SINT Committee Meeting

SUB-COMMITTEE ON INTERNATIONAL TRADE, TRADE DISPUTES AND INVESTMENT OF THE STANDING COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE

SOUS-COMITÉ DU COMMERCE, DES DIFFÉRENDS COMMERCIAUX ET DES INVESTISSEMENTS INTERNATIONAUX DU COMITÉ PERMANENT DES AFFAIRES ÉTRANGÈRES ET DU COMMERCE INTERNATIONAL

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, March 14, 2001

• 1608

[English]

The Chair (Mr. Mac Harb (Ottawa Centre, Lib.)): I'd like to call the meeting to order. We have a quorum.

I just want to bring it to the attention of committee members that we do have appearing before us Mr. Murray from the Bank of Canada. He has a series of slide presentations. However, they are in English only and I need the permission of the committee for him to proceed with that and to eventually, at the earliest possible opportunity, provide the other version in French.

Is that okay with everyone?

Some hon. members: Agreed.

The Chair: All right, Mr. Murray, we'll invite you to proceed with your presentation. Thank you very much for coming here.

Mr. John Murray (Adviser, Bank of Canada): Thank you very much for inviting me. I'm delighted to appear before your committee.

At the Bank of Canada, we tend to approach some of these issues at a pretty high level, so I hope what I have for you today is useful. I have prepared a package with some notes and graphs. I apologize at the outset for it being seulement en anglais. Owing to the time pressure, there wasn't a lot of time to prepare the material in both languages.

• 1610

I don't propose to go through all of this material in front of you. Instead, I'll be guided by your interests. The second page of the package outlines some issues and questions that we could go through, but again I'm prepared to be guided by your interests.

I thought we could start with a simple review of what I'll call the stylized facts, the trade and investment flows between Canada and the U.S., then Canada and Europe, and Canada and the rest of the world. I'll then move on to how we can account for what I've called, somewhat pejoratively, Canada's dependence on the U.S. And by that I don't mean to suggest, as I'll make clear later, that's necessarily a bad thing, a bad neighbour to have.

From there, I'll be looking at the near-term outlook in Europe's macroeconomic conditions, and following that, again depending on your interest, the early experience with the Euro and the European monetary and economic union. Finally, we'll see if there are any lessons for Canada from some of this recent experience.

I've included these issues at the end not so much because they're directly related to the issues at hand, trade and trade flows vis-à-vis Canada and Europe, but because I think in part the motivation for your work is the sense that something important is going on out there—which there is—and perhaps we're missing the boat. Perhaps putting EMU and the introduction of the Euro into some sort of context might help inform that debate as to whether there's a boat being missed or not as we look at Europe.

Turning to the trade and investment flows, if you flip past the point-form notes I've prepared and go to the first graph, you can see one thing very clearly.

The Chair: What page?

Mr. John Murray: It's called graph 1, so you'll find it if you just keep flipping through the notes until you see the first graph. Unfortunately, I've ordered things in such a way that all the point-form notes appear first, and then you get to the graphs, so we'll be flipping back and forth.

You can see three lines on graph 1. They represent Canada's exports, measured in millions of dollars. The top line represents Canada's exports to the U.S., and you can see them just taking off, especially in about 1990. If you wanted to, you could make a connection between that and the introduction of the free trade agreement and, following that, NAFTA. This is certainly providing some reinforcement for that trend.

There are other factors, too, that we'll highlight, such as the relationship of our dollar to the American dollar, and the growth in the American economy. There are all sorts of things to which you can point to explain that, but it is rather startling.

The U.S. has always been important. For a long time—and I don't know how far back you'd have to go—it's been our most important trading partner. Certainly that distance has widened vis-à-vis the U.S. and what I call the “rest of the world”, or ROW. That bottom line is Europe, the EEC, the European Economic Community, which is a distant third.

If you flip to the next graph and look at the imports, the pattern isn't much different. There's a slightly better showing on the part of the rest of the world than Europe, but you're still talking about a lot of commerce with the U.S., with a lot of what we buy from other countries coming from one source, the United States.

Graph 3 expresses this export concentration, as I'll call it, in percentage shares. You can see slightly less than 70% of our exports went to the United States in 1975. That has now grown to 87%. I think that is the most recent figure. It has certainly increased through time in a relative as well as an absolute sense, and you can see the downward trend with regard to the lines for rest of the world and Europe.

• 1615

There's a similar pattern on graph 4, but again it's a little less dramatic. If you look at imports, 25 years ago we imported about 68% of our goods and services from the U.S. Now it's about 74% to 75%, so there hasn't been as much growth there on the import side. For those people who are mercantilists, which is to say they love exports and hate imports, we certainly gained more on the export side than we've received in terms of imports.

Mr. Mark Eyking (Sydney—Victoria, Lib.): Who do we pick up on the import side? Could you tell me?

