INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, February 29, 2000

• 0907

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I call the meeting to order. Pursuant to the committee's mandate under Standing Order 108(2), this is a study concerning productivity, innovation, and competitiveness.

This morning, we're very pleased to have Executive Director Sally Rutherford with us from the Canadian Federation of Agriculture. Also here, from the Canadian Vehicle Manufacturers' Association, is David Adams, vice-president of policy.

What I would propose is that you both provide your opening statements, and then we'll move to questions together.

We'll begin with Ms. Rutherford, unless you have another arrangement.

Ms. Sally Rutherford (Executive Director, Canadian Federation of Agriculture): Thank you very much for the opportunity to speak with you today.

For those of you who are not aware of it, the Canadian Federation of Agriculture is the largest general farm organization in Canada. Our members are general farm organizations in each of the provinces—other than Saskatchewan, which does not have one—and many of the major national commodity organizations. As such, we have members from coast to coast, in all commodities.

The issues we'd like to bring to your attention today relate primarily to how agriculture in this country is suffering in some respects from a lack of competitiveness, largely in terms of things like cost recovery and the way programs are delivered and decisions are made. At the same time, we realize that we all have to make some serious adjustments to meet new world standards and to move ahead into the world. We have to make sure the relationships that industry has with government and those that government has with industry do not undermine what opportunities Canadian agriculture does have.

I can maybe go through a few bits and pieces. In terms of inputs, for example, there are some good points and some bad points in relation to that issue. Pesticides, for example, have been one of our big bugbears over the last number of years. It's fair to say that the situation in relation to pesticide use is getting better. Farmers are using less, and they do have access to better products.

• 0910

The harmonization with the U.S. is becoming better as well, although it's still lagging. There are growing issues with harmonization with the EU in terms of products that are available there and the point in time when they are available on this market.

One of the really big issues that relates to access is the issue of cost-recovery fees. As the market changes significantly, companies are less and less interested in spending the money to actually register products in Canada. To this point that hasn't had a big impact, but it's beginning to. The mergers amongst the big companies make the Canadian agricultural market a smaller and smaller part of their own market, and therefore it's not worth spending the bucks a lot of the time. That is becoming a message that we're hearing more and more often from the companies, and we don't think it's simply a bit of a ploy. I think it is the truth. I think it applies beyond agricultural chemicals, to pharmaceuticals and other kinds of products that require registration and require that fees be paid.

Cost recovery overall continues to be a considerable concern that wasn't addressed in last night's budget. Between 1995 and 1998, fees did rise 28%. There has been more or less a moratorium on fees, but just within agriculture, it has resulted in another $5 million in costs, meaning that in addition to the 28%, $5 million in costs have been shifted from government to the private sector. That is also continuing, and that again becomes a bigger and bigger problem as we move into a new era with different kinds of requirements. For example, moving into environmental-type issues and food safety issues, more and more of the onus is put on individual farmers to actually pick up the costs of the certification for their own farms in relation to food safety and quality and in terms of the environment. These costs are beginning to mount.

As well, in terms of the way the programs are being approached and developed, they're trying to develop the integration amongst them. It's very difficult, which means that people are actually on the verge of paying for something three times when they should probably be paying for it only once. And there are other kinds of issues that I think we have to look at more carefully as we move down the line.

We continue to believe that we need to reinvest in research and development. Clearly last night's budget addresses some of those issues. We'll be waiting to see what kind of impact it has on agricultural research and development. Clearly there will be money for biotech, but it will be divided up quite broadly. Certainly there will be benefits that will come back, but if we are going to be competitive, I think we have to spend a great deal of money on R and D, and also on education. Perhaps one of the most important things for agriculture in last night's budget may indeed be the funding of the chairs in universities, depending on how that happens.

From some other work that we're involved with—for example, work that involves biodiversity—I know we're trying to create a system whereby Canada will safeguard its biological heritage, both plant and animal. We don't have enough taxonomists in Canada to even begin to do the work. We don't even have people left to train people to do the work. If we were going to train taxonomists in this country, we would actually have to send them to Mexico. They have spent a reasonable amount of money trying to build up a faculty there that has the capability to do it, which is great. In some respects that's not a problem, but that's not the only area that we're lacking in.

Too often, we think of R and D as being the development of a new chemical, or the development of a new trait within an animal, no matter how it's bred, whether it's traditionally or with biotech. But if we don't have the people who can do the base work on the science side, we're cooked. It's just a matter of time before we're simply purchasers of somebody else's technology. If we're looking at costs now, the costs are going to go out the window and we'll lose any kind of competitive edge we had.

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Certainly one of the other issues coming out of the budget last night, just to point it out, was the whole issue of moving to wireless technology and government using the Internet. One of the big issues for agriculture remains the fact that the infrastructure is not there in rural areas. There are still many people who don't have private lines. Frankly, there are many people who still don't have telephone access. For example, you can't even pay enough money to get access to a second line that you might need to have Internet or fax access in a way that is going to be useful to you. Until we do have that infrastructure available, the federal government can spend all the money it likes to provide increased access to those who already have access, but it's not going to change anything for those who do not have the appropriate access at this point in time. I think that's something that definitely needs to be addressed.

As the industry has changed and as the world has changed over the last 15 years, federal and provincial governments have gotten out of the provision of advisory services—whether they're ag reps or people at research stations—that did fall to people in the input sector. Again, as they were pulled back and merged, there were fewer and fewer bodies there. People are therefore relying much more on Internet services and that kind of thing in order to be able to access the kind of knowledge they need to make the decisions they have to make. If we're going to ignore the fact that they don't have the appropriate physical access, then I think we're ignoring their ability to function.

I think this also has a huge impact on the social side for people, particularly in areas that actually don't have easy access to even secondary education. There are places in Saskatchewan now that rely on the Internet to provide high school classes. If we move into a situation in which that becomes more prevalent—and we may indeed do that—for many northern communities this is going to become a really important issue.

In terms of trade, certainly the issues we have are the issues that we've had for a long time, at least since the last GATT round. For fiscal reasons, Canada did cut its support to a much greater extent than was necessary under the Uruguay Round agreement, and it certainly did more than other countries did. For example, our green support in 1995 was 8.1%; in the U.S., it was 24%; and the EU's was 9%. But the blue box support in the U.S. was still 30.5% of the amber limit. In the EU, it was 26.5% of the amber limit, and there was no requirement for reduction.

Canada is lagging behind in support. Certainly the income support that has been provided in the last number of months is very welcome, but also it doesn't address the ongoing issues that are being addressed in other countries, and particularly in the EU, for example. Last week, at our annual meeting, we did have a workshop on multifunctionality. The vice-president of the grain growers in France came to speak to us about multifunctionality. It was very interesting to hear how France is actually supporting its farmers. That's not to say that we want to be supported in the same way. Simply, what Canadian farmers are having to compete against is increasingly difficult.

In terms of export subsidies, they are still a major problem for Canada. In the last year, the U.S. has announced $500 million to $600 million more going to countries that require food aid, by their definition. In those countries that actually require food aid, this is not a problem, but in countries in which the U.S. is simply using it to open a door to continued and increased exports, it is a problem. Canada does export food as food aid, but we give a great deal more money to provide assistance for the purchase of food in those countries than we actually do provide as food. I think it shows the difference in our approach, and the difference also in the way the U.S. is using its food aid program.

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In terms of market access, certainly TRQ administration continues to be a problem, market access into Europe in particular, where certain tariff lines were aggregated—for example, meat. That has made a really significant dent in our ability to export to those countries, which, again, has serious implications for our ability to produce for markets and for profit. They are issues that have to continue to be on the list. One of the things I think we have to be very careful about is that while the GATT negotiations or the WTO negotiations are not high on people's lists—they've slipped since December—we can't forget that the issues are still there.

Market access in terms of non-tariff barriers is probably the growing issue and may indeed become the greatest issue. They include everything from health and safety to environmental issues. Certainly they do affect Canadian competitiveness and the competitiveness of other countries as well.

One of the other workshops we held last week was on the precautionary principle. The EU has now bought into the use of precautionary principle in a huge way. All of the farm organizations in Europe support it, and the consumer organizations support it. As a principle it's pretty well unassailable, and as a way of trying to keep product out of a market, it's also pretty much unassailable.

It's very difficult to box with a shadow and win. To some extent, that's what we're dealing with here. It's going to be very difficult to try to develop rules that anybody can live with when what you're dealing with is somebody just turning around and saying no, today we've decided we're not going to accept your product. It's very difficult to try to meet those standards. This isn't simply a matter of increased standards; it's a matter of constantly changing standards, and it is something that we are going to be very careful to try to address.

Again, it's not that we're denying that there are health and safety issues or environmental issues, but everybody needs a benchmark, and clearly we need to be able to deal with those.

With that, I'll turn it over to my colleague.

The Chair: Thank you very much.

Mr. Adams, please.

Mr. David C. Adams (Vice-President, Policy, Canadian Vehicle Manufacturers' Association): Thanks very much for the opportunity to appear before the committee.

The membership of the Canadian Vehicle Manufacturers' Association includes DaimlerChrysler Canada Inc., the Ford Motor Company of Canada, General Motors of Canada, Navistar International Corporation, which as of last week became the International Truck and Engine Corporation Canada, and Volvo Cars of Canada.

While I'm speaking on behalf of our member companies, on many of the items that I'm going to talk about this morning, I don't think other manufacturers in Canada would have a view that is too much different from what I'm expressing today. I guess we're all in the same boat. We all face similar challenges.

I thought I would start by just reviewing some of the numbers for you. I've given you a brief PowerPoint slide presentation that has some of those statistics on it, so I won't go through them in detail, but I think if you've been watching the papers at all you'll know that the automotive industry had quite a good year last year, from both a production point of view and a sales point of view.

We had a record production of 2,987,000, almost 2,988,000, light trucks and cars, which was about 18.5% more than 1998 levels. We also had the highest sales volume in Canada since 1988, at 1,501,000 units. Our production in Canada was 19.2% of the total Canada-U.S. production, while our sales were only about 8.8% of the total Canada-U.S. production.

Having said that, though, I don't want to leave you with the impression that the good times in the auto industry will go on ad infinitum. I think we're at the mature point in the economic cycle with respect to the automotive industry, and I think it's important to ensure that Canada has policies in place that will be beneficial to the automotive industry not only in the good times but in the downside of the cycle as well.

That said, it looks like the automotive industry will have another good year in the year 2000. Sales in the U.S. are expected to be in the 16.5 million to 17 million range; it could be even higher than that, given some of the recent reports. Our own sales here in Canada at the end of January were up 8.4% over last year, so again, things are looking good and are in support of the forecast of Canada having perhaps a record year for sales this year.

• 0925

There's probably more opportunity for Canada, on a relative basis, in comparison to the United States, to do a little better. I think that's because in the United States the demand for new vehicles has been more or less consumed, given that about 60% of households now have vehicles that are four years old and under, whereas in Canada that's only about 40%. The average age of the vehicles on the road in Canada today is about 8.3 years, so there's still a bit of pent-up demand there for consumers to be purchasing new vehicles.

If you look at those statistics, especially the production statistics, you could maybe conclude that the low dollar is one reason why Canada has been successful, as those numbers allude to. But there are many other lower-cost jurisdictions around the world that produce vehicles in an industry that is truly global, and if we compare our labour statistics, as one small component of the total production picture, with only the United States, we're probably getting a bit of a distorted picture of what competition means in the automotive industry. There are other factors, then, that do influence the productivity and competitiveness of the automotive industry in Canada.

As far as the automotive industry is concerned, it's often looked at or lumped with other manufacturers as being sort of the old economy. What I'd like to say is that although the focus seems to be on the new economy, on the high-tech industry, information technology, and e-commerce generally, Canada should not forget the importance of a strong automotive industry. Most of you are well aware, I think, of the importance of the automotive industry in terms of it being the economic engine of the country—especially your chair.

Having said that, we would look at the automotive industry and say that it's currently applying those sorts of new economy technologies, the high-tech, the information technology, but not only to reinvent the manufacturing process: that whole information technology is actually reinventing the corporations and the automotive business themselves.

From a productivity point of view, which is what the committee is interested in hearing about this morning—and I think you already heard reference to this last week when the CAW was before you—the industry standard is the Harbour report.

Harbour & Associates go into the auto assembly plants, the engine assembly facilities, the transmission assembly facilities, and the stamping plants throughout North America and Mexico and measure how productive the plant is by looking at how many workers it actually takes to produce a vehicle. Recently they've changed their methodology so that they're now looking at the actual number of hours it takes to produce a vehicle. You end up with an output divided by input productivity equation, basically, under the numbers they produce.

In the handout I've given you, those numbers are there. They show, at least for our members, the Big Three since 1979—that's a North American number—through to what I believe on your chart is 1992. But you also have figures on the other graph that show all of the manufacturers in Canada, comparing 1992 to 1998. I'm not going to go through all the numbers in detail with you, but I think you get a general idea that the numbers have come down, that the productivity has improved significantly, in the case of Canada.

Another determination of productivity is obviously capacity utilization. When I say that, I mean basically ensuring that you're trying to produce the number of vehicles in the plant that the plant was originally built and designed to manufacture. Obviously if you're working at a capacity that's lower than the maximum, your productivity will suffer. And I guess the opposite is true, although you might not think it. Unless it's structured right, sometimes when a plant is operating at overcapacity, the overtime and whatnot, those extra costs you incur, can impinge upon your productivity at the plant.

