FAIT Committee Report

            Fully 87% of our traded goods were shipped to the U.S. in 2000. In contrast, the EU is the destination for a mere 5% of Canada’s exported goods. The reality is that all of our economic relations with countries other than the U.S. — as significant as they appear to be to the nations involved — are dwarfed by the sheer magnitude of Canada-U.S. economic ties.

            Canada faces a troubling dichotomy. On the one hand, our businesses have found it easiest to conduct their operations within NAFTA, and are largely choosing to concentrate on North America over Europe. As a number of witnesses told the Sub-Committee, it is only natural that Canada’s economic priorities continue to be centred on its relationship with its largest trading partner. Private sector companies, it was pointed out by Robert Keyes (Senior Vice-President, International, Canadian Chamber of Commerce), are the ones making the business decisions, and if firms decide to undertake business in North America and not elsewhere, they should not have to apologize for their actions. These witnesses tended to support the federal government’s positioning of the U.S. at the top of the trade priority list.

            On the other hand, Canada has become quite dependent on its southern neighbour for its trade and investment, and the recent economic downturn in the U.S. demonstrates that there is a danger in continuing to rely so heavily on one trading partner for our well-being. The dominance of the U.S. market provides a rationale for Canada to diversify its exports. In this context, Europe could serve as a useful counterbalance to Canada’s high degree of dependence on the United States.

            That Europe, and within that the European Union (EU) specifically, has often been neglected when discussing Canada’s trade and investment picture is perfectly easy to understand. Canada has, recently, expended considerable energy in helping to set up a Free Trade Area of the Americas (FTAA), and despite its recent financial crisis, Asia is still thought of by many as the new frontier, destined once again to enjoy impressive rates of economic growth.

            However, Canada-EU economic relations cannot be seen simply in the light of Canada’s current 87% dependence on the U.S. export market. The declining importance of the European market and the increasing relevance of the U.S. market is part of a long-term trend. Since the 1940s, the importance of Europe (and the United Kingdom in particular) as an export market has been declining.

            This realization has led, at different times, Canadian governments to try to diversify the country’s exports away from too much dependence on the United States. Pierre Trudeau’s "Third Option" of the 1970s is the most famous example, but the beginnings of this policy can be found in Canada’s push for Article 2 in the North Atlantic Treaty Organization’s charter, which called for the establishment of a North Atlantic Community. It was never implemented, and NATO instead grew to be a military organization.

            Increased regional economic integration is not a purely Canadian phenomenon. According to WTO statistics, a rising amount of trade is now intraregional. In 1999, 48.1% of the U.S.’s merchandise exports stayed in North and Latin America. Likewise, in Asia, 46.6% of exports stayed in that region; and 71.3% of the EU’s trade was among its members. While Canada is paying less attention to the rest of the world, so too are other regions, including the EU, paying less attention to any country outside its own region. It is thus not surprising that both Canada and the U.S. have lost export market shares in the EU as intra-EU trade has risen.

            We ignore Europe’s sizeable potential at our peril, however. Europe, in the words of William Clarke (Assistant Deputy Minister, International Business and Chief Trade Commissioner, DFAIT), is a "huge and sophisticated market" whose recent economic performance continues to be positive and whose future looks promising, given the economic integration now occurring. It is a key market for Canada, even if the bilateral trade and investment relationship is overshadowed by the existing economic link with the U.S.

            Not only does the EU give Canadian companies access to 376 million individuals, it is also the world’s second largest economy, with its GDP of US$8.9 trillion accounting for 20% of global output (the U.S., with a GDP of US$10 trillion, is the world’s largest economy). Moreover, with exports totalling an estimated $1.2 trillion and imports at $1.3 trillion, the EU is the world’s largest trader. These are impressive numbers.