Mr. John Murray: The shares haven't changed quite as much, although obviously they still have to add to 100%. We have grown slightly with regard to the U.S., and we have lost a little, although it's hardly noticeable in terms of the EC. I guess we're down a touch against the rest of the world. That's the difference.

Graph 5 takes a particular year, 2000, last year, and looks at the composition of our exports to the United States. A lot of them were manufactured goods. Indeed, most of them represented manufactured goods—autos, machinery, equipment—speaking to the high-tech view of the world that a number of people are trying to encourage when people think of Canada.

Raw materials, however, still accounted for over 41% of what we exported. That's not a bad thing. We'll speak about this a little later perhaps, but it's a comparative advantage. If you have the resources and there's a demand for them and you can earn money selling them, you'd be crazy not to. So we shouldn't be embarrassed by the fact that, to a considerable extent, we're still hewers of wood and drawers of water.

There's also an “other” category in graph 5.

If you flip to graph 6—and this may surprise you—you'll see that the composition isn't that different as you look at what we sell to Europe. Obviously we sell a great deal less to Europe than we do to the United States. The proportions are a little different, but 42% of what we sell to Europe is still manufactured goods. It's not all raw materials. However, raw materials are now the largest portion, at 52%.

Mr. Pierre Paquette (Joliette, BQ): What kinds of raw materials?

Mr. John Murray: That's a good question, because these figures are very much an aggregate, and they hide some detail. It turns out that most of those are agricultural products.

If you flip ahead to graph 8, you can look at the composition of Canada's imports from Europe, the EEC, and there you do notice a difference. There are two things. First, over 68% of what we import is in the form of manufactured goods, so on balance we're importing manufactured goods, net, from Europe. We are importing, though, about 30% worth of raw materials from Europe.

It's not as though they're just selling us Mercedes cars and high-tech machinery. By and large, that represents such various industrial products as chemicals. There are some agricultural products, but if you look just at the raw materials, we tend to export agricultural goods to Europe and import chemicals and other industrial semi-refined products.

If you flip back to graph 7, you'll see that's not much different from the U.S. case. We also import a surprising percentage of raw materials from the United States, so it's not as though we get only computers or cars from the United States.

Mr. Mark Eyking: But it's pretty well a two-to-one balance in terms of import to export in Europe, isn't it? We import 10% and we export only 5%.

Mr. John Murray: Yes, there's certainly an imbalance. We're a net importer from Europe. We run what is not a large but nevertheless significant deficit with Europe on trade. That isn't necessarily a problem, of course, because you shouldn't try, as an objective, to balance your trade with every country or every region. It should reflect your comparative advantages, again.

• 1620

If we wanted to balance with every country, we'd be in terrible shape, because we run an enormous surplus with the U.S. that far offsets any deficit we ever run with Europe or Japan. As you know, right now Canada is running a net surplus not just on a straight account but on its current account balance of over $25 billion a year.

So we're definitely in the black, if that's your measure of success, on a total basis. That's an important point as you look at the bilateral trade flows.

Mr. Mark Eyking: How would oil and gas fit in there? Would that be raw material?

Mr. John Murray: Yes. There we are clearly a net exporter. A few years ago we were a modest net exporter because we did import a lot, and on oil we were just about even. Now we're a net exporter of oil. But where we've really picked up steam, so to speak, is on natural gas exports, electricity, and to a degree coal—the other energy exports.

Graph 9 gives you some information on investment flows. Again, the U.S. is in the lead. The EC is down below. I won't go through all of those. Total foreign investment as well as direct investment flows are documented here.

The only thing I'd note is that in terms of investments, for what it's worth, there's less of an imbalance. The U.S. is clearly ahead in terms of our investment there, their investment here, etc., but, historically, we have received a lot of investment not just from the U.K. but also from the Netherlands, which, interestingly enough, has always been a very important investor in Canada.

One further thing to note before we get to some of the issues is if you look just at direct investment—and what I'm about to say is a little misleading, because this is often recorded at book rather than market value—our direct investments abroad now are roughly comparable to foreign investment in Canada. So this whole notion of Canada being taken over by others and being a hapless victim is really a misperception. There are healthy two-way flows here, portfolio investment as well as direct investment. Again, this kind of diversification instead of concentration is something you'd like to see.

Mr. Mark Eyking: When the Dutch invest here, would they invest in companies on the stock market or in properties as such?

Mr. John Murray: A lot of it is and was direct investment not just here but also in the United States. The Dutch are major investors in several places. I just note that out of interest. They're a small country but historically they've always had disproportionate representation even in the United States, if you look at the amount of property and the number of companies they own or control.

We are closely integrated with the United States. There's a sort of dependence there, if you like. We could explore for a few minutes some of the reasons for that dependence and, more importantly, the phenomenal growth recently. Obviously, a lot of it relates to proximity. We share a border with them. They're our closest neighbour. It's not just that; they're enormous. We have the good fortune, you could say, to live beside the largest economy in the world in terms of GDP and wealth. So it's not a bad neighbour to have. You'd expect us, in other words, to have a lot of trade with them.