All of the factories have undertaken initiatives that are aimed at streamlining not only the amount of product but the type of product that can be put through a plant. One of our members has invested about $500 million in body shop facilities in each of the plants that produce a particular type of vehicle.

• 0930

What that body shop facility is designed to do, with some very minor programming changes, is to allow the body shop to actually build a number of variations of the same vehicle, whether it be a pickup truck or a sport utility vehicle or some other vehicle. This means that you're effectively getting the same type of productivity out of one piece of machinery that you would have normally had to purchase several pieces of tooling for.

When you combine that type of flexibility in your assembly facilities with the new type of assembly facility that uses an automated, guided vehicle instead of an assembly line, where the vehicle that's being assembled can be lowered or raised to accommodate the workers, and I guess to the best position for the worker to accommodate the job, then I think you're starting to see that the impact of productivity on the worker can be maximized as well. You can reduce the possibility of worker injury too when you have the flexibility to move the vehicle to the height or position that's most appropriate for the task at hand.

Above and beyond the initiatives that are actually taking place on the assembly line, there are initiatives that you may have read about recently in the press. One of our members is teaming up with United Parcel Service, better known as UPS, to try to take time out of the delivery process in actually getting the vehicle from the factory to the dealership. That time is currently about 15 days. We're trying to get that down to six days.

That could potentially translate into productivity at the dealer level as well, meaning that they wouldn't need to have as much inventory on hand, and it could build in some better predictability for consumers who are actually going to purchase a car in terms of when that vehicle is going to arrive. On the Internet, using the vehicle identification number, dealers will have the capability to track all the vehicles when they're shipped.

More recently, in the papers on the weekend you may have read about the strategic alliance that was formed with my three member companies, DaimlerChrysler, Ford, and General Motors, specifically, I guess, designed to build an Internet network to streamline their $240-billion purchasing process from 30,000 suppliers. It's estimated that this type of initiative could slash about $90 from the $100 cost of filling a purchase order.

So with respect to auto manufacturing, I think there are some really innovative applications of the new technology or new economy being applied to what people normally think of as an old technology industry.

CAD/CAM—computer-assisted design and computer-assisted manufacturing—has allowed engineers to build virtual vehicle prototypes, thereby reducing the time it takes to develop new cars from the ground up. Satellite communication and, again, Internet technology allow these virtual prototypes to be built collectively by company design centres all around the world at the same time.

To that point, I guess it wasn't too long ago that 48 months or four years was the standard time it took to develop a new product. Twenty-four months is now considered to be a global benchmark, and certain manufacturers are trying to drive that time down even further, to about 15 months.

In that regard, vehicle manufacturers have also refined computer simulation for vehicle testing purposes for regulatory compliance. I think these techniques could create real efficiencies in terms of the whole design cycle and could dramatically reduce costs for the manufacturers. Vehicle manufacturers would be greatly assisted in this regard by the amending of the Motor Vehicle Safety Act in Canada to accept this test approach, which would be computer simulation of crash tests and that kind of thing as opposed to actually having to physically crash a number of vehicles.

Looking at the auto industry in Canada, there are a number of factors that impact productivity in the auto sector. These factors include but aren't limited to capital investment. Our member companies have invested more than $22 billion in their facilities over the course of the last decade. For the most part, this is what we call brownfield investment, meaning that there are no new bricks and mortar going up. What it means is that the facilities are basically rebuilt from the inside out as opposed to the other term, greenfield, which would be a new facility going up. I guess this investment means that the latest production-process improvements have been incorporated into the plants, which lends itself to improved productivity.

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An educated workforce is also a key component, and Canada has a workforce that is generally well educated. Unfortunately, in our industry we're experiencing shortages—I think that was alluded to by the previous people—of skilled tradespeople and engineers of all types. Part of the reason for this shortage is the activity from the assemblers to push aspects of product development down into the supply chain, necessitating that the tier-one suppliers to the auto industry invest in intellectual capital. There are simply too many jobs and not enough engineers.

I guess the existence of a well-educated workforce means that workers are better able to take advantage of new equipment and production processes to ensure the productivity enhancements contemplated by the new machinery in the plant can be realized. I think, really, to the extent that Canada has an educated workforce, it lends itself to being one of the key factors that goes into the decision-making process in terms of where new product mandates go when the competition ensues, every three or four years, amongst the different facilities that might produce a particular vehicle.

Regarding scientific research and experimental design, I think although Canada has a very good R and D tax credit system, in recent years there have been issues around project definition as well as the certainty of actually receiving the credit. In the Canadian industry as a whole, and in particular the auto industry, we've been working with Revenue Canada and the government in general to ensure we have the best program in the world.

In the globalized industry, the R and D quickly becomes diffused through a company regardless of where it's undertaken, and I think that's probably why traditionally, we haven't seen a lot of automotive R and D actually take place in Canada, but Canada has benefited from the R and D that has taken place elsewhere. For us to attract R and D projects we need to have a tax credit system that's not just comparable to other countries'. In our particular circumstances, it's comparable to that of the U.S. That's where our members are based. But it needs to be much better than that in order to draw the research and development away from the home jurisdiction.

It is noteworthy that each of our members has had mandates to undertake niche research in areas like alternate fuels, fuel cells, aluminum casting, and engine design, and I think that demonstrating our expertise in these areas has contributed to the decisions of certain CVMA member companies to set up multimillion dollar research and development facilities in Canada that will collectively provide more than 300 new high-tech jobs, not to mention keep some of Canada's brightest and best engineers and technicians in Canada.

Regarding strategic trade policies, Canada's automotive industry became—

The Chair: Mr. Adams, could I ask you just to wrap up in the next 60 seconds, please?

Mr. David Adams: Sure.

I think there are three points I would like to review quickly. One is the strategic trade policy. I think you're probably more aware than you'd like to be that the Auto Pact is currently under review. That was the foundation of the auto industry in Canada. It allowed us to get the physical plant here and it allowed those plants, once they were here, to compete for new investment going forward. So I think it's important that we don't lose sight of the fact that we need strategic trade policies to keep the industry productive in Canada. The second is, again, tax policies, to the extent that they have a bearing on productivity. Certainly we can't have a tax structure in Canada that is out of line with other jurisdictions.

The last item I would like to mention is climate change, very briefly. We certainly can't ratify the Kyoto protocol ahead of the United States, and I think if and when we do ratify with the United States we need to be vigilant that the impact of the climate change protocol doesn't have a more adverse effect on the Canadian industry than it does in other jurisdictions. Thanks very much.

The Chair: Thank you very much, Mr. Adams. We'll now turn to questions.

Mr. Penson, please.

Mr. Charlie Penson (Peace River, Ref.): Thank you very much, and welcome to both members of the panel this morning.

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Mr. Adams, I have read your presentation and certainly would like to ask you some questions if I get another chance. But I have to take advantage of having the Canadian Federation of Agriculture here this morning because I think there's more of a crisis in that industry than in yours. I want to explore a few things with Ms. Rutherford.

Ms. Rutherford, we're talking about the productivity gap between Canada and the United States, what productivity means, and where we're going in that area. It's kind of ironic in a way that Canadian farmers are very productive, and yet they are not able to survive. Productivity to a lot of people also means your standard of living. Well, in agriculture, as you know, the standard of living is not very good at all these days and is in a crisis mode.

Given, as you said earlier, that the trade talks don't seem to be developing along the lines that we would like, and given that Canada probably can't match European and American subsidies, let me ask you if you would advocate, for farmers, a lot tougher approach by the Canadian government in other areas in order to bring these trading partners to the table.

I'll ask you if you agree with this, but it seems to me it's going to be very difficult for Canadian farmers to exist and for the Canadian government to subsidize enough. Therefore, we have to find some other means of getting some sanity into the world market.

I would suggest that maybe we should be sort of the boy scouts at the trade and negotiating tables in terms of security arrangements like NORAD and NATO, and in all of the areas where we can say to some of our partners that if they are going to destroy our agriculture industry, we're not going to help them in some of these other areas. What's your response to that?

Ms. Sally Rutherford: I think it's a fair point. I think it's very difficult to try to make those kinds of trade-offs in a negotiation like that. But it's very clear that as we move.... In some respects, having the trade talks delayed a little bit gives us a bit of an opportunity to actually rethink our position and how we would move ahead into the negotiations.

On the one hand it would have been really nice to begin now to start trying to chip away at some of these things. But I think having the experience of the last year, or two years actually, because people tend to forget at this point that it's not just a grains industry issue.... The issue two years ago was essentially the decimation of the hog industry.

We're looking at a significant change in the way the world is working, and the fact that Canada can't subsidize to the level that others can is a significant problem. We do have to find ways of trying to address it in the next round of negotiations.

Mr. Charlie Penson: I'm suggesting, Ms. Rutherford, that we take it outside the trade box and start having some bilateral talks with other countries and other political units like the European Union, because it seems to me the road we're on is a road to total devastation for our farming industry.

I mean, we've seen the $240 million so-called package to Saskatchewan and Manitoba. We've seen the $1.7 billion that was allocated to farmers in the AIDA program, of which only about 25% has been able to be accessed so far. But even if they were to get all of that, you know, for a farmer in western Canada in the grains industry to get a cheque for $10,000.... I had one farmer tell me that they had $270,000 in payments, whether they seeded a crop or not—seeding 3,000 acres. Aren't we in danger of losing all of these people if we don't take a much different look at this?

I'm suggesting to you that as an advocate for farmers, shouldn't you be pushing this approach of how we can say to others that we're going to help them, we're going to up our defence budget to be a good member of NATO, when some of the policies of our partners are killing a significant part of our industry?

Ms. Sally Rutherford: It's something, quite frankly, we haven't looked at in terms of NATO, NORAD, that kind of thing and trade-offs. The truth is that I don't know that it would make a great deal of difference at this point in time. The subsidies that Europe uses are legal under the GATT. Trying to address those is not going to be done. They're not going to give those up because we threaten to pull out of NORAD.

Mr. Charlie Penson: What is your solution then?

Ms. Sally Rutherford: There is no silver bullet here. Nobody else has come up with one either. Simply delivering money to farmers, however nice that may sound, is not a long-term solution. I think we do have to take a completely new look—you're quite right there—at how we're going to actually promote this industry into the future.

• 0945

Right now, as a really small example that may sound silly but I think it's really indicative, there are now almost no farm machinery manufacturers left in Canada. They don't even have offices here. They have dealerships and that's it. John Deere moved out last summer. You can't even get sponsorship out of John Deere for farm safety. We've now been added to the American list.

Those are the kinds of issues we're dealing with. To ignore those and to ignore the impact of those on Canada becomes a really serious problem. The mergers within the chemical companies are also beginning to have a really significant effect on what's available here and what the cost is.

Mr. Charlie Penson: Ms. Rutherford, who would want to invest in the Canadian agricultural industry under the circumstances we have today?

Ms. Sally Rutherford: Oh, I think there are probably people out there who'd be willing to look at it for the good times, long term.

Mr. Charlie Penson: How long do you think Canadian farmers, grain farmers, for example, who are really bearing the brunt of this subsidy war that we have on, are going to be able to exist unless something dramatic changes?

Ms. Sally Rutherford: Not very long, quite frankly, but in terms of dramatic change, I don't think Canada pulling out of NORAD tomorrow is going to change the European approach to export subsidies or to subsidizing the production of grain in Europe.

Mr. Charlie Penson: But you're not willing to look at avenues other than just—

Ms. Sally Rutherford: Mr. Penson, I didn't say CFA was not willing to look at that. I said we had not looked at it yet. What I said was, I don't think doing it is going to be the silver bullet that you may be looking for. It's one avenue, but I think there are a whole bunch of them.

One of the other things I was going to mention was in relation to R and D tax credits. Agriculture is having the same problem, where we can make some small gains perhaps. They may seem small in terms of new seeds, new technologies on the farm, but the R and D tax credit system, particularly as it applies to non-profit organizations, is very difficult.

Mr. Charlie Penson: Yes, I understand that.

The Chair: This is your last question, please, Mr. Penson.

Mr. Charlie Penson: I understand that, and I understand your point about biotech and some of the advances that can be made there, but it seems to me that more production, the ability to produce more, is not the solution to our problem at the moment.

Farmers in Canada are very efficient. They have production sitting in the granaries, coming out their ears, yet they're sort of dying on the farm because of commodity prices driven down to historic lows.

Ms. Sally Rutherford: I didn't say it would be for more production of the same products. What farmers are seriously looking for are the alternatives, and there are opportunities out there.

Mr. Charlie Penson: Give me an example.

Ms. Sally Rutherford: Cars, hemp for car doors—there's a huge opportunity there to diversify into that kind of stuff if we have the right kinds of government policies. That's where we have to look at it.

We're not going to sell grain into markets that aren't able or willing to buy it and that we can't get into because of market access issues. Simply pulling out of agreements is not going to change that overnight. That's something we should take a harder look at, and we're willing to do that.

The Chair: Thank you.

Thank you very much, Mr. Penson.

Mr. Malhi, please.

Mr. Gurbax Singh Malhi (Bramalea—Gore—Malton—Springdale, Lib.): Thank you, Madam Chair.

In the report from the Canadian Vehicle Manufacturers' Association, you mentioned that the industry is currently experiencing shortages of trained, skilled tradespeople and engineers of all types. What is the industry doing to improve the skills shortage, and also, what do you recommend that the government do?

Mr. David Adams: I think it's a good question.

One of the things we're trying to do is bring the actual capability for the engineers to do work here. The recent announcement by GM, for instance, is one example of that, as was the announcement by Chrysler, I believe, about four years ago, to put their engineering centres in place.

While it's not huge, it's a start. I guess the thing there is to show that you can do the work and do it well, and I think that serves as a lever for further R and D. To the extent that Canada proves itself, then I think we have a greater opportunity to get more.

• 0950

To the point about the tax credit system, it has been mentioned to me on a couple of occasions that the certainty is key about getting the tax credit, because it's a little bit challenging when you go and make a pitch to have R and D done outside the home jurisdiction, and then, if for whatever reason it doesn't materialize as you initially pitched it, it makes it that much more difficult to go back the second time.

But to your point about skilled tradespeople and engineers, if you were to talk to the parts industry in particular, I think they're facing the shortage more acutely than our members are, because much more of the work is being pushed down. The product development is being pushed down into the tier-one parts supplier and down from there.

The APMA, the parts manufacturers association, has quite a significant initiative on now to start in the high schools, to start in the grade schools, and inform people who are involved with the initiative, as well with HRDC, about career awareness, to make people aware of opportunities in the automotive sector so that we're not reaching for straws at the last minute trying to find people who haven't had an awareness of the industry prior to graduating from school.

Mr. Gurbax Singh Malhi: Besides that, are there any other incentives for students and the high school or the college?

Mr. David Adams: I know all our members have strategic alliances with the community colleges that are close to their facilities, their headquarters in Canada. There are other facilities around, like Georgian College, which is more geared towards the marketing side of things, or the Southern Alberta Institute of Technology, where there have been partnerships that have been forged to try to develop the types of technicians and skilled tradespeople the industry is looking for.

But I would agree with your comment if your comment is that more needs to be done. I don't think you'll get an argument from anybody in the automotive industry.

In terms of what the government can do to assist that, it's probably something I'd like to contemplate and get back to you on.

Mr. Gurbax Singh Malhi: The second question is, how does the tax policy affect the productivity of the industry, and what do you see as a recommendation for the government to help this?

Mr. David Adams: Capital will move, especially in a capital-intensive industry like the automotive industry. Although billions of dollars sounds like a lot of money and it's there forever, that's not necessarily the case. It's there for one product mandate, and then all bets are off.

So to the extent that Canada's tax structure is open and accommodating to industry and to putting investment there, I think that augurs well for continued investment.

In regard to taxes in particular that might affect manufacturing facilities more than other facilities in Canada, if that could be looked at, I think that would be helpful.

Mr. Gurbax Singh Malhi: Thank you.

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

[Translation]

Mr. Dubé, please.

Mr. Antoine Dubé (Lévis-et-Chutes-de-la-Chaudière, BQ): I am interested first in the productivity aspect. I address myself first to the representative of the Canadian Federation of Agriculture.

I am looking at page 29, the price indices, the cost of inputs, and all that. According to the figures for 1986 to 1996, the increase in productivity just maintained you at the same level. These are figures we know about. But, we see in the west, for example, because of the bad weather or for other reasons, that the situation has worsened. We can imagine that at the moment things are worse than the figures indicate.

Is it your impression that the increase in your productivity is just enough to maintain you? It does not bring a message of hope.

[English]

Ms. Sally Rutherford: Well, it's true. Those numbers are essentially out of the last census and out of the financial statistics two years ago.

There's no doubt that in the last couple of years those kinds of numbers have changed. Clearly, we've had a significant decrease in the amount of money that has been spent on inputs, but at the same time the cost of operating expenses has continued to grow. In the last year farmers spent about $120 million less on inputs, but at the same time their operating expenses overall have risen by about $200 million to $300 million.

• 0955

I think we have to be really careful about how we deal with the issue of productivity. Perhaps, as Mr. Penson suggested, the definition of productivity has to include figures that are broader than just the economic figures of the industry production overall. In terms of the amount of product being produced in agriculture in Canada, we're at record highs, except in those areas where there have been severe weather problems, and that simply doesn't count. But in other areas the crops were pretty good. The prices were just the pits. Clearly, what that says is that the management is good. If people are using fewer inputs, their management is good. We have record productions in animal agriculture as well. We just can't seem to get the money for the product we need to have. That's an issue that's really very difficult to deal with.

My entrance into this industry in Ottawa 20 years ago was on yet another cusp in the development of an international wheat agreement. It didn't go anywhere. That wasn't the first time around. There doesn't seem to be a whole lot of hope for anything like that coming on now. I think it is something we're going to have to start really looking at seriously.

Clearly, one of the things that's very important to farmers is the further development and continuation of a long-term income support program, so that they actually know what it is they're dealing with and can count on it. That's not to say that people prefer to get their money from the mailbox than from the market, but rather that we need to find a way of entrenching a program that's going to last for longer than nine or twelve months, depending. I think people would be really happy with something like that.

In the last little while people have been asking more and more often for a five-year agriculture policy. That has come up again and again. They're looking for some kind of policy commitment for a period that's going to let farmers make the decisions they have to make about what it is they're going to produce and how they're going to produce it and about how they're going to make the changes they have to make to accommodate rising input prices and things such as greenhouse gases within their operation, manure management, and the kind of money farmers are being asked to actually invest in infrastructure to deal with what in some respects are considered to be new issues in terms of what you have to take into account in any kind of industrial operation.

We were talking before about what the biggest issues are, and Mr. Adams mentioned that he thought one of their big issues right now is greenhouse gases. Well, it's going to be for agriculture as well.

If we're going to have any possibility of getting out of this loop, we have to look far enough ahead and give farmers enough lead time to be able to make the right decisions as to how they're going to change the management of their operations. That is not to say that the management is poor now, but it is going to have to change to take all of these things into account.

It's not just a matter of finding the right way to provide the subsidy. It's a matter of making sure that people have the knowledge that there is going to be the base there and that there will be income support, but there are also going to be policies in place that are going to allow them to adapt to the realities of the new economy.

The Chair: Thank you.

[Translation]

Mr. Dubé, a final question, please.

Mr. Antoine Dubé: I am somewhat distressed. As the son of a farmer, I sympathize a lot with what you are saying. I know that in the farming sector things are not easy. I have a question for the two of you: is it your impression that yesterday's budget responds to your concerns or has it changed nothing?

[English]

The Chair: Ms. Rutherford.

• 1000

Ms. Sally Rutherford: I think there are some things that are positive. As I mentioned earlier, the moneys that are going into helping more people in universities be able to do good work is a long-term investment. I think the money that's going into greenhouse gas research is important. I don't know that we know what to do about greenhouse gases right now. I don't know that if we put a lot of money into implementation, we'd be spending it exactly the right way, but we're going to have to be prepared to do that pretty quickly.

We haven't had enough time to look at it, but with regard to some of the tax implications—and this may sound rather peculiar—for middle-class earners, for those farmers who have a spouse working off the farm, whether they're male or female, being able to save those tax dollars is going to make people happy.

We were looking forward to some other announcements that were related more to agriculture, but we'll look to the estimates in the next little while to see what's actually there for agriculture in terms of programming to try to address some of the other issues.

The Chair: Thank you.

Mr. Adams.

Mr. David Adams: I would say that some of the concerns with regard to the R and D tax credits have been identified in the budget, not specifically the ones we mentioned, but I think there's an awareness within government of the issue to make those more predictable, transparent, and available in terms of having the best system in the world.

There are also some corporate tax cuts in the budget, which I think are welcome. In line with what Ms. Rutherford said, the extent to which money is put back into the hands of Canadian consumers causes both a psychological effect and a tangible effect in having those dollars come back. They're not huge amounts, but it's a step in the right direction. Whether it's somebody saving their money or spending their money in the economy, one of the items it could potentially be spent on is a new vehicle, which would help our industry out. I think that has been an issue all along in Canada. I think the reason our industry has lagged behind the U.S. to a certain extent is because there has been an affordability issue. People just haven't been able to afford to buy new vehicles.

The Chair: Thank you. I'm going to have to remind both our questioners and witnesses that we only have five-minute rounds, so we'll have to try to make our questions and answers more succinct. Also, more witnesses will be appearing before us at 10.30 a.m.

Madam Jennings.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you, Madam Chair. I will try to be brief.

Thank you both for your presentations.

Ms. Rutherford, you mentioned a couple of things that were announced in the budget yesterday, which you hope will be favourable to not just maintaining our agricultural sector but to actually helping it. You've also said that a number of things you were hoping to see were not announced yesterday and that you hope they might be in the estimates when those come out. Could you be more specific?

I'm going to direct a question to Mr. Adams at the same time. That way you'll each be able to respond to your specific question. You seem to be quite pleased with a number of the announcements in the budget, so I'm not going to deal with that. You talked about some of the innovations that have taken place, for instance, being able to do testing through computer simulation, and how our Motor Vehicle Safety Act is actually moribund in certain areas. Could you be more specific? Could you also address the issue of whether or not the vehicle manufacturers are in the process of discussing amendments to that act with government.

Ms. Sally Rutherford: I think the big thing we were looking for was a longer-term commitment to an income disaster program. Right now it's two years. We were looking for a commitment to a longer period, which would give people more assurance that they could move ahead and do their planning. I think they've been left a little bit in the lurch. So we're hoping we'll see that coming along soon, and we'll continue actively to look for it.

Ms. Marlene Jennings: Do you think the individual provinces are prepared to participate and also to commit to longer-term income disaster relief? Normally, they're involved in it as well.

Ms. Sally Rutherford: That's one of the lovely constitutional issues that constantly raises its head. The truth is that some of them will and some of them won't. But there's a growing desire on the part of farmers for the federal government to take the lead and to take the responsibility that we believe it has, and to actually provide assistance. It can be provided in such a way that if the provinces want to come along and do their bit, that's fine. But make sure the federal government is there and is essentially not holding farmers to ransom.

• 1005

Ms. Marlene Jennings: Thank you.

Mr. David Adams: To answer your question, we have had discussions with Transport Canada on that issue. They're proceeding, and we hope we're going to get the right answer coming out at the end. But I think you're right, in that it is a little bit archaic and it's just trying to keep up with the way testing can be done now anyway.

Ms. Marlene Jennings: Obviously it would have an impact on productivity, because if you're able to use the consumer's computer simulation to meet regulatory testing if it is accepted, that means you can get the product to the consumer much more quickly. You cut down on the product development time and the whole bit, like the licensing, etc. So in some cases, it's government that acts as the brake to productivity.

Mr. David Adams: Yes, that's correct. Just even the actual physical cost of doing a crash simulation is very expensive as well.

The Chair: Thank you, Madam Jennings.

Mr. Pickard, please.

Mr. Jerry Pickard (Chatham—Kent Essex, Lib.): Thank you very much, Madam Chair.

Both of your industries are extremely important to me and to the area that I come from in southern Ontario, but I'm going to direct my questions more to the agricultural side. Mr. Adams, you can sit back and relax at this point.

Sally, it's great to see you. I know you have been a real advocate for agriculture, and you're certainly a level-headed person who has been looking at the agricultural problems in this country for years. Through your work, I think the federation is doing extremely well, and I think that's very important.

I'll tell you what I see right now. I've had several meetings with agricultural people in my area, and they're suggesting that several problems are there. First, many are experiencing problems in the short term, and that short term is going to very critical for them. They don't see the AIDA program meeting the needs they have. Secondly, they have a little animosity over the feeling that possibly a year or two down the road, because of costs being the way they are and because of prices being the way they are, they may not be able to withstand the onslaught of low prices and the difficulties they're seeing today.

They were very clear that we need two agendas. One is the short-term agenda, which includes disaster relief and the contingency factors built in for disasters in the future. Secondly, they feel we need longer-term direction. I believe you have been working very closely with the federal Minister of Agriculture over the years, looking at our trade policy and what you see as important in dealing with other nations. That's a long-term solution, not a short-term solution, but it's one that I think is very important for us to understand.

Where do you want to go in the long term? Quite frankly, I do believe what you said a little earlier, that there is money and there will be money coming in to make sure agriculture goes for those who have the money. They can withstand the short term and the long term, and it can be very prosperous. But for those in the short-term crunch, we're hearing them very clearly and very loudly in different sectors in agriculture in this country. What would you say we should do for them as well?

Ms. Sally Rutherford: Clearly one of the things that I think has been happening over the last number of months has been adjustments to the AIDA program specifically, in order to try to make it work better. You talked about my longevity. I remember the drought program and the grains programs. None of them were perfect. We're all human. I've never met a program that everybody was happy with, particularly at the delivery end. But I think we can continue to make improvements to the way AIDA is delivered.

Whatever we call it in the future, we need to have an income disaster program, and we have to make sure the rules around the shorter-term programs or the more regular programs—NISA, for example—also work better. I think some improvements have been made to NISA. They were announced in the last couple of days. I believe that happened last week, at my annual meeting, and I hope those changes will help.

How the companion moneys are spent in specific provinces is up to those provinces. It's up to farmers in their individual provinces to work with their provincial governments to decide how those moneys should be spent, and how they are best spent in those provinces. I think that's something real.

• 1010

Frankly, it also is a little bit of a concern in terms of getting back to where we were in the eighties, with competing provincial subsidies—richer provinces have more money to spend than others—and what we ended up with back then. But certainly I think trying to improve the kind of programming around income supports is a major issue. And so is trying to improve continuing to move along the lines of dealing with input costs; trying to ensure that there is competition in the marketplace in terms of inputs; and trying to ensure that cost recovery doesn't take too great a toll on the income of farmers.

Things keep coming back. We've been spending time looking at biotech labelling. What we're getting is not a rejection of labelling; what we're getting is concern about who's going to end up paying for this. The truth is that it's very seldom the consumer who pays for the vast majority of this. It comes back to the farmer.

One of the things I came across when I was preparing to come today is that farmers tend to get less for a meal in a restaurant than the server gets in tips. I think that begins to give some idea of where we are and of the kinds of issues we have to address.

The Chair: Mr. Pickard, last question, please.

Mr. Jerry Pickard: Just to readdress the AIDA side of things as well, many have said that even though there have been changes to it, the AIDA program was designed for a red meat industry and is not fulfilling some of the crunch problems that we see across the board in the grains and oilseeds in low pricing. What would you do as a community to fine-tune or tune that disaster program so that it is going to deliver a fair dollar to a broad spectrum of the industry? I guess what I'm hearing is that this is not happening.

Ms. Sally Rutherford: I think it is beginning to happen. There have been changes announced in the last couple of weeks, and there are further changes coming. One of the other things that will happen is that the safety net advisory committee will go out on the road some time in the next six weeks, I believe, to hear from people across the country about specific changes. It will be a set of technical meetings looking for recommendations about specific changes to try to address some of those problems.

One of the issues that we have to realize we're all dealing with—I don't think it matters whether it's the automotive industry or high-tech or agriculture—is that we have signed trade agreements. Whether we like it or not, at least for the time being we have to live within those rules or suffer the consequences. I don't think we're prepared to suffer the consequences, given the kind of retaliation we could be hit with. The rules around an income disaster program have to be written in such a way that we do not invite countervail or challenge.

As I said, things move on and people have a better idea now than they did even six months ago about what those rules could be. I'm confident that people are going to make every attempt they can to make this as good a program as they possibly can. We know it's not going to absolutely get everybody. We know there are people who will continue to fall through the cracks. That's a fact of life with any kind of programming. In relation to that, though, one of the other things we have to seriously address is what we do for those people who are falling between the cracks. One of the resolutions that was passed at our annual meeting last week was to ask the federal government to begin to look at exit programs for those who make the decision to leave.

I think one of the things we'll see that is very different this time around than in the early eighties is that people aren't going to wait to go bankrupt necessarily before they leave. They're going to make the decision to leave with some equity, but they're still going to need some assistance. One of the problems we have is that farmers are self-employed individuals for whom a lot of the programs around employment insurance, training and that kind of thing, don't work. We have to find ways of trying to address that situation in order to ensure that they have the same kind of social safety net that others in society have.

The Chair: I'm going to have to move on, Mr. Pickard.

Mr. Jerry Pickard: Sally, I really do think it's important to understand that you have worked very closely with the Canadian government. I applaud all the efforts you have made, and I think that has been a great combination partnership that has gone on. Thank you for your work.

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The Chair: Thank you, Mr. Pickard.

Mr. McTeague, please.

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Thank you, Madam Chair. Mr. Adams, I'll let you get off your break here. I have a couple of questions to ask of you. Perhaps, Ms. Rutherford, if you want to join in, that's fine.

Concerning the overall question of productivity and how negatively the situation of rising energy costs is impacting your industry, particularly given the dimension and nature of the Canadian motor vehicle industry, if I look at our major plants here—the Crown Victoria in St. Thomas, the Intrepid in Brampton, the truck plant in Oshawa, the Windstar truck in Oakville, and the Caravan in Windsor—it appears to me, at least at first glance, that you're building the larger-platform vehicles, which are very sensitive to your earlier-stated question about affordability and to money in the hands of the consumer—factors impinging on this.

Some of your plants have been picketed in the past week by diesel truck owners, who have been concerned about the rising energy costs. We're not building the Focus, the Neon, or the Cavalier, and your transplants, who are your competitors, are building the Corolla, the Civic, and the Sidekick here in the province of Ontario. I think that's pretty well it.

I'm wondering if you might be able to provide a comment on how this is going to impact your industry, no matter how much you do and what you request, in terms of your five conditions here. Obviously, there are rising energy costs, which may be around for some time. I'd like to get a comment from you as to how you see this impacting your industry, in the context, certainly, of what happened to Ms. Rutherford's industry two years ago, when propane prices hit the roof.

Mr. David Adams: I think as far as energy prices are concerned, nobody likes to pay high gas prices. On the other hand, though, they are one mechanism for addressing consumer behaviour, in terms of their driving habits. You're right, our member companies tend to produce minivans, mid-size sedans, and trucks. To that I would say, because we're in a globalized marketplace, virtually 90%—regardless of who's making them and whether they're Corollas or Civics as well—are going to the U.S. So we're getting a mix across the border.

It could potentially mean, I suppose, if you were to hypothesize a scenario where fuel prices were high for an extended period of time—I don't know how long that cycle would be—that consumers would start to say “I'm not going to put $60 worth of gas in my tank. I need something that's smaller and more fuel efficient.” It might impact on the product mandates that are put into those facilities or the ability to get a new product mandate.

In terms of productivity, if that kicked in it might mean slowing down the plant because the demand wasn't there, so your productivity wouldn't be there either. I think you could easily find Canadian plants going from being some of the best, in terms of North American productivity, to slipping down the ladder a little bit.

Mr. Dan McTeague: That's a very interesting response. I guess it is something your association will be monitoring.

I want to switch very quickly, in the brief time that's given to us, to your concerns with respect to climate change. Although you didn't get to put this on the record, I think it's important that you say the business environment in which the automotive industry in Canada operates could experience a significant negative impact by any unilateral action to ratify the Kyoto protocol in advance of the United States.

I think that's very interesting. It's particularly interesting in the context of discussions I've had with an associate of yours, Mark Nantais. When I raised this very point with respect to sulphur, he said it really didn't amount to the same thing.

Could you tell me why, in the specific case of sulphur, your association has gone ahead with a position to move in advance of the United States, if necessary, but on the question of Kyoto—the more general question—you feel it's important that we harmonize with the Americans?

Mr. David Adams: I think what we've tried to do in Canada is take an approach that gets the cleanest fuel to the marketplace in the fastest way possible. Everybody's familiar with the route we've gone with MMT. Now there's the whole issue of the sulphur in fuel.

If I were to comment on something I would have liked to have seen in the budget but didn't, it would have been excise tax relief for clean fuel, the automakers' choice fuel that our member companies have introduced as a market-based program. They have offered it to the oil producers to say “Here's the fuel standard. If you meet this fuel standard, we'll market that fuel in the marketplace.” To date, only Irving Oil has come aboard, but we're in talks with other oil companies. That would be one area where we would like to have perhaps seen some action in the budget. I think it gets to your other question about high fuel costs as well.

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

Mr. Murray, please.

Mr. Ian Murray (Lanark—Carleton, Lib.): Thanks, Madam Chairman.

I just want to follow up on the climate change issue. I was struck by the fact that you suggest that we not unilaterally ratify the Kyoto protocol in advance of the United States. When we look at leadership in emissions legislation, we normally look to California. I'm wondering why in this case California wouldn't already be out front, perhaps beyond what's required. I don't have the knowledge of Mr. McTeague in this area, but legislators in California seem to be quite willing to impose pretty strict restrictions on emissions. Why is it that Canada couldn't ratify the Kyoto agreement without waiting for the U.S. when California usually leads the way?

Mr. David Adams: That's a good question. I think what you have to do is look at the peculiarities of California. It has a particular environmental problem with smog, and we're fast running into that same problem here. A lot of our smog, our pollution problem, is a transborder issue from the States as opposed to being homegrown. If you look at the California environment in particular, their regulatory approach has been one to address the specific situation there.

If you look at climate change in the Kyoto protocol, if you've read some of the pieces in the press recently, they talk about the kind of impact on all industry in any country. Forget our industry. Well, I guess it's our country in particular because of what we've signed up to. It's not a minus six. It ends up being around minus 25 or minus 30.

You talk about the economic consequences for not only our industry but all industries in Canada. That's not leadership. It could be sort of economic suicide to do that without moving in lockstep with at least the United States.

Mr. Ian Murray: In terms of the auto industry itself, would it be such a great difficulty to essentially accept California guidelines for emissions if the cars are already being built to those standards?

Mr. David Adams: I guess it gets down to volume questions. Do you have the volume to feed the whole market? I don't think it's a question of having the technology available to do that. It's just maybe the production capacity to be able to do that and whether or not that's absolutely necessary in Canada.

Mr. Ian Murray: Thanks.

The Chair: Thank you, Mr. Murray.

I just have a couple of points.

Mr. Adams, you mentioned in your brief that the tax policies of a country also have a bearing on the productivity of an assembly. There's been some discussion, even last night after the budget and watching the news and the shows that come after the magazine, etc. There was a discussion on another issue. You talk about corporate tax structure not being competitive. Although our income tax for corporations may have been or may be higher, in fact our payroll taxes are lower than in other countries. Does this mean we can expect all kinds of jobs, more jobs in Canada?

Mr. David Adams: I think you're right, you have to look at it as a package in terms of how the tax environment is in any given jurisdiction. All I would say to it is that Canada needs to be aware of what other jurisdictions are doing from a holistic point of view of tax structure, to ensure that we have an environment that is conducive to security investment going forward.

The Chair: But if we're lowering corporate taxes and we already have lower payroll taxes, does that not mean we should have more people employed in Canada?

Mr. David Adams: If you look at the rounds of investment that have been made over the last few years, perhaps that speaks to some of those issues. Investments have been made not only in our member companies but in some of the other manufacturers in Canada to expand the existing facilities, to put new product mandates in there, to operate on three shifts as opposed to two. That may be part of the issues you raise.

• 1025

The Chair: Secondly, in your slides you talk about the auto industry forecast. Do you anticipate that the budgetary news of yesterday will change those statistics so that Canadian households as well now have newer vehicles?

Mr. David Adams: I think a lot of it is psychological, to be honest. If you asked your average consumer what the measures that were announced in last night's budget mean to them in a dollars and cents sort of way, I don't know that they'd be able to tell you. But I think a lot of it could be essentially psychological in the sense that they know the government is cutting taxes and that it's something positive, as opposed to taxes being increased. So whether it's automobiles, books, or any other consumer good, I think there would be a certain feeling of “I'm going to have some more money in my pocket with which to purchase goods and services”.

The Chair: Thank you, Mr. Adams.

Just briefly to Ms. Rutherford, I don't know if you can answer this question. When we talk about agricultural exports and an increase in dollars, there seems to be some analysis out there that would say that an increase in exports by $1 billion would automatically raise the net farm income in Canada by about $300 million. Is that accurate?

Ms. Sally Rutherford: I can't vouch for the precise numbers. If you're going to sell a product, you're going to get a return on it. The question is, how much did it cost you to produce it in the first place? If it has cost you $400 million to produce and you're only getting $300 million back from the export market, you're in a net loss position.

The Chair: That's my point. Right now in the grains and oilseeds, would our exports actually be making money for us?

Ms. Sally Rutherford: I think it really depends on what commodities you're trying to sell and where you're trying to sell them. Livestock is doing okay, but in grains in particular it's pretty dicey.

One of the things that has made it really difficult in terms of trying to design programs that work for people is that everybody's situation is different. You can try to design a program that's going to work overall, and for two people with the same amount of land and growing the same crops it's going to work differently, because they're different people and they've made different decisions. That's not an excuse. It's just reality.

I think there is a real problem with grains, and it's not going to go away. As I said before, it may be a little bit of an advantage for us that the WTO talks are a little bit off.

I think the whole dynamic is changing radically. We're not looking at just having to compete with the U.S. and Europe. We're going to have to compete with India, China, and South Africa. We're going to have to compete with a whole lot of countries we used to sell into. The amount of grain that actually moves on the international market is really pretty small. Those countries are coming to a position where they're able to put enough grain onto the market that it's going to begin to change things. That's not a bad thing. It's just a different thing. Trying to go after just European subsidies is an appropriate thing to do, but we have to recognize that it's not the long-term solution and that we're looking at having to deal with different kinds of rules and the application of rules in different ways than we have seen in the past. Life is becoming increasingly more complex. It perhaps makes it more interesting for those of us who get to deal with it on the paper side, but it also makes it a lot more difficult for people out there trying to grow a crop and make a living.

The Chair: Obviously, I agree with many of your comments.

You mentioned earlier in your presentation about access to the Internet and telephone lines. I wonder if the federation takes the opportunity to make representation to Industry Canada, which is in charge of the licensing of these concerns. I know that some decisions are going to be made in the next month or so, and there's a big issue on the table. There are some proponents out there who have suggested that they could replace the telephone systems of today with telephone systems of tomorrow that would be completely digital. This would benefit rural and remote communities. Do you participate in that to try to explain how that would help your industry?

