FAIT Committee Report

            1. Enhancing the Image of Canada in Europe

            It has become increasingly apparent that the perception that Europeans have of Canada poses a serious obstacle to the promotion of Canadian business in the EU. Our European fact-finding mission confirmed that Canada possesses an overwhelmingly positive image overseas. Abroad, the name Canada often conjures up images of pristine parks and wilderness areas, other tourist draws such as Niagara Falls, a peaceful, democratic and tolerant people, and an economy critically dependent for its performance on its natural resources. While the description of Canada’s natural beauty is certainly apt and worthy of promotion, and generates invaluable goodwill, it misses the reality that in the economic arena Canada no longer relies solely on its natural resources. Some 70% of our exports are, in fact, now industrial products. For the first time in Canadian history, as the Sub-Committee was told by a senior Canadian embassy official in Paris, one can say that there is balance in the domestic economy between the resource-based industries and other sources of industrial output. In a number of high-technology areas (e.g. rapid access to the Internet, broadband access), Canada has become a powerhouse.

            Still, the old vision of Canada dies hard. In 1997, the Conference Board of Canada concluded that the business communities on each side of the Atlantic were plagued by a major "information deficit" about each other’s markets. A private survey of European executives undertaken for Foreign Affairs and International Trade Canada in 1998 also revealed gaps and inaccuracies in the overseas knowledge of Canada. In France, the Sub-Committee was informed of the findings of a survey that revealed perceptions of a complete lack of "high-performance" industries in this country. The image problems identified in the 1990s thus appear to continue to this day.

            The fact remains that Europeans hold an outdated picture of Canada’s economy, and that Canada is not on the radar screen of most EU companies. Remarked Mr. Keyes, "… we're seen as a satellite of the U.S. The U.S. gets the primary attention and we're sort of some snowbound northern end and the U.S. may be a launching pad into Canada. They could not identify Canadian products, companies or services that really stood out as a real must-have in the European context." In Europe, we even found out that our leading high-technology companies are often thought to be American owned. With the common European impression being that we are dominated by the U.S., it may be in Canada’s best interests to differentiate itself from its southern neighbour.

            Why do we continue to have an image problem overseas, in that Canada is not being correctly perceived as an important manufacturer of advanced industrial and high-technology products? Has accurate information been made readily available to European business? The Sub-Committee heard contrasting views on the information question. Mr. Keyes was convinced that no "information deficit" existed with respect to Canada, that in fact there was too much information available. Mr. Clarke agreed that while the quantity of information was not an issue, people on each side of the Atlantic nevertheless did not know very much about the other. For his part, Charles Barrett (Vice-President, Business Research, Conference Board of Canada) claimed that both sides suffered from a shortage of timely and targeted information on each other’s markets. In France, the Sub-Committee heard that French firms experienced a dearth of information on Canada, with even the well-known French company Alcatel (which purchased the Kanata-based Newbridge Networks in 2000) not having initially perceived Canada as a high-technology market.

            The Sub-Committee can only conclude that Canada’s stereotypical image is harming its business prospects. With the depth of global competition for business that now exists, the challenge for Canada is to build on its positive "natural" image and its comparative advantage in natural resources and compete more effectively for business by promoting Canadian products, services and companies to the European market. This can be done by striving to modernize Canada’s image as a dynamic, open society with cutting-edge technology (e.g. information technology, telecommunications, aerospace and electronics) that can provide solutions to European business requirements and be a key partner for European business through the use of joint ventures in Europe and investment in Canada as the gateway into NAFTA.

            We need to tell Europe what Canada is really about, and develop greater "Canada Brand" awareness there. We should enhance Canada’s overall profile in Europe as a means of advancing our strategic interests. To help present a more accurate and up-to-date portrait of Canada to Europeans, we recommend:

Recommendation 2:

That the federal government, through the use of an effective information campaign, undertake a more concerted effort to communicate directly and effectively to European decision-makers that rapid change in the structure of the Canadian economy has occurred. Europeans need to be informed that Canada has now evolved from being primarily a resource-based economy to one that encompasses many modern, knowledge-based industries.

Recommendation 3:

That this revamped "rebranding" strategy, designed to reposition Canada’s image abroad as a world leader in the new economy, make greater use of the resources of European companies having successful Canadian operations; Canadian firms with sizeable presence in Europe; incoming visits by journalists, especially those representing specialized newspapers and journals; student exchanges; images of the new Canadian reality displayed prominently at Canadian airports; and the Canadian flag.

            Witnesses both here and in Europe also raised the concern that Canada’s efforts to promote tourism, through an emphasis on the country’s natural beauty, may be running counter to the desired projected image of Canada as a high-technology, advanced manufacturing, and electronic economy. It appears that we may have been almost too successful in marketing ourselves as a wonderful, free, open-air country, in the sense that our desired business image as a high-technology provider of goods and services is being overshadowed. As a result, companies in Europe may be avoiding Canadian suppliers and European investors may be considering U.S. investment locations as opposed to Canadian ones. To rectify this problem, the Sub-Committee recommends:

Recommendation 4:

That, in collaboration with the provinces, Canadian tourism promotion campaigns in Europe be reassessed and modified, where applicable, to include information on the rapid transformation that has occurred in Canada’s economic structure and the lifestyle and high quality of life that Canadian knowledge workers enjoy. Greater targeting of Canada’s cities as business and tourist destinations should be considered.

  2. Canada’s Image of the EU

            A parallel EU image problem exists among Canadian companies, who have not taken a strong interest in what is the second largest economy in the world. Opinions as to why this is differ, although a reasonable explanation is that the pull of Canada’s southern neighbour (especially in the context of its protracted economic boom of the 1990s) has historically provided a sound business case for continued concentration on the U.S. What may also be causing potential traders and investors to look the other way when it comes to Europe is the long-lasting perception that "European markets are hard to crack, old world, protectionist, bureaucratic, full of barriers." The Sub-Committee certainly heard evidence in Europe that Canadian companies perceived these markets to be difficult to penetrate.

            Mr. Keyes felt that it was the proper role of both the EU and Canadian governments to counter these perceptions, otherwise firms were going to go elsewhere. Apart from obtaining information on the individual European country markets themselves, Canadian businesses may need to be more aware of the policies and practices of the EU for them to develop strategies targeted at the increasingly integrated European market. The key, therefore, is to raise awareness and disseminate information about the EU and its member states in Canada. The Sub-Committee was told that while large Canadian multinational corporations appear to understand Europe and are well represented there, smaller businesses were confused about the purpose and policies of the EU. To address this shortcoming, we recommend:

Recommendation 5:

That the federal government review the needs of Canadian business, especially those of small- and medium-sized firms, for accurate and up-to-date information about individual European country markets as well as the policies and practices of the integrated European Union. Remedial steps should be taken to respond to information deficiencies.

B. Promoting Trade and Investment with Europe

            The federal government has an important role to play in providing information that companies and investors need for decision making, and in encouraging trade and investment. These responsibilities are especially important in Europe, where a full 55% of DFAIT’s clients in European posts are novices in the market. This figure represents the highest rate of all foreign markets and a significantly higher share than DFAIT had initially anticipated. A 1999 survey of over 2,000 firms undertaken for DFAIT on the level of client satisfaction with Canadian trade commissioners found that the above firms tended to be small- and medium-sized enterprises (SMEs), many of whom had carved out key niche markets in the U.S. before turning their sights on Europe, Asia and Latin America.

1. The Need for More Resources

            Although the DFAIT survey revealed an overall 81% rate of satisfaction with the Canadian Trade Commissioner Service, the Sub-Committee received evidence that the federal government’s promotional resources in Europe may have become stretched. For example, Mr. Paterson pointed out that "…some of the trade people in Europe are run right off their feet. They’re overwhelmed by the number of companies that are calling on them for help. This is one of the difficult issues DFAIT has had to face in managing their resources: keeping up with the demand for partnering information and market intelligence in the fast-growing markets."

            An unfortunate development has been the sharp decline in DFAIT’s European budget in recent years. Funding for the Program for International Business Development has gone down from $5.4 million in 1994-95 to $1.9 million in 2000-01 and that for the Program for Export Market Development from $1.7 million to $1.0 million. Government cutbacks in the 1990s led to a sharp decrease in the amount of direct trade promotion (trade fairs, missions, Program for Export Market Development support to the Canadian business community) undertaken by the Department. According to Mr. Keyes, this reduction definitely exerted a negative impact on Canadian presence and visibility and on the ability of Canada’s posts to provide information and project commercial opportunities. In Europe, the message was very much the same, that the expenditure reductions had been counterproductive and that there was a need to augment financial resources.

            In response to the above-mentioned cutbacks, DFAIT developed a strategy to guide its transatlantic trade and investment promotion efforts. Mr. Clarke noted that while the 1990s saw cutbacks in the number of Canadian trade commissioners abroad, these were replaced with much less expensive local commercial officers. The net result is that the total number of DFAIT staff throughout the world promoting trade and investment has remained approximately constant. In Europe, the number of employees actually rose, from 137 in 1990 to 175 in 2000. The Committee was informed that 27% of DFAIT’s trade commissioners and locally engaged commercial officers were based in Europe. According to Mr. Clarke, DFAIT’s resources in Europe are in "a decent balance," with excellent representation in the commercial centres of western Europe and good representation now in most of the eastern European region.