There are certain other obvious advantages, such as a common culture, to a degree language, institutions, and this type of thing, that no doubt facilitate trade and commerce. There's both a French and an English connection in the two countries historically.

More recently—here I'm flipping back to the bullets I outlined on page 4 of the handout—the U.S. has had a remarkable success in terms of growth if you ignore the last six months. People have referred to the U.S. miracle, and they've certainly done much better than Europe in terms of real growth not just through the last 10 years but on balance through the last 25.

• 1625

I apologize for moving between the material, but if you flip to the last graph, graph 18, you'll see two rather choppy lines. The heavy and more stable one is for the “Euro 15”, the 15 countries participating in the European Union, and the other more volatile line is the U.S. But as you can see, in most years U.S. growth in their real GDP, which is what this documents, has been higher than what it's been in Europe.

More recently, we've had the U.S. miracle, an almost phenomenal string of growth in the U.S. We've also had, as you mentioned earlier, a depreciation of the Canadian dollar. There is an upside to that. It has made us very competitive in the U.S. market. We started in 1975 with a Canadian dollar that was worth a little more than $1 U.S. I think it reached a local maximum around that time of about $1.04 U.S. Of course, we've settled recently around the 65¢ U.S. level. We hit an all-time low of 63¢ briefly a couple of years ago.

That explains two important things working in favour of increased trade with the U.S.—strong growth in the U.S. and our very competitive exchange rate. It also raises a mystery, however. If you turn to graph 17, the second-last graph—and I promise this is the last graph I'll ask you to look at—it shows you the value of the Canadian dollar indexed to 100 in 1975 vis-à-vis the U.S. dollar and vis-à-vis what you could call an amalgam of European currencies. The heavy line in this case is the Canadian dollar-U.S. dollar exchange rate. You can see it falling.

But we depreciated even more against Europe than we have against the U.S. dollar, at least until 1995. Since 1995 the Euro and European currencies have fallen quite dramatically, so some of that competitiveness has been lost. But what this graph suggests is that even as we were super competitive with the United States, we've been even more competitive with Europe. So on those grounds we would have expected faster increased trade with Europe at least on the export side. Our goods would look more attractive to Europeans as a consequence, so you'd expect to sell more.

But the mystery there is twofold. First, we didn't depreciate as much against the U.S. dollar but obviously sold a lot. Second, not only did we not sell as much to Europe but its share of our exports has gone down. We haven't even managed to maintain the share. The share dropped from about 10% to about 5% of our exports.

Mr. Mark Eyking: On graph 18 where it shows that big dip around 1983 and then it goes way up, what's happening there?

Mr. John Murray: We had a very bad recession in the U.S. We shared it in Canada in 1981-82. The first time I had the statistical clerks prepare this graph for me I had three lines, and perhaps I should have left it as it was. I had Canada, the U.S., and Europe. You'd have seen how similar our line was to the U.S. growth line. That's the recession of 1981-82 followed by a very sharp recovery in the U.S. That's the spike. It was a very deep recession followed by a very steep recovery. Now, we don't hope for the deep recession part, but we do hope for the steep recovery as we look through 2001-02 in the U.S.

• 1630

How do we explain this amazing growth, both in our exports to the U.S. and our imports? Part of it, of course, can be credited to the FTA, followed by NAFTA. This has had a much larger effect on both exports and imports than most economists expected going in.

Now, you have to treat that with caution, because when I say it had a larger effect than expected, it's really saying that the trade models we have weren't able to forecast it. However, whether or not that error can all be credited to NAFTA isn't clear. Certainly the timing coincides, so there's reason to believe the free trade agreement was important.

Two examples reinforce the caution. First, a lot of the growth in trade we've seen relates to autos, and there we already had free trade with the U.S. Secondly, a lot of the growth also relates to machinery—equipment like computers, for instance—not subject to tariffs or other quotas and already essentially free, although they weren't protected by an auto-type pact. Clearly they weren't benefiting necessarily from free trade. There were other forces, I would say industrial structural changes, under way that happened to benefit us in that regard.

Mr. Mark Eyking: If we do 75% of our trade with U.S., what percentage of their trade is with Canada, overall? Would 30% of their trade be with Canada?

Mr. John Murray: It would be a little less. I think it's between 20% and 25%. Interestingly—and Americans forget this—we are their most important trading partner.

[Translation]

Mr. Pierre Paquette: It is better if they forget it.

Mr. John Murray: There is still a difference, but we are more important to the United States.

[English]

Their second-most-important trading partner is a race between Japan and Mexico. Mexico is coming on very strongly, in part because of the free trade agreement, in part because of the rapid economic development there. In fact, I think now they are the United States' second-most-important export market, ahead of Japan.