• 1030

Ms. Sally Rutherford: We have in the past, on and off. We're not on their list of people to call. I think one of the other things with that is that yes, it's digital and it has possibilities, but at this point in time you still have to have a tower to catch the satellite beam to rebeam it to make it work. Nobody likes to invest in that kind of infrastructure to be able to make it work. There are still lots of places in this country where you can't use the cellphone well, for example in rural, remote areas, simply because you don't have that kind of technology available. Anything that's really satellite based is much too expensive for people to actually invest in.

We're a bit away...for downtown communities, downtown business operations, yes, because there's the volume there that's going to make it affordable. The same kinds of problems that we have in dealing with good roads, good schools, and good health care in rural Canada at this point apply to good telephone lines. When you have a much smaller population base, the cost per capita increases significantly, the ability to make a return on it decreases, and it continues to make it a problem. So if there's an opportunity to talk to Industry Canada, we'd be very pleased to do that.

The Chair: Thank you. I want to thank both of you for being here this morning. We've appreciated your presentation. If you do have any further comments that you'd like to send to us in light of yesterday's budget—and we know it's very new—on how that may affect your productivity or your competitiveness in the future, we'd appreciate hearing further from you on that.

We're very pleased to welcome our next group of witnesses. Today we have with us, from the Alliance of Manufacturers and Exporters of Canada, Jayson Myers, the senior vice-president and chief economist. From the Canadian Pulp and Paper Association we have Fiona Cook, the vice-president, international trade and government relations; and Steve Stinson, director of finance and business issues.

I propose that we have both of you put forward your opening statements and then move to questions. I will begin in the order as listed, unless you have a different agreement, with Mr. Myers.

Mr. Jayson Myers (Senior Vice-President and Chief Economist, Alliance of Manufacturers and Exporters Canada): Thank you very much, Madam Chair. I thought I'd spend my time today trying to outline for you from a business perspective how companies see the issue of productivity and competitiveness, and speak a little bit about the restructuring that is going on within Canadian industry. I don't think this is fully appreciated today by the public or by many governments.

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The Alliance of Manufacturers and Exporters Canada represents 3,500 companies, and these are companies really at the forefront of competition and innovation in international markets.

Our members come from all sectors of Canadian industry, across all sectors of Canada's exporting community, and from all provinces across the country. We represent Canada's largest companies, but more than 85% of our members are small and medium-sized enterprises. Together they account for 75% of Canada's industrial output, 95% of Canada's exports, and 90% of the country's R and D effort. You can see that these are dynamic companies, but they're also very interested and concerned about issues related to innovation, competitiveness, and productivity improvement, and they really have to be, just to stay in business today.

I have to say, speaking on behalf of the manufacturing sector in particular, this is a sector that many critics of free trade thought was going to go out of business 10 years ago. A lot of people said Canada couldn't afford to have a manufacturing sector, that opening up the markets to competition in free trade would see the disappearance of major sectors of industry: furniture, clothing, textiles, distilling, wine and beer production, some standard sectors. As well, many people were concerned about the disappearance of many high-tech sectors.

I'm very pleased to say that all of those predictions have been proven wrong. Even economists who said that got it wrong. In fact, manufacturing has been the most dynamic sector of the Canadian economy, creating over 400,000 new jobs over the last six years. It's the sector that's leading in R and D activity and it's the leading sector in capital investment. Our interest is to keep it that way.

Productivity improvement really has to be an integral part of any business strategy in Canadian industry today. Open markets, very intense international competition, and overcapacity in many sectors around the world mean that companies are simply not able to increase their prices as their costs of production go up. That's why inflation is relatively low but costs are nevertheless rising. The only way companies can really survive under those circumstances is to increase productivity.

Canadian industry has done just that in the last 10 years, and it's done it by doing two things. Number one is driving to greater cost efficiency. This means companies are aiming to reduce all forms of overhead. They're driving to bring down inventories, they're contracting out goods and services that can be provided at less expense or higher levels of quality elsewhere, they're automating their production systems, they're reducing waste, they're reducing defects, and they're reducing the need for product rework and production set-up times.

The current jargon that many companies use is to accelerate throughput. This just means speeding up the production process as quickly as companies can in order to develop and manufacture and deliver products to their customers as quickly as possible, before the competition does. Companies are also reducing the space it takes to manufacture by adopting very flexible systems of automation.

In terms of driving to reduce defects, many companies are aiming at something called six-sigma status, which means three defects in a million. This is an objective that really changes the whole outlook on cost efficiency and productivity improvement, on the whole way that companies run their manufacturing processes, and on the whole way they are doing business. To achieve that status, companies really have to undergo a revolution in the way they're running their production deficiencies.

There's a second part to this. Companies find it easy to cut costs. It's much more difficult to reinvest in order to grow, and that's necessary for any business. Canadian companies have been able to reinvest in order to increase value, and they've done that basically through specialization.

In the face of extreme competition from large-scale producers in the United States and from low-cost producers in Mexico and other developing economies, Canadian manufacturers have really had to rely on specialization in order to compete in world markets.

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They've been adding value by developing new products and technologies, by customizing design, by developing products with more specialized applications, by integrating services into their product mix, and by focusing on niche markets.

This form of productivity improvement is, I think, key to the growth we've seen in Canada's manufacturing industry over the past six years. It's what has taken furniture manufacturing into what is today considered to be a world-leading sector. It's what has caused furniture manufacturing in this country to become one of the fastest growing sectors of Canadian industry, and this was one of the sectors that many of the critics of free trade said was going to disappear.

I don't want to talk very much about standard sectors of manufacturing, because of course we are also seeing tremendous growth in other secondary sectors, including automotive and electronic technologies and telecommunications. This is also extremely important today. But the growth is based on the same idea of innovation, new product development, and customizing products and services for the final customer. That is what has led to this growth in employment and manufacturing, with 400,000 net new jobs since 1994, as I've mentioned.

Since we're talking about value-added and specialization, I would also like to say that a lot of people tend to focus on the new economy, on the new high-tech sectors of manufacturing, and those are certainly very important sectors, particularly here in Ottawa. But it's the application of new technology that has really made a difference for all of Canadian manufacturing across the board, from pulp and paper to clothing to automotive to electronics to chemicals. It's the application of those new technologies that counts. If you want to see the new economy at work today, look under the hood of a car, because that's where the electronics are, that's where the advanced systems are, and that's the product in particular that is leading the way in terms of productivity improvement and the application of new advanced production technologies.

Canadian industry has really achieved considerable success in its restructuring efforts in response to the challenges of the global market over the past 10 years. Companies have increased productivity. We have been adding value, going up the value stream, in the products we're generating. We've gained export market share at least in the U.S.

But the problem many companies face is that our competitors are doing even better than Canadian industry. Studies have shown that Canada's productivity gap with industry in the United States is widening. Studies have pointed to the widening gap in two industries: electronic technologies and electronic machinery manufacturing. These are two sectors where the gap is widening at an increasing rate. I think one of the reasons for that is that these are two sectors in the United States where there has been a significantly higher level of investment in new automation systems and new information technology systems than there has been in Canada. The pace of innovation is faster in the United States than it has been in Canada.

We can spend some time looking at the various levels of productivity improvement sector by sector, but the basic part of this argument is that I really don't care if we're lagging or leading in terms of our productivity improvement in manufacturing sectors. The challenge for Canadian manufacturers is to continue to improve productivity. It's something we should be continually aiming for regardless of whether we're leading, in which case we're gaining more market share, or lagging, in which case we're having to compete in world markets against some very progressive companies. So from our point of view, productivity improvement has to be a priority issue for industry as well as for government.

It's not just in the area of productivity improvement where we're lagging behind. There are a lot of other indicators of industrial performance where we tend to lag behind the performance in the United States and in many of the other leading industrial economies.

At the back of my presentation I've included a graph. I apologize for the poor quality of the reproduction, but it's taken from a series of slides I use quite frequently in my presentations on industrial performance.

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The idea here is to portray how Canada is performing in relation to the best of the G-7, the leading industrial economies of the world, with respect to a number of benchmarks of competitive performance. This is over a period of five years, from 1994 to 1999, the growth in industrial production, the growth in industrial exports, reductions in unit labour costs, reductions or growth in selling prices, productivity improvement, technology commercialization measured in terms of the number of patents filed by Canadian industry in external markets, machinery and equipment investment measured in terms of percent of GDP going into that, and R and D performance, again measured in terms of our percentage of GDP that industrial R and D accounts for.

The idea here is that the best performer of the G-7 is represented as the outside line of that graph. Canada's performance over the past five years with respect to each of these benchmarks is represented by the shaded area in the centre.

As you can see, over the past five years Canada has made significant gains in terms of productivity and bringing our unit labour cost down. Of course, a large part of that is because of the falling dollar. We've made significant gains in exports and in production, but where we do lag behind is in terms of innovation, investment, and the adoption and commercialization of new technology. I think that is where Canadian industry really has to get its act together.

It's instructive to ask industry itself where the main impediments lie in terms of productivity improvement and their efforts to improve innovation, to improve their productive capabilities.

We've asked our members in our latest management issues survey where some of the problems lie. Almost two-thirds of the 504 companies that responded reported that resource limitations, financial constraints, were their number one impediment to making the investments in innovation and productivity improvement that I think they too realize they have to make.

That makes sense. After all, profit is the money that companies have either to reinvest in the new technology, the organizational changes, the additional training, the growth of a company, or it's the money that is paid to investors that have already invested in that productivity improvement, and I think that's important.

Take a look at our performance in relation to the United States. Industry after-tax profit margins are currently running about 30% higher in the United States than in Canada. U.S. businesses are investing approximately 33% more in new technologies, machinery, and equipment in relation to GDP than their Canadian counterparts. That's particularly true in the two key sectors where we lag behind in productivity improvement.

It shouldn't be surprising, therefore, that our productivity improvement has been lagging behind the United States by about 25% over the past five years, and it shouldn't be too surprising either when Canadian companies appear to be more risk adverse than their competitors in the United States.

The second major impediment to productivity improvement that's identified by over 50% of our companies is the lack of qualified and skilled personnel. These are not only traditional manufacturing skills, but skills and expertise in manufacturing management, engineering, design, marketing, international marketing. These are the new skills today—software development, information technology. They're skills that are required by all sectors of Canadian manufacturing, not just the high-tech product sectors but the high-tech processing sectors as well.

Partially it's a problem that we simply aren't graduating the people from our universities, colleges, and apprenticeship programs with the skills that modern manufacturing requires. But it's also, of course, again, a reflection of the financial limitations that companies face; they don't have the finances that are adequate to increase the training within companies as well.

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As I say, I don't want to portray an industry where nothing is happening, because a great deal of very positive news is coming out of the sector, but we have tremendous challenges before us, particularly as more and more of our global customers are looking at sourcing internationally. We have to make sure that our smaller suppliers are capable of responding to the new requirements in terms of technology and the new requirements in terms of engineering and design capability that are going to be placed upon them.

Industry has a great deal to do to get its own act together. I don't want to suggest this is entirely a problem that's outside the hands of industry. To tell you the truth, I don't know of any company that does not see productivity improvement as an extremely important part of their business. I don't know of any company that is not making its efforts to increase productivity both by becoming more cost-efficient and by becoming more specialized.

But it's not only a problem of industry. In response to these two major constraints that industry has identified, I think government does have a role to play in reducing taxes that are a part of mandatory overhead, reducing taxes today, capital taxes that penalize companies for investing in the technologies that are required today to increase productivity, a tax system where, even with yesterday's budget, where our corporate tax rates, our manufacturing tax rates here in Canada, remain far higher than our competitors' rates in the U.K., Ireland, Germany, and many states in the United States, where state taxes simply don't exist. That is a problem that remains, and that is a problem we still have to deal with.

The other area—

The Chair: Mr. Myers, I'm going to have to ask you to wrap up.

Mr. Jayson Myers: I will.

The other area is knowledge infrastructure, education and skills training. It is extremely important that Canada is, one, graduating young people who see manufacturing as a key priority sector for career advancement, and two, graduating the people with the skills and the expertise that are required by modern manufacturing, not only in Canada but around the world.

Thanks.

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

We're now going to turn to the Canadian Pulp and Paper Association. Ms. Cook, please.

Ms. Fiona Cook (Vice-President, International Trade and Government Relations, Canadian Pulp and Paper Association): Thank you very much, Madam Chair.

First of all, we'd like to thank the committee for the opportunity to appear here today. What we'd really like to do today is to convince members around this table that the future is indeed bright for the Canadian forest products industry as long as economic policies are in place that recognize the international dimension of our industry's business environment.

We represent an industry that exports three-quarters of its production outside of Canada. Given that, international competitiveness is a key issue for the future of the industry.

We'd like to focus on three key areas that we believe are crucial to the future success of the industry.

First, taking a look at the tax system, we applaud the government for its efforts to reduce taxes, mainly on the personal side. However, we do take issue with the statement in the budget that the tax system in Canada for the resource and manufacturing sectors is internationally competitive. We will touch on that a bit later, and I will turn to my colleague Steve Stinson to elaborate on that further.

We'd also like to talk about the trade side. Given that we do have relatively free access to the world's largest market, just south of the border, I think we can tend to be lulled into complacency to believe that free trade is operating worldwide, and that is not the case.

Thirdly, we'd like to argue for the efficiency of markets and make the case that demand side factors and the linkages of this industry to the so-called new economy need to be recognized. Jayson touched on that earlier in mentioning that it's great to build Canada as a premier location for high-tech, but consideration also has to be given to the base that will demand and use that technology as enabling technology.

First of all, I'd like to go over a couple of industry facts, just to emphasize the importance of this industry to the Canadian economy. Forest products generate annual sales in excess of $50 billion Canadian. It is the largest annual contributor to Canada's trade balance. In fact, without this industry, we'd be consistently in the red on our trade balance. It is an industry that sustains over one million direct and indirect jobs and supports over 300 rural communities right across the country.

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I'd like to make the point that contrary to the popular perception of forest products as a sunset industry, we see global demand for pulp and paper and other forest products continuing to grow in line with overall economic growth in the global economy. With the advent of Internet technology and its various business applications, there have been a lot of doom and gloom predictions, as we saw with the computer and fax machines. In fact, the Internet has turned out to be complementary to the demand for paper rather than a substitute.

You can see that if you run your eyes through the national or local newspapers. Most of the .com companies are using full page ads to direct people to their websites. For e-commerce, there's more packaging used when products are delivered individually to customers. So it's definitely a positive for the industry at the moment.

So the key question here is whether the Canadian forest products industry is well-positioned to take advantage of this future growth. As the world's largest exporter of pulp and paper products, Canada has traditionally maintained a share of 10% of world demand.

As I mentioned before, with a 3% annual growth rate expected over the next 10 years, we see world paper demand increasing from 300 million tonnes a year to just over 400 million tonnes a year. That would mean that if Canada were to maintain its traditional share, we would need to see our capacity increase from its current state at a level of 30 millions tonnes to 40 million tonnes. While we don't believe growth of that extent is likely, we do believe that despite the low rates of return and the inroads made by competitors in other countries, Canada should be able to capture some of this future growth. To do so, some fundamental changes need to occur in the direction of Canadian economic policy.

I mentioned before the importance of continued market access to some of the high-growth market areas in the world. Despite the globalization of markets, Canadian pulp and paper producers still face tariff barriers in the EU, and those markets with the most potential for future growth being Asia and Latin America. In fact, close to 10 million tonnes or one-third of Canada's production is still destined for areas where tariffs remain an issue. We estimate that, on average, tariffs add an estimated cost of $20 per tonne to Asian shipments and $50 per tonne to Latin American shipments, effectively, in fact, to the industry's entire profit margin.

This is a conservative estimate as well because it doesn't include the opportunity cost, i.e., those sales that have not been made because of those tariffs.

Not only are these tariffs preventing trade today, but perhaps more onerous is the fact that they are permitting competing jurisdictions to build up significant capacity behind tariff protection, particularly in value-added grades. As new competitors spring up in these emerging economies and continued capacity expansion occurs in Europe, which shifts the focus of producers in Europe to international markets, the Canadian industry is having difficulty striving to remain competitive in this rapidly evolving global market.

Therefore, despite the failure of Seattle, we encourage the Government of Canada to keep trade liberalization at the top of its agenda and to continue to pursue initiatives, whether they be bilateral or multilateral, through such processes as the Asia Pacific economic cooperation forum and the free trade area of the Americas initiative, which is ongoing right now.

The second point we want to touch on is the tax issue, and I'll turn this over to Steven Stinson.

Mr. Steve Stinson (Director, Finance and Business Issues, Canadian Pulp and Paper Association): Good morning. One of the fundamental issues we have to look at in terms of improving the attractiveness of Canada as a base for investment and the ongoing improvement in productivity is the tax system. We see that this is one way we can create a fundamental advantage for the Canadian economy by creating an internationally competitive tax system.

The finance minister acknowledged as much in his budget yesterday. There was an awful lot made of his calls for tax cuts, both on the personal income tax side as well as on the corporate side. Unfortunately, we get the feeling that the forest products industry and the manufacturing sector in general were left high and dry. There was very little in the budget for them.

It's a mistake to ignore the importance of a competitive tax system for capital-intensive, export-oriented industries such as pulp and paper.

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In our report we have a table comparing the tax rates for pulp and paper manufacturing in various jurisdictions. The reality is that we are the highest taxed. We face a real effective tax rate of 73%. This is a combination of both the corporate tax systems and the personal tax system. So the question is, what do we do to improve the competitiveness of our tax system in general and specifically for the capital-intensive manufacturing industry such as pulp and paper?

We have made the call before that attention should be paid to the personal income tax side. Here our concern is that high marginal tax rates, particularly on the highest income tax brackets, are a fundamental driver of our cost to capital. In the study we refer to in our report, the finding was that almost the entire 11% gap with the United States for investment in pulp and paper was due to the differences in the personal income tax. While we're encouraged to see that there were changes implemented in the budget, particularly in the cuts to the middle rate and the reintroduction of indexation, we still haven't really seen any move on the high marginal tax rates. That will do nothing for our cost to capital.

The second plank is to reduce the burden of non-income-sensitive taxes. In assessing the real business tax burden, it's a mistake to focus exclusively on corporate income taxes. These are only a small part of the overall business tax burden, 26% in our case. So what we also have to look at are these other payments to various levels of government—the provinces, municipalities, and the federal government—since they account for the bulk of the problem.

For example, much is said about the supposed preferential rate that manufacturing receives because of the M and P tax reduction. Yet little mention is made of the incidents or the discriminatory impact of capital taxes on capital-intensive industries such as pulp and paper. As the most capital-intensive industry in the country, pulp and paper bears the brunt of these taxes. Moreover, the fixed nature of many of these taxes, which are not sensitive to income, exacerbates the cyclicality in the forest products industry's profitability and hence undermines their ability to sustain employment during downturns because of cashflow problems. It's really not necessary.

A brief mention should also be made about federal cost recovery, just to highlight what we see as the inconsistent application of this initiative to those services for which government can easily charge for, but not to other services. Some attention should be paid to that. Also, the program, as implemented, has not been very efficient or responsive to users. We have to recognize that the government delivering efficient quality services is an important component of the nation's ability to remain competitive and to improve on our productivity record.

The third plank on the tax side is to eliminate capital taxes. We see that capital taxes really serve no useful purpose, and they are, in effect, a tax on innovation.

The forest products sector, as I mentioned, is the most capital-intensive industry. It accounts for about a quarter of all spending in the manufacturing sector on machinery and equipment. As a result, innovation in the forest sector is largely diffused through purchase technology. Thus, it's essential that we ensure new investment is forthcoming, as this is the key to sustaining growth and jobs in the forest sector.

The type of investment the industry makes is also critically important. The current incentives argue for a much more cautious and incremental approach to existing capital stock. We need to move away from replicating existing technologies and what others are doing and try to create some sort of sustainable advantage through new investment in new technologies.

The way to do this is to take a look at the incentives we presently have in place. We suggest that by restructuring these incentives we could do a lot to encourage new investment. We suggest accelerated depreciation rates or looking at investment tax credits. I think the point of this is to recognize that such investment not only plays a critical part in terms of our competitiveness, but it also plays a very important part in supporting development of our technology industries.

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The final point I want to raise is that in looking at overall economic policy, it's a very dangerous game to play favourites. We're a little concerned that there's an awful lot of attention being paid to the so-called new economy, and the trade-off really doesn't exist between the traditional sectors and the new economy sectors. I would argue that the neglect of Canada's resource-based industries and their relative decline plays a major role in terms of poor performance in some of these technology- and knowledge-intensive industries.

In terms of the government's approach, most of the support toward these industries is focused on the supply side. There were very generous research and development tax credits and the like in the budget last night. There were new spending initiatives directed at research and development. But I think we also need to focus on the demand side and ask ourselves who is buying this technology. If nobody here is buying the technology, why would these industries want to locate in Canada?

As I suggested, a great way to encourage the development of these industries is to lower the cost of capital for capital-intensive industries, such as pulp and paper, through eliminating capital taxes and new incentives to encourage investments.

The benefits of a strong forest cluster in particular extend to the new economy as well as the communities that depend on us for their livelihoods. I think we need to reinforce these links, if we are to capture the benefits, by creating a policy to ensure that Canada will be a preferred base for global forest products firms.

The Chair: Thank you very much. Now we'll turn to questions.

Mr. Penson, please.

Mr. Charlie Penson: Thank you, and welcome, panel members. It's good to see you again.

There are pretty strong themes coming from the panel this morning: the competitive capabilities of Canada are lagging behind our major trading partners, the major economies of other G-7 countries; we need a competitive tax rate in order to compete out there; and stop picking winners and losers in the economy. We heard that from the mining industry as well. It almost sounds like the Canadian government has written off the mining industry. They say they are alive and well and could be even better if they had government policy that didn't hurt them in a lot of areas.

You talked a little about the budget yesterday. Given that you've made the case this morning that we are pretty far behind some of our major competitors, and you've had a chance to look at this budget, I'd like an assessment. I see the Canadian Chamber of Commerce have made a few points this morning. I'll just read a couple of quotes here. They say:

While the federal government deserves the country's kudos for finally taking a serious look at...the tax burden, Canadians should be concerned that the Budget's overall priority stills remains on spending....

They also say:

“There are a lot of positive steps laid out in the Budget, but it fell well short of providing a fundamental shift in direction for fiscal policy,”....

Given that a lot of the problems you're facing with reinvestment and competitiveness seem to be sort of confidence factors—the need to show some direction to attract new investment into your industries—how would you assess—and I don't want the five-year projection because that's like the old Soviet Union's plans—the results of the budget's projections for the next fiscal year? How would you size those up in terms of helping your industry overcome the competitive disadvantage you've outlined this morning?

The Acting Chair (Mr. Ian Murray): Who'd like to go first?

Mr. Jason Myers: I will answer the question, but in some ways it is difficult to disassociate what the government has outlined for this coming fiscal year and the next fiscal year from its overall five-year plan. I think industry and business as a whole are certainly looking for immediate tax changes, but also for a sense of direction in where the government intends to go.

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In giving that direction, I think the budget does help to strengthen business confidence. It surprised us how far the government was willing to go in reducing the general corporate tax rate. A reduction of seven percentage points over a period of five years is far more of a reduction in the general rate than we were expecting. The one percentage point reduction next year is a good step. I think it sort of does instil confidence that more reductions are to come. But of course we are looking at that over a five-year period, and anything can happen over that period of time.

If you asked me what benefit the immediate reductions were going to have for manufacturing industries as a whole, I would say very little. There are four major economic problems where tax policy really has to aim to strengthen performance. The first is the erosion of consumer income. It's no surprise that over 65% of the entire value of manufacturing production in this country today is being exported. Part of that is because of the strength of the U.S. market, but another very important part is the weakness of the domestic market. On an after-tax basis, after inflation, per capita incomes in Canada have fallen by 10% since 1989.

Tax policy has to aim at strengthening consumer spending. That's a very important part of keeping Canadian companies here in Canada. You need a market in this country to sell into; you can't simply look at the North American market, because if you're going to do that, I think companies would rather locate in the United States. You can't underestimate how strong the attraction is to the American market today. I see tax policy as a very important lever in offsetting that attraction, for both the market and investment.

Changes have been outlined in the budget to reduce middle-income tax rates by increasing the thresholds. We would have liked to have seen the thresholds come up even more, but that will have a very good effect on consumer income over time and should help to alleviate some of the problems we see there.

I'm more concerned about three other problems. The brain drain is one, but let's redefine that as a drain of entrepreneurial capital and entrepreneurs to the United States. The second problem is our ability to attract investment into Canada. Our share of foreign direct investment has fallen from 11% to 4% of world direct investment over the past 15 years, even as the American share has gone up. Most of that direct investment is industrial investment.

The third problem is the one Steve has outlined. What sort of incentives do capital-intensive sectors of industry have—those sectors that create most of the jobs in this country—to invest in the new technologies, the new economy? That's where all of this technology is going to be used. I think that's where the budget falls short.

Steve is right that for manufacturers, the corporate tax rate is still uncompetitive. Nothing has been done on capital taxes, and provincial capital taxes are certainly more onerous than federal capital taxes. For B.C. to tax investment in new technology is ludicrous today in a world where investment in those technologies really makes the difference.

I think those three areas are the real problems this budget doesn't address.

The Chair: Mr. Penson, you asked a question and it's taking a long time to get an answer, so I'm going to defer to the pulp and paper industry now.

Mr. Steve Stinson: As I mentioned, we were disappointed in the budget because business tax reform has sort of come in through the back door and left the manufacturing sector outside.

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With respect to your comments about the spending projections, with each budget I think we've learned to take the spending estimates with a grain of salt. This is one of our concerns about the budget process, and it feeds into our concern about the capacity for tax reductions to actually come to the manufacturing sector in later years.

There's a tendency for spending to be ratcheted up with each budget. I'm not sure of the specifics, but certainly the spending for the past fiscal year will come in higher than what was projected in the previous budget. The spending for the coming fiscal year will look like it's a moderate increase until the actual numbers come in. We have to be very careful that the spending that government does undertake serves to reinforce the capacity of the Canadian economy to compete in the international marketplace.

I think Canadians are concerned about the efficiency and the quality of the many government services that we do have, and it is not necessarily a question of money. This is a question for the broader body politic to determine in terms of the allocation of resources controlled by government and resources controlled by the private sector, but it's not clear that we're getting good value for those moneys.

Mr. Charlie Penson: I have another short question for both groups here.

Aren't we also dealing with a moving target in that, as we reduce taxes—even though it was a modest reduction, it's welcome—aren't other jurisdictions also moving their tax levels down? Therefore, isn't it difficult for us to compete even more so? We're going to have to continue this process in order to try to stay in the game at all.

Mr. Steve Stinson: That's certainly the case, and I think yesterday's budget really is reacting to the situation three years ago, when the report on business taxation was released. It noted that manufacturing rates were broadly competitive with those in the United States and elsewhere. But you're right, it is a moving target.

I attended a tax policy conference several weeks ago at which Jack Mintz spoke. He now notes there is a significant gap that has emerged on the manufacturing side as well as on the corporate income tax side. I think that's of some concern. We're basically playing catch-up here, and it's certainly not a way to create any kind of competitive advantage on the tax front for the Canadian economy.

The Chair: Thank you, Mr. Stinson.

Do you have anything to add, Mr. Myers?

Mr. Jayson Myers: No.

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

Madam Jennings, please.

Ms. Marlene Jennings: Thank you, Madam Chair.

Thank you very much for your presentations. I missed a little bit at the beginning of them, but I have read the three documents that have been circulated.

You have identified some issues that you would have liked to have seen addressed in the budget that was announced yesterday. You have also identified some issues that have been addressed. For instance, there's the reintroduction of full indexation, which is retroactive to January 1, 2000. I think that will go a long way toward rebalancing the gap that we see between Canadian consumers and Americans, if we compare to the United States, because that led us to fall further and further behind. We also have a lowering of the marginal tax rate on personal income; a reduction and elimination of the 5% surtax; and an increase in the income levels at which the marginal tax rates kick in. You may not have had a chance to sit down to work all of the little actuarial tables and the whole bit, but I have a sense that they're very positive.

On the corporate side, there will be a lowering of the corporate tax rate gradually and over time. But one of the things you seem to have identified—and we've heard it from others—is that in some cases either our fiscal policies or some of our legislation actually acts as a brake on continuing and increasing development within a field. In this case, one of the things you have raised is the issue of the need for faster depreciation rates that would reflect the increasing changes and the rapidity of change in technological advances, equipment, etc., where the shelf life, so to speak, or the actual life of a piece of equipment is much shorter than is reflected in the fiscal capital depreciation rates.

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Do you have a sense at all that even if there was nothing specifically mentioned or outlined in the budget, this is an area the government can address, given the clear announcement that it wants to make our corporate side, our private sector, more competitive over the short term? And I define “short term” as five years, maximum.

A lot of the time, a broad statement is made. There's no program actually announced in the budget, but a year down the line or eighteen months down the line, there's a new policy. Sometimes we get the opposition screaming and yelling that it wasn't in the budget, but it was because it could be contained under a broad policy statement, for instance. So do you get a sense that this could be a possibility and that we, as backbenchers, should push so that it happens?

Mr. Jayson Myers: Let me begin by saying that we were certainly pleased by the budget provisions on CCA that categorize manufacturing equipment as a separate class. I think that gives companies a great deal more flexibility there, and moving toward a faster rate of depreciation would certainly help.

Across all of industry, you have some more capital-intensive sectors that have production processes in place. Chemicals would be a good example, pulp and paper would be a good example, and so would primary metals. The life of that equipment is far longer than that of some of the equipment that is put in place by, for instance, electronic equipment manufacturers, for whom the rate of obsolescence is somewhere in the range of two years. From an industry perspective, though, if you look not at the obsolescence rate of the equipment, but at the rate at which companies themselves are expecting to make money to pay off that equipment, it's two and a half years on average in manufacturing.

I think anything that would speed up the rate of write-off to make it much more in line with the usage of equipment—equipment doesn't have to become obsolete in order for companies not to use it—would be certainly beneficial and would provide a greater incentive for productive investment.

Ms. Marlene Jennings: Right, and then we would possibly be able to increase our foreign direct investments.

Mr. Jayson Myers: I'm not so sure.

Ms. Marlene Jennings: You don't think so.

Mr. Jayson Myers: It would certainly provide much more of an incentive for capital investment, for productive investment, for companies in Canada. That would be an important part of the argument for foreign investors to put their money in Canada, but it would only be a part of that argument. It would help, but I don't think that alone would be a major incentive.

Ms. Marlene Jennings: In our increasingly complex society, there's never any one thing that is the solution. There are a series of solutions that create a whole, and that would be one piece of it.

Mr. Jayson Myers: This would help.

Ms. Marlene Jennings: Ms. Cook.

Ms. Fiona Cook: Speaking of a reference to solutions in looking at accelerated depreciation schedules within a broader context—the Kyoto protocol, for instance—our industry has already made significant inroads in reducing its reliance on fossil fuels. But to push that further, to curve that bend up, if you will, we'll need to have more rapid depreciation schedules in place to get that type of new technology.

Ms. Marlene Jennings: Mr. Stinson, do you have any comments?

Mr. Steve Stinson: If you look at the macro level, Canada has lagged behind the United States in business investment, and anything that would encourage it would be welcome. One of the challenges for the pulp and paper industry is these legacy paper machines, which industry members tend to hold onto for long periods. There are a number of factors. One is that it's very expensive to put up a pulp and paper mill today, so they're trying to conserve their capital, particularly given that there has not been a very favourable pricing environment, at least until recently. There are also other pressures beyond the cost of investment, largely at the provincial government level. It's very difficult to close one of these facilities and replace it with a modern facility.

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If we are to look at how the industry can move away from more of a commodity orientation towards trying to stay one step ahead of the competition, we have to encourage a more rapid replacement cycle of its existing capital stock. Certainly accelerated depreciation schedules and investment tax credits would push the industry in that direction, and I think for substantial benefit.

Ms. Marlene Jennings: Is there anything we could do on the R and D side that would make Canada a much more interesting place for that industry to do its research and development here?

Mr. Steve Stinson: Yes. This is where we try to emphasize the forest products cluster. If the nature of most of our investment is of the sort where you're retrofitting existing mills and you're not pushing the technological envelope, most of that stuff will be bought off the shelf from suppliers in other countries—to the extent that the equipment supply industry is largely foreign owned and controlled.

If we had new firms in Canada investing in these new technologies, they would certainly have a much greater presence here instead of basically a sales operation. There are also a lot of other supporting technologies, process controls, etc., which smaller Canadian suppliers would supply to the large turnkey operations, but that's critical.

I think that applies for the new economy in general. Unless we are leveraging off our base the demand that we have here, unless we have sufficient critical mass, that development will go elsewhere. So in e-commerce, the initiatives are going to the United States because that's where the market is developing the most rapidly. We have somewhat of a presence here, but these guys are going to be located next to their customers.

The Chair: Mr. Myers.

Mr. Jayson Myers: Let me just echo what Mr. Stinson has said on the R and D side. One of the most important factors here in encouraging the development of and application of new technology in Canada is to have a strong customer base in Canada. That links into the importance of providing a good environment, not only for foreign investment but for retaining Canadian investment and for encouraging investment in capital equipment, which is all high technology today. Nobody's investing in out-of-date technology.

The other thing is that we have one of the most attractive R and D tax credit systems in the world, and we've certainly seen a tremendous improvement in R and D, but even with that we're lagging behind other jurisdictions.

One of the problems with the R and D tax credit system is a great deal of uncertainty surrounding the rules governing that system and the actual operation of that system. This is an issue that Revenue Canada—now the new Canada Customs and Revenue Agency—has been dealing with for two years, and it is still a major problem that has to be resolved soon, because the business confidence in this system is being eroded.

I know of many small companies that are not applying for the R and D tax credit because of the bureaucratic problems they've run into, the administrative problems they've run into, and the fact that the rules seem to be changing on a daily basis so that they don't know where ground zero is.

Ms. Marlene Jennings: It's shifting ground.

Mr. Jayson Myers: That's right. We have to correct that to make sure this good tax credit system actually works in the way we want it to.

The Chair: Thank you.

[Translation]

Mr. Dubé, please.

Mr. Antoine Dubé: First, I have a question for Mr. Myers. You say your industry has created 400,000 new jobs, but I have not seen a total of the number of jobs in your sector. What is it?

[English]

Mr. Jayson Myers: Approximately 2.4 million Canadians are employed in manufacturing. That is broken down with probably half of employment in manufacturing in Ontario and 25% in Quebec. The prairie provinces today, particularly Alberta, have a very strong manufacturing base. They would account for approximately 13% of the remainder.

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[Translation]

Mr. Antoine Dubé: What is the source of these 400,000 jobs? Are they primarily in Ontario? Where was the fastest growth?

[English]

Mr. Jayson Myers: The strongest growth in this.... It's difficult to look at trends in manufacturing employment from a regional or sectoral level because there has been very strong growth at almost all levels. It's more important to look at individual firms. It really comes down to the management decisions of individual firms.

But then, within that, looking at the categories of employment, most of the new jobs are in what we might consider new economy areas, like technical skills, information technology, engineering, design, and marketing. These are in all sectors. Of course the more traditional technical skills are also very important here, but in the machining, the “on the shop floor” type of manufacturing employment, that is where the biggest cuts have come in employment.

[Translation]

Mr. Antoine Dubé: I understand it is difficult, but could you give the committee a breakdown by region?

I address myself now to the Canadian Pulp and Paper Association. On page 4, you have a table indicating the tax rate for paper manufacturers by country. Obviously, this is from a study by PricewaterhouseCoopers. What strikes me is that the figure for Canada is 73 per cent, and the figures go as low as 33 per cent, for Indonesia. I would like to understand what this is about. For Canada to have a rate of 73 per cent, the scale has to go to 100 per cent. Are there countries, even small ones, with a tax rate higher than Canada's? That is my first question.

I have another question. Does this study take everything into account, that is payroll taxes and so on? For example, for your consideration, the auto workers unions told us last week or a couple of weeks ago that the average salary in Canada was lower than the average salary in the United States. The difference is $6. However, it costs American companies and individuals $6 more for health insurance. We often forget to mention that when we look just at tax rates. We forget the benefits in terms of payroll taxes. In the absence of such taxes, businesses and individuals have to assume their costs.

I would like to know if this has been included in the study.

[English]

Mr. Steve Stinson: The study was prepared by PricewaterhouseCoopers—their Washington office—on behalf of the American Forest & Paper Association. We were invited to participate and were a little bit leery of participating because we thought the fix would be in to show that the Americans had the highest tax rate.

We did manage to secure a copy and these are the results. Now, the scope of the study is limited to the countries included in this list, so I would have no idea whether or not our country is higher, but I would highly doubt it.

I'd also draw the attention to the fact that our competitors are not only in the developed countries but also in the developing countries. We have to pay attention to the competition on the tax side in those countries as well, although as your subsequent comments suggest, there are perhaps some other components such as health costs and the like that must also be considered.

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The methodology of this study focused on a theoretical investment in the various countries. They were looking at the corporate taxes and at their interaction with the personal taxes. If there was a dividend returned to the investor, what was the overall tax rate on that investment? The study does not include these other taxes we have in that pie chart in our report, which shows the various property taxes, provincial taxes, fuel taxes, etc. So in effect, our burden could be even higher. When we looked exclusively at business taxes, we came up with 70%. That chart basically shows a 70% tax rate.

With respect to the question on the wage side, I'm not aware that Canadian wage rates in the forest sector would be any lower than those in the United States. In fact, even with the exchange rate, I think they're higher. The industry is almost exclusively unionized here in Canada, whereas many of the competitors, particularly in the U.S. south, are not unionized and wage rates tend to be lower.

With respect to health costs, that's certainly a factor. You have to take that into consideration when comparing the tax systems, as to what is included and what isn't. To the extent that our health care system functions well, it is a potential source of competitive advantage.

The Chair: Thank you.

[Translation]

Mr. Antoine Dubé: Could you tell me whether the table on page 5, which provides the breakdown, draws on the same references as the PricewaterhouseCoopers study on page 4? Does it involve exactly the same things or something else?

[English]

Mr. Steve Stinson: It is another study, which hopefully has been distributed to you, The Forest Industry in Canada in 1998. The numbers have been taken from the historical database we've had from that study. So if you look at the payments to governments, you'll be able to calculate that. That's where the numbers were drawn from.

The Chair: Thank you.

[Translation]

Thank you, Mr. Dubé.

[English]

Mr. Murray, please.

Mr. Ian Murray: Thank you.

The tax on capital appears rather perverse. I'd just like to ask one of you to perhaps put on a devil's advocate hat, pretend you're working for the Department of Finance, and explain to me why this is a good thing—beyond government's propensity to tax anything that moves. We're perhaps in a new era now, where governments are backing off on certain taxes. What is the rationale for a capital tax? You can be forgiven if you don't know, but you probably know more about it than I do.

Mr. Steve Stinson: I think the argument given is that the imagination of the tax experts on the corporate side is infinite and the capacity of the tax collectors is limited when it's faced with that kind of creativity with respect to the tax codes, with this perception, I think, that corporations weren't paying their fair share, so in effect it's a minimum tax. Our concern with capital taxes wouldn't be so great if it were a minimum tax—I'm not sure exactly how it works—but in effect it's not creditable against future tax and that's the problem. It has become an additional tax.

The Chair: Mr. Myers.

