SINT Committee Meeting

37th PARLIAMENT, 1st SESSION

Sub-Committee on International Trade, Trade Disputes and Investment of the Standing Committee on Foreign Affairs and International Trade

COMMITTEE EVIDENCE

CONTENTS

Wednesday, February 6, 2002

¹

1530

The Chair (Mr. Mac Harb (Ottawa Centre, Lib.))

Mr. Jack Mintz (President and Chief Executive Officer, C.D. Institute)

The Chair

Mr. Jack Mintz

¹

1535

¹

1540

¹

1545

The Chair

Mr. Rick Casson (Lethbridge, Canadian Alliance)

Mr. Jack Mintz

Mr. Rick Casson

Mr. Jack Mintz

Mr. Rick Casson

Mr. Jack Mintz

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1550

Mr. Rick Casson

Mr. Jack Mintz

Mr. Rick Casson

Mr. Jack Mintz

Mr. Rick Casson

The Chair

Mr. Rocheleau

Mr. Jack Mintz

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1555

Mr. Rocheleau

Mr. Jack Mintz

º

1600

The Chair

Mr. Bob Speller (Haldimand--Norfolk--Brant, Lib.)

Mr. Jack Mintz

Mr. Bob Speller

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1605

Mr. Jack Mintz

Mr. Bob Speller

Mr. Jack Mintz

The Chair

Mr. Mark Eyking (Sydney--Victoria, Lib.)

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1610

Mr. Jack Mintz

Mr. Mark Eyking

Mr. Jack Mintz

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1615

Mr. Mark Eyking

Mr. Jack Mintz

The Chair

Mr. Tony Valeri (Stoney Creek, Lib.)

Mr. Jack Mintz

Mr. Tony Valeri

Mr. Jack Mintz

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1620

The Chair

Mr. Rocheleau

Mr. Jack Mintz

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1625

Mr. Yves Rocheleau

The Chair

Mr. Peter Berg (Committee Researcher)

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1630

Mr. Jack Mintz

The Chair

Mr. Jack Mintz

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1635

The Chair

Mr. Jack Mintz

The Chair

Mr. Jack Mintz

The Chair

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CANADA

Sub-Committee on International Trade, Trade Disputes and Investment of the Standing Committee on Foreign Affairs and International Trade

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NUMBER 019

l

1st SESSION

l

37th PARLIAMENT

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COMMITTEE EVIDENCE

Wednesday, February 6, 2002

[Recorded by Electronic Apparatus]

¹  (1530)  

[English]

    The Chair (Mr. Mac Harb (Ottawa Centre, Lib.)): Good afternoon, everyone. We'll call the meeting to order.

    We are very fortunate to have with us Mr. Jack Mintz, who is the president and chief executive officer of the C.D. Howe Institute, as our first witness. We'll start with a presentation by Mr. Mintz, and then we will open the floor for questions or comment.

    Mr. Mintz, thank you very much for coming.

    Mr. Jack Mintz (President and Chief Executive Officer, C.D. Institute): Thank you very much. It's a pleasure for me to come before this committee.

    As some of you may know, my expertise is very much in public finance. Some areas of trade and development I've dealt with over the years, but it's not my major expertise. I do hope that at least some of the comments I have may be of use to the committee.

    As I understand it, you want to talk about the World Trade Organization in the first part, and so I'll concentrate on that.

    The Chair: If you want to touch on both at the same time, that would be fine too.

    Mr. Jack Mintz: Okay. There are some similar issues involved, so let me do that. I'm not going to cover all the questions you had in your survey, but I would be happy to respond to some of them. You really wanted a short presentation, so I decided to concentrate on some very specific points.

    First, I do believe that the World Trade Organization and the previous institution the General Agreement on Tariffs and Trade have made a very important contribution to world growth. In fact, there have been various economic estimates about the impact of reductions in tariffs across countries and how they've improved economic growth generally, gross domestic product across the countries involved with the agreement, because of the gains countries have enjoyed from trade. I think those are very important economic impacts to always keep in mind, no matter how much one is discussing the nature of various trade agreements and getting into the various details.

    I should also say that the World Trade Organization, and what's happened under it, has been very important for less-developed countries. In particular, trade itself has allowed less-developed countries to grow much more, and it's been as a result, really, of three important impacts. First, the countries have been able to gain access to developed country markets they wouldn't have been able to get without various agreements, including the World Trade Organization. They've also been able to get access to foreign capital investment, which has been very important for building up the capacity for countries, including their productivity. And they've also been able to get access to technology, which is also critical. In fact, of all the things trade agreements have done for less-developed countries it's really in access to the technology of western developed countries that we see the ability to grow much more, because of having better machinery to put into place for production. And there's also better management, being able to secure multinational investments that have been able to help those countries.