That's a good question, just to put things in context.

Referring to page 4 again—and this may be of less interest, being a little too esoteric—I refer in the fourth bullet to something called the “gravity” model and the “borders” effect. I thought you might be interested in the following. Economists often use what they call a gravity model to try to predict how much trade a country should have with another trading partner. Basically, it has three elements.

The first element is distance. How far are you from that trading partner? This turns out to be very important. Second, how large is it in terms of population? Third, how rich is it, how wealthy, how much income is there? So you've got distance, population, and per capita income that turn out to be fairly good predictors.

It's amazing how fast trade falls off as distance increases. It's not necessarily a linear relationship. It's rather like gravity; the further you get away, the more tenuously you're linked to the other body.

Why am I telling you this? Well, obviously it explains some of what we're seeing with the U.S. They're very close, they're very large, and they're very rich. The interesting thing, though, is the puzzle created by the following realization. If you look at population, distances, and income in Canada—between provinces—and compare them with distances, populations, and income between Canadian provinces and U.S. states, by this measure we trade far too much with ourselves and far too little with the United States.

Let me give you an example. We have provincial trade data, so we can actually look at the amount of trade Ontario, for instance, does with each of the other provinces. Let's look at British Columbia, with Vancouver in it, as a fairly wealthy province.

• 1635

If you took a U.S. state that was as far away as British Columbia, had roughly the same population, and adjusted for differences in income, there's a tremendous shortfall in trade. According to John McCallum's estimates, trade between Ontario and B.C. is 12 times higher than would be the equivalent trade between Ontario and a U.S. state.

I'll say it again. Even though we trade enormously with the United States, free trade, common culture, similar institutions, etc., have not been enough to overcome what economists now call an important borders effect. This refers to the national borders that separate us.

If everything were equal, we should actually—according to John McCallum's estimates, and it's not clear how we could—be trading 12 times more than we do with the United States. Interestingly, that estimate has come down since the introduction of free trade. John McCallum's initial estimates were a factor of 18. They've come down to 12. John Helliwell, another Canadian economist, has done more recent estimates and has it down to about 8.

That number still suggests that we're trading far too much with ourselves. We're trading a lot with the U.S., but distance, population, and income suggest we should be trading much more. Of course, by extension, we should be trading even more with Europe. There's a bigger deficit, or absence of trade, there.

So we have a long way to go before we have truly free trade in the sense that we treat foreigners the same way we do one another interprovincially. Despite all the talk you've heard about interprovincial trade barriers, which is an important factor and should be reduced for efficiency reasons, or eliminated, we trade far too much with ourselves and there's still a borders effect.

You notice a similar borders effect when you look at investment. In a sense, we invest far too much in ourselves and far too little abroad. If you looked just at rates of return, portfolio diversification benefits, Canadian investors should have a far larger share of their portfolio dedicated to foreign securities.

But this is true everywhere. This isn't peculiar to Canada. The borders effect I talked about with regard to trade, the home country bias I'm talking about with regard to investment, is true in every country. It seems to be something very ingrained. There are deep institutional reasons, apparently, for this reluctance to invest, diversify, trade as much as we should to get full benefit from the opportunities abroad and they from opportunities here.

Mr. Mark Eyking: Well, John, if you're doing an RRSP portfolio, you're only allowed so much investment. If you want to buy grain, if you're a livestock producer and you want to buy grain from Argentina, there's a big problem. We're going across the provinces because of the systems in place.

Mr. John Murray: No, you're absolutely right. A lot of this, an unfortunate amount of it, can be credited to direct government intervention, whether it's tariffs, non-tariff barriers, restrictions on investment activity, or not.

But you raised the RRSP example. It's an interesting example because, although there was a limit on the percentage of your RRSP you could invest in foreign securities, it's been raised from 20% to 30% recently. And for most people, this was never binding. In aggregate, the percentage of RRSP funds invested abroad never even came close to the old 20% limit. For some people, it was binding but they usually found creative ways of circumventing it through options and other things.

Nevertheless, it's a good thing the limit's been raised. I'm not suggesting it's not. It's just to say that these restrictions are harmful. But it seems, going beyond that, there are other deeper forces that one has to confront when you try to explain this mystery. Some of it is just a lack of information and familiarity, a lack of awareness of the opportunities.

• 1640

Turning now to the final bullet, some people have suggested that one of the reasons we don't trade as much as we should, and one of the reasons we don't invest as much as we should abroad, and foreigners with us, is exchange rate volatility, and that this would be one of the advantages of a common currency.

I don't happen to believe that's as important a factor as some have suggested, for a variety of reasons that we could explore here, but I would note that Europe will provide a very interesting example. Many of the countries have moved to a common currency and it will be fascinating to see what happens to their trade and investment flows.