            The government’s existing strategy to increase trade and investment with the EU is essentially a business plan designed to identify products and outlets in Europe. Increasingly, emphasis in our overseas embassies is now being placed on cost sharing with the private sector and on concentrating promotional efforts on activities providing high value-added, core services (e.g. provision of accurate information on local markets and hard leads, provision of advice on how to do business in European markets, and problem solving as opposed to offering logistical services). Mr. Paterson informed the Sub-Committee that the greatest value added that DFAIT can provide is by developing a sound knowledge of the local industry, in his case the high-technology industries, and searching for suitable partners for new Canadian entrants into the European market. It also bears mentioning that, for trade purposes, 12 high-priority sectors have been identified by DFAIT’s partners in Team Canada Inc., which comprises the departments and agencies involved in trade. The majority of funds are now directed to these priority sectors in priority markets.

            While the DFAIT officials cited believe that the Department is functioning effectively in operational terms, the Sub-Committee is concerned that a mismatch between needs and resources may be eroding the effectiveness of the government’s trade and investment promotion activity. In Europe, embassy officials bemoaned the lack of sufficient human and/or financial resources with which to realize the region’s full trade and investment potential. Departmental officials in Ottawa also stated that they would welcome additional resources. The federal government’s former senior trade commissioner told the Sub-Committee that follow-through on the government’s plans to increase the amount of resources devoted to direct trade promotion (especially in high-growth industries such as information technologies, biotechnology and environmental industries), as announced in the October 1999 Throne Speech, would be greatly appreciated.

            Two specific areas where the greatest immediate need for additional spending was felt included involvement in sector-specific European trade fairs as well as in the hiring of new personnel to solicit European direct foreign investment (i.e. investment counsellors). DFAIT believes that attendance at all of the major international trade shows and events in Europe is vital, as this is where most European business is done. Since the EU is an integrated market, each embassy should have enough funds to be involved in trade fairs; funds should not be targeted exclusively to embassies in the countries in which the majority of trade fairs take place. The Sub-Committee also heard of the value of embassy officials making visits to the local regions of the countries in which they reside and to more European SMEs, in order to drum up investment business. We see merit in significantly augmenting the resources devoted to direct trade support and investment development and recommend:

Recommendation 6:

That the federal government provide a boost to DFAIT’s direct trade and investment promotion budget in Europe. These increased resources should be targeted towards expanding Canadian involvement in European trade fairs, thereby enhancing Canada’s image and presence within the European business community, and to a broader, more extensive search for additional investment throughout Europe.

   2. Encouraging Exports

            A number of witnesses in Europe spoke of the lack of interest on the part of Canadian companies, particularly SMEs, in doing business with Europe. We were informed that encouraging businesses to come over for the first time was a valid role for the federal government, even if subsidizing their involvement in trade fairs was less appropriate. The Committee was also told that design standards, quality standards, environmental standards, and various other product and service standards can be higher overseas. A key area to focus on, therefore, is building the capacity of small companies in Canada, in particular, to trade (and to invest) in the European market. The concern expressed to us in Europe was that too many of Canada’s SMEs were ill-prepared for the highly competitive European market and the many exciting niche-market prospects that it provides. Once over there, they were too quick to return to North America when performance began to suffer.

            We are of the view that the Government of Canada should be doing a better job in the area of export promotion. It is indeed telling that embassy officials spoke to us of the fact that they had often been wasting their time on the export side and, given their limited resources, that they had switched to concentrating on attracting investment to Canada where the returns were often greater. More needs to be done in Canada to spark the interest of smaller Canadian firms in the European market, prepare them fully for the task, and once established overseas, to follow up on their performance. The Sub-Committee therefore recommends:

Recommendation 7:

That the Government of Canada rededicate itself at home to generating interest on the part of small- and medium-sized Canadian companies in participating in European markets, more adequately preparing "new to Europe" firms for European export opportunities, and following up on these corporations once they are established overseas. More funds and personnel should be allocated to meet these objectives.

            Finally, witnesses in Europe told the Sub-Committee that the Government of Canada’s export services suffered from an overlap of effort between itself and the provinces, a lack of integration with domestic business organizations (e.g. Chamber of Commerce, Alliance of Manufacturers and Exporters) and a lack of human resources with private sector skills. To rectify these perceived shortcomings, we recommend:

Recommendation 8:

That the federal government review and modify its export promotion activities and resources to ensure that complementarity between its activities and those of the provinces is achieved, that closer links with Canadian business organizations are forged, and that adequate recruitment of foreign officers with the necessary private sector skills to help open up European markets to Canadian firms is undertaken.

  3. Promoting Investment

            Turning to the investment side, attracting European investment into Canada can be quite challenging, given the strength and potential of the U.S. economy and the stiff competition for foreign investment that exists from certain aggressive American States and municipalities. It is important to show that the Canadian market is a dynamic and competitive one, embodying an attractive environment for productive investment.

            DFAIT pointed out to the Sub-Committee that it is placing considerable importance on developing "Canada Brand" investment awareness in Europe. The message to potential European investors is that Canada is the preferred location for companies to achieve access to the NAFTA market. Canadian advantages include favourable macroeconomic conditions, lower business costs than the U.S. in many instances, less labour turnover than in the U.S. (i.e. more employee loyalty), the existence of social programs appealing to European investors and a less litigious society. We do have a favourable message to provide to potential investors. In Germany, the Sub-Committee was told of the importance of ensuring that the proper economic fundamentals stay in place in order to maintain these investment advantages.

            To generate European investment in Canada, DFAIT has developed an aggressive and active program in Europe involving investment counsellors, Canadian ambassadors, heads of missions throughout Europe and trade commissioners. Instead of utilizing a broad information campaign to attract investment in Canada, the approach has been to target the investors that are desired, for example, companies that source internationally. The number of resulting "corporate calls" has more than doubled in the past five years. The Sub-Committee found support for this approach in Europe.

            The federal government also operates a country-champion program, under which deputy ministers call on foreign companies in a given country once a year and attempt to resolve any investor concerns at a high level. The program, run by Investment Partnerships Canada (a joint venture of DFAIT and Industry Canada), has been repeated in most of Canada’s major investor partners, and has generated tangible results in terms of investment inflows (e.g. over $2 billion in new Swedish investment from companies such as Ericsson, Astra, and Stora).

            In Brussels, the Sub-Committee was told by a senior official in the Canadian High Commission in London that the trade and investment mandates of DFAIT are quite distinctive in nature and that the federal government had essentially taken the Trade Commissioners Service and layered upon that the new investment mandate. However, there was no comprehensive mechanism underpinning investment promotion. The October 1999 Throne Speech included a reference to a possible launch of Investment Team Canada, designed to bring together a wide array of federal departments and agencies, other governments in Canada, and the private sector to invigorate and promote foreign investment in Canada (thereby serving as a replacement to the existing Investment Partnerships Canada).

            We believe that the introduction of such a complement to the existing Team Canada Inc. trade vehicle is long overdue. It is important to coordinate federal and provincial approaches in attracting investment to North America, in the process establishing a complementary relationship between the two levels of government. Moreover, the Sub-Committee heard (while overseas) of the need to devote DFAIT resources in Canada to "after-investment" service. Since a full 60% of investment in Canada comes from firms that have already invested in Canada, it was felt that more needed to be done to encourage and facilitate this additional investment spending. We therefore recommend:

Recommendation 9:

That an Investment Team Canada, integrating the resources of relevant federal departments and agencies, other governments in Canada, and the private sector, and equipped with a mandate to promote foreign investment in Canada, be established as soon as is feasible. A national strategy to attract investment from Europe and elsewhere should be developed with an eye to removing existing overlap and duplication between the various levels of government. As part of this strategy, emphasis should also be placed on encouraging and facilitating reinvestment once foreign companies have been established in Canada.

            Finally, plans to send a Team Canada trade and investment mission to Europe had been previously derailed in favour of one seeking out new opportunities in China. We find this decision to be regrettable, and would hope that Europe could be reconsidered as a priority Team Canada destination. To this end, we are encouraged by the inclusion, in the January 2001 Throne Speech, of a commitment to send a Team Canada investment mission to Europe. At the same time, it would be most advantageous if the focus of such a mission could also include the broadening of transatlantic trade ties. The Sub-Committee recommends:

Recommendation 10:

That the federal government make every possible effort to ensure that Europe be reinstated as a priority destination for future Team Canada missions, and that both trade and investment promotion are designated as key objectives for such missions.

  1. Canada-EU

            It is safe to say that at the official level, the transatlantic relationship between Canada is in dire need of a boost. As Pascal Lamy (EU Trade Commissioner) informed the Sub-Committee in Brussels, while the good news surrounding the relationship is that there does not appear to be any major problem, the bad news is that the potential for greater ties has not been met and that much more needs to be done. Other witnesses in Brussels echoed these observations. Rod Abbott (Deputy Director General for Trade, EU Commission) called for a new impetus to improve Canada-EU relations, but was not sure if free trade was the answer. A German parliamentarian at the EU suggested that Canada was an important country for Europe and that the existing bilateral relationship needed to be redefined in the next five to ten years. For his part, James Bartleman (Canada’s Ambassador to the EU) stressed the need for a "magic bullet" to alter the current transatlantic psychology.

            We believe that this "bullet" could well take the form of a free trade agreement(s) with Europe. Ever since Canada first supported the concept of a North Atlantic Community in 1948 as part of NATO, free trade with Europe has been the Holy Grail of transatlantic trade relations. In the fall of 1994, Canada’s International Trade Minister made a number of speeches advocating a Canada-EU free trade agreement. Taking up this idea in a December 1994 address to the French Senate, our Prime Minister called for the joining of the NAFTA and EU trade regimes in a Transatlantic Free Trade Zone. He reiterated this proposal in a speech delivered in London, England, in October 1997.

            Since then, Canada has abandoned its pursuit of an EU-NAFTA deal in favour of a Canada-EU bilateral one. During the December 1999 Canada-EU Summit, proponents of a comprehensive Canada-EU free trade agreement were given some hope that such an undertaking could be realized. At that summit, EU Trade Commissioner, Pascal Lamy, told Canadian authorities that while the EU prefers to establish free trade deals with economies less developed than Canada’s⁹ and while certain EU member states (perhaps France and Spain) may have strong reservations, he would be prepared to examine a sound business case for a free trade agreement.

            Several points in favour of a free trade deal with Europe are worth noting. First, DFAIT officials informed us that Canada is one of only eight geographical entities (Australia, Hong Kong/China, Japan, the Republic of Korea, New Zealand, Singapore, and the U.S. being the others) without a preferential trade agreement with the EU. Not being part of such an arrangement has no doubt hurt Canada since trade tends to be diverted towards countries enjoying the favourable treatment.

            Second, free trade results in a lowering of both tariffs and non-tariff barriers, the latter of which have proven difficult to remove. The completion of a free trade initiative would alter the dynamics of our relationship, thereby making progress on trade barriers more possible.

            A third rationale for free trade involves the psychological boost that such an accord would give to the transatlantic business relationship. Just like the Canada-U.S. Free Trade Agreement altered the interest that the Canadian business community had in the United States, the Sub-Committee frequently heard while in Europe that a Canada-EU deal would substantially improve Canada’s visibility in Europe and that it would lead to significantly greater trade with EU countries. Moreover, free trade agreements typically prompt an entirely new business perspective on investment. When asked by the Sub-Committee for their views on such a free trade agreement, a group of round table participants from German industry and government delivered a unanimous and clear yes.

            In its hearings, however, the Sub-Committee also detected a certain sense of skepticism regarding the prospects for such an agreement. We were informed that, apart from the EU’s more liberal northern-tier states, there was little enthusiasm within Europe for a comprehensive free trade pact. Canada is viewed in certain quarters as simply not important enough to warrant the expenditure of time and resources that such an agreement would entail. According to Mr. Abbott, there is limited administrative capacity in EU offices in Brussels to take on an additional set of bilateral negotiations with Canada, especially at a time when so much attention is being focused on the launch of a new multilateral trade liberalization round at the WTO.

            On a more substantive note, the initial view of the European Commission on this question is that since tariffs between developed countries are already at low levels, there may not be much to gain from a free trade agreement with a developed nation such as ours. Instead, what ought to be dealt with are the non-tariff barriers which, at any rate, can be handled more appropriately in a multilateral setting.

            Kathleen Macmillan (President, International Trade Policy Consultants Inc.) concurred with this assessment, pointing out that the economic benefits of free trade would not be significant and that it would only provide a temporary leg-up on the other non-aligned EU trading partners. She pointed out that the real impediments to transatlantic trade are found on the regulatory side and that Canada would not be any more successful in having these dismantled than others who have already failed. Finally, she argued that little would be gained in terms of investment because relatively few barriers currently exist. With respect to investment inflows, drawing in greater quantities of investment would require "made-in-Canada solutions."

            Gauging the reaction of the European business community to a potential bilateral trade deal is another matter. While the Sub-Committee was told that certain members of that community were not supportive, it is premature for us to consider this sentiment as an accurate reflection of the business view on this issue. Certainly, the views expressed to us by the round table participants in Berlin give us some hope that European business leaders and other decision-makers have begun to give the free trade question a more favourable look.

            A key question in this discussion is whether the Europeans would be interested in free trade negotiations (bilateral or plurilateral) with Canada over agriculture. Europe’s agricultural sector remains highly protected and dependent on the use of export subsidies and generous levels of domestic support. Immediate changes in its agricultural policy would have to be made, which would not be politically popular. Any success in the area of agricultural trade liberalization would likely either have to be modest in nature (if undertaken bilaterally), or arise out of multilateral negotiations, in which trade-offs in other areas important to the Europeans could occur. However, a free trade agreement with modest progress in agriculture is still considerably better than no agreement at all, especially since agriculture represents less than 10% of total bilateral trade.

            As was noted, it appears that the EU is reluctant to negotiate free trade arrangements with developed countries outside of Europe such as Canada, choosing instead to strike deals with other countries for strategic, geographical reasons. When asked why Europe undertook a free trade agreement with Mexico and not Canada, Mr. Lamy stated that the EU’s share of the Mexican market had dropped considerably after NAFTA’s implementation in 1995 and that since the focus of bilateral trade was on goods and not services, it was a relatively easy agreement to conclude. Indeed, the relationships between Mexico and the EU, and between Canada and the EU, are quite different in that the average tariff level in EU trade with Mexico was substantially higher (roughly five times higher) than that with Canada and that the links between the EU and Canada are at a much more advanced stage. In addition, European companies saw Mexico as a useful launching pad for accessing Central and South American markets, and there was a certain complementarity between the Mexican and European agricultural sectors that simply did not exist between Canada and the EU. Finally, Mr. Lamy expressed concern that any negotiation with Canada over services could potentially violate NAFTA rules although, as was pointed out to the Sub-Committee, one would really only find out once the negotiations were started.

            Given these points of view, if Canada is to have any success in achieving a bilateral trade deal, it remains likely that it will be up to Canadians to heighten European’s attention on the issue and prove the free trade case to them. DFAIT is currently completing a macroeconomic study on the effects of tariff elimination on Canada-EU merchandise trade. Notwithstanding the fact that further review of the impacts of non-tariff barriers and other issues such as investment, trade in services and rules of origin is still required, the initial results of the tariff-removal study are positive.¹⁰ For his part, Mr. Lamy noted that he needs to see a clear economic and political return from free trade with Canada before proceeding.

            The Committee believes that the concept of a free trade agreement should be pursued if such an arrangement could improve market access and generate additional trade between Canada and Europe. The study that DFAIT is attempting to finalize needs to be made public as soon as possible and then broadened to include the effects of a liberalization of non-tariff barriers. Once that is completed, the results of the entire business-case analysis should be published and pursued with the Europeans and with Canadian business at every opportunity. Mr. Lamy informed the Sub-Committee that the Canadian business-case study would give the EU Commission a starting point for their own development of a similar business case. The Sub-Committee recommends:

Recommendation 11:

That the Government of Canada rapidly develop a business case for a free trade agreement with the EU and undertake an aggressive campaign both in Canada and in Europe to promote its findings to key decision-makers. In this promotional campaign, every effort should be made to seek out and utilize champions of transatlantic free trade.

   2. Canada-EFTA

            Canada also has strong trade relations with the European Free Trade Association (EFTA) set of countries, comprised of Switzerland, Norway, Iceland and Liechtenstein. Two-way trade amounted to approximately $7.2 billion in 2000, of which $1.3 billion could be attributed to Canadian exports. Also of great significance, companies in EFTA countries have invested a total of $4.6 billion (1999) in the Canadian economy, in such industries as finance, insurance, chemicals, fish processing, and oil and gas development.

            Negotiations to achieve a free trade agreement with EFTA, this country’s first transatlantic arrangement ever, were launched in October 1998. Three unfortunate developments have occurred since that point. First, the coverage of the agreement has been reduced from original intentions.¹¹The text of the agreement that remains under discussion now focuses primarily on industrial tariff elimination,¹²a small amount of liberalization for agriculture, and new cooperation with respect to trade facilitation and competition. If a bilateral deal is to be signed, it will consequently be of the "first generation" type, with no new commitments in the areas of services, investment, government procurement or intellectual property.¹³

            Second, while the framework for a deal continues to exist, negotiations broke down in May 2000 primarily over the issue of the treatment of ships and industrial marine products. Immediately prior to that negotiating session, the Canadian shipbuilding industry decided to remove its previous support for the trade-off of a gradual elimination of the domestic tariff on the above-mentioned products in exchange for an immediate end to the Norwegian 9% direct subsidy program. It was the Canadian industry’s contention at the time that implementation of this arrangement would still tilt the "playing field" in Norway’s favour, given the forms of protection available to Norwegian shipbuilders that would continue to remain in place outside of the above-mentioned subsidy program. Since then (December 2000), Norway has agreed to eliminate its direct subsidies although the Sub-Committee was informed that it also signed a number of shipbuilding contracts benefiting from three years of subsidies (under the old subsidy program) just before year-end.