    I say this, in part, because I've had personal experience working in a number of less-developed countries through various missions under the World Bank and the International Monetary Fund, and in my own personal capacity, in Eastern and Central Europe, Asia, Latin America, and Middle East countries. I've been to quite a large number of them. No matter which way you cut it, when you look at some of the changes that have occurred once countries had lower tariffs, did away with regulations that inhibited trade, in particular allowed for greater access to technology, these countries really did have a significant period of economic growth.

    As an example, the World Bank did a major study back in the mid-1990s looking at reforms in Eastern and Central Europe, and they found that the countries that really undertook substantial reforms, which included opening up markets, were able, after a somewhat difficult transition period, to enjoy very rapid growth. Countries that only went part of the way, made some changes, didn't really open up entirely, suffered as a consequence and did not do nearly as well.

    So in many ways, trade policy and access to markets is a very important aid program that we provide to less-developed countries when we open up markets for them. The World Trade Organization, in it's contribution to economic growth in the world, as well as, in my view, reducing some of the inequality across countries, to the extent that countries have been able to open up borders and gain access to technologies, I think has been very important.

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    Let me just make one comment about the trade dispute mechanism, which I think is important. The comments I hear sometimes about World Trade Organization rules is that perhaps we've let standards be a little bit too high, with rules that created some barriers for the use of trade dispute mechanisms. People sometimes are concerned that when you have trade disputes, you might be a country on the losing end and, as a result, get a stick that hits you on the head, which is not particularly good for the economy. But there are some very important instances.

    One of the fascinating aspects of the World Trade Organization--it's in my field, so that's why I'm going to make some reference to it--has been some recent disputes with respect to tax issues. The most recent one was a challenge of the FISC program in the United States. This was the son of the DISC program in the United States, the Domestic International Sales Corporation. FISC is a similar program that allowed U.S. companies to export goods and services, and the income from those activities would not be subject to tax in the United States, even though the production may have taken place in the United States. This raised important distortions and some very significant concerns on the part of a number of countries, particularly Canada, about the unfair trade practices of the United States with respect to the FISC program. In fact, there was some pressure on the Canadian government at points to introduce a similar program in Canada, or at least to bring in export incentives similar to those of the FISC program. The Canadian response, and I think a good response on the part of the government over the years, has been to say we are not going to encourage export incentives like this that are highly distorting and inhibit trade. Instead, we will challenge it under the World Trade Organization, or at that time, earlier on, the GATT agreement.

    What happened actually was that eventually, the United States lost out on the FISC program. It tried to make some changes that were required by the WTO. Those were rejected by the WTO as not accomplishing the intention, which was to eliminate distortions in trade. Recently, the United States has agreed that it will make the changes that were required under the WTO trade disputes for the elimination of the FISC program. This is a very important development. It gives a very good example of how Canada can benefit very significantly from these kinds of changes.

    So that's a particular example, but I want to say that trade disputes can go either way. Sometimes something in Canada's interests may not go the way it wants. But I think the important goal is to eliminate barriers to trade and to increase trade as a result of increasing incomes for all the populations that are involved with these trade agreements. Therefore, certainly on the personal side, I would support changes that would improve the trade in agriculture and trade in services and the access to markets that would come about.

    Let me just turn for a few moments to the free trade agreement of the Americas. We will see by the spring whether the United States will agree to a fast-track approach for the FTAA. If they do, I think there's a possibility of an agreement. If there's not a fast-track approach, I think the partners to the agreement are going to be very concerned about the ability to negotiate with the United States, when, effectively, they'll have to do it twice, once through the administration, and then another time through Congress.

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    Let me first say a few words about trade with Canada. There have been various studies done on how much trade Canada has with the Latin American countries. As you know, almost 85% of our trade is with the United States, our major trading partner. There is some trade with Latin American countries, but it's only a few percentage points of our trade. We tend to be net importers from the Latin American countries, not net exporters, so we have a deficiency in our balance of payments with the Latin American countries. On the other hand, given the smallness of that and the fact that we run a very large trade surplus, we have to remember that we can't be net exporters to every country in the world, while some countries will be net importers, mainly because of the economics that drive you.

    So our trade with Latin American countries is very small. On the one hand, you could say, what does it matter whether we have an agreement with the Latin American countries on free trade, given that there's so little trade we have already with them, and maybe it's just not that important to us? I think there are really two issues that are important as to why we would like to be part of the free trade of the Americas agreement. Actually, it really doesn't matter whether the United States is in the agreement or out of the agreement, as one can make an argument that Canada having a free trade agreement with Latin America would be something in our favour.

    If the United States is in an agreement with the Latin American countries, there's certainly going to be a value for us to be part of that agreement as well, because then businesses can locate in Canada and be able to service the North American market, as well as the Latin American market, under an FTAA agreement. If the United States is not part of that agreement, there's still a value if we had an agreement, as we have had now with Chile. In fact, Mexico, at least President Vincente Fox, has seen that there's a grand strategy of being a hub and spoke in the world. Mexico's strategy is to have as many agreements with as many partners throughout the world as possible, whether it's Asia, United States and Canada, or Europe, or Latin America, because it believes it could be a hub and spoke in the Americas and be able to have very significant gains from trade as a result.