There was already a lot of intra-European trade, intra-European investment. There is no sign in the last two years that this has grown enormously because of the common currency. So the early results are not encouraging in the sense that, if you were hoping the common currency was going to effect a dramatic change in trade and investment patterns, that hasn't been realized yet.

It isn't to say it won't, but as a Canadian you can look on this with some interest. It's nice to have others do the experimentation here, at times. Those who have suggested a common currency for North America look with interest on Europe.

Maybe there is a message here. Maybe the “Euro skeptics” as we're called, the doubters, have underestimated some of the microeconomic advantages of a common currency, the benefits you realize in terms of reduced uncertainty, reduced transactions costs, when it comes to trade.

All we do know is that even with a floating currency against the U.S., which has at times moved erratically, our trade with the U.S. still managed to grow by 500% in the last twenty years. So it's hard to believe that volatility had much of a restraining influence on the behaviour we observed.

The last three pages of my point-form notes go through the near-term outlook for Europe, early experience with EMU and the Euro, and then finally what are the lessons for Canada. But I realize I've done a lot of talking and I haven't asked you what you'd like to hear about.

So before I go on, I thought I'd pause.

The Chair: Mr. Murray, we're very much enjoying your presentation. Perhaps you want to give us a summary of the rest of your presentation and then we'll open it up for questions and comments.

Mr. John Murray: Sure.

The Chair: We have quite a bit of time left, so we can take the rest of the time for questions and answers.

Mr. John Murray: I'll be very quick to leave time for your questions. I'll go through these points, but quickly.

Perhaps you can turn to page 5, the near-term outlook for Europe. I guess the quick answer is that it's a little better than the U.S. right now, we think, although the extent to which Europe is looking more encouraging is by a very thin margin.

Europe is very anxious, as I note here, to try to import the U.S. miracle. The U.S. in the 1990s and in through the year 2000-01 experienced the longest period of uninterrupted and strong growth they had experienced in the post-war period.

This was driven in large part, or associated with, tremendous improvements in productivity, real wages and wealth. And not just Europe, but I'd say the rest of the world, including Canada, would very much like to import this miracle, because we haven't seen it anywhere else. There are early indications in Canada that some of the intensive investment activity that's been underway since 1996-97 is starting to pay dividends.

Unfortunately, just at a time we started to see evidence of faster real income growth and stronger labour productivity just for a quarter or two, it looks like the U.S. economy, and potentially ours, is going to begin to slow so we may not have a true test for a while.

Europe is trying to import this as well. However, as I note in the second bullet, there's a risk of contagion from the U.S. slowdown. Commentators in Europe have been pretty sanguine, suggesting that Europe's going to continue to grow even as the U.S. slows: “That's the place to invest, that's the place to trade.” However, I think they may be underestimating the extent to which the U.S. slowdown is going to affect them, both directly in terms of U.S. demand for their product and also through financial markets in terms of the effect the downturn in U.S. stock prices is likely to have on their financial markets. I think Europeans, especially Germans, are starting to realize this now.

• 1645

So while Europe has a slight edge as we look ahead over the next year or two vis-à-vis the U.S. in terms of growth and investment potential, I wouldn't put a large weight on that.

One thing to note, though, is that because you have 15 countries involved in Europe, you have greater diversity and as a consequence often greater stability with regard to net growth. So although the U.S. has on balance grown much faster than Europe in the last 25 years—you'll remember that last graph I showed you, where we documented the growth in real income, real GDP through the years—Europe didn't do quite as well on average, but it tended to be more stable than the U.S.

What are the long-run aspirations of Europe and future prospects? Well, there's EMU. The Euro has been introduced. I wouldn't say it's the final stage, but it's at least the latest stage in this process towards what they hope will be social, political, and economic integration.

Certainly Europeans had tremendous hopes going into EMU in January 1999, when the Euro was introduced. They hoped their new currency would rival the U.S. dollar. They hoped it would promote trade and investment. They hoped it would encourage structural adjustment and market liberalization and support political integration and otherwise enhance the influence of Europe in the world.

Some of these hopes have been realized, but not many. Admittedly, it's still early days. The Euro was successfully launched and that was something of a victory because there are a lot of people who thought it would never get off the ground and it did. It was a smooth launch. We have seen a dramatic growth in some European financial markets, particularly their bond markets, reinforced perhaps by the introduction of the Euro. I wouldn't say it's caused by but reinforced by the introduction of the Euro.

There have been disappointments, though, and I note those briefly at the bottom of page 6. The Euro has been amazingly weak. I wouldn't argue that's a bad thing. That's helped stimulate European growth. It would have been worse had the Euro not depreciated against the U.S. dollar and the Canadian dollar.

Economic growth has nevertheless been weak in Europe, disappointing many politicians, as well as households and businesses. And progress on the structural adjustment front has not been that great. Some countries have made some moves with regard to tax reform, labour market reform, but not nearly enough. So there's disappointment there.

