SINS Committee Meeting

SUB-COMMITTEE ON THE STUDY OF SPORT IN CANADA OF THE STANDING COMMITTEE ON CANADIAN HERITAGE

SOUS-COMITÉ SUR L'ÉTUDE DU SPORT AU CANADA DU COMITÉ PERMANENT DU PATRIMOINE CANADIEN

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 12, 1998

• 0900

[English]

The Chairman (Mr. Dennis J. Mills (Broadview—Greenwood, Lib.)): Order, please.

Good morning, ladies and gentlemen. We continue our debate and discussion on the linkage of sport and the Canadian economy. We'll just have a short preamble before we hear from our witnesses this morning, the issue being the North American Free Trade Agreement and sport in Canada.

• 0905

In February we heard two professors from the University of Ottawa, Jean Harvey and Marc Lavoie. In their submission to us they brought out the fact that, in their view, there could be or might be some challenge that should be discussed because of the various types of investment preferences that U.S. NHL teams receive.

A few weeks ago we heard from Mr. Bettman and the Canadian owners. In the NHL presentation he listed a number of preferences that happened to U.S. teams, and so this committee felt it was very important to hear from the department on their position. We had heard, because there were reportings in some newspapers, that there was no application. We received a phone call from a Mr. Barry Appleton, who takes a different point of view.

So for our committee and for our listeners this morning, this will provide an interesting exchange because we're going to hear about both sides of this particular issue.

So I would begin by welcoming all of you.

Mr. Klassen, you can begin. Perhaps you'd like to introduce Mr. Gero, and give your position, etc.

Mr. John Klassen (Director General, General Trade Policy Bureau, Department of Foreign Affairs and International Trade): Thank you, Mr. Chairman, monsieur le président, I am director general for—

Ms. Suzanne Tremblay (Rimouski—Mitis, BQ): Do you have a copy in French?

[Translation]

Mr. John Klassen: Not for the time being, unfortunately. The text of the opening speech has changed a bit.

[English]

My colleague, Mr. Gero, is the other director general dealing with general trade policy within the Department of Foreign Affairs and International Trade.

We have been asked to come here today, Mr. Chairman, to explain our views on what Canada can or cannot do under existing trade rules to respond to or to place disciplines on the provision of financial incentives for the purposes of attracting professional sports franchises, most particularly hockey teams.

There have been a number of statements and a lot of press coverage on this issue over the past several months. Our hope today is that we can clarify the issue and a number of the concerns that there are.

In summary, in our view there are no constraints either in the World Trade Organization agreement or in the NAFTA on the provision of investment or development subsidies by authorities in either Canada or the United States at the federal or subnational government levels.

Having said that, Mr. Chairman, I thought it might be useful for our discussion to provide you with a brief description of what disciplines do exist within the WTO and the NAFTA with respect to subsidies and with respect to services and investment. We will also discuss why, in our view, none of these applies to the provision of subsidies to build sports stadiums or highway interchanges to sports stadiums to attract professional sports franchises.

The first question is a matter of definition. In terms of current trade laws, is a sports franchise a good or a service, or neither? There are remedies available under the WTO to respond to the possible unfair trade effects of government support provided to local industries, but these remedies are limited to trade in goods. Under the WTO, subsidies provided on the production of goods are either prohibited or actionable if exports of the subsidized goods injure the domestic industry of another country.

The subcommittee may be familiar with the remedy available to respond to such injurious subsidies on exported goods. They are called countervailing duties. However, the subsidies at issue with respect to sports franchises do not involve trade in goods since no physical goods cross the border into Canada. They are therefore not covered by these disciplines.

The first question with respect to disciplines that the WTO or NAFTA may offer with respect to the provision of services is whether a sports franchise is a service and whether such a service would be covered by either agreement in any event.

• 0910

There are disciplines in both the WTO and the NAFTA on services. The WTO obligates members to provide services and service providers of other member countries with a treatment no less favourable than it accords to like services and service providers of any other member country. This is called the most favoured nation treatment principle. However, this obligation does not extend to the services and service providers of the member country itself unless it is specifically provided for by that member state. This is what is called national treatment.

The WTO does, however, provide for members to enter into negotiations with a view to developing multilateral disciplines on subsidies that have a distorting effect on trade in services. Preliminary work has begun in the WTO to extend disciplines on subsidies to trade in services.

NAFTA builds on the WTO disciplines by providing certain services and service providers in all three NAFTA countries with national treatment. There are, however, a number of exceptions to that general principle—for example, in the areas of communication and social services. Furthermore and most importantly, the services provision of NAFTA specifically does not cover subsidies.

On the question of subsidies on investment, in our view the provision of financial inducements by a state to attract a sports franchise is an investment incentive and it should therefore be considered in relation to any trade agreement obligations on investment.

There are few international rules that limit a government's ability, at either the national or subnational levels, to use investment incentives to attract business and investors from other jurisdictions.

Incentives to attract investment are used extensively in many important sectors of the economy. The issue has been raised in the context of international trade and investment negotiations, including the NAFTA and the current MAI negotiations in Paris. The results have been minimal.

The WTO agreement on trade-related investment measures does not provide for disciplines on investment incentives. While the NAFTA provisions on investment exceed those of the WTO disciplines, they provide no disciplines on the granting of financial inducements to attract investment.

In conclusion, Mr. Chairman, I hope these comments have been helpful to the subcommittee in understanding that our current trade agreements do not deal with subsidies such as those being considered in the review by the subcommittee.

While there have been some preliminary discussions—and I emphasize the word “preliminary”—on extending the disciplines in place on subsidies on goods to subsidies on services and investment, this is a longer-term proposition. In part, this reflects our recognition that these subsidies can distort economies and they are expensive for governments and taxpayers.

I'll stop there, Mr. Chairman, and perhaps in the discussion or in the debate we'll bring out some more of these points.

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

Mr. Barry Appleton.

Mr. Barry Appleton (Counsel, Appleton and Associates International Lawyers): Mr. Chairman and honourable members of this committee, I'd like to thank you for giving us the opportunity to appear here today to talk about this very important issue.

First of all, allow me to introduce myself and my colleague. I'm an international trade lawyer. I practise in Toronto and New York. I'm joined by my colleague, Marjan Neceski.

Mr. Neceski is not only an international trade lawyer but also an economist. He works with me, and together we will attempt to sort through some of the questions you may have today and try to give you a brief presentation.

I will start with a brief presentation and then Mr. Neceski will join me for the questions.

I also would like to beg the indulgence of the members of this subcommittee. I have come to the committee today as a volunteer, not on behalf of any group, but just as an expert in the area. I finished my brief to this committee last evening, which we've provided to members here, but it is only available in English. I understand the clerk will arrange for translation.

I apologize to any committee members here who are unable to take the comments in their written form. I will also do my best to explain them in my oral testimony today to try to assist you.

I understand that all members had been given a copy in both English and French of chapters 11 and 12 of the NAFTA, and I will make reference to that in the presentation.

• 0915

To assist us, I'm going to use the benefit of a computer presentation as I try to walk through some of these complicated issues.

Fundamentally, the reason I'm here today is because sports is a very significant business; it is an industry in Canada. As the subcommittee looks at how sports is a part of our economy, it now must look at how sports is connected in international agreements.

Today I will make a lot of reference to the NAFTA agreement. I will not be talking about the WTO, although you can ask me questions about that later on, if you prefer. But the NAFTA agreement deals with the question of sports in its investment chapter. In fact, if we can start the presentation....