    I think Canada needs to think very much about that hub and spoke type of strategy, because the more agreements we have with various parts of the world and the better our access to markets throughout the world, the better our position as a country to welcome businesses here, where they will find advantages to locating in Canada and trading with the rest of the world. So for that reason, I'm very supportive of the idea of entering more trade agreements in order to achieve the gains we can get from our economic trade.

    Certainly with Latin America, we have significant resource investments in a number of countries, particularly in the southern area of the Latin American countries. We have important manufacturing investments, for example, in Brazil and in Mexico, and Canadian services would benefit significantly, as we really do have very successful companies in a number of areas, and if they had increased access to the Latin American countries, that would be very valuable.

    The most important country, I think, in Latin America for trade, leaving aside Mexico, which we already have an agreement with, is Brazil. It's a huge market, it's a large population, it dominates Latin America. Brazil is a reluctant partner in the matter of trade agreements; it tends to think very much as a closed economy. In part, it's a historical thing; it was established by Portugal, unlike the other countries, which were established by Spain. Brazil tended to be a little more inward compared to the other Latin American countries for that reason, but it certainly is looking at the agreement and will consider adopting it if it does get terms that will be favourable to it.

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    Actually, Brazil has the highest level of tariffs among the Latin American countries, 14%. In Canada and the United States, by contrast, the average tariff rate is a little more than 4%. So when you look at access for Canadian producers to Latin American countries, particularly Brazil, we could have very significant gains, and there are a number of companies right now that try to operate in Brazil to develop markets there.

    So I think there are going to be a number of key and difficult issues to deal with for the FTAA, and perhaps we will get into that in discussion, but at least from the point of view of general principle and a strategy for Canada, I think there is much to say for adopting an agreement with respect to Latin American countries.

    Thank you.

    The Chair: Thank you very much for that excellent presentation.

    We'll start the questioning.

    Mr. Casson.

    Mr. Rick Casson (Lethbridge, Canadian Alliance): Thank you, Mr. Chairman,

    Thanks, Mr. Mintz, for your comments.

    You talked about whether we're with the U.S. as part of the FTAA or not. In your mind, would Canada be better off if they were not part of the total agreement, if we did have these other countries involved, but not the U.S.? Would that give us a better chance in the market?

    Mr. Jack Mintz: We'll have to see what the United States does. My point is that if the United States goes into the agreement, we should want to be part of the agreement, for sure, but if the United States decides it doesn't want to be part of the agreement, even though our trade is relatively small with Latin American countries, if we could have more trade agreements with them, that will be a benefit to us, particularly in the North American climate, where if we could create this hub and spoke strategy of trade agreements with various countries, even more than the United States has, that makes us that much better a country to invest in.

    Mr. Rick Casson: I suppose having other trading partners and lessening our reliance on the U.S. for the majority of our trade in the long run should be better for Canada.

    Mr. Jack Mintz: Sorry, I didn't quite catch that.

    Mr. Rick Casson: If we have less dependence on the U.S. as our major trading partner, a smaller percentage of our trade with them, and it's spread out a little more, I guess that would work to our benefit in the long run.

    Mr. Jack Mintz: Yes. The economics will drive you to where you want to go. Certainly, I think there's value in having more trade agreements, reductions in tariffs across countries. If that allows Canada to be able to diversify and not have all the eggs in one basket, I think that is an advantage to us. In fact, if you look at foreign direct investment by Canadian companies abroad, you'll see that the share going to the United States has actually fallen over the years. Canadian companies are certainly not reluctant to look at other markets and develop trade there. In fact, I suspect that over the years we're going to start seeing some of the trade share climbing outside the United States with other countries, because of the fact that we have Canadian companies that are not afraid of getting into markets besides the United States.

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    Mr. Rick Casson: When we look at Canada's position as we're go into the FTAA negotiations, if you analyze the strengths we have, the weaknesses, some of the opportunities and threats, do you have any ones that particularly come to your mind where we have some good opportunities, and on the other side, where some of our domestic industry could be threatened?

    Mr. Jack Mintz: Latin American ones?

    Mr. Rick Casson: Yes, the Latin American ones.

    Mr. Jack Mintz: Textiles is always an area where we could be affected, because of differences in wage levels. Services is an area where we could do quite well in certain respects, particularly in the business service area, where we've had some very successful companies. We have seen some of our telecommunications companies do quite well in international markets. I think the reason our companies can do quite well is that despite the fact that there may be lower wages in many Latin American countries, productivity and technology are very important for trade, and if you are on the upper part of the value-added chain, where you're relying on significant capital investments and technology that is required to produce certain types of goods and services, you could do quite well, while other countries that have, let's say, lower wages, but do not have the technology, will specialize in those kinds of industries as a result. Of course, that's really part of the gains from trade. Countries will specialize in what they do best, and as a result, everybody gains by the fact that you do get the specialization in production.