            One should also not overlook the question of future membership in the EU, for it is widely expected that by 2010, the Union will have grown from its existing 15 members to almost 30 countries. Twelve (Poland, Hungary, the Czech Republic, Slovenia, Estonia, Cyprus, Latvia, Lithuania, the Slovak Republic, Malta, Bulgaria, and Romania) are now undertaking to satisfy certain economic and social membership criteria, with the hope being that this task will be completed by 2004. The pace of accession negotiations varies according to the ease with which each country is absorbing the acquis communautaire (EU body of laws) into its own national law and practice. Managing this enlargement, which could result in a 33% increase in territory, a 30% gain in overall population to approximately 500 million, and a 100% increase in the EU’s rural population, will undoubtedly prove to be the EU’s most pressing challenge over the next decade. The implications of enlargement for European agricultural policy alone are enormous.

            As was previously alluded to, the euro is now the official currency of 12 of the 15 EU member states having joined the Economic and Monetary Union (EMU). In 2002, euro notes and coins will begin to circulate. Information provided to the Sub-Committee by DFAIT reveals that the EMU is not expected to exert significant short-term direct trade and investment effects on Canada. Whether the Canadian economy will be aided (through an improved European market for Canada) or harmed (through increased EU competition with Canada for European and other markets) in the long run is still uncertain.

            When considering Europe’s exciting economic prospects, one must also not lose sight of the fact that the region also poses a variety of challenges for Canadian business. In many ways, the EU continues to be a collection of sovereign states, each with its particular laws and regulations. As David Paterson (Government Relations Officer, Canadian Advanced Technology Alliance) explained to the Sub-Committee, the EU is a collection of 15 markets "united under a single trade regime, but each having its own language, customs and business practices. Each must be addressed individually." This reality often results in a struggle for foreign companies to penetrate easily and fully the whole of the EU.

            On top of the perceived difficulty in penetrating European markets, the EU continues to employ market-restricting regulatory practices in certain economic sectors and, in the case of agriculture, the provision of costly subsidies. Trade barriers have, over the years, harmed many of Canada’s natural resource exports and the Union’s recent acceleration in the use of sanitary and phytosanitary regulatory measures has caused problems for Canadian exporters. In agriculture specifically, approximately 50% of the EU’s budget is allocated to its Common Agricultural Policy (CAP), which provides a high level of trade-distorting subsidies to farmers. The CAP remains a concern for Canada and continues to be a key issue in the pursuit of a new multilateral round of trade liberalization.

            Recognizing the interplay between the economic opportunities that Europe provides and the challenges that still need to be overcome, the Sub-Committee set out to explore Canada’s economic relations with the European region. It held two phases of hearings in Ottawa, one in the 36th Parliament and the other in the 37th, and undertook a successful fact-finding mission to Europe (Paris, Berlin, Geneva, Brussels) in the spring of 2001.

            After much reflection, we have concluded in this report that greater focus needs to be placed on Canada’s commercial links with Europe and that Europe’s status on Canada’s trade and investment priority list requires elevation. Whereas the data suggest that Europe is far and away our second largest trade and investment partner, we were told by our Mission to the EU in Brussels that Europe was only ranked fourth on Canada’s list of global priorities. A concerted effort to augment our trade with European countries and to deal more effectively with the trade barriers and disputes that continue to affect the relationship is warranted. While in the past there may have been a tendency to sometimes take Europe for granted, doing so is a mistake given the richness of the market and the opportunities for Canadian businesses. Canadians should not be complacent regarding the current transatlantic relationship. The Sub-Committee therefore recommends:

Recommendation 1:

That, the Government of Canada significantly elevate Europe’s status in its global trade and investment list of priority regions. A concerted and effective initiative to augment our trade and investment with the countries comprising Europe and to deal more effectively with existing bilateral trade barriers and irritants is required as soon as possible.

        This report, based largely on the evidence received by the Sub-Committee, consists of two parts. The first describes the current state of transatlantic economic ties, with emphasis on trade and investment. There it is noted that while two-way trade is growing in absolute terms, the investment link has become the real "success story" of the bilateral relationship.

The second part of the Sub-Committee’s report addresses a number of key challenges to broadening trade and investment with Europe. These include: