butter oil, all you're going to do is put the same fat into a product to replace the butter fat in butter. The whole thing is strictly a price issue. To sell butter fat on the world market below the domestic price would amount to an export subsidy. So there is no opportunity there unless I bring my butter fat for all dairy products at a low price, which is crazy.

    Mr. David Anderson: But at the same time, there's a huge market in Canada right now that someone else is filling, while Canadian producers are not able to.

    Mr. Richard Doyle: I don't think producers can compete with these products at the world price. These products are coming in here subsidized.

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

    This is a very complex issue. Many people within your industry don't understand it either--I know you people do--and we certainly don't fully understand it, but it is wholly a price issue. It's a way of bringing butter fat into this country at a subsidized rate, because other countries are subsidizing. It comes in here and competes against a product we have priced more highly. We certainly thank you for your input. We need to put some pressure on those points that perhaps can exercise the will to change some of these things, because it's a very complex thing and very disturbing to the industry. We thank you for your presentation.

    The meeting stands adjourned.