    Mr. Rick Casson: Thank you, Mr. Chair.

[Translation]

    The Chair: Mr. Rocheleau.

    Mr. Yves Rocheleau (Trois-Rivières, BQ): Mr. Mintz, I'm interested in hearing your views on a proposal put forward by the President of Mexico, Mr. Fox. The proposal has the support of the Quebec government, the Bloc Québécois and various stakeholders in the province. It calls for the establishment at some point in the future of a development fund for the Americas. The fund would be somewhat similar to the initiative launched in Europe to help countries with the weakest economies boost their consumption of goods manufactured in the wealthiest nations, thereby striking a better balance between the two groups of countries. How do you feel about the principle involved here?

[English]

    Mr. Jack Mintz: First, Canada already has a number of important aid programs, of course with CIDA, some of them working with the Latin American countries, and through the World Bank there are a number of programs that have operated with Canadian funding in various countries throughout the world. So if one is creating a new fund, my only comment is on coordination and what we're trying to achieve. I think one would always be supportive of helping, especially, the less developed countries in the Americas to improve themselves. So development aid can be usefully spent, as long as we know governments are going to carry out the programs that are being funded and not waste the money themselves. We could end up having an important impact in helping those economies grow.

    One of the countries I worked with was Guyana. That and Haiti are the two poorest countries in the Americas. Guyana is a wonderful country in respect of its people, its very warm population, and they have struggled a lot over the past thirty or forty years. After the British left, they had difficulty in trying to build their industries, in part because they nationalized a lot of companies and did not have the management to run those companies. Eventually, the very best Guyanese, or at least many skilled Guyanese, left and went to New York and Toronto to live rather than stay in Guyana. So over time Guyana had a very difficult time making sure it would have even a good human capital, good skilled workers, to run the businesses.

    There were changes in government, particularly in the 1980s and 1990s, that I think have earnestly tried to improve the fortunes in Guyana, and there certainly were some improvements made. I think there were some very bad policy mistakes, particularly with respect to development in those countries, in Guyana particularly with respect to the forest industry, where they virtually gave away land to one company at an extremely low price, with very little royalties, thus not getting enough back, in a sense, from its development. Those are the kinds of things we have to try to prevent in our development programs, because I think everybody is interested in seeing these countries improve a lot.

    Development is a very difficult area, making sure countries grow better, but I think the principle and the practice we know about, capacity building in these countries, will allow us to at least make some good strategic investments through a development fund.

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[Translation]

    Mr. Yves Rocheleau: It's important to realize, Mr. Chairman, that the proposal put forward by Mr. Fox and supported by our party is unique. It calls for a special program that would be administered by governments and not by traditional institutions like the World Bank. This program would be brought in to address a new phenomenon, namely a free trade zone and would include new mechanisms to distribute wealth and strike some kind of balance among nations. Of course, the details of this alternative solution are still being worked out.

    I have a question for you about agriculture more specifically and your take on the negotiations. As far as agriculture is concerned, Quebec and Canada -- at least Quebec -- stand out because of their supply management skills, especially as regards the dairy industry.

    As the negotiations proceed, do you think we can count on the supply management system as we know it remaining intact or will it eventually join the list of concessions?

[English]

    Mr. Jack Mintz: I think I would rather answer this question in terms of whether I think the marketing boards and our supply management system should continue in Canada, or whether we should really try to move to much better policies in the long run, not just in Canada, but at the international level, where we removed many of the subsidies that are available for agriculture.

    I would be very supportive of changes coordinated at the international level that would do that. As for trying to forecast whether we will end up agreeing to that or not, when you look at the United States and where it's at on the agricultural issue, I'm not sure they're prepared yet to make major concessions along that road to cut down subsidies. We haven't seen the Europeans moving strongly on that either. So when you look at the kinds of agreements, whether it's the free trade of Americas or the WTO, I think it'll be a very long road, and I'm not sure whether any changes will come about under the negotiations, unless people really feel they've had enough and it's about time that we moved to a world where far fewer subsidies are being paid to agriculture and we make sure we have a much more balanced approach to industrial development in all of our countries.

    One country, New Zealand, took the unilateral approach of eliminating subsidies. That created a lot of hardship, many sheep farms went under, but they've eventually had a huge increase in productivity in the agricultural industry in New Zealand; much larger farms developed, producing at a much cheaper cost their lambs and sheep for export. So that was actually quite a dramatic change, for one country to do it without coordinating with other countries.

    I think all countries would be better off if we finally dealt with the agricultural file and tried to have a much better treatment of the industry, one in which, over time, we will probably see quite huge productivity increases as a result of better management of the whole system.

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    The Chair: Mr. Speller.