            From Norway’s perspective, a Canada-EFTA agreement without liberalization in shipbuilding would be of little economic benefit. To help accelerate the negotiations, Norway tabled a proposal in March designed to give greater flexibility to Canada to phase out tariffs for ships and industrial marine products.

            A final complicating development was the April 5 publication of the report of an industrial task force on Canadian shipbuilding. One of its key recommendations was to "resist any requests from other countries to change provisions of the Canadian shipbuilding policy until such time as the Canadian industry has been able to overcome the long-term effects of the subsidy and unfair pricing policies of other countries." While this report has now become an impediment to progress on the European free trade front, both sides are reflecting on the best approach to move the negotiations forward. However, no date has been established for the next set of negotiations.

            The Sub-Committee is disappointed in the current state of play with respect to Canada’s relationship with EFTA, and hopes that the thorny shipbuilding issue can somehow be resolved. We believe that the successful completion of the negotiations would be of large symbolic value and as William Rossier (Secretary General, EFTA) noted, would be viewed with great interest by the EU. We realize that free trade with EFTA is worthwhile on its own, but also anticipate that it could serve as a useful entry point in our quest for free trade with Europe. We therefore recommend:

Recommendation 12:

That the federal government rededicate itself to concluding a "first generation" free trade agreement with EFTA as soon as possible and then enter into further negotiation so as to finalize a broader "second generation" accord by the end of December 2002.

1. The Prospects for a New Round

            While Canada has been placing considerable emphasis on bilateral trade liberalization, while also thinking multilaterally, the EU has been concentrating squarely on the launch of a new, comprehensive round of multilateral trade liberalization at the World Trade Organization (WTO) in Geneva. There is no question, as Mr. Abbott remarked to the Committee, that the WTO leads to "trade liberalization with maximum effect." Many of the issues impeding the bilateral Canada-EU relationship could be addressed if a new round were to be launched. While negotiations on the "built-in agenda" (i.e. agriculture and services) have begun, a broadening of negotiations will likely be required to generate true progress in these two areas.

            The trouble is that it is not at all certain at this point in time if a launch will take place this year. Considerable differences of opinion between key players remain and decision making within the WTO is notoriously inefficient. There is thus no agreement yet on a realistic framework negotiating agenda that meets the need of WTO members.¹⁴Even if the decision to launch is formally agreed to at Doha, Qatar (the location of the Fourth WTO Ministerial Conference) in November, negotiations would take years.

            What are the key stumbling blocks to the start of negotiations? The first hurdle to consider is the lack of an agreement within the Quad set of countries (Canada, the U.S., the EU and Japan) on a realistic core agenda. No doubt, the fact that the new U.S. Administration has had to get itself installed has caused some delay. The lack of a trade promotion authority (i.e. fast track) for the U.S. President and the existence of a Congress that is, on balance, not free trade oriented, have led to uncertainty regarding the precise U.S. position going into the new round. As Mr. Abbott remarked to the Sub-Committee, many countries would commit to a new round of negotiations if a positive signal from the Americans were to emerge.

            The relationship between the EU and U.S. is critical. In Geneva, the Sub-Committee heard that while the personal rapport between the U.S. Trade Representative and the EU Trade Commissioner was favourable, differences remained on the scope of the negotiating agenda. The Europeans continue to seek a comprehensive round, incorporating elements such as competition, investment and sustainable development. As Carlo Trojan (European Commission Ambassador to the WTO) noted, a comprehensive round is the best recipe to ensure that market access is attained. If the WTO does not achieve a comprehensive round, he stressed, it will lose relevancy. For their part, the Americans are intent on crafting a more limited, but still wide-ranging agenda. They are reluctant to include such issues as competition and investment in the negotiations. Given the desire on the part of the WTO to make a decision on the new round by mid-summer, there is an urgent need to encourage both sides to narrow their differences.

            Quad agreement on a core negotiating agenda could serve as a magnet for other developed and developing countries to gravitate towards, but for a new round to be realistically struck there will have to be an effective response in place to the concerns of developing countries. Mike Moore’s (Director General, WTO) four-point confidence plan (improved market access, flexibility on implementing existing WTO obligations, greater input in WTO decision making, provision of trade-related technical assistance) has not generated the necessary confidence, since most developed countries have not been prepared to offer significant new market openings or flexibility on implementation outside of new negotiations. Instead, they are attempting to generate confidence that these concerns will be addressed in the next round.

            Sergio Marchi (Canadian Ambassador to the WTO) told Sub-Committee members that developing countries now have "a loud voice at the table" and that they are more united than the developed countries. Many of these countries have a wide variety of concerns related to "implementation." For example, they have yet to fully digest the obligations stemming from the previous WTO Round (Uruguay Round) and, on the other side of the ledger, they have not yet realized the market access (e.g. in textiles) that had been promised. The fact that their expectations from the previous round of trade liberalization were not met has made them reluctant to enter into new commitments this time around.

            Not all is negative on this front, however. According to Mr. Lamy, most developing countries have come to realize that a world without a new round would be worse than one with, since the expected ensuing acceleration of regional arrangements would not necessarily include them and since not dealing with the issues now on the table at the WTO is leading to trade hostilities (e.g. agriculture). Developing countries are the largest beneficiaries of a rules-based multilateral trading system. Another positive factor is that developing countries are not a totally homogenous group, and even the small number of hard-line countries from this group are not uniformly opposed on every point. According to a senior Canadian official in Geneva, the key will be to integrate the implementation issue into the Qatar Framework and establish the next round as a key development round.

            The Sub-Committee is cognizant of the concern that the WTO not be perceived to have failed again in launching a new round (as it did in the run-up to Seattle). It is therefore struck by the urgency of achieving movement towards a negotiating agenda. We are hopeful that Canada can play a useful role in bridging the gap with respect to both the existing differences within the Quad and the willingness of developing countries to sign on to a negotiating framework. We therefore recommend:

Recommendation 13:

That the Government of Canada accelerate efforts to seek consensus, both within the Quad group of countries and between developed and developing countries, on a broadly based but manageable WTO negotiating agenda for the next round of multilateral trade liberalization.

   2. Other WTO Concerns

            Three other WTO-related concerns were brought to our attention in Geneva. The first was the need for more efficient decision making within the organization. Currently, decisions are taken by consensus among the member countries and are subsequently ratified by members’ Parliaments. Under this consensus model, several witnesses in Europe pointed out, decision making moves at an incredibly slow speed. Once a decision is made, however, then everyone is bound by it and it is virtually impossible to reverse, giving decisions a strong legitimacy. As Andrew Stoler (Deputy Director General, WTO) remarked, the WTO is the international organization that places the most emphasis on country sovereignty. Mr. Moore echoed this sentiment, observing that "the WTO is imprisoned by its culture" and "no one has the vote and everyone has the veto."

            According to Mr. Trojan, the consensus-building WTO is not a prime model of an efficient organization. The institution should be more management driven and marry the need to be transparent and inclusive with the need for efficient decision making. Recognizing the difficulties inherent in changing the current system, he nevertheless supported the establishment of a smaller but representative decision-making body within the organization. One of the reasons the Seattle negotiations failed in November 1999 was because many developing countries felt shut out of the substantive negotiations. Having a representative "G-20" type of coordinating group within the WTO that would communicate well with other countries could simplify the decision-making process. The Sub-Committee recommends:

Recommendation 14:

That Canada, in conjunction with like-minded countries such as those represented by the EU, encourage World Trade Organization members to create a more efficient decision-making procedure within the WTO while respecting individual countries’ sovereignty, the need for transparency and the need for consensus building within the institution.

            Second, the need for improved policy coordination between international institutions such as the WTO, the World Bank, the IMF, the ILO and other multilateral and regional organizations on international trade and development was brought to our attention. Both the U.S. and EU ambassadors to the WTO shared the view that not enough is done to coordinate these international organizations. No less an authority than Mr. Moore launched a challenge to parliamentarians to keep a vigilant eye on global institutions and to call for their restructuring. Several witnesses questioned the usefulness of a number of these institutions, calling for additional steps to rationalize the existing network. Sharing these two concerns, the Sub-Committee recommends:

Recommendation 15:

That Canada aggressively begin a global campaign to launch an in-depth examination of the world’s trade and development organizations, with a view to fashioning a more effective, cohesive, and efficient network of global institutions. Where institutions have outlived their usefulness, they should be dismantled.

            Finally, the Sub-Committee was struck by the concerns expressed by a number of ambassadors to the WTO of the need for a more streamlined dispute settlement mechanism in Geneva. More effort needs to be made to avoid litigation, and ways to reduce the still small but increasing tendency towards non-compliance of WTO decisions (e.g. Canada’s beef hormones case brought against the EU) need to be explored. Such issues as the provision of compensation as an alternative to the use of retaliation also need to be examined. We thus recommend:

Recommendation 16:

That the Government of Canada encourage WTO member states to undertake an extensive examination of alternatives to the existing dispute settlement mechanism to render it more effective. Such issues as the need for time limits on WTO compliance and the usefulness of giving greater priority to compensation as opposed to retaliation as a form of settlement should be given serious consideration.

E. Strengthening Official Transatlantic Links

            Canada has a variety of links with the European Union, encompassing both government initiatives and a business-led but government-supported undertaking. The primary bilateral instrument governing economic relations is the 1976 Framework Agreement for Commercial and Economic Cooperation, which gave birth to a number of consultative committees. In 1990, a Transatlantic Declaration was also signed. More recently, the 1996 Joint Political Declaration and Action Plan set goals for broadening the bilateral relationship, and agreements in the areas of customs cooperation, veterinary equivalency, competition law and mutual recognition of conformity assessment of regulated products have been achieved. Ongoing official ties now consist of semi-annual summits, involving the Prime Minister and the ministers of Foreign Affairs and International Trade, as well as a joint cooperation committee that meets once a year. This committee includes a trade and investment sub-committee that meets once or twice per year.

            While we were told that past efforts to negotiate closer EU-Canada trade ties have not always been particularly successful, a number of more recent moves at the bilateral level may hold more promise. These include the EU-Canada trade initiative (ECTI), the establishment of a Canada-Europe Round Table for Business (CERT), and the Crossing the Pond program.

  1. European Union-Canada Trade Initiative (ECTI)

            ECTI was launched in December 1998 to formalize the trade portion of the Joint Action Plan, with its primary objective being to enhance market access (e.g. access of Canadian companies to the EU market) and bilateral economic cooperation. ECTI’s objectives include: regulatory cooperation; services; government procurement; intellectual property; competition issues; cultural cooperation; business-to-business contacts; and electronic commerce. It also calls for regular consultations on multilateral trade issues. However, given the Most Favoured Nation (MFN) disciplines that both Canada and the EU are subject to — for example, we cannot bilaterally negotiate tariff concessions with the EU without having to extend the same treatment to all WTO members — ECTI cannot serve as a vehicle for deeper trade liberalization.¹⁵In scope, ECTI closely mirrors the bilateral trade initiative (Transatlantic Economic Partnership) between the EU and the United States.

            Some progress, albeit limited, has been achieved with respect to ECTI. The Canada-EU Agreement regarding the application of their competition laws was signed in June 1999. CERT, an organization of Canadian and European businesses, has met twice and efforts are being made to increase corporate membership. Bilateral discussions on exports of wine and spirits have led to enhanced access to the European market for Canadian icewine and other quality-certified wines. Implementation of the May 1998 Canada-European Union Mutual Recognition Agreement (Conformity Assessment)¹⁶ continues, although progress has been slow. Establishment of a Working Group on Further Equivalence could eventually result in the harmonization of standards in certain areas. Further movement towards a professional services mutual recognition agreement would certainly be useful, as would continued dialogue on biotechnology issues.

            The major knock against ECTI that the Sub-Committee heard in Europe is that it is active in only certain sectors. Moreover, Claude Carrière (Director General, General Trade Policy, DFAIT) stated that the issues involved under ECTI are complex and require considerable transatlantic dialogue. For example, the implementation of sectoral mutual recognition agreements (MRAs) can be both resource intensive and time consuming. Often, the problem simply relates to the different regulatory systems in existence on both sides of the Atlantic. Thus, according to Mr. Carrière, results will be at a premium in the short term. On the other hand, greater cooperation should prevent the emergence of future irritants to bilateral trade relations.

            We believe that efforts should be made to reduce barriers and increase European market access, in parallel with the quest for a free trade agreement. Definitely, more work needs to be done on MRAs at the Canada-EU level, to achieve broader coverage in the mutual recognition of standards. Additional mechanisms could be achieved in the area of customs facilitation, and improved bilateral mechanisms established to solve trade problems. According to Mr. Keyes, non-tariff barriers (e.g. complex technical requirements and standards) need to be examined constantly since they are more of a barrier for business than tariffs. The Sub-Committee thus recommends:

Recommendation 17:

That the federal government redouble its efforts to expand the Canada-EU bilateral relationship. Possible measures to be considered within the European Union-Canada Trade Initiative framework include: negotiating mutual recognition agreements in a larger number of industrial sectors, making progress in the area of trade facilitation, and establishing improved bilateral mechanisms to resolve trade irritants. The formation of a bilateral group under ECTI to systematically address regulatory barriers to Canada-EU trade should be considered.

   2. Canada-Europe Round Table for Business (CERT)

            Another recently announced bilateral link is the above-mentioned CERT, which was established in June 1999 with some support from DFAIT and from the EU Commission. This organization is essentially an advisory group of business people from both sides of the Atlantic keen on developing and enhancing transatlantic links and intent on proposing advice to both the EU and Canada on trade and investment issues. Over the longer term, the organization hopes to be a key advocate for trade liberalization between Canada and the EU.

            CERT arose out of an initiative of several Canadian and European firms based in Brussels, whose intention was to promote a business-to-business dialogue on a Canada-EU basis, after discussions to trilateralize the U.S. — EU Transatlantic Business Dialogue did not bear fruit. Roy MacLaren, a former Minister of International Trade, recently agreed to become CERT’s Canadian co-chair and a part-time Canadian Executive Director (André Bouchard) is also now in place.

            To date, the round table has been a somewhat more modest counterpart to the established EU-US Transatlantic Business Dialogue. Even though CERT has held two meetings since its founding, it has experienced relatively slow progress and both the Canadian and European sides are only now beginning the recruitment and fundraising challenge. This lack of progress is unfortunate, given the comments heard in Europe that much more in the way of pressure from business needs to placed on policy-makers to achieve the desired progress in the areas of MRAs, trade facilitation and the like.

            To ensure CERT’s effectiveness in advancing policy interests and ultimately trade liberalization, it is vital that more business involvement in the round table be encouraged on both sides of the Atlantic. Jayson Myers (Senior Vice-President and Chief Economist, Alliance of Manufacturers & Exporters Canada) suggested that it might be worthwhile for CERT to establish formal interaction between a group of Canadian companies operating in Europe and a group of European companies operating in Canada to discuss trade and investment challenges and opportunities, and to build up personal contacts.

            In addition, CERT has been primarily aimed at larger firms up to now. It is important that small- and medium-sized companies be active participants, given their increasingly important contribution to transatlantic economic relations. One measure that could be contemplated is a lowering of the US $6,000 membership fee since the size of this charge may be impeding involvement on the part of smaller businesses.

            Finally, CERT’s May 2001 written submission to the Sub-Committee calls for increased funding of the organization’s activities in 2002 and 2003. We believe that the federal government can play a helpful role to ensure that CERT’s momentum is maintained. The Sub-Committee recommends:

Recommendation 18:

That the federal government increase its support of, and actively encourage business participation in, the Canada-Europe Round Table For Business (CERT) initiative. The government should also recommend to CERT that it review its membership fee structure in order to stimulate greater participation by small- and medium-sized companies.

  3. Crossing the Pond

            Yet another bilateral mechanism is the Crossing the Pond initiative, which attempts to stimulate new trade opportunities for small business. This initiative incorporates a set of programs designed to help new exporting companies, particularly those of a high-technology nature, enter into the European marketplace. The aim is for business people who have been successful in the marketplace to impart specific knowledge to new exporters in key areas of business preparation, through a vehicle known as a "knowledge café."

  4. Other Links

            Canada also has various bilateral mechanisms with individual EU countries in place (e.g. action plans with France, the United Kingdom and Italy), in addition to various economic commissions with non-EU nations such as Russia and Ukraine. These latter commissions provide for regular meetings among ministers of trade and senior officials.

            To conclude, there has been a tendency in the past for Canada-EU declarations of intent to result in little in the way of concrete action. While we believe that ECTI reflects an improvement in the type of bilateral mechanism being developed, the pace of the work currently taking place under that arrangement should be accelerated. Evidence received by the Sub-Committee indicated a keen desire to have the federal government expend greater effort towards re-energizing Canada-EU trade relations.

F. Lowering European Trade Barriers

            Overall, Canada enjoys a reasonable, if unspectacular, trade relationship with the EU. Two-way trade in goods and services between Canada and the European Union now exceeds $60 billion. Even though our access to the European market is relatively favourable, as with any other large trading relationship there are always concerns. Specifically, the EU’s tariff and non-tariff barriers can make Europe a difficult place in which to do business.