The bottom line? I wouldn't dismiss the European hope, driven by EMU or the Euro, but neither do I think there's a boat leaving the dock quickly, and that it would be the end of the world if we didn't grab on as fast and as hard as we could.

But a lot of what we've seen in terms of the trade flows between Canada and the U.S. as opposed to Canada and Europe are natural and inevitable. They are big. They are close. They are wealthy. We are becoming more integrated. But as I suggested with the gravity model and the reference to borders effect, by some measures we aren't nearly integrated enough. We haven't begun to explore the full potential in terms of efficiency and wealth generation of becoming even more integrated, treating U.S. states more like Canadian provinces.

That isn't to say we shouldn't pursue the European option. But I think you want to do what is natural and efficient. Increased integration in North America does imply a declining share of trade with Europe, because you can never have, unlike sports, more than 100%.

If you're becoming more involved with the U.S. by definition someone else in percentage terms is suffering, and that has to be the rest of the world and Europe as part of that.

So by all means, there are things that can and should be done vis-à-vis Europe by way of promoting free trade, which is always a good thing, reducing barriers, advertising our products, and increasing awareness and recognition. But don't feel that just because our relations with one country are growing much faster than they are with another, or a group of countries, that it's necessarily a bad or perverse thing. It may be a natural and inevitable consequence, I would suggest, of the economic realities.

• 1650

The Chair: Thank you very much.

Let's open it up for questions, starting with Monsieur Casson.

Mr. Rick Casson (Lethbridge, Canadian Alliance): Thank you, Mr. Chairman, and thanks, Mr. Murray, for your presentation.

In your closing comments you said if you increase the percentage with Europe, then you decrease the other. But to what extent should we be looking to do that? If the U.S. is going through a downturn in its economy and we're tied so closely and so hugely with them, should we as a country be looking to diversify that trade and to give a bigger share to another part of the world to help insulate us? Or can we insulate ourselves from that type of situation, where whatever happens in the States eventually gets through to us?

Mr. John Murray: That's a good question. I have three thoughts.

First, this has been a long-standing concern in Canada. Discussion of what was called in the early seventies the “third option” has been around for a long time. The desire to diversify our trade, become less dependent on the U.S., has been a long-standing concern. Fortunately, all the movement has been in one direction against that. So clearly we're fighting a strong current.

The second thought, however, is that promoting trade with other regions in what I'll call an artificial manner, trying to fight what might be the natural current, could be useful in terms of the diversification you describe. It's like buying insurance. But I guess I'm suggesting it could be expensive insurance. It might be better to live with the partner you have, recognizing there are going to be ups and downs, as opposed to, in an artificial way, trying to fight against that and diversify your trade, where it would not be a natural outcome.

The third thought is that there are ways other than trade in which you can benefit from other countries' well-being, and that's mainly on the investment side. The way you can protect yourself if the U.S. goes down, but Europe, or even Japan in the future, does well, is by having more investments abroad, so that at least that part of your income stream is insulated. This doesn't all have to be through trade, in other words. There's the investment side you could benefit from. That might be a more efficient way of protecting yourself than trying to reallocate real resources towards trade and services further afield.

Mr. Rick Casson: Thanks.

The Chair: Monsieur Paquette.

[Translation]

Mr. Pierre Paquette: I wanted to know what you think of this. Given the fact that, in spite of freer trade and globalization, there seems to be a greater regionalization of economies rather than a real globalization, and since we are ever more dependent on the American market, keeping in mind the upcoming FTAA negotiations, a number of people, in Canada and Quebec, feel that there is no advantage to Canada being part of that agreement because, essentially, everyone in the Americas is chasing the American market. However, since we are already the United States' main trading partner, any gains made by Brazil, Mexico, and the other Latin American countries would be detrimental to Canadian interests.

This idea is gaining widespread currency. I would like to know what you think about it.

Mr. John Murray: You mean it would increase competition for Canada, perhaps.

May I answer in English? It would be easier for me.

[English]

That is a concern about this free trade for the Americas. We're already number one, as you mentioned, and don't stand to benefit as much. We already have a free trade agreement, we're already the United States' most important trading partner in the world, let alone the western hemisphere, and if Brazil and others come onside, it will only be to our disadvantage. There's a sense in which that's true, but I think there's a more important way in which it isn't. I'll explain.

• 1655

Trade doesn't have to be a zero-to-one game. Just because someone else benefits, it doesn't mean we lose. There is a competition that goes on for the American dollar. We all try to export to the U.S. But we also know that free trade and free exchange hold the potential for making most people, if not all people, better off. With Brazil, Argentina, and Chile doing better, in part because of free trade with the U.S., perhaps we'd have opportunities to engage in more commerce with them as well, so that as everyone develops, we all do better. And I think that's the sense in which enlarging the circle, as it were, ultimately benefits the global economy.