    Mr. Bob Speller (Haldimand--Norfolk--Brant, Lib.): Thank you.

    I just want to jump in here. I've looked at the productivity numbers--on your last point about supply management--and the productivity numbers in supply management in Canada have gone up dramatically compared to any of the other commodities. I've also had an opportunity of talking to some New Zealanders who might differ with your comment as to the fact that productivity levels have gone up, because those rural areas have been affected dramatically, and the levels of services and a lot of the small businesses that used to be in those rural areas have been hurt.

    I don't want to ask you a question on that, but I was interested in your comments on Brazil and the United States. I guess it's whether or not these negotiations can really go forward without the United States. Certainly, Brazil probably will not want to get into such an agreement unless they can get access to the American market. If Brazil decides not to go, do you feel it's over? Do you feel there might be some sort of movement to have a smaller agreement?

    Mr. Jack Mintz: First, there are a large number of agreements in the Latin American countries. You have MERCOSUR, which, of course, includes Brazil, Argentina, Chile, and I think Mexico as partners. You also have a free trade agreement amongst a number of Caribbean islands. I forget how many different free trade agreements there are actually in Latin America. One of the concerns raised with all these different agreements relates to interesting discriminatory impacts, whereby some countries have different playing fields within Latin America as a result. I think that's the one reason Brazil and many of the other countries, Mexico particularly, might be interested in seeing the development of the free trade agreement of the Americas, because actually, that would bring a more homogeneous and more coordinated approach to free trade agreements in Latin America itself.

    If the United States did not go into an agreement and Brazil didn't do it, the question then is, would there be any value to Canada in doing it? With Chile we've had an agreement, and I don't think it's hurt us. I think that Canadian companies have had an important role in Caribbean islands. There are the Central American states we've had trade with. When you start going to some of the other countries, there may be some value in individual agreements with them. So I think the free trade of Americas agreement would be virtually dead if you didn't have major partners in it, but I don't think that would necessarily stop us from wanting to improve our access to whatever markets become available and whatever partners might be interested in doing that with us.

    Mr. Bob Speller: Thank you.

    You talked about trade being important as an aid program. At the same time, you talked about our domestic industries having adjustment problems. How does a country like ours deal with that? Here, on the one hand, we're helping these other countries through aid, and at the same time, we're putting our own people out of work. Do you think there's a need for government to provide adjustment programs for our own people, or does that follow your philosophy of a free and open market?

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    Mr. Jack Mintz: It depends on the extent to which you need to make these adjustments. The one problem with the transitional support you provide in view of policy changes is, of course, that you might impede the movement you want to get of resources going from, let's say, one industry to another, one area of the country to another. In the case of the free trade agreement with Latin America, given the smallness of our trade, I'm not sure there are going to be major adjustments required. There may be some particular industries, narrowly defined, that might get affected, but we have relatively flexible markets, and we have shown that Canadians are willing to move to different parts of the country, willing to change occupations quite readily. As long as the economy is growing relatively well, the transition will be a lot easier to adjust for.

    We had an appreciation in the Canadian currency just after the Free Trade Agreement of 1989. That really did make it much more difficult for export markets at that point and exporters to adjust. It also meant that importers faced a lot more competition. Of course, we had a very serious recession in 1990 and 1991 as a result. So the Free Trade Agreement there showed what happens when you don't have a robust economy at the same time, and the transition can be a lot harder as a result, as happened in 1990. We are in an economic slowdown today, but by the time we get through this agreement, I suspect we will be seeing more robust growth globally, as well as in Canada and North America. As a result, I think it will be easier to handle the transition.

    Mr. Bob Speller: I don't want to carry on the debate, but we have interesting points, again, on the agricultural aspects coming from the C.D. Howe Institute. If you did finally get rid of all of these subsidies, given the fact that Canada is such a northern country, you thought there wouldn't be many adjustments. I would suggest what you're saying is that we probably will not solve the agricultural problem. In fact, if we did solve it and we did get rid of all the subsidies, don't you think there would be rural adjustments needed in Canada, given the number of jobs that are directly affected in this country by agriculture?

    Mr. Jack Mintz: If we did it unilaterally, there would be major adjustments. If you had a coordinated response by Europeans, the United States, and Canada with respect to the subsidies, what would happen is that the prices of agricultural goods would rise to make up for the loss in the subsidy revenue. As a result, the adjustment needed would be less. My argument is really that there have been “beggar the neighbour” policies in some of the countries involved with agricultural policies. No one wants to move alone, because there could be quite dramatic costs associated with that for agriculture, but if they all move together, the adjustments won't be as difficult, because of the fact that agricultural prices probably would shift up, given the nature of the demand and supply conditions in the industry.

    The Chair: Mr. Eyking.