The Chairman: Members, while we're waiting for our witness, I realize we have a vote at 10.30 a.m. So after the witness is finished, we'll get on to questions right away and we'll try to make our questions tight and focused so that everybody has a chance to participate.

[Translation]

Mr. Denis Coderre (Bourassa, Lib.): Mr. Chairman, I'm going to take advantage of this lull to make a comment. I understand what Mr. Appleton is doing. He's a private individual, and he is submitting this document to us in English only as a volunteer, simply because he's doing it at his expense and the clerk can take care of the translation. As the Vice-Chair of the Joint Committee on Official Languages, if some official from Foreign Affairs comes and tells me something I've already heard and it's strictly in English, Mr. Klassen, I can't accept that.

[English]

I don't accept that, and make sure it's the last time, because I want to make sure that everything is in French and in English. As a member of Parliament, a francophone, my privilege is attacked today, and I don't accept a bureaucrat from Foreign Affairs giving me something only in English.

Thank you.

The Chairman: Thank you very much.

Mr. Appleton.

Mr. Barry Appleton: I'm going to proceed, and hopefully the computer will catch up to us; that's the beauty of technology.

Let me start by mentioning what the NAFTA covers.

The NAFTA is a comprehensive trade agreement that deals with goods, services and investments. Many members of this House of Commons have looked at the NAFTA agreement in the past and they continue to look at its implications, but the fact of the matter is it no longer deals in terms of issues of just trading goods, but trade in services and trade in investment.

The investment rules that are in the NAFTA agreement apply to government action. They do not apply to actions between private parties. They apply to whenever governments are involved, and then we look to the specific obligations to see how they have effect, but we're always looking at the realm of government activity.

Also, the NAFTA agreement covers not just the federal level of government. For example, in Canada it doesn't apply just to federal activities or the federal Parliament. Even though it was signed by only the Government of Canada, it applies to the provinces, the territories, and the municipal levels of government. In the United States, it applies to state and local governments. So even though only one level of government signed it, it applies throughout the country, into all levels of governance inside the country.

We have already seen from evidence before this committee and from reports in the media and from other discussions that there are a number of American actions for sports teams in the United States. We'll bring you up to that slide in a moment, but I will give you three examples: first, there are state and municipal subsidies to local teams; second, there are municipal property tax abatements that are given to local teams; and third, there's federal-level tax assistance through municipal bond financing. Each of those is a government provision of assistance.

• 0920

So where I seem to have a difference initially with my colleague Mr. Klassen is that he seems to feel that sports perhaps teams are not investments. He's talked about the fact that we're looking at investment incentives.

We agree to the point that the NAFTA covers investment incentives, but for the NAFTA to apply—and my colleague says that it does not apply—there would have to be an investment involved. If there's a investment and then it's a government act, then the terms of the NAFTA would be invoked. If it's not investments, it would not be relevant. So let's turn to that.

I've put some very specific commentary in the brief to show you how sports are investments. They qualify in at least four different ways under the very detailed definition of investment in the NAFTA.

You'll see, for example, that in article 1139 of the NAFTA the definition of investment is over a page and a half long. The NAFTA was created to be a very broad, encompassing agreement to protect foreign investments operating in other NAFTA party countries. The way they protect the investments is by constraining governmental activity. That's the goal of the NAFTA itself.

So the fact that Canadian sports teams operate in the United States as a branch of an enterprise—that is, they operate because they are corporations, or some of them may even have separate corporate structures—in itself would qualify it as an investment under the definition in the NAFTA.

For example, when Commissioner Bettman of the NHL appeared before you, he talked about the equalization fund, and how an equalization fund that pools revenues across the league for hockey is able to share the profits from the common activity. That qualifies as an investment under the NAFTA.

The fact of the matter is that intellectual property rights.... We know that hockey, baseball, basketball are all big businesses. These are megabusinesses and they have very expensive intellectual property rights. Separately on their own they would even constitute an investment.

This is just an example. There is more.

Quite simply, professional sports—hockey, basketball and baseball, in particular—are all covered as investments under the definition of the NAFTA. So if in fact they are investments, then we have to look at what specific obligations are contained in the NAFTA to see whether or not they will apply.

I will talk about two specific obligations that, in my opinion, have been violated by these American rules.

The first is performance requirements. The NAFTA prohibits requirements, commitments or undertakings to use local goods or services. That is in article 1106(1)(c). If a government provides some type of benefit, if they condition the receipt of a benefit, if they require you in some way to use local goods or services, then that's a violation of this part of the NAFTA.

An agreement to keep a sports team in a particular location, an anti-relocation clause, would violate the NAFTA performance requirements, and there are a number of examples of these agreements set out in the brief cited by Professors Noll and Zimbalist from Stanford University. They violate it because they are an inducement to keep an investment, or to operate an investment, inside a particular place.

Whether you like it or not, the NAFTA agreement constrains the ability of governments to be able to pick and choose based on where you're located. If you are investments and you are located within the NAFTA zone, which is Canada, the United States and Mexico, you may not give other types of preferences to locate for a service in a particular spot. In other words, a Canadian team from Canada playing hockey has to be treated the same as a Canadian team playing hockey in Nashville.

We know, for example, that the Nashville Predators have been given a $20 million gift from the City of Nashville to be able to play in Nashville. They've been given heavy subsidization for their own stadium. They've been given a very lucrative arrangement to be able to be there. And they get it as long as they're there, that is, to provide a service in Nashville.

That is not permitted. In international trade law we call this a predatory practice. So I'd suggest that the Predators are ably named.

Let's move over to national treatments. Before we do that, let me just add one other point. The performance requirement section of NAFTA is the broadest obligation that has ever existed in an international investment agreement that has been passed. It not only applies to Canadian companies, for example, in the United States and in Mexico, but each NAFTA party agreed that they would apply this rule to all investors all over the world. So this section of NAFTA applies to American investors in the United States, and it applies to Japanese investors in Canada.

• 0925

Each NAFTA party unilaterally disarmed itself of all these governmental abilities in the NAFTA. If in fact we do policies that are inconsistent with that, that is inconsistent with the NAFTA agreement. There is a process I will walk you through in a minute.

Now let's look at national treatment. National treatment means, for example, that Canadians in the United States must receive the best treatment given to American investors in any specific state in a similar circumstance, that is, a “like circumstances” issue.

So what that would mean, for example, is that tax benefits that are covered, municipal taxes in particular—not revenue taxes; they're exempted, and I spent some time in the brief talking about that.... But municipal property tax abatements—and there are a number of those—are all given because you are in that specific location, and that violates the national treatment rule.

You can give a subsidy, if you wish, to all teams to pay for, or to assist with, municipal taxes. In other words, if you're the City of Nashville, the City of Minneapolis or St. Louis, you can give a subsidy to everybody in that sector, which might even be as narrow as just pro hockey. But it's called generally available. If you give it to everybody generally, then there's not going to be a negative national treatment effect.

But if you prefer local teams over foreign teams, that's a violation. Fundamentally under NAFTA you're not allowed to say that because you are from a different country you're to be treated differently. That's the test, and that's what's been broken here.

So let's just look at the reservations and exceptions, because Mr. Klassen made some reference to some reservations and exceptions in the NAFTA.

First, all actions taken before 1994 by the state and local governments are exempted. In other words, if it was done before 1994, it is going to be reserved under the provisions of article 1108 of the NAFTA.

Second, cultural industries are exempted. That is not culture but cultural industries. I'd encourage you to ask me some questions about that later so we can describe how that works.

In my books, I can't think of anything that's quintessentially more part of Canadian culture than hockey, but that's not covered by the cultural industries exemption here. That only deals with specified industries, and we can talk about that.

Finally, there are no general exceptions permitted. The GATT, for example, allows a variety of general exceptions in article XX, but when it comes to investments and services, there are no general exceptions.

Now, before I turn to the question of remedies, let me just address the issue of services for a minute. In my opinion, professional sports are a service as well as being an investment. But the definition of services in the NAFTA itself specifically exempts the type of activities that are done by professional sports from the operation of the cross-border services chapter of NAFTA.

So again, when you look at the NAFTA agreement, one of the greatest problems for those of us who practise in this area is that something that looks like it should apply, but when you look at the detail, it doesn't.

In particular, I've set out in the brief that if you look at the wording in article 1213(2) of the NAFTA agreement, the last parts of the definition, you will see that the services chapter does not apply because it does not include the provision of a service as defined by article 1139, on investments, in that territory. In other words, because professional sports teams in Canada are an investment as defined by article 1139, they are excluded from the coverage of the services chapter of the NAFTA, and even though they are a service, they are not a NAFTA cross-border service.

That's a little confusing, but unfortunately that's what you're left with when you look at this agreement.

So let's look at the remedies, then. Mr. Chairman, when you're studying this issue, you and your colleagues will have to look at what you can do, what Canadian teams can do, what the Government of Canada can do here.

• 0930

First of all, there are two different types of remedies. The first is under chapter 20 of NAFTA, which is an interpretive provision that allows the Government of Canada to bring a challenge to a NAFTA panel against the United States government. A chapter 20 panel would look at whether there has been a violation of the provisions of the NAFTA, and would make some type of ruling. That's all it does. It'll say this was good or this was bad—it's a classic international trade panel. They generally do not award compensation.

The second route available is under NAFTA chapter 11, and it's called the investor states remedy. It's a rather innovative process for Canada, although it has been used in many other bilateral agreements, especially with the United States. There have been a number of decisions of investor state panels under bilateral agreements, but NAFTA is the first multilateral agreement to contain that in its general provisions.

Under the investor state process, which is a special dispute system, Canadian investors on their own will be able to bring a challenge to a special no-fault compensation panel created under the NAFTA. This panel would look at whether the provisions of the investment chapter were being met or being violated by the United States. If this panel were to find that Canadian teams—and they can do it individually or as an association—were not being given their NAFTA investment rights in the United States, they would be entitled to compensation.

This compensation will not change the rules, however, and I want to make that very clear. Investors state compensation does not take the place of courts. It does not strike down laws. It doesn't change the provision of these municipal and state benefits in the United States. It would judge whether or not it was consistent with the NAFTA, much like a no-fault insurance case, and then it will award compensation. The Canadian teams that brought this—the Canadian investors—would be entitled to the compensation that they were not getting in the United States, but that's it. There is no striking down of the rules.

By the way, the compensation would be paid by the United States federal government, not by the state and local governments, and not by the NHL team, NBA franchise or baseball team in the United States, and not by their league. It won't affect what they do. The municipal government or the state government can continue to take action that is inconsistent with the NAFTA because it didn't sign the NAFTA agreement. It's the federal level that signed the NAFTA agreement and it is responsible for policing it and paying for it.

So in summary, U.S. actions may violate NAFTA chapter 11. We believe that professional sports are investments and they're covered by the investment chapter. We are quite convinced of this.

Second, there are two types of violations—one of a performance requirement and one of national treatments. However, we do believe that the federal tax issue, the municipal bonds, is probably covered by an exemption in the NAFTA for revenue taxes, but that every other issue done by the state and local levels is inconsistent with the NAFTA investment chapter.

Finally, the U.S. federal government must answer the questions, not the local level, the league, the state governments or the teams, because it's government activity. What we're looking at is fundamentally a fairness issue. Canadian teams have been paying a tremendous amount that their American counterparts have not been doing. The American teams have been able to use this money to make their teams stronger and better. They've been able to build better farm teams, scouting teams and development systems. Canadian teams have been using that same money to pay their taxes. The NAFTA says you have to treat everybody basically the same in this regard.

I watched the game last night here in Ottawa. It was an exciting game between our two capital cities in Canada and the United States. Thank goodness Ottawa won last night, but think of what an extra $12 million or $15 million would have meant to that team. The Capitals got all types of benefits, and they were using them to make it to the play-offs. What about Ottawa? And all the Canadian teams are in that position. They've been having to divert their money.

• 0935

When I look at the testimony of Rod Bryden, I see that the Ottawa Senators had to pay for an underpass at the highway, an interchange and the other pieces that go with it. That never had to happen in the United States, and they got all types of benefits from not having to pay that. And you see it by looking at how many teams are in the play-offs.

This type of benefit would go right back to hockey, for example, or to the development process that we're looking at. This is the type of thing that would be able to occur if the playing field were made even again.

So these are the options that are available to this committee and to the sports. I thank this committee for taking the opportunity to study this important issue, and for looking at the interrelationship of these international agreements and sports.

I look forward to your questions today. Thank you very much.

The Chairman: Thank you, Mr. Appleton.

As you know we're on a tight schedule this morning because we have a vote at 10.30, so I'll begin with Mr. Abbott.

Mr. Jim Abbott (Kootenay—Columbia, Ref.): Thank you.

First, the Reform Party has taken the position that the key to this issue at the government level is the fact that in Canada we have 32¢ on each dollar of tax collected going to service the debt—in other words, to pay the interest on the debt—versus 24¢ in the United States. So there just isn't the money in the economy for the municipalities, the province or the federal government to compete with the United States.

Second, it has been my own position that there has been bad faith on the part of the NHL. I believe the NHL is threatening hockey in Canada, and as you've said, it is a fairness issue. I watched both of the hockey games last night and I saw what is quintessentially a Canadian sport, and it makes me very upset that we have a multibillion dollar, multinational corporation—that's what the NHL is—threatening our game in Canada. That makes me very angry with the NHL.

But I'm equally angry with Minister Marchi. Hockey is about extra effort. I think that's what attracts us to hockey. Hockey is sprawling like that one save by the goalie where he was right out of the mix. It's the extra effort. And what I find so frustrating about our minister is that he isn't making any extra effort.

When he was asked by my leader in the House what he was doing about this, and about NAFTA, his response was something about Mr. Manning. He said sometimes Mr. Manning skates with his skate guards on, so he's just been asleep on this.

I compliment the—

The Chairman: Mr. Abbott, I think it would be important for the record to know that when we approached Minister Marchi about having witnesses from the department in front of this committee, he responded within seconds. He didn't hesitate. So I wouldn't want there to be any misunderstanding about his cooperation in pursuing this issue, because he responded immediately.

Mr. Jim Abbott: Thank you, Mr. Chairman. I respect your comment that he responded immediately, but I think Canadians are looking for people who will make the extra effort and take a look at a more aggressive stand such as Mr. Appleton has brought forward.

My question for Mr. Appleton—and I would also appreciate a response from Mr. Klassen—is this. Without getting into a lot of detail, what are we looking at in terms of an independent panel? What would be required to set this up? Would there have to be some precondition or pre-acceptance of the panel by the United States? I can't see where we could set it up on a unilateral basis, but you've suggested that it is one of the vehicles we could use to attack this inequity on the part of the NHL.

Mr. Barry Appleton: Mr. Abbott, that's an excellent question.

This is the NAFTA agreement. Half of its investment chapter deals specifically with these investment disputes. Under the NAFTA agreement the federal governments of Canada, the United States and Mexico have given a pre-commitment to engaging in this arbitration. In other words, no consent is needed by the United States. It's given inside the NAFTA agreement.

So the process set up in section B of chapter 11 is that an investor notifies the government, in this case the U.S. government, by an notice of intent. It says we have a problem here, we'd like to talk to you, and then there is a consultation period that lasts 90 days.

• 0940

Canada's statement of interpretation on the NAFTA talked specifically about it being a 90-day period where we can talk and perhaps avert a conflict, because what we're looking for is to get an answer, not to have a fight. After 90 days, if something has not been resolved, the investor can file something called a notice of arbitration. That starts the process, the creation of a panel.

A panel would be appointed—it's a three-person panel, unless both sides agree to make it different. Each side picks one person and then they jointly pick a third person. That international panel would then determine whether there's been a NAFTA investment chapter violation. It can only deal with the investment chapter and nothing else. It doesn't find fault; it just says whether you've met the condition or not, and then it will award compensation.

One of the controversial areas of the NAFTA agreement and later agreements it uses, such as the Multilateral Agreement on Investment, is that there is no appeal from the decision of this panel. It is as enforceable as if it was a decision of the Supreme Court of Canada or the United States. So once this decision is made, it is enforceable and that's the end of it.

That's why it's a relatively fast process. The process tries to depoliticize issues. We have $1 trillion worth of trilateral trade between Canada, the United States and Mexico, so you don't want to have huge fights over these types of issues. You want to depoliticize it. Just look at the facts and come up with a conclusion.

Mr. Jim Abbott: Okay.

Mr. Klassen.

Mr. John Klassen: I'd like my colleague Mr. Gero to answer.

Mr. John Gero (Director General, Trade Policy Bureau, Department of Foreign Affairs and International Trade): Thank you.

Mr. Appleton was absolutely right. Any Canadian investor can avail themselves of the provision of the investor state provisions in chapter 11 of NAFTA. They would have to make the case that there has been a violation of the NAFTA—by the United States in this case—and would also have to demonstrate that there have been damages to them as a result of that violation of the rules. They have to prove both of those. They have to say there has been a NAFTA violation and they have to say it has been damaging to their investment in that country.

Mr. Jim Abbott: Mr. Klassen, obviously you disagree with Mr. Appleton.

Mr. John Gero: I don't think we disagree on the context of Mr. Appleton's description of the process.

Mr. Jim Abbott: Mr. Gero, I referred to Mr. Klassen, because in his presentation it sounded very clear that he didn't agree with the premise of Mr. Appleton's position that there has been a violation of NAFTA. So we couldn't go to the second step, according to the current thought process within the Canadian department, is that right?

Mr. John Gero: I think that's right. We're coming to different analyses in the context of what is or is not a violation of NAFTA in this particular case.

The Chairman: Madame Tremblay.

[Translation]

Ms. Suzanne Tremblay: Mr. Sauvageau is going to begin.

Mr. Benoît Sauvageau (Repentigny, BQ): I'm going to begin by speaking to Mr. Gero. You said that we had to find out whether the Canadian teams in the National Hockey or Baseball League were harmed. Mr. Appleton talked about the Senators' hockey game against the Washington Capitals and he actually told us what could have been done with $12 million more. I don't think we should spend too much time trying to find out whether or not the national Canadian teams were harmed. It seems to me it's obvious, but maybe I'm mistaken. You talked about finding out also whether American national sports teams had undue advantages. But my analysis may be too simple and you'll say I didn't understand correctly. Mr. Appleton talked about chapter 20, but your answer was about chapter 11 concerning investment, and not chapter 20.

About chapter 11, you said it would involve seeing whether the investors can submit a claim. But chapter 11 concerns claims from one government against another, if I properly saw what was on the screens a while ago. So, could the Canadian government be made aware of the situation and submit a claim instead of the investor or the national hockey or baseball League or whatever? That's my question for Mr. Gero.

Now, Mr. Appleton, what, in your opinion, would be the real chances of winning a victory if the government submitted a claim under chapter 11 dealing with investments?

• 0945

So, you're saying that instead of creating a new tax covenant and finding a new form of tax to help professional teams, we should work on an equal footing with the U.S., on the same playing field, with the same tools. And you're suggesting that we should submit a claim to do this. What do you think the chances of winning are, Mr. Appleton?

Furthermore, we can see that chapter 11 in the NAFTA agreement and the Multilateral Agreement on Investment have a lot of points in common. Can you tell us whether we should pay particular attention to this type of problem in future negotiations concerning the Multilateral Agreement on Investment?

I apologize for not asking you the question about culture, but I think we don't have time for that.

[English]

Mr. John Gero: Let me cover both of those. You're absolutely right, there are two different dispute settlement mechanisms. Mr. Abbott was asking about the investor state one, and that's why I was responding to that. That was Mr. Appleton's comment as well.

You're absolutely right. There is a chapter 20 mechanism in the context where the government, to the extent that it thinks the United States government or governments—Mr. Appleton is right; it covers more than just the federal government—are in violation of the NAFTA obligations, could seek a chapter 20 challenge and thereby seek to have those violations changed. That's possible.

There are two, and one is looking at the same basis: has there or has there not been a NAFTA violation as such? That's the question. Whether you go chapter 11 on investor state or chapter 20 on dispute, as a first stand you have to prove there's been a violation.

Mr. Appleton has mentioned at least two possibilities. He mentioned the question of national treatment and the possibility that there may be a violation on national treatment grounds. The national treatment provisions of chapter 11 refer to discrimination between investors. That means one would have to prove a Canadian investor would be discriminated against vis-à-vis an American investor.

The question that isn't evident, or at least we don't have the facts of the case, is the situation where a Canadian investor wished to go to the United States and invest in a particular context, and found they were getting different treatment from that of a U.S. investor. For example, a United States city would look differently at and provide different obligations to a Canadian investor who wanted to establish a hockey team or baseball team, for example, than it would a United States investor. We don't have facts that would say there is this active discrimination between investors as such.

Mr. Appleton mentioned a number of investments the Ottawa Senators have in the context of equalization payments or intellectual property rights, for example. That's absolutely right. Those investments would be deemed to be Canadian investments in the United States, but it's not clear whether there's discrimination between the sale of an Ottawa Senators jersey with the Ottawa Senators logo on it versus a New York Rangers jersey with a New York Rangers logo on it. So in the context of discrimination among investors and investments, one would have to prove that there is a violation and discrimination in that regard.

Let me talk very briefly about performance requirements, because I know you're short of time. As Mr. Appleton pointed out, there are very strong provisions on performance requirements and the ability of governments to set conditions on investments. But there's a fundamental difference depending on whose coin is being used. There are far stricter limits on governments' ability to put conditions on investors when they're using their own coins, in other words, to say that to be able to invest you have to do this or you have to do that.

There's a totally different set of rules vis-à-vis the conditions that can be put on investors when public money is involved as an investment incentive. At that point, I think all the governments.... This is what Mr. Klassen said about why there are very few international rules in the context of subsidies and investment incentives. There is very little international discipline in the context of the conditions that governments can put on the granting of an advantage, an incentive, a subsidy, or a tax advantage. They're all viewed in the same way, because at that point you're playing with public funds.

• 0950

Therefore it seems that most governments wish to maintain for themselves the case that if public funds are involved one way or the other, then they should be able to measure the benefits they receive for those public funds. So it's not clear that in the context of the question of when it comes to granting public funding, one has the same disciplines in that there's been a violation in that regard.

Why don't I stop there?