That's why there's not so much tremendous danger as a downside to bilateral trade agreements, like the one we negotiated with the U.S. in 1989. The effect wasn't as important in our two cases, because we already had most of our trade with the U.S. So it wasn't subject to as much trade “diversion”, as economists call it. But if you form a bilateral free trade agreement with a country, you naturally encourage more trade amongst yourselves and by implication discourage trade with other countries, which are disadvantaged. Some of those countries may have been more natural trading partners, able to provide greater efficiencies for you in terms of the products they'd sell you and better markets for your goods than the partner you've just signed up with.

So even as a free trade agreement with one country reinforces two-way trade flows between those two partners, you could, in a way, pervert global trade by directing it away from other countries with whom you would have had a more natural partnership. If you broaden the free trade umbrella, ideally through a WTO mechanism where everyone is involved, or if not that, something like free trade for the Americas, where you're casting your net wider, you give a better opportunity for these economic realities, these true advantages, to come forth. You're thus subject to fewer trade diversion problems.

That was a long-winded answer to your question.

I think there are some industries in Canada, some regions, that could suffer as a consequence, whose products would compete directly with those provided by Brazil, Argentina, and Chile. There'd be an adjustment period, a restructuring process. But ultimately, I think, everyone would benefit. There was a painful restructuring in some areas after the FTA, but we have strong evidence that Canadian manufacturers really did benefit.

[Translation]

The Chair: Have you finished, Mr. Paquette?

Mr. O'Brien.

[English]

Mr. Pat O'Brien (London—Fanshawe, Lib.): Thank you, Mr. Chairman.

Mr. Murray, thank you. I'm sorry I was late, but I was chairing a meeting on GATT, another trade topic.

I have just two or three brief questions, I think.

Following on my colleague Mr. Paquette's point, would you agree that one of the positive side effects of increased trade could very well be democratization and a more stable world? I'm thinking specifically of the Americas, where so few of the countries are, even now, stable democracies. Is it not true that increased trade would lead to more engagement with those countries, a chance for us to influence their values, a more democratic regional area of the Americas, and quite probably a situation where we have less conflict?

• 1700

For example, by engaging in trade with Cuba we've really been doing the smart thing and the U.S. hasn't, because post-Castro—there has to be a post-Castro—we would hope they would move towards democracy.

What are your thoughts on that premise?

Mr. John Murray: I'm no political scientist, but certainly it sounds persuasive. That's the hope. Of course you could think of other examples, not just the Americas—North Korea, China. We've worried about some countries because of human rights violations, the democracy deficit.

There's the sense that by helping them through trade, you perhaps broaden the base of an informed middle class that can more easily contest the lack of democracy.

Mr. Pat O'Brien: Because of FTAA, I singled out our own hemisphere.

Unless you did so earlier in your comments, I didn't hear you make any reference to the fact that the British have not adopted the Euro yet. It seems probable they will, but I wonder what your thoughts are on that.

As well, on the common currency, listed under your lessons for Canada is a greater interest in a common currency. Don't we have to be careful not to draw the direct analogy with Europe, where it's a situation of more or less equal partners, or more equal? Really, wouldn't it be just us adopting the American greenback? That's what the common currency would be.

I think a lot of Canadians would have concerns about that, and I wonder what your thoughts are.

Finally, can you help me on what you mean by “some `orphan' countries like Canada”? In what sense do you mean that?

Mr. John Murray: I'm glad you asked, because those questions give me a chance to talk about the last page of my notes, which I didn't really touch on.

To begin answering your last three questions, I should let you know that you're getting biased commentary in two senses. Maybe they're related. One is that I work for the Bank of Canada, and if we were to move to a common currency—

Mr. Pat O'Brien: You wouldn't have a job.

Mr. John Murray: I might not have a job. So there's some job protection involved.

Mr. Pat O'Brien: There's nothing wrong with that.

An hon. member: [Inaudible—Editor]

Mr. John Murray: I could have a better job, yes. It doesn't seem to have harmed job prospects or salaries in the European national banks, but....

The other point is that I've written a number of papers on this issue, essentially coming come down on the side of flexible exchange rates and separate currencies, defending the status quo—for now. We like to believe we're reasonable people, and if we could make a good case for a common currency, we'd hope that we'd have the sense to recommend it and that Canadians would adopt it.

We realize there's a lot of emotion attached to this issue. It isn't just economic. Unlike Europe, where the move to a common currency was part of a larger initiative to encourage political and social union, where in fact economists had to show just cause why it shouldn't proceed, I think the motivation and the situation in Canada would be far different. In order to offset what would be perceived by many as a political downside, economists would have to show overwhelming evidence that there was material benefit.