    Mr. Mark Eyking (Sydney--Victoria, Lib.): To follow Bob a bit on agriculture, I know we were talking about South America, but in my opinion, supply management is one of the best things that happened to farmers in this country, and our consumers seem to be quite content with it now. If we're going to use that some day to trade it off to supposedly get a better access to the rest of the world with our agricultural products, I'd be a little leery of that, because so far, with all the negotiations we do, we seem to be the good boy scouts; we cut back on our subsidies, especially for grain, and it didn't happen on the other side. So on that note, I'd be pretty cautious about trading any of that stuff off without some really concrete stuff on the other side.

    We were talking about South America, and it seems like Brazil is a dynamic force down there, similar to the U.S.A. in North America, I guess. So whatever foothold we get down there, the Brazil window has to open more. Last year we had a problem down there with the beef dispute, if you recall. It seemed they weren't too happy with Canadians at that time--they were even cutting our music off and the whole thing--but where is that right now? Are they still lukewarm towards us?

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    Mr. Jack Mintz: I'm not able to answer that question. To go by the last discussions I had with some people who were trading in Brazil, Canada was not a particularly welcome name, and these were Canadian companies who already had investments in Brazil and were operating in Brazil. Certainly, they were hurt by the whole confrontation that went on between Brazil and Canada over not just the meat, but also subsidization in the aerospace industry. I suspect there are probably still some negative impressions in Brazil as a result of that confrontation, but I haven't, at least in the past six months, been keeping in touch with that.

    Mr. Mark Eyking: On that, before I became a member of Parliament, I did a lot of business in Central America, and it's a pretty finicky place sometimes, you'll get changes of government. See what's happened in Argentina. It's one thing to sell trade goods back and forth with these countries, but some of the big money is made in investing in these countries, of course, and setting up shop. How does it look down there with that? You kind of mentioned it before. Is there economic stability? Are some countries really off the limb and some really good? How is the rating? Are Brazil and Peru really good, but Ecuador bad? What is the lie of the land down there?

    Mr. Jack Mintz: I can't comment on all the countries. Brazil over the past five, six, seven years has actually undertaken a number of reforms, but they still have quite a way to go in improving the functioning of their own economy. They certainly have a lot of policy issues on their plate to deal with. On the whole, they have not been in a bad position.

    Argentina, of course, is in dreadful shape now. There's a whole story behind that, and of course, that will have some spillover effects on a number of the neighbouring economies around Argentina that have traded with it, of which Brazil is actually one, a major trader with Argentina.

    However, when you move further north, you start seeing that the economies are doing relatively well, and when you hit Mexico, the northern part of Mexico is actually doing extremely well in economic growth, the southern part less well.

    Some of the Central American countries, like Costa Rica, which I had forgotten to mention--we have a free trade agreement with Costa Rica--have recently been undertaking a number of reforms. In fact, I was involved in some work in Costa Rica just last year. They have been undertaking some changes in their tax system to, basically, bring down rates, broaden the tax base, get rid of special preferences, and eliminate dividend withholding taxes, which has become quite common in a number of the Latin American countries. This is to encourage more foreign direct investment in Costa Rica.

º  (1615)  

    Mr. Mark Eyking: So overall, they have really come a long way, and some of them have a little way to go yet.

    Mr. Jack Mintz: Absolutely.

    The Chair: Mr. Valeri.

    Mr. Tony Valeri (Stoney Creek, Lib.): Thank you for coming and spending some time with us. I have a couple of questions.

    I wanted to pick up on your hub and spoke strategy in respect of going forward with trade agreements. Correct me if I'm wrong, but I was under the impression that Canada was initially looking to avoid a hub and spoke strategy. That's why we got into the free trade agreement. I was just interested in your comments on the possible impact on our dollar, the impact on our productivity, standard of living, that kind of thing. You're obviously advocating a hub and spoke strategy because it will be better for the country, but I'm just trying to understand whether that is the approach you would recommend, or whether that's the default position and there is a better approach to enhancing our trading relationship.

    Mr. Jack Mintz: I think it's really part of an overall view I have about economic strategy for Canada. I think the big concern Canadians would have is losing out in the North American market. As Canada becomes increasingly integrated in North America with the United States, taking away policies and just looking at the economics of markets, the U.S. has a very large market, Canada has a much smaller one. There's a tendency for businesses to move close to the market, and so if many companies were going to look at setting up shop in North America, there would be a tendency to go to the United States, where the market is large, you have a very diverse and large labour pool to draw from, and of course, deep capital markets. So all those things tend to augur well for investments in the United States.

    I've taken the view that what Canada needs to do is not copy U.S. policies, not harmonize our policies with the United States, though one would want to get rid of significant barriers in some of our policies, but create the Canadian advantage, where we would be so attractive that we would be, say, the northern tiger in the Americas, where we would have better policies than the United States and other countries and make it so attractive for businesses to locate here that they would want to serve the North American market, as well as Latin American markets. When I say there's a value to a hub and spoke type strategy, it's really part of that idea of creating advantages in the world market, where being in Canada would be viewed as being in an advantageous position for trade with the rest of the world.