            While most trade flows barrier free, there is no question that Canadian firms have encountered real barriers in Europe, such as differences in the manner in which tariffs are calculated, customs procedures, labelling requirements, registration requirements, sanitary and phytosanitary requirements, regulatory requirements, and the structure of distribution systems. These impediments can both restrict actual entry by Canadian firms and deter companies from even considering the European market. The Sub-Committee has already recommended that the federal government place priority on addressing these barriers.

            Given the scale of our bilateral economic relationship, one should not be surprised that a number of bilateral irritants have arisen. In recent years, Canada-EU trade relations have been dominated by a list of quantitatively minor, though individually important, longstanding trade tiffs concerning tariffs and non-tariff barriers, affecting wines, softwood lumber, fish and seafood, beef produced with growth hormones, wheat, and genetically modified products such as canola. Other issues, influencing such products as asbestos, pharmaceutical products and automobiles, have recently been settled at the WTO.

            Progress on many of these issues has been slow, owing to the failure to launch a new round of multilateral trade negotiations and because bilateral progress has been hampered by both insufficient political will and by political realities in the EU’s agricultural sector (discussed below). What is troublesome is that certain of these trade issues have remained unresolved over lengthy time periods and that the considerable effort required to obtain solutions has, no doubt, distracted government officials from the loftier pursuit of enhancing the overall trade relationship.

            Concentrating on these relatively minor disputes clouds our overall positive economic relationship with the EU. In some cases, however, it can be observed that the trade irritants in question have been, or are being, examined in an orderly manner. In several of these — regulatory standards come to mind — Canada and the EU are working bilaterally to resolve these issues. Resolution of these issues can also be achieved within the Dispute Settlement System at the World Trade Organization (WTO). In the end, it is vital to explore both options: to have efficient bilateral mechanisms for resolving disputes, or agree on the effective use of WTO mechanisms.

            The Sub-Committee shares Mr. Paterson’s view that it would be far preferable if dealing with trade barriers were not to interfere with the development of trade and investment opportunities. He felt that greater effort ought to be expended on trade and investment in the new economy, the high-technology sector, in which there are almost no trade barriers except possibly telecommunications equipment standards, for which standardization across Europe is desired. European policies in areas like electronic commerce, trade in services, deregulation and privatization, intellectual property rights and competition rules are central to the growth prospects of the EU market for Canada’s high-technology businesses.

   1. Barriers to Agricultural Trade

            That the agriculture and agri-food sector accounts for a disproportional number of Canada-EU trade disputes should not be surprising. Agriculture has been a sticking point for over 40 years of trade talks. The Uruguay Round of multilateral trade talks that led to the creation of the WTO, for example, contained relatively fewer concessions on agriculture than in other sectors.

            Despite these issues, Canada has enjoyed several success stories in the EU. Canada is one of only three countries to have a Veterinary Agreement with the EU, which governs trade in live animal products, fish and fish products. The agreement establishes a mechanism for achieving recognition of equivalent sanitary measures between Canada and the European Union aimed at improving bilateral trade. Furthermore, Canada enjoys strong exports to the EU of bison meat, horsemeat and vegetables such as lentils and mustard seed (including the ingredient in Dijon mustard).

            In the case of Canada-EU relations, agricultural trade irritants stem from three main sources: the EU’s Common Agricultural Policy and Europeans’ long-standing concern over food safety, borne from a series of successive public-health disasters, as well as more traditional trade irritants.

  (a) Common Agricultural Policy

            A key bilateral trade concern for Canada involves the EU’s Common Agricultural Policy (CAP), and the protection it provides for European agricultural producers. By subsidizing farm production, the CAP has shifted Europe from being a net food importer into occupying the status of a major net exporter.¹⁷The average agricultural tariff of the EU is four times as high as that of Canada, and its high support prices and network of subsidies make EU farmers the most heavily subsidized in the world.

            The CAP, through its use of production-linked subsidies, results in overproduction of farm commodities. This excess production is purchased at the EU’s intervention price, which is considerably higher than the world prices. The EU then subsidizes exports of these agricultural products enabling them to be sold at competitive prices in world markets. This action tends to depress world market prices and lower access of Canadian producers to third-country markets. According to Mike Gifford (Special Trade Policy Adviser to the Deputy Minister, Agriculture and Agri-Food Canada), the EU accounted for a full 85% of the world’s agricultural export subsidies. Conventional tariff barriers, along with the EU’s domestic support measures and adopted regulations, are restricting Canadian access to the European agricultural market. From the Sub-Committee’s perspective, the CAP is a costly deterrent to trade.

            Already, the EU’s Agenda 2000 has resulted in some minor declines in agricultural price supports, but no elimination in the use of direct production-linked subsidies.¹⁸ While it is in Canada’s best interests to continue to pressure the EU on CAP, both EU and non-EU witnesses — including EU Trade Commissioner Pascal Lamy — told the Sub-Committee that the EU itself is already under extreme internal and external pressure to reform the CAP, and that reform — possibly substantial — is inevitable.

            The Sub-Committee heard that many Europeans are questioning why farmers —and not other groups — should be subsidized so heavily. However, the most intense source of pressure will likely come from the planned EU enlargement. To take only one example, about 15-20% of Poland’s GDP comes from the agricultural sector, which also employs 25% of the population (versus 3% in Germany). If the CAP were extended unchanged to the rest of relatively underdeveloped Eastern Europe, as some enlargement candidates are demanding, it would actually increase the percentage of the population engaged in agriculture. This in turn would eat up even more of the 50% of the EU budget that the CAP currently accounts for, a stress that the EU budget cannot handle. Furthermore, in France, the country most in support of the CAP, finances are tight. It is not likely, therefore, that France, or any EU member for that matter, will support an increase in CAP funding.

            Externally, the WTO and the prospect of a new round remain important pressures on the CAP. In 2003, the "peace clause" in the WTO Agreement on Agriculture will expire and the EU’s subsidies will be open to challenge. However, witnesses told the Sub-Committee that while this could be a useful prod, the drawn-out nature of the WTO’s dispute-settling mechanism limited its usefulness.

            Change is coming to the CAP. The progress of Agenda 2000 is scheduled to be reviewed in 2002. Agriculture Commissioner Franz Fischler has indicated that he expects additional changes to support levels will be necessary following this mid-term review unless commodity prices move markedly higher. Pascal Lamy, the EU Trade Commissioner, told the Sub-Committee that he has no problem with committing the EU to lower export subsidies and domestic support, and improved market access. In its European hearings, the Sub-Committee was told repeatedly that the most likely scenario involves no change in the overall funding, but a move to support farmers’ income rather than prices, thus "decoupling" subsidies from production and reducing market distortions.

            This is in line with the EU’s championing of "multi-functionality," which stresses the non-economic benefits of agriculture (e.g. recreation, retention of a pleasant rural landscape, tourism, preservation of rural life, environmental benefits of agriculture). This would allow the EU to shift its subsidies toward environmental, landscape and regional support. While EU Commission witnesses told the Sub-Committee that this shift should reduce market distortions, multi-functionality is seen by some to be a way for Europe to continue to justify high protection and export subsidies. The Sub-Committee believes that Canada, through the WTO, should continue to exert pressure on the EU to assure that multi-functionality is not protectionism by another name. We therefore recommend:

Recommendation 19:

That the Government of Canada attempt to ensure that any support provided by the EU to preserve the multifunctionality of agriculture not be trade distorting. The government should work with the EU to arrive at an international definition of the multifunctionality concept.

            Regarding CAP, the key question is: how quickly will the next stage of reforms be implemented, given that the politics of agriculture in Europe are extremely sensitive and complex? According to Mr. Gifford, a 2002-03 timeframe is considered reasonable. More action before that is unlikely due to the scheduling of elections in France and Germany, the two key players in the EU.

            While sheer economics and external pressure are significant, substantial CAP reform is not a done deal. Though it is often thought of in purely economic terms, the CAP is of vital importance, both economically and culturally, to the EU (especially France, which along with Germany, is the heart of the EU.) The Sub-Committee heard that the current structure of the CAP means that France gets more money out of Brussels than it puts in. Rita Hayes, the U.S. Ambassador to the WTO, suggested that it is better to be active in pushing the EU to change its course.

            The Sub-Committee agrees with this assessment: while CAP reform seems inevitable, Canada should push to assure that reforms go as far as possible to address Canada’s concerns. Current conditions present Canada (and the EU) with a window of opportunity. As Mr. Lamy told us, current reflections on CAP in Europe and on the enlargement of EU will make it easier for him to realize change, and these changes are most likely in a multilateral round of trade negotiations.

            Based on its hearings both in Canada and in Europe, the Sub-Committee believes that ongoing WTO negotiations on agriculture, coupled with a new round of WTO talks, represent Canada’s best opportunity to influence positively the reform of the CAP. Several witnesses stressed that progress on agriculture was most likely in a broad-based negotiating round, which by allowing greater scope for deal making, will make it easier to reach an agreement on agriculture. Even given this opening, however, agricultural reform will be a long-term process requiring diligent work.

            In the WTO’s negotiations on agriculture, Canada, in conjunction with countries such as the United States and members of the Cairns group of agricultural exporting countries, has been pushing hard for the Europeans to make substantive changes in three core areas: eliminate export subsidies, significantly improve their terms of market access, and significantly reduce or eliminate their production- and trade-distorting domestic support (i.e. production subsidies). Canada has also called for an overall cap on all forms of domestic support.¹⁹The Sub-Committee strongly supports these general negotiating objectives. We hope that any changes that are negotiated can help move toward a level playing field for Canadian agricultural producers, and be of help to them. The Sub-Committee therefore recommends:

Recommendation 20:

That in the WTO negotiations on agriculture, Canada not deviate substantially from its initial negotiating objective of (a) removing EU agricultural export subsidies; (b) significantly enhancing access by Canadian agricultural producers to the European market; and (c) ensuring that the EU’s production subsidies are not trade-distorting.

             (b) Food Safety

            One of the most difficult challenges Canadian producers face in selling to the EU market is Europeans’ concern about food safety. For Europeans, the past decade has brought one food-related disaster after another. Failures of the EU regulatory system in everything from mad cow disease (BSE) to the recent outbreak of foot-and-mouth disease has left the public extremely fearful and mistrustful of their own regulatory systems. As WTO Director General Mike Moore bluntly told the Sub-Committee (echoing many other witnesses), European consumers simply do not trust their governments when it comes to food safety. As a result of this and the European public’s extreme fear for the safety of their food supply, everything from beef hormones to all genetically modified organisms (GMOs) are seen in the same light.

            In attempting to correct possible deficiencies in food safety control measures, to regain consumer confidence and to maintain public health, the EU has increasingly adopted a precautionary approach in formulating the Union’s regulatory decisions.²⁰ From Canada’s point of view, the "precautionary principle," which holds that if there is the possibility of harm from a product (even if the science is inconclusive), it should be banned, functions as a trade barrier. Instead, Canada favours a process of evaluating products at each stage that they are used, giving more of a role to science.

            The Sub-Committee, while recognizing the concept of precaution as inherent in all stages of the risk analysis process, supports the position that regulatory decision making in this area must continue to be based on scientific risk assessment. The precautionary approach should not be applied at the risk management level as an additional level of protection without necessarily seeking a scientific assessment first. The concern is that inappropriate employment of the precautionary approach may have contributed to the European paralysis in approving biotech foods.

            However, after talking to EU representatives and business people, and our ambassadors abroad, the Sub-Committee is pessimistic about prospects for advancement on food safety. Time and again the Sub-Committee was told that the political reality of a fearful public have made it almost impossible to inject proper science into the approval process.

   (i) Example 1: Canola

            The linking in the public’s mind of food safety and GMOs has waylaid Canadian food exports in several areas, the most notable being genetically modified canola.²¹ Canadian exports of this product into the European market, while having been approved by the EU Commission, are the victim of public sentiment, strong consumer and producer resistance and the ability of a minority of EU members to block regulatory approval of new, genetically enhanced varieties of agricultural products. These developments have caused a de facto EU moratorium on additional GMO approvals.

            In an effort to unblock the approval process and gain public confidence in GMOs, the EU Commission proposed an unblocking strategy in July 2000, which included revised EU legislation for GMO approvals. This was formally approved by the European Parliament on 14 February 2001 and then moved to member states who were given 18 months to pass the directive into national law. However, within 24 hours of the approval, the blocking member states demanded additional concessions such as amendments to the EU GM labelling regime and a GM traceability system requiring special documentation for shipments of GM grains and oilseeds to the EU. At a minimum it is expected the EU GMO approval regime will remain blocked until the fall of 2002.

            In 1995, Canadian exports of genetically modified canola peaked at $425 million. Owing to the current regulatory situation in Europe, Canadian canola exports to the EU were effectively eliminated as of 1997. The federal government is obviously concerned about the loss that domestic producers of canola have experienced.

            The Canadian government’s position, confirmed by favourable European Commission scientific reports, is that those canolas produced in Canada do not pose a health or environmental risk. However, as one witness noted, decisions being taken are now based 80% on perception and 20% on science, making it exceedingly difficult to argue what the Sub-Committee believes is Canada’s strong case. Consequently, as Mr. Lamy remarked to the Sub-Committee, the GMO problem is more political than technical.

            Making progress on labelling issues will, eventually, go far to address these problems. However, even this will prove to be contentious. Because of the negative perception of GMOs, European producers worry that by labelling their products they will be hurt by a consumer backlash, ruining their brands. Groups like Greenpeace, who are against GMOs, enjoy more credibility than do European governments on ecological issues, thus solidifying the opposition to GMOs. Furthermore, in several areas in Europe there is an ideological opposition to GMOs, e.g. herbicide-resistant plants.

            Canada has entered into dialogue with the European Commission at the technical and regulatory level (i.e. among scientists and experts) over this issue, with the ultimate objective being to attain greater compatibility of the respective approval systems. The federal government will continue to seek market access for exports of GM canola from Canada, even if Mr. Carrière did suggest that obtaining results would take time. On the positive side, the Sub-Committee did hear that Europeans are beginning to discuss GMOs: more receptive attitudes are emerging in the European Parliament, and some sectors of European society, such as German business groups, favour more science in the food-approval process.

            In dealing with this issue, Don Knoerr (Co-Chair, Agriculture, Food and Beverage Sectoral Advisory Group on International Trade) observed that there needed to be harmony between the international response to the issue (i.e. what other countries do) and the domestic one, which is currently being developed. Decisions were necessary on the definitions of genetically modified (GM) or biotech products, the labelling rules that are established, and the realistic, effective and scientifically sound procedure for determining the risks associated with the use of modern biotechnology.

            While advancement in this area could best be helped, as one EU agribusiness witness remarked, if the EU were not to suffer another food catastrophe in the next decade, Canada should continue to work to adopt internationally accepted standards. In the long run, the logical solution is to adopt international science-based standards that all countries can live with. The Sub-Committee recommends:

Recommendation 21:

That the Government of Canada work diligently within the international community to achieve international agreement on the definitions of genetically modified (GM) or biotech products, science-based standards of producing GM products that the international community can recognize, and the labelling rules that are required.

            The Sub-Committee recognizes that much of the difference between Canada and the EU on the precautionary principle stems from the failure of their regulatory regime. As Mr. Lamy told the Sub-Committee, Europeans are against GMOs (for example), not Canada. Still, there has been a tendency for the Europeans to disparage our production methods in certain instances and to use this criticism as a basis for imposing restrictions on trade. While this failure to recognize Canada’s standards is as much a political problem as a scientific one, it remains vital that Canada and the EU keep this dialogue open. In order to promote greater understanding, such a dialogue should include regular exchanges between representatives of non-trade departments, such as Environment, Labour, and Industry. The Sub-Committee echoes the views of Ms. Macmillan that Canada needs to better champion its excellent standards in health, safety, environment, and technical areas with European decision-makers.

Recommendation 22:

That the Government of Canada, in conjunction with the provinces, seize every possible opportunity to enhance cooperation between Canada and the EU on regulatory policy in the areas of health, safety, environment, and technical standards, and share Canada’s regulatory experience with European decision-makers and, where appropriate, the public at large. These efforts should be directed through Canada’s overseas posts, industry associations active in Europe, and Canadian participation in international organizations in which standards are discussed, developed and monitored.

            As was previously mentioned, the Canadian and European perspective on biotechnology and the use of the precautionary approach differs. On the latter issue, there appears to be differences between the two sides in the way this approach is interpreted. The publication by the EU of a paper on this issue ("Communication on the Precautionary Principle"), while not providing insights on key elements (e.g. providing for "zero risk" and determining the appropriate level of protection), does nevertheless provide both sides with an opportunity to better define the meaning and application of the precautionary approach and to seek out convergence on these points. This will prove especially important as both countries prepare for the WTO summit in Qatar, where the precautionary principle promises to be a contentious issue.²² We therefore recommend:

Recommendation 23:

That Canada and the EU seek common understanding on the meaning of the precautionary approach and the manner in which it is to be applied to regulatory practices. Ultimately, such an understanding should be arrived at within a multilateral setting.

(ii) Example 2: Beef Hormones

            The EU’s contentious 1989 decision to ban the use of growth-promoting hormones in livestock as well as imports of beef produced with such hormones is also tightly linked with Europeans’ mistrust of their regulatory regime. Canada, along with the United States, has consistently opposed the ban on the basis that it does not believe it can be supported from a scientific basis. The federal government, therefore, believes that the ban represents an unjustified use of a non-tariff trade barrier. In addition, the safety of growth-promoting hormones has been endorsed by the international organization that establishes food-safety standards (Codex Alimentarius).

            Canada and the U.S. challenged the EU’s ban on imports of beef produced with growth hormones and obtained a favourable WTO ruling on the issue. After direct consultations with the EU failed to resolve the dispute, Canada requested a WTO dispute-settlement panel in 1996. Reports issued by both the panel (August 1997) and the WTO Appellate Body (January 1998), set up in response to an appeal of the initial panel’s decision, were favourable to Canadian interests. However, with the failure of the EU to comply with the WTO ruling by altering its regulations, the Canadian government was forced to implement retaliatory measures against the Union. These, consisting of $11.3 million in tariffs placed on European beef, pork, cucumbers, and gherkins, were approved by the WTO in July 1999. The EU continues to claim that their ban is promoted by science and is not a protectionist measure, a view they claim is backed up by the WTO ruling that critiqued their assessment process and that stated their position was based on science.

            In May 2000, the European Commission announced plans to make its temporary ban on one beef hormone permanent within a year, and to continue a provisional ban on five others. This action was taken after a EU scientific advisory committee reaffirmed its opinion of last year. According to Mr. Lamy, the ban has nothing to do with protectionism, but rather with risk aversion in the EU. While in Europe, several witnesses told the Sub-Committee that, in the public’s mind, the question of beef hormones is tied up with the negative images of mad cow disease. As a result, the EU would rather face the tariffs than lift the ban.

   2. Market Access Issues

            Canada also faces several more traditional market-access issues when dealing with the EU, some of which have already been mentioned. Two of the most contentious, involving what Canada believes are non-tariff barriers, are wine and softwood lumber.

   (a) Wine

            The trade situation with respect to wine has, up until just recently, been extremely one-sided, with Canada importing $545 million worth of European production in 2000 and exporting a mere $350,000. Historically, Canadian quality wines had faced difficult hurdles in getting into the EU, while the EU had enjoyed favourable access to the Canadian market without any special agreement. Canada’s principal objective in resolving this bilateral dispute had always been to obtain secure and predictable access to European markets for quality Canadian wines. Roger Randolph (President, Canadian Wine Institute) told the Sub-Committee in the spring of 2000 that Canadian wine producers could export roughly $20 million in wine products per year to Europe if the market was open; of these revenues, sales of icewine in Europe would generate the vast majority.

            Fortunately, access to the European wine market has now improved significantly. In April 2001, Canada realized its long-sought goal of convincing the European Union to allow (through the use of a derogation, or exemption) the sale of Canadian icewine, the showpiece and key export of the Canadian wine industry, in the EU. (Canada is the world’s leading producer of icewine.) According to DFAIT officials speaking to the National Post, the lifting of the 20-year ban was agreed to after Canada implemented a series of quality controls related to the wine’s sugar and acidity levels.²³

            The EU derogation also covers imports of quality-certified wines from two Canadian provinces (Ontario and British Columbia) since their certification processes (and accompanying legislation) either meet or exceed EU standards. Now, quality-designated Canadian wines can enter the European market without limitations other than the demand for the product.

            In exchange, Canada also agreed to discuss with the EU all outstanding wine and spirit-related issues, including the use of geographic indicators (i.e. the EU wants Canada to require its wine producers to refrain from using certain EU-origin names, such as champagne, port and sherry, something the Canadian industry has now agreed to do), descriptive names and the structure of provincial liquor control boards. These discussions are ongoing.

   (b) Softwood Lumber (Pinewood Nematode)

            To prevent the introduction into Europe of the pinewood nematode (PWN) worm, the EU has, since July 1993, insisted that all softwood lumber exports from Canada, with the exception of cedar, be heat treated. This regulation has effectively eliminated Canadian exports of the product by substantially raising the costs of production to Canadian firms. Prior to 1993, exports of untreated wood to Europe had attained an annual value of some $400 million. From October 1, 2001, this ban has been expanded to include wood packing material (from Canada, the United States, China and Japan); given that wood packing material can accompany almost any type of manufactured goods, estimates suggest that up to 70% of Canadian exports to the EU could be affected. Under a "gentleman’s agreement," the Commission has agreed that the ban will be applied "proportionately and prudently" in return for Canadian reports on how Canada is advancing towards compliance. DFAIT is awaiting a reply to its letter outlining its understanding of the "agreement" and recommending an official exchange of letters to clarify how the gradual enforcement of the measures would work.

               Canada has had extensive consultations with the EU on this issue. According to Mr. Claudio Valle (Director, Technical Barriers and Regulations, DFAIT), "We pointed out that we've had the longest trial period — the 350 years of trade — with little effect or anything to show in European forests. That should be clear evidence that this little bug doesn't move unless carried substantially into a perfect environment where you require high heat conditions and so on. It has been a war of scientists up until now."

            Canada continues to believe that it has become a victim of excessive regulation of untreated softwood lumber in order to control the PWN worm. The Canadian government has consistently opposed the regulatory requirement, arguing that there is a miniscule risk of transmission of the insect to European forests.

            Canada is currently considering challenging the European ban. According to Mr. Valle, "We have put the Europeans on warning that we would like to resolve it amicably. But if we can't come to an understanding, we feel science is on our side. … We're talking to each other across the bow, but nothing seems to sink in. We might have to go to the WTO to basically get a resolution of this issue."

G. Dealing With EU Enlargement

            As was previously mentioned, EU enlargement in this decade may boost the organization’s membership to as many as 30 countries. There are now at least a dozen countries that have been identified as potential candidates, on top of the 15 that already exist.

            In addition to the already mentioned stresses this will place on the EU’s budget (i.e. through the Common Agriculture Policy), EU enlargement, which will take in Central and Eastern European countries, should provide certain business opportunities for Canadian companies, and a more predictable and stable commercial environment in those countries. For instance, Canada undertakes agricultural trade with Central and Eastern Europe and, as Martin Rice (Executive Director, Canadian Pork Council) remarked, certain sectors (e.g. pork) believe that this trade can be augmented. These countries will also need help in bringing their economies up to EU specifications, generating openings for Canadian companies to provide for investment and clean environmental technology. As well, the bound tariff rates of the EU’s Common External Tariffs are, in many instances, lower than the levels at which the new entrants are bound. In these cases, accession to the EU could improve market access for Canadian firms.

            Furthermore, enlargement offers the countries of Central and Eastern Europe the opportunity to raise their citizens’ incomes, thus making them a more attractive market for Canadian investors and exporters. As John Murray (Adviser, Bank of Canada), told the Sub-Committee, "There may be a little trade diversion associated with that as they come into the EU fold, but there may also be some encouragement for faster development. … It benefits everyone, because if they become richer, their ability to purchase our products expands. Again, I think we could have a win-win situation."

            The anticipated growth in the EU’s membership to include these countries could also have adverse economic consequences for Canada. While Canada has always supported the integration process in Europe as a way to foster stability and economic prosperity, previous enlargements have, regrettably, resulted in the displacement of certain Canadian exports to Europe. In other words, EU enlargement has led to trade diversion away from Canada and to a displacement of economic activity as the traditional bilateral access that Canada had enjoyed was altered.

            Future EU enlargement could prove no different, in that tariffs will be raised against some of our exports, thereby lowering the market access enjoyed for those products. In these situations, Canada is entitled to negotiate compensation for the loss of markets; this is done under existing WTO rules on the basis of trade levels in specified products during the three-year period immediately prior to a country’s accession. Historically, however, the negotiation of compensation for enlargement has been long and arduous. Moreover, compensation in the form of increased access often is provided in a different commodity, or even in a sector entirely different from the one in which the trade diversion occurred.

            It is extremely important that Canada attempt to ensure that its overall economic interests not be adversely affected by enlargement. The hope is that further EU expansion not result in a net diminution of access to the European market for Canadian products.

            The Government of Canada is currently examining the possible economic impact of EU enlargement on this country’s trade and investment interests. In the Sub-Committee’s view, federal officials should analyze the existing experience with previous enlargements, to see what lessons can be learned. The government should also develop an effective strategy to deal with the upcoming EU enlargement, one which would incorporate possible measures to promote closer trade links with Central European countries in order to help offset the diversionary effects of the enlargement. We therefore recommend:

Recommendation 24:

That the federal government make public any assessment of the probable positive and negative effects of EU enlargement on the Canadian economy. On the basis of these findings, the government should formulate an effective initial strategy to deal with the upcoming enlargement. The issue of potential compensation for forgone market access should also be explored, and timely and targeted information on the enlarged European market provided to Canadian businesses.

            While responding to the potential costs of enlargement represents the most vital public policy consideration, the Sub-Committee would like to raise another concern that was identified in the Committee’s hearings. According to Mr. Paterson, attention must be devoted to strengthening the protection of intellectual property rights in Central and Eastern European countries, which can serve as a major barrier to trade with these countries. These property rights are either non-existent or not enforced in many of the nations in question, yet companies doing business there do not want essentially to give away the ideas behind the products that they have developed. To help strengthen the protection of intellectual property rights in this part of the world, the Sub-Committee recommends:

Recommendation 25:

That in order to significantly strengthen bilateral economic relations between Central and Eastern European countries and Canada while assisting our high-technology community, the federal government, through multilateral organizations, encourage and assist these countries in developing and especially enforcing intellectual property rights in the region.