Mr. Jayson Myers: Oh yes, you can't deny that. It is probably because capital doesn't move that it's far easier to tax. Of all of the industries where making a big investment in capital makes them unlikely to walk away, it's manufacturing in particular, the more capital-intensive sectors and the resource processing area, that is making those investments so easy to collect. But that itself is a reflection of a tax system that is probably more focused on the industrial structure that was common up to about 1960 than it is on any new modern industrial structure. Industry has changed quite a bit since then.

Of course now the whole problem is making sure we get that investment in the first place when similar industries are developing around the world. And of course the second problem on the capital tax side is that these are taxes paid, as Mr. Stinson has said, regardless of the profit performance of various sectors. So it's an easy tax to collect, unfortunately.

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Mr. Ian Murray: Well, continuing on the theme of archaic practices—and we already touched on this question of the difficulty in closing down obsolete pulp and paper plants—in the pulp and paper industry's submission, it mentions that firms have often been thwarted by government bailouts, and that the bulk of the investment in industry has been directed to upgrade obsolete mills.

Is this a question of governments making an offer that a firm can't refuse in terms of cash bailouts so that they stay there and try to fix up the plant? Is that what you mean?

Mr. Steve Stinson: I guess this continues on the theme of capital taxes in that firms are often sort of kept hostage to their past investments, and when a situation develops that a mill is no longer competitive, the company has to take a hard look at it and say, what do we need to bring it up? Does it make sense to invest more money in the mill? Oftentimes, these considerations are not the primary driver of the ultimate investment decision because of concerns about the one-mill town, the dependence of a local community on the facility.

It's a very difficult question, but what often happens is that a mill that really should be closed down—it might have paper machines that are based on the turn of the century—but has been upgraded and directed perhaps at a particular product niche where the scale doesn't matter that much and they could make a profit, but it's no longer the case....

Mr. Ian Murray: Are you saying this is the problem of soft-hearted managers? What do shareholders say? I can think of one paper company that's become a penny stock, for example. It has an obsolete mill in Canada. When does reality kick in?

Mr. Steve Stinson: If you look at what's happened there, the mill, regardless of who owns it, comes back and is resurrected from the ashes. In many respects, these mills just are not viable investments, and they suck up government money—mostly provincial. There are a number of levers at the provincial government level in terms of their control of fibre that they can press upon, in terms of getting them to see the light on a particular investment and to reconsider the decision to close it.

By resurrecting it, whether or not it's a labour venture fund that comes in, some government money, or implied government backing on the new loans, it keeps this less competitive, obsolete mill in production, it exacerbates the capacity supply problems, and it lowers prices for every other community. It makes it much more difficult for every other community to function.

The Chair: Ms. Cook.

Ms. Fiona Cook: To answer your question directly, often the ownership does change. There was a case in B.C. in which the government has become a major shareholder in a mill. So to answer your question, it's often not the original company that stays with the mill. The ownership does change, whether it be an employee buyout or, in this particular case, when the provincial government steps in.

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

Mr. Penson and Mr. Lastewka.

Mr. Charlie Penson: My question is for the pulp and paper industry. I understand the focus of your presentation this morning, but I'm a little surprised you didn't address the issue of land use and how that also affects competitiveness and productivity. I guess I'll just ask that question. In a very big forest area in my riding in Peace River, I know that one major mill decided not to expand their paper capacity because of a potential land claim dispute. There are others in the mining industry who moved to Chile, who have essentially told us that there are a number of factors, including how long it takes to get environmental impact studies and the cost of that, and the dangerous species legislation.

Is this not a concern to you, or would you agree that it also affects your competitiveness?

Mr. Steve Stinson: Well, I think the issue of harvestable forest land is a very complex one. We have a legacy of public ownership in the industry. We have all these other factors—environmental concerns, aboriginal claims to these lands—and certainly these will impact on the investment decisions of firms to locate in an area.

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I think the uncertainty that comes from public ownership, compounded by uncertainty about future environmental legislation with respect to the protection of species and other environmental concerns, as well as the ultimate tenure of the land—is it aboriginal land or is it government land?—will create the uncertainty that impacts on investments in the industry. I think we're at a fundamental competitive disadvantage because of that, versus private ownership, but it's a very sticky political issue to overcome.

Mr. Charlie Penson: You've raised the issue of public versus private ownership of a forest area.

I know it's a different model from that in the United States, one of our major competitors. It's an issue in the free trade agreements and the softwood lumber agreements. It's been a longstanding concern. But if Canada were to move to the model that the United States has, wouldn't there have to be some kind of stewardship overseen by government to make sure environmental problems did not proliferate?

I'm just looking at some right in our own backyard, where certain aboriginal bands have had a forest industry, for example, and have come in.... You would think they would be averse to coming in under those conditions, but some forest companies and some other resource companies, such as the petroleum industry, seem to be pretty happy because they don't have to have the same kinds of standards, in terms of environmental conditions, as you do under public ownership. And that's a concern. It should be a concern to all of us, I think. How would you address that issue?

Mr. Steve Stinson: I think the forest industry stands to gain by responsible, sustainable development of our forest resources, whether it's a public or private system. And certainly, in a private system—and private timberlands certainly do exist in this country, particularly in the Maritimes—I don't see that these kinds of concerns have been paramount, in terms of abuse of the environment, and even if you were to have a private system, the government would set the terms of access to those resources.

With respect to the way they manage it, I think sometimes some of the biggest black eyes for the industry come from provincial control of the lands and our status as a tenant in some of these sensitive areas where the companies are required to log the area or lose their cut. This runs right in the face of environmental groups. If it were privately owned, they may very well have approached it differently. So public ownership is not necessarily the answer.

In the United States there has been a movement toward private trusts being set up to take lands out, to establish them as ecological trusts. So I think we should be looking at all the alternatives and not be blinded by our indignation that the Americans are always criticizing our system. I think we should take a look at it and say, can we make it better?

The Chair: This is the last question, Mr. Penson.

Mr. Charlie Penson: Essentially, whether it's public or private, stewardship is important. It's a renewable industry, and it's in all of our interests to make sure it is renewed.

Ms. Fiona Cook: It's of key importance, and as you might be aware, this whole area of sustainable forest management and how Canada or other nations perform is key in securing what we call continued market acceptance in world markets.

There's a lot of controversy now around forestry practices, particularly in Canada, and despite the complex network that we have to operate under—federal and provincial regulations—Canada is being labelled in international markets as a poor steward of its forests. Again, given the public ownership, we argue that the government also has a role to come out and say, yes, there are these policies in place, and we do, as the landowner, believe the tenant is managing.

Mr. Charlie Penson: Do you have any studies that show the impact of a private system, like in the United States, versus Canadian industry, which is publicly owned, in terms of stewardship?

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Ms. Fiona Cook: I can't think of one off the top of my head, but we can definitely look for that.

The Chair: Okay, thank you.

Mr. Lastewka, please.

Mr. Walt Lastewka (St. Catharines, Lib.): I apologize for not being here for your presentation, but I was defending your industry in the environment committee.

Mr. Myers, I want to question you on a number of items. You have approximately 3,500 companies in your organization. How many of those companies are involved with ISO 9000 or registered in ISO 9000?

Mr. Jayson Myers: I would say not nearly enough. Most of the larger companies are, to the extent that they need to be certified to that level. Of course, some of the other companies are certified to other standards, in QS 9000 and so forth.

The general certification rate stands at about 5,000 among small Canadian manufacturers. You're looking at a community of approximately 30,000 establishments here, so if we're looking at doing business around the world, we really have quite a bit more to go in terms of encouraging companies to become ISO certified.

That just means they have a good process in place, they've documented their process, and they're doing what they've documented. It says nothing at all about product quality or about what they need to do to grow. So it's really the bare necessity that companies need today to get into the market and compete.

Mr. Walt Lastewka: That's been one of my concerns with many of your manufacturers.

Mr. Jayson Myers: It's one of our concerns as well.

Mr. Walt Lastewka: I'm not quite sure what your organization is doing to promote the idea that they must get the message.

Mr. Jayson Myers: We run three programs to encourage ISO certification. In fact, one joint certification program aims at small companies alone. So we're quite active in the field. Today, however, especially with questions around energy efficiency and climate change, we're encouraging companies not only to look at ISO 9000 but also at ISO 13000 and the environmental certification, which is going to be quite important.

Mr. Walt Lastewka: Despite the fact that we have very good R and D tax credits and a number of other write-offs, when you compare Canada and the United States, many studies have shown that the investment by small and medium-sized businesses as far as R and D goes is very, very low. I heard your remarks concerning some of the problems with our R and D tax credit, and I've worked with them quite extensively in the last seven years, but our industry almost refuses to do R and D compared to what U.S. companies do. Why?

Mr. Jayson Myers: I agree this is a very important problem as well. It can't just be written down to size or risk aversion either.

A part of it is the way that small Canadian suppliers have traditionally operated. They produce a range of fairly standard products for their customers and they have until now been pretty much given the product specifications that their customers require. That's all changing, and it's a real problem, particularly in automotive and aerospace, because what we're seeing there is customers looking for systems integrators, passing more of the design research service requirements down the customer base. I'm extremely concerned, because frankly, without the R and D and the engineering capability, many of these companies won't be able to meet their customer requirements.

When you go into a lot of small companies, I've noticed that companies using CAD, computer-aided design, computer-automated manufacturing systems, have replaced the draftspeople who would come in and do this on paper with these automated systems. Instead of doing it on paper, they now do it on a computer, but they're operating the CAD system like a word processor. They're not going the next step to automate the design; they're not going the next step to integrate the automated design into the manufacturing, into the services, into the e-commerce that allows companies to connect with customers and the supply chain.

That too may change, but I'm very, very concerned about that.

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You can do all the talking, give all the encouragement in the world but until...the biggest encouragement these companies will get is the day when their customer says, you do this or you're out of business. That's when you'll get a lot of these companies to move. I echo your concern on that side as well.

Mr. Walt Lastewka: One area I'm always concerned about with small business is the complacency of taking advantage of the Canadian dollar now but not managing to plan that it could be at 80¢. I've asked the same questions to CFIB and other organizations and small businesses.

There seems to be very little attention brought to the groups to understand that you need to be managing...almost doing double accounting to make sure you are competitive and not relying....

Mr. Jayson Myers: That's right. The most advanced companies, of course, in Canada are. Especially if they're exporting, they're certainly pricing in U.S. dollars and they're doing a lot of their cost accounting as well...they're doing that double accounting. In reality most of the smaller companies in Canada are still selling into the domestic market here.

I agree a higher Canadian dollar is going to mean that their exporting customers are going to put more and more cost pressure on these smaller companies. They're not going to be able to take advantage on the other side of lower import costs because very few of them are importing. And they're going to be caught. That is why productivity has to be the key for smaller companies.

Probably a gradual adjustment in the value of the dollar up could be managed, but I'm afraid if we see a rapid increase, as we saw in the late 1980s, it would have serious consequences for industry. I'm not so sure we wouldn't see the type of very deep industrial recession in this country that we saw at the end of the 1980s, particularly among small companies.

Mr. Walt Lastewka: I have one last question. If there was one item you wanted the government to help your industry with to make you more competitive, more productive, what would that one item be for both of you?

The Chair: Mr. Myers.

Mr. Jayson Myers: On the government side, I would say tax, but in the way of tax as a government overhead. So I would focus on capital taxes. I would also focus on the rising level of user fees, which are, as far as many companies can see, taxes in another form. If there's no service or no improvement in service standards, it is a big problem, as Ms. Cook has pointed out.

The biggest issue overall is not a government issue. It's an issue of management in this country, and it goes back to your previous questions. If you look at almost any sector, if you look at the companies that have succeeded and are growing and the companies that have failed in Canada, the growth in Canadian manufacturing has come because companies have taken the right steps. They have invested in new technology. They have managed the technology well. They've cut the cost and so forth.

The biggest problem right now is management.

The Chair: Okay, Ms. Cook and Mr. Stinson.

Ms. Fiona Cook: Given Jayson's observation about the risk averse nature of Canadian management, anything that could be done to mitigate that, to encourage investment either through cost-of-capital reductions with accelerated depreciation, as we discussed earlier...anything that would address that issue of enhancing the investment climate in Canada.

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

Just before we adjourn, I need some clarification, Mr. Myers. I'm not sure if you can answer this. When we were talking about the R and D tax rules, you said there were definitely problems. Can you identify specifically what the problems are?

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Mr. Jayson Myers: Along with a number of other associations, we prepared a paper that went to Revenue Canada at the time—I think it was almost two years ago—and it outlined in detail all of the problems of the R and D tax credit system. I'd be glad to pass that along to you.

The Chair: That would be very much appreciated.

Mr. Jayson Myers: There are also some more studies that I'll pass along as well.

We prepared a study in 1995 that looked at where manufacturing is going, not in Canada, but around the world. In looking at the issue of productivity and prospects for the industry, and also for the education system, it's pretty important to look at some of the structural changes going on in the international marketplace so that we can position ourselves, not necessarily today, but ten or twenty years down the road. So I'll pass that along to the committee as well.

The Chair: Thank you.

I want to thank you all for being here today. We have appreciated your presentations, your briefs, and indeed the discussion. If you have any further comments you wish to make on the budget or anything in the next couple of weeks, we'd appreciate receiving those in writing.

The meeting is now adjourned.