    Mr. Tony Valeri: If the hub and spoke strategy is to work, you really need to have the Canadian advantage, right? Can you expand a little bit on the Canadian advantage. What are some of the components of the Canadian advantage? I don't want us to find ourselves in a situation where we might be pursuing a hub and spoke strategy and not have the advantage. Our challenge is obviously that foreign direct investment in North America is continuing to decline. You tend to locate in your larger market to serve your larger market. So what is part of that Canadian advantage, if we were to pursue this hub and spoke strategy?

    Mr. Jack Mintz: I think you might know my answer to that question before I even answer it.

    I published a book in the fall, Most Favoured Nation, through the C. D. Howe Institute and articulated what I felt were ways in which we can create that advantage. Certainly, I think government policy has a lot to do with it, and I think a key is for governments to have effective and efficient programs and a tax strategy that would encourage significant investments in Canada.

    Let me just give you the Irish example, which I happen to know a fair amount about from various things. Ireland, effectively, took a strategy of being quite different from the rest of Europe. It had, in the early 1980s, a very high unemployment rate, close to 20%. It was a poor cousin in Europe, and it had a historical brain drain to the United Kingdom and North America of its skilled population. It also had a very low level of education. In fact, many people didn't even have secondary education, never mind university or post-secondary education. The Irish government somehow, with the support of both labour and business, developed an economic strategy to pull itself away from this historical period of low growth, and they did it really through a number of important policies.

    One of the things that helped them was European regional subsidies, which allowed them to have money to accomplish some of their objectives. But the main thing they did was say, all right, we need to have more skilled labour, bring them to the market, and they did that through heavy expenditures in education, particularly at the secondary and university level. In fact, university education is still free in Ireland. It was really to encourage their population to get more education. And they said, we can't just have more skilled labour, that's not going to work; we also have to create more demand for these skilled labourers, or they'll just go off to the United States and the United Kingdom, where job opportunities are better. So they made major cuts to business taxes, particularly with respect to manufacturing and financial service income. They also did away with a bunch of ineffective corporate tax policies, particularly investment tax credits and investment allowances, that they had in their system.

    It attracted a lot of attention from multinationals. I was looking at some numbers recently, and it's really quite amazing what Ireland has done. It tracks even from Canada now; it tracked $8 billion of foreign direct investment in the year 2000, while in 1990 it was just one billion. Its unemployment rate has now fallen to the levels we see in Canada. It has reversed its brain drain; it now has more people moving into Ireland than moving out of Ireland. And of course, Ireland was the fastest growing OECD country in the 1990s. Its per capita income doubled, while Canada's per capita income only went up 4% during that decade. We were one of the slowest growing OECD countries at that time.

    We're not going to be Ireland, we have different issues to deal with, but I think that's why I've been arguing for the strategy, considering what we can try to achieve, in respect of our fiscal policies, our regulatory policies, and in this case, trade policies, really with an idea of using various policies to create that advantage in Canada.

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    The Chair: Thank you.

    Mr. Rocheleau.

[Translation]

    Mr. Yves Rocheleau: As for the negotiations on services, in your opinion, what role will the provinces be invited to play in this process? Will they in fact be consulted, given that when a sovereign country signs a treaty, it undertakes to ensure that its provisions are respected by all parties? That's my first question.

    Secondly, many concerns have been expressed about the fact that eventual service agreements could jeopardize Quebec's network of public daycares as well as the province's minimum labour standards board and occupational health and safety commission. Are these concerns justified or have they no basis in fact?

[English]

    Mr. Jack Mintz: The federal government, of course, has a constitutional responsibility with trade agreements and has the constitutional power to enter into trade agreements without necessarily having provincial acceptance. Of course, in a country like Canada consultations are very important, and I think it's very important that the provinces feel that such trade agreements are going to be in their interest as well. In a number of situations I think we've seen that, as with auto trade and the auto pact, and then later the Free Trade Agreement. Many of the provinces benefited from such trade, including Quebec. Quebec, of course, has been a very strong supporter of many of the trade agreements we've entered into internationally.

    With respect to labour standards and environmental standards, this is a very difficult issue, because, in principle, one would like to see strong environmental and labour standards adopted in many countries, in order to deal with, perhaps, human rights abuses and other things people are concerned about. But then the question is whether this is something that should be part of trade agreements or something one does separately with other agreements among countries. The less-developed countries are very apprehensive about the use of labour and environmental standards as part of agreements, because they see this as maybe just another form of protectionism that developed countries are trying to use in order to prevent trade. Maybe they'll agree to lower tariffs, but then, through these standard requirements, would end up being hurt. Their preference is to use other types of agreements in order to move ahead on other fronts.