Mr. Barry Appleton: I'm going to give you a simple answer. First of all, the submission I've given you here today is very conservative in its nature, not aggressive. Mr. Abbott suggested it was aggressive, but in fact it's conservative. It's based chapter and verse on the NAFTA agreements.

I have to tell you that I appreciate having Mr. Klassen and Mr. Gero here, but I expect that the position they take would be best enunciated by the American government rather than the Canadian government. I would have expected the Canadian government to look at these issues very carefully to see how they could help Canadian teams rather than try to suggest that there's nothing there. So that's something that I'm sure—

The Chairman: Mr. Appleton, I think Mr. Gero just said they're not clear yet.

Mr. Barry Appleton: Okay. Then I take that back, and I hope they look at this carefully, because it's a serious issue.

When you look at this question, I'd say that, very conservatively, this is a very solid case. Allow me to point out two issues.

First is the discrimination that Mr. Gero talked about. If you look at the law of the GATT and if you look at page 14 of my brief, you'll see I make reference to the 1990 decision of the GATT that dealt with the European Community and the oilseeds case. In that case, the GATT said very clearly that the national treatment violation doesn't have to be actual, it can be hypothetical; it's if you are systemically discriminated against and there's damage.

So I obviously do not agree with the law. Now, I know that Mr. Gero is not a lawyer, so I can't hold him to that level, but that is what the GATT law says there, so I obviously have a difference with him.

Second, when it comes to the issue about performance requirements, Mr. Gero has suggested that you can do more things when it comes to conditioning a subsidy on an advantage. He makes a point that's correct to a point, and it's complicated. On page 11, I set out a table to assist members in looking at this most complicated issue.

I can show you very briefly how in fact Mr. Gero's conclusion is incorrect, because as I've set out, you'll see in the chart that I looked at article 1106(1), which is a general prohibition.

Then article 1106(3) deals with prohibitions dealing with an advantage. An advantage is more than a subsidy; it's a subsidy, a tax concession, and loan financing. It's the broadest term you can use in international trade.

So article 1106(1) says you can't do seven things and article 1106(3) says you can't do four things, but it doesn't say how they relate. It just says you can't do some more things.

The reason they do this is that when they add in an article 1106(4), which is reproduced on page 12, it says that nothing in paragraph 3 will prevent you from doing a number of things. They tell you that you can have a requirement to locate productions, provide a service, or train or employ workers. All of these are the types of things that governments would want to do.

For example, if you look at the WTO in the TRIM Agreement, that's the level they're at. There aren't clear rules in the WTO here. But NAFTA went further.

This is why I have a difference with Mr. Gero. NAFTA said that “Nothing in paragraph 3 shall be construed”; it doesn't say anything about paragraph 1. So if you go back to the table, you'll see that paragraph 3 talks about using a preference for goods. You'll see it in the second column of the second row.

But article 1106(1), the other prohibition, talks about goods or services. It says you may never do something for goods or services, so this clause giveth and yet taketh away, as they say.

Article 1106(4) says you can give a subsidy to locate production for a good. If we're talking about hockey sticks rather than hockey, then that would be correct. But we're talking about more than our goods here, we're talking about services and investments. Because article 1106(4) doesn't modify article 1106(1) when it comes to services, that's where Mr. Gero and the department's position is incorrect.

• 0955

I'm sorry to make this a complicated answer, but it's the most complicated section of NAFTA, and I felt that members should know that in fact very clearly the framers of NAFTA anticipated this. If you look at that chart again, you'll see that if you look at the last row, you'll see that in another one of the provisions, paragraph (d), they deal with both goods and services.

So there it's clear that in article 1106(3), when they wanted to modify things, they thought about goods and services there. It's clear that in paragraph (b), which is just above it, they only want to deal with goods.

That's exactly why it's a performance requirement. It's exactly the type of thing by which governments are limited in what they can do.

So to simply answer the question, I believe this is a very strong case. I believe that Canadian investors who would bring a case would be successful, but unless the department were to shift its position, that would be more of a reason why an investor would want to do this on his own than to go back to our government to advance their cause.

The Chairman: Now we have to move.

[Translation]

Mr. Benoît Sauvageau: The interpreters didn't translate the last part and I didn't understand the last sentence he said.

[English]

Mr. Barry Appleton: What I was saying was that the reason the investor state provisions were there is to allow an investor himself to make his best case and not have to rely on his government to make his case. The reason is that an investor might more clearly enunciate his concerns compared to a government that has other things on its mind.

That's a good reason why Canadian teams would want to look at this investor process rather than looking at a chapter 20 dispute, unless the government became very interested in advancing their arguments.

The Chairman: Mr. Coderre.

[Translation]

Mr. Denis Coderre: First of all, I'd like to thank you for this presentation. I think there are some extremely interesting things, which will give rise to even more questions.

Mr. Gero and Mr. Klassen, I'm trying to understand. Has the Canadian government taken a clear look at the issue of professional teams? At the beginning, you said it hasn't, and now it's not clear. In your opinion, in the light of what Mr. Appleton has said, is the Canadian government going to do something about studying the issue or have you already done it?

[English]

Mr. John Gero: I received a copy of Mr. Appleton's study late last night. We will certainly look at it very carefully. To the extent that we think there are significant legal questions there, we will certainly turn it over to our lawyers to look at them in that regard.

[Translation]

Mr. Denis Coderre: So, the government hasn't done anything yet concerning professional teams, under NAFTA, because it thought it didn't apply in any case. So nothing has been done in this connection for the time being.

[English]

Mr. John Gero: That's right.

[Translation]

Mr. Denis Coderre: All right. If I've understood properly, if there is a complaint under chapter 11, there's compensation, but the law doesn't change. If there's a challenge under chapter 20, that is, from one government against another, does that affect the law? Moreover, you said there was no appeal, but isn't there what we call an extraordinary challenge, which a government may use further to a court decision?

[English]

Mr. Barry Appleton: Mr. Coderre, that's a very good question. Let me deal with each one specifically.

Mr. Denis Coderre: Yes, please.

Mr. Barry Appleton: If there were to be a challenge under chapter 11, you're correct that there would be compensation, but you could not change the law. If there were to be a challenge under chapter 20, the panel would not be able to strike down the law. It would say the United States is inconsistent and would ask the United States government to take measures, if it could, to be able to bring its laws into conformity with the obligation of NAFTA.

So it doesn't have the power to strike it down, it has the power to declare. Then it would be up to the American government and questions of American constitutional law as to how they would bring it into line.

In terms of the extraordinary appeal process, that deals with questions of subsidies and countervailing for goods. That's chapter 19 of NAFTA, not chapter 20. Chapter 20 of NAFTA is an interpretative process; it doesn't have appeals. Chapter 11 of NAFTA, using the investor state mechanism, has a process where you get an arbitral award, and it doesn't have an appeal.

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[Translation]

Mr. Denis Coderre: If it's done under chapter 20 and the government's not satisfied, is that when chapter 19 can be applied?

[English]

Mr. Barry Appleton: No. Chapter 19 would deal with discriminations.

Mr. Denis Coderre: I'm not a lawyer, by the way.

Mr. Barry Appleton: You ask excellent questions, as if you were a lawyer.

Mr. Denis Coderre: Thank you very much.

Mr. Barry Appleton: Chapter 19 applies to domestic determinations for subsidy and countervail for goods. If we were talking hockey sticks rather than hockey, chapter 19 would apply, but because we're talking about a service and an investment, chapter 19 does not apply. Chapter 20 applies. So we would never use chapter 19.

The question would be, would we use chapter 11 and chapter 20, or would we use just one? In fact, you may do both at the same time.

I should point out that there are some time limits involved with chapter 11, so in fact it would probably be safest for Canadian teams to bring a challenge under chapter 11 first, because there are no time limits dealing with chapter 20 interpretive disputes between government.

[Translation]

Mr. Denis Coderre: Mr. Gero, I've got something for you to think about personally. You talk about discrimination. When we see what happened to the Winnipeg Jets and the Quebec Nordiques, we realize that the market was too small and that the teams left for Phoenix or Colorado, indeed because of the advantages these cities offered these teams regarding infrastructures, and even mutual tax bonds and so on. Could it not, on the contrary, seem that the relocation of these teams put Canada and the Canadian cities that lost their teams at a disadvantage? We can say we want to discuss things on an equal footing, but since Canadian cities are not equal from the tax or exchange rate point of view, it could be demonstrated that there's discrimination and, therefore, that chapter 11 should apply.

[English]

Mr. John Gero: Well, no. It's a different kind of issue. In one context, you're looking at whether there has been a difference in the amount of systems or advantage or subsidies provided between one city and another. What chapter 11 looks at is: would one city treat two different investors in a discriminatory fashion? It's a different set of issues.

[Translation]

Mr. Denis Coderre: But the tax system isn't the same and, for instance, the Nashville Predators are offered $20 million in compensation. It's clearly discrimination. When one city doesn't offer the same advantages as another, it's obvious that there's discrimination.

[English]

Mr. John Gero: I think what you have is a different set of incentives being provided by each different government in that context, not a discrimination by one government between two investors. In that regard, one has tried to examine in a number of contexts disciplines on subsidies or investment incentives in an international context, to try to eliminate these kinds of differences, so far unsuccessfully.

Mr. Denis Coderre: Do I have another question?

The Chairman: A short question, and then we'll go to Mr. Riis.

[Translation]

Mr. Denis Coderre: We're going to extrapolate, Mr. Appleton.

[English]

We have a case. It works.

[Translation]

First, how much would that represent in millions of dollars? It could be $300 million that Washington would have to pay the Canadian franchises, as you say. So they pay the National League, which is going to make an equalization among the six franchises, for example. That's great, but in the end isn't that going to help kill the sport? Even if we're on an equal footing, that won't settle the tax issue or the legislative issue, and Washington will be able to prevent other cities from doing the same thing. So in a way, expansion of the National Hockey League has just been killed.

[English]

Mr. Barry Appleton: That's an excellent question. First let me talk about the question of valuation. Second I'll talk about the implications.

I am not a valuator. There are excellent valuators who are looking at NAFTA-type issues. They will tell us what the amount is. We know there is loss. We know there is harm. I suspect that the amount of loss is in excess of $100 million. It could very well be more. I can't tell you.

Again, I'm not retained to act for any of these teams. I only know what I read in the newspapers and look at in studies. You may have a better idea than I will, but it's bigger than a breadbox—not small.

On the second question...I'm sorry, you'll have to repeat your second question for me, and then I'll answer for you, Mr. Coderre.

• 1005

[Translation]

Mr. Denis Coderre: The question is clear. As long as there really is compensation, we have a case. Are we not in a way going to kill expansion of the National Hockey League?

[English]

Mr. Barry Appleton: Thank you. I'm sorry, it was such a good question; it preoccupied me.

In terms of the implications for the NHL, first of all, it is not clear under American constitutional law whether or not the U.S. federal government can actually change the laws set by the states and the municipalities in this area. This is an internal matter of U.S. law, and I'm not certain they could even do that. What happens is that the U.S. federal government speaks to international responsibility under this agreement and then they would have to deal with it.

In my opinion, there are some provisions under Canadian law that might permit the federal Parliament to be able to get money from a state or province if it was to do something like this. That, again, is a distinctive question of Canadian internal law.

Looking at this issue, I don't think at this point the U.S. government would be able to collect anything. In fact, you have the rather bizarre situation in which the localities, the states and municipal governments that would want to have new teams would be able to give as many benefits as they want, therefore violating the NAFTA as they see fit, because they want to do it. They would make the U.S. national government pay the price to the affected Canadian teams for doing that.

It seems a little absurd, but that is actually how the NAFTA operates. Rather than doing anything to make expansion more difficult in the United States, it might make expansion the same, just as easy as it has been. Municipalities that want a team are going to continue to bid for a team and do everything they can to get a team. Since it doesn't cost them anything, they don't care. The U.S. national government won't like that.

The Chairman: Thank you, Mr. Appleton.

Mr. Riis.

Mr. Nelson Riis (Kamloops, NDP): Thank you very much, Mr. Chairman. This is very interesting this morning.

My first question is to Mr. Gero.

In terms of the level of subsidy that a franchise could be offered, say, in the United States, if in the Nashville example they had offered $100 million annually and a free stadium, completely free access, a whole set of incredible incentives, would we still feel as we do, that there is no unfair competition occurring?

Mr. John Gero: No, what we would ask is whether or not the provision of those incentives would violate a NAFTA obligation. And the question is—

Mr. Nelson Riis: On that point, this goes back to your earlier explanation, when you were saying that as long as there wasn't a differentiation and these incredible subsidies were available to any team that was vying for this location....

I'm from British Columbia and I'm thinking of the softwood issue. We have American companies and Canadian companies that all pay the same stumpage rates; in other words, there's no differentiation. Yet, we have agreed that there is a subsidy here, and consequently we have countervailing duties we've agreed to and quotas as well. What is the difference between that...?

Mr. John Gero: Let me use the softwood lumber example. First of all, we haven't agreed there's a subsidy, but that's one of the battles we have with the United States. In the context of that provision of stumpage, clearly because there's both U.S. and Canadian investors, they can both get the same provisions, and there is not a violation of the national treatment provisions by the British Columbia government, for example, because it provides it irrespective of the nationality of the investor. That doesn't make any difference.

What does come into it, which is what the United States claimed, is that by our setting that subsidy too low, we are in fact subsidizing lumber as opposed to what the United States is doing in selling those trees in the United States at a “fair market value”, according to them.

We have a difference of view on whether or not that constitutes a subsidy. In a number of cases they have attempted to prove that there is a subsidy and they have imposed countervailing duties on the exports of Canadian lumber into the United States, but there is nothing that says you can't provide that.

All that comes into place is that if it comes into the United States, we can impose a countervailing duty. As you know, that's been a battle we've had with the United States for a number of years. They've never made the claim that you can't provide a subsidy as such. They've said that if you do and you want to export to the United States, then obviously we have the right to countervail.

Mr. Nelson Riis: Would you reply to that same question, Mr. Appleton?

• 1010

Mr. Barry Appleton: Mr. Riis, I have very specific views on the softwood issue that would take more time than we have actually here today to be able to go through, so I'd rather keep my counsel. But I'd be happy to talk to you and other members at another hearing about that.

Mr. Nelson Riis: Okay, fair enough.

Going back to my colleague's question, there seem to be some violations here. There seems to be some damage. Mr. Klassen, I agree there might be a different interpretation here, but let's say we just agree to differ on this and say, well, we around this table think there's a case. You might question our wisdom but say, “Well, you're a decent fellow. I'll just go along with this.”

Why wouldn't we give it a shot, just try it, if nothing else just to make the point? Whether or not we can win in law based on our NAFTA, clearly it would provide an interesting public debate in Canada and in the United States. Is there any reason we shouldn't do this, other than that in your judgment we wouldn't have a strong case? Mr. Appleton has a different view that we would.

Mr. John Klassen: I certainly wouldn't question the wisdom of the committee, Mr. Riis, and contrary to Mr. Appleton's insinuation earlier, the department and the minister are quite prepared and quite keen to defend Canadian interests when and where we can. We have a long history of disputes against the United States in the WTO under the old GATT where we have done so, and we continue to do so. So it's not a question of a willingness on the part of the department to defend Canadian interests.

It really is a question, as you've summed it up, of an honest difference of opinion here on what is the legal case. We have received Mr. Appleton's submission. We will examine it in considerable detail and we will talk about it with our trade lawyers.

To come to your other question, there is a policy question there. If our view, if the view of our legal experts, really is that this is not a case that could be won or is not a case that should even be brought in the sense of a NAFTA violation, then that is perhaps not the best forum to have the sort of public policy debate you're talking about in that context. That may well be a debate we should have with the United States that we should air more publicly. But if in our view the NAFTA provisions really don't prevail, then it's an abuse of the NAFTA. It's an abuse of the process, which serves us very well. We would certainly resist and take umbrage if the United States were to use the process for matters we don't think it's really designed to do.

Mr. Nelson Riis: On the previous point, to Mr. Gero, that's our view of the Americans in the softwood lumber: that they don't have a case. We've argued that clearly and we still don't believe it. As Mr. Gero said, we never accepted this, and we feel they've taken an inappropriate action.

If we as a committee, having heard more about this than we've had today and having received responses from you and perhaps sought other advice, on balance decide this to us looks like something we should argue, other than that it might just upset our American friends, is there any other reason we wouldn't do that?

Mr. John Klassen: I don't worry about upsetting the Americans or anybody else with whom we take a case. This would then be a decision the minister would have to take: is this the proper mechanism to have that kind of debate?

Mr. Nelson Riis: Okay.

For my last question, Mr. Chairman, I'll go back to Mr. Klassen's presentation of this morning. He says on page 4: “we do not believe that a sports franchise can be defined as a service...”. Then on page 5 he says: “While the NAFTA provisions on investment exceed WTO disciplines, they provide no disciplines on the granting of financial inducements to attract investment.”

Mr. Appleton, do you agree with either of those statements?

Mr. Barry Appleton: In relation to the investment chapter, no, absolutely not, and I've set out in detail in my brief why.

Mr. Nelson Riis: Yes.

Mr. Barry Appleton: And I've given you evidence for why specifically I believe that is not correct.

In relation to the service chapter, I believe, for the reasons I've set out in the brief, that the cross-border services chapters don't apply, but services do apply, and since there are not similar rules in the WTO—in the GATS agreement, for example—it might apply there. So there might be other agreements that would apply as well.

• 1015

Perhaps I can make a brief comment on your last question. On Sunday, I stopped by the local hockey arena near where I live. I saw a group of parents taking their kids to the rink so they would have a chance to play hockey and participate in our national sport.

You can see the kids when they go on the ice...they want to be in the NHL. They want to be in the play-offs that we're watching right now.

Our teams aren't able to spend the money to get some of those kids into the NHL because they're spending it on other things. This committee has the opportunity to to try to remedy that situation, to be able to give the Canadian teams the ability to give those kids a shot.

What are the real questions here? What's the real constituency here? The real constituency is Canadians and their kids who are trying so hard to be able to participate in part of our Canadian culture. That's the issue here. I hope that after the department has carefully reviewed this material they will perhaps side with them when they make a determination on the right action to take.

The Chairman: Thank you.

Madame Tremblay.

[Translation]

Ms. Suzanne Tremblay: I have a little question to ask. We have to go to the House soon.

When we meet professional teams, they sometimes say they're an integral part of the culture and other times they come across as business companies, just like Bombardier. They sell television rights and are therefore involved in communications.

We saw how aware of culture they were when they were on television the Sunday afternoon of Mother's Day, when there's nothing more unpleasant for a Quebecker than to see hockey on Mother's Day. They showed us this game on Sunday afternoon because it was better for the American television stations. Anyway, I think they seriously hurt our culture by doing that on Sunday afternoon instead of Sunday evening. What are these teams exactly? Are they people who belong to show business? Are they part of the cultural industry? Are they ordinary businesses? Is there something somewhere that would enable us to define them? Could you enlighten me in this regard, Mr. Appleton?

[English]

Mr. Barry Appleton: Madame Tremblay, I'm going to ask my colleague Mr. Neceski to address that, and then I may give you a final comment at the end.

Mr. Marjan Neceski (Counsel, Appleton and Associates International Lawyers): Basically, much as I and many of those of you in front of me have done in the past...we've skated on ponds, we've skated on rinks. Hockey is definitely part of our culture; there are no two ways about it. However, in the NAFTA itself there's no—

[Translation]

Ms. Suzanne Tremblay: Like pea soup.

[English]

Mr. Marjan Neceski: Like pea soup, exactly...Habitant pea soup.

Under the NAFTA and the original free trade agreement there is no actual cultural exemption, as mentioned earlier. Within the NAFTA there's an incorporation of a provision in the earlier free trade agreement of a cultural industries exemption. Basically, there are five enumerated areas: print publication, film and video, music recording, music publication, and publishing and broadcasting. That is found on page 20 of our submission.

Even though we love to say that hockey is definitely part of our culture, unfortunately it is not a cultural industry as enumerated by the earlier free trade agreement and incorporated later into the NAFTA under a later annex.

Mr. Barry Appleton: Perhaps I can just add to that. Even though there are broadcasting issues involved, those are not broadcasting issues of the team. They are broadcasting issues of the network, and therefore the provision of a cultural industries exemption won't apply. That means the exemption only applies to Canada. It only deals with Canadian issues. Canadian governments cannot provide advantages or subsidies to Canadian teams and then justify this under the cultural industries exemption. Even though it's an essential part of our culture, it's still not covered by what culture is in the NAFTA.

The Chairman: We'll now go to Mr. Provenzano, then back to Mr. Abbott and Mr. Coderre. It's a half-hour bell, so we will finish at 10.30 a.m.

Mr. Carmen Provenzano (Sault Ste. Marie, Lib.): I'm down to one question, Mr. Chairman.

Thank you, Mr. Appleton, for a very lucid presentation. It makes it a lot easier for the committee to get a point, and you've made some of your points very well. My question is, are there any situations where the nationality of the Canadian investor becomes relevant in foreign ownership?

• 1020

Mr. Barry Appleton: Whenever you're dealing with the NAFTA, the nationality of the investor is critical. The NAFTA says that a Canadian investor can bring a claim against the Government of the United States, or a Canadian investor who owns an investment in the United States. In other words, an American corporation owned by a Canadian is deemed under NAFTA to be Canadian. So, in fact, if there were to be Canadian ownership, or a variety of other interests, of an American hockey franchise, it would also qualify as a Canadian under NAFTA. It's complicated.

Mr. Carmen Provenzano: Where the Canadian investor, though, is a foreigner, where the owner of one of the Canadian NHL franchises is a foreigner, whether an individual or a foreign-controlled corporation, what implications does that have that we should know about?

Mr. Barry Appleton: Let me give you a specific example. The Vancouver hockey team, for example, is owned by an American business. Because the Vancouver team is separately incorporated in Canada, and therefore it's a juridical person in Canada, it has standing as a NAFTA investor. The American owners themselves do not have standing against the U.S. government. The NAFTA says you can't bring a claim against your own government. That's not covered by an international agreement; that's domestic law. But the Canadian investor being the team, or a Canadian investor being a regular citizen or an association, all have standing.

Mr. Carmen Provenzano: I'm thinking of an NHL team owned by a multinational having foreign nationality.

Mr. Barry Appleton: If it's incorporated in Canada, then it would have standing to be able to use the investment chapter provisions of the NAFTA itself. If it didn't, if it was a Dutch company and it had no incorporation in Canada, you'd have to look very carefully at the NAFTA to see whether it would fit in.

Mr. Carmen Provenzano: Thank you.

The Chairman: Mr. Abbott.

Mr. Jim Abbott: We've spoken with smiles on our faces about pea soup and maple syrup, but I think the quintessential part of being a Canadian is that we go to the wall. You take a look at what we've done in the First World War or the Second World War, or indeed in any effort; that is what we're about.

So I ask this question. Considering that the NHL has embraced this distorting effect that has been brought to it by these subsidies...they've acknowledged that there is a difference between our currency and so they've pooled their profits in the equalization fund, but they continue to embrace this distorting effect. And as you point out on page 13 of your presentation, Mr. Bettman even acknowledged that. I ask Mr. Klassen: if we are going to go to the wall, as we do as Canadians, very proudly, would you not agree that it would be beneficial for us to start to at least rattle the sabres on this thing?

Mr. John Klassen: Thank you.

Yes, Mr. Abbott, as I've said in speaking to Mr. Riis, certainly we will look in much more detail at the legal case. We want to see whether or not we actually have a sabre to rattle here, sir. We want to be much more sure in our legal stance than we believe we are at the moment before we decide whether or not to pursue this under NAFTA provisions or whether or not this is a public policy debate that should be held in some different context.

The Chairman: Mr. Coderre.

[Translation]

Mr. Denis Coderre: Mr. Appleton, there was an agreement with the Edmonton Oilers, and the city of Edmonton gave the arena, worth $2.9 million, for $1 million. The Raptors are going to have the new Air Canada Centre, on land that belonged to Canada Post. The Montreal Expos are trying to get a new stadium on a Canada Land site, worth $16 million and are asking whether something might not be done for them. If it's true for the Nashville Predators, then couldn't the American government say that we're also breaching the NAFTA agreement by making this sort of gift? Therefore, if Washington has to compensate us, will Ottawa also have to compensate when certain professional teams receive some advantages?

• 1025

[English]

The Chairman: Investment incentives.

Mr. Denis Coderre: I rather like that one.

[Translation]

Thank you, Mr. Chairman.

[English]

Mr. Barry Appleton: This is an excellent question. Again, I want to say how pleased I am to come to a committee that is so well versed in terms of the facts that it makes it a real pleasure to be able to look at these types of issues.

The deal with Edmonton is pre-1994, and therefore it would be covered as a pre-existing measure and under NAFTA it would be exempt. Any transaction that took place after 1994 would then have to be looked at.

There are questions as to how it is structured and how it is dealt with. If it deals with the government itself, then there might be an issue. If it deals with an entity of the government that may no longer be, a crown corporation for example, and if it is a question as to how much was paid, if things are paid for, then those would be dealt with in a different way. There are factual issues in every situation, and they would have to be looked at. There is a sense of balance.

What I am talking about here, Mr. Coderre, is that Canadian teams have to be treated equally. That means that if they are getting special benefits, perhaps they would be offset. In other words, if there was to be a claim, perhaps the value of the Canadian benefit would be offset at the end of the day from some of the payments. The American payments are so extraordinarily large and the Canadian benefits, if any, are so small that I don't think there would be much of an effect at the end of the day.

The Chairman: Mr. Riis, then Madame Tremblay.

Mr. Nelson Riis: I am trying to imagine what an American session like this would be like. It wouldn't be like this. I'm going back to the point that Mr. Abbott was making. We would have senators and congressmen sitting here saying, “Goddamn it, those Yankees are bribing those teams to come in here left and right, and we have to stand up and do something about it.” They wouldn't say “Yankees” they would say “the other side”.

I think Mr. Abbott has something here. We have to say...you know, we have been sitting here quietly long enough, and we have to go down there and kick their ass. We have this NAFTA system to do this.

Mr. Klassen, I would encourage you and your fellows to look into this and try to find us a sabre to go down there—and take it far beyond rattling. We have to start taking some lessons from our American counterparts and get tough and kick ass.

The Chairman: Mr. Riis, on that point, if we had handled the auto industry the way we've handled our national sport, we wouldn't have an auto industry.

Madame Tremblay.

[Translation]

Ms. Suzanne Tremblay: I'd like to ask one small question about my understanding of article 1108, where it says that articles 1102, 1103, 1106 and 1107 do not apply. If I understood correctly, Mr. Appleton, you said that the municipalities could continue to offer incentives to the teams since the American government would have to pay. In article 1108(1)a)(iii), they talk about local government. Can this be interpreted as you told us earlier, that is, that this does not apply to local governments? How are we to interpret this?

[English]

Mr. Barry Appleton: The best way of interpreting provisions is to read them very carefully, especially when you are dealing with the NAFTA, which is very complicated. If I can just read it, it should make it a little clearer.

It says that various articles, 1102, 1103, 1106 and 1107—that is, national treatment, most favoured nation treatment, performance requirements and senior management for corporations—those obligations do not apply to “any existing non-conforming measure that is maintained by...a local government”. And “existing” is defined as “in force on January 1, 1994”. So if it is an existing non-conforming measure—that is, an existing measure that would otherwise violate the NAFTA that was in force in January 1, 1994 and is still maintained today—that is exempt. If it is a measure that is similar to a 1994 measure but that they stopped and did again, it would be covered.

If you look just above that to 1108(1)(a)(ii), it says state and provincial measures that are listed in a reservation may be preserved. And in their very good judgment, the Government of Canada and the Government of the United States reserved all existing provincial measures in force on January 1, 1994 in March 1996. So they protected all existing provincial measures that were maintained. So those two areas are totally covered; it's only new measures after 1994.

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It also would apply, by the way, if you change a measure and it's less consistent with the NAFTA. In other words, if before you were giving $3 million a year and then in 1997 you started giving $20 million a year, the difference would also be subject to the NAFTA provisions.

The Chairman: Denis Coderre.

[Translation]

Mr. Denis Coderre: I think that's an extremely interesting and extremely important subject. I certainly don't want the impression to be given that things are being done hastily, and I'd like to suggest, with my colleagues' agreement, that if the vote ends about 10:50, we have a supplementary session from 11 o'clock to noon to carry on the discussion. I think these are very important matters and that we should take a closer look at certain articles.

Ms. Suzanne Tremblay: There's a committee sitting at 11 o'clock.

[English]

The Chairman: Mr. Coderre, I hear what you're saying. I think there are a couple of things that we would recognize as of this morning.

First of all, other members do have committees to go to at 11 a.m., but I think we have discovered this morning the complexity of this issue. The department has agreed to take a look at Mr. Appleton's brief and do an analysis, and with the consent of the membership of this committee, I would suggest that maybe within a short period of time we could have the department back when they could more formally respond to Mr. Appleton's position, so that we would make sure we are—

[Translation]

Mr. Denis Coderre: I think that, in view of the great credibility of Mr. Appleton, who is here not only voluntarily but also in a private capacity, it would be interesting to see him again so that he can give us his point of view. In the meantime, we'll have time to read his brief more closely,

[English]

if you're willing to compromise.

The Chairman: Are we in accord on this? Thank you.

I would like to just say to Mr. Neceski, Mr. Appleton, Mr. Klassen and Mr. Gero, thank you very much for coming here this morning and helping us to advance the debate.

The meeting is adjourned.