    There is an argument that when you try to do too much in an agreement, it's harder to accomplish this, and that might be the objective of some people who want to see many different things included in various agreements, because the idea of a trade agreement is simply to improve trade and achieve those things. In fact, I've always found it fascinating that we have created, worldwide, a system of bilateral tax treaties among countries, and never once have people been arguing that we should put in environmental standards and labour standards as part of those tax treaties, because they know how important it is to facilitate capital investments and labour mobility through the tax treaties and secure the gains one achieves from them.

    I think it's a difficult issue, because, in principle, one would like to see a number of standards raised. We can use our aid programs or other means in order to get these agreements. That would suggest to me that having simpler types of trade agreements might be a more appropriate approach, but I know that is not the political thinking in today's world.

º  (1625)  

[Translation]

    Mr. Yves Rocheleau: Thank you.

[English]

    The Chair: With the permission of the committee, and your permission, Mr. Mintz, I'm going to ask Mr. Berg to ask you a question that was on my mind.

    Mr. Berg.

    Mr. Peter Berg (Committee Researcher): Thank you, Mr. Chair.

    One of the important negotiating issues in both WTO and FTAA is the whole question of investment. We have lost count, and there may be more. We have 1,800 bilateral agreements throughout the world, of which Canada has a number. We have regional agreements through NAFTA chapter 11 and other agreements. But we have nothing at the multilateral level. We tried with the MAI, and it didn't work. Now the WTO is mandated to come up with a game plan for 2003 and perhaps launch negotiations then. Do you think bringing these bilateral and regional investment agreements into a multilateral framework is a good idea? If so, what are some of the key features you would like to see in a multilateral agreement? Would you like to see, for example, this contentious investor state provision in there? We have it in NAFTA. There's some controversy over it. Would you like to see that in a multilateral agreement as an additional form of protection?

º  (1630)  

    Mr. Jack Mintz: From a practical point of view, going to the multilateral approach for an investment agreement I think is going to be very difficult in the current climate. So one has to wonder whether it's worthwhile using that approach, rather than working through regional agreements. I'm not sure whether at the WTO level there will be much stomach for a major agreement on investment, although one never knows, as bargaining goes ahead, with the interests of various countries, whether there might not be a willingness to revisit that issue. With the Free Trade Area of the Americas, there might be more interest in having some agreements on investment, in order to encourage investment amongst the different countries, with the appropriate protection that I think is required to make sure that investment can take place.

    That then gets to your other question as to what kind of investor protection we should have in agreements in principle. I think it's valuable to have some sort of investor protection, for the following reason. We have to remember that when businesses make capital investments, once they put them in place, the capital is sunk, to use a word that is often used in the economics literature. There's always an incentive for governments, down the road, to impose heavy taxes on that sunk capital, or in the case of expropriation, actually take the companies over without providing a fair return for the capital that's being expropriated. Because of that time consistency problem, as it's often called, that can often hurt countries, in the sense that if they don't offer some sort of protection, investors will be more reluctant to invest there. So there's a real value in having some sort of long-term investor protection as a signal by governments that if you invest here, we're not going to treat you unfairly somewhere down the road, after you've sunk your capital and have made your strategic investments in this country.

    So I would suggest that if you look at the basic principle that investor protection is appropriate, this is not to say that governments should not be able to make expropriations at certain points in time, because that could happen. I think the key point is that there's fair compensation for any expropriation. I think many countries end up behaving that way because they don't want to discourage investments in their jurisdiction. So if they're willing to behave that way normally, being part of an agreement I don't think is a serious issue.

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

    I have a very simple question for a simple answer. Have you given any thought to the dispute resolution mechanism that exists at the WTO level now? It seems to me at least that this system needs a total revamp. Do you have any thought on that? Have you done any papers on this issue that you could pass on to the committee?

    Mr. Jack Mintz: We're going to be doing work on the whole issue of foreign trade policies etc. at the C.D. Howe Institute. In fact, we are planning an investor protection conference for this spring. We have a paper I could send you on trade dispute mechanisms. I'm not an expert in this area, on the details about the current problems and revamping, but I would be happy to send you a version of....

º  (1635)  

    The Chair: I think that would be most useful, because in that paper we might be able to find exactly what we are looking for, and your wisdom and insight would be very useful.

    Mr. Jack Mintz: I think we already have one draft in, but I'll have to go back and check.

    The Chair: That would be perfect.

    We were very fortunate to have you for a full hour all to ourselves, and the presentation was most interesting and most informative. The questions were lively. As you could see, we have views that truly reflect the state of the nation, MPs from urban constituencies and from rural ones, from different parts of the country. So on behalf of all my colleagues, I want to thank you very much for being with us. Hopefully, we'll be able to communicate over the coming weeks and months, and if there is any information you want to submit to the committee as a formal document, that would be most useful.

    Mr. Jack Mintz: I'd be happy to do that.

    The Chair: I'm going to suspend for two minutes, as we have to go in camera to discuss some future business of the committee.

    [Proceedings continue in camera]