The U.K. is cautious. We've done some research on this, and it's interesting; it isn't just stubbornness and an island mentality. If you look at historical data on all the countries in Europe, and try to identify which countries are least suited to a common currency arrangement, three countries stand out. The countries that should probably not join because their industrial structures and trade patterns are so different are the U.K., Norway, and, to a degree, Sweden—and the Netherlands too, actually, although they did join.

We did this research before the decision was made in 1999. Interestingly, the two or three countries that decided to stay out were the ones that should, by our analysis.

• 1705

For the U.K. and Norway it's largely an oil energy story, unlike the rest of Europe, especially Norway, an important energy exporter. It's subject to very different shocks. Things that actually help Norway enormously, such as a positive energy price shock, hurt the rest of Europe. So its cycle is often going to be out of phase with the continent, and the last thing it might want to do is tie itself to a common monetary policy.

What's interesting from a Canadian standpoint is that this improves the experiment. You now have three sets of countries in Europe. You have a group of countries that have decided to join EMU with common currency—and you can look at what happens to their trade, investment, market restructuring efforts. Then you have the U.K., Norway, and Sweden, countries that still have floating exchange rates and have decided not to join. In the middle you have a country like Denmark, which has a fixed exchange rate but not a common currency—an even stranger choice.

So you have this gradation. On the one hand you have a flexible exchange rate and truly separate currencies; in the middle you have Denmark, which fixes its exchange rate but has a separate currency; and then you have the countries that have a common currency.

You can thus compare. It's not a perfect experiment, because there are other factors you have to control for, but you can kind of see how they do. How much do you gain just by fixing rates as opposed to floating them? Going beyond that, how much more do you get if you go all the way to a common currency instead of just fixing?

We appreciate the fact that some of these countries have stayed out, and in different ways. Right now it makes sense for the U.K., at least based on historical economic evidence. Looking ahead, you can make a case either way.

Mr. Pat O'Brien: Isn't Tony Blair making all kinds of noises that he's pro Euro? I don't know whether he would campaign on it necessarily, but from the little bit I've been reading about it, it sounds to me as though it won't be too long until his government will take them into the Euros.

Is that how you see it?

Mr. John Murray: You are probably as informed on this as I am, or more informed. I don't pretend to any special political knowledge or understanding of the U.K. From what I've read, you're right, Tony Blair and the Labour Party have been far more sympathetic to a common currency than the opposition, the Conservatives.

But even within the Labour Party there are divisions. The exchequer of the treasury, Gordon Brown, is more skeptical, more cautious. Prime Minister Tony Blair and Foreign minister Robin Cook are far more enthusiastic.

Interestingly, though, it's not just the politicians and the Labour Party who, on balance, are in favour of the common currency. If you canvass U.K. businessmen, a majority favour it. It's more the population at large that overwhelmingly doesn't want it. But that was the case in Europe as well. Polls regularly showed that German citizens and even French citizens were 70% opposed. But it didn't matter, it went ahead. That's not to say it's right or wrong, but there's a constituency there in the U.K. for a common currency.

Regarding lessons for us, you're absolutely right. The European situation is far different from ours. In Europe there were 12 countries, potentially 15, and five of them—Germany, France, Italy, Spain, and the U.K.—were of roughly equal size. All those countries got one vote in terms of monetary policy.

But in North America, even if the U.S. was willing to form a currency union with us—and it's not clear why it would want to—you can be pretty sure there wouldn't be one vote per country. If you look at the combined Canada-U.S. trade, the U.S. accounts for over 90%.

• 1710

There are 12 people who now sit on the federal open market committee in the U.S., making policy decisions. We might get one seat, so we'd be the thirteenth, but even then, we would be expected to vote on what was in the common interest of the combined economy of the U.S. and Canada. As good members, you're not there to vote your narrow regional interest.

So the situation would be different because there is one country that's so dominant. Effectively, we would be dollarized. Monetary policy for us would be determined by the use...which could be fine under two states of the world—one, if they always did a better job than us on monetary policy; and two, if the structures of our economies were such that we always happened to be subjected to similar shocks, so you always had the same monetary policy needs.

Often they are similar in the two countries, because we're so interrelated, but occasionally they aren't. There was a very important period just recently when this was true. That was during the Asian financial crisis, when world commodity prices fell. This was of tremendous benefit to the U.S. economy, but it hurt us enormously. It was a situation in which our two economies wanted to move in opposite directions. This was reflected in our exchange rate, which fell to new all-time lows. Our dollar depreciated. It was doing exactly what it should. It was doing exactly what it had to do to protect us. If we'd had a common currency, this would have been a very painful period not just for certain parts of the country, but for the country in aggregate. So there are times when the independence of monetary policy and the flexibility of the exchange rate certainly help us.

Finally, by “orphan” countries, I just meant—and you referred to this—the regionalization of the world. Even as everyone's becoming more integrated, subject to globalization, certain regions seem to be forming even tighter ties with one another than they had earlier. You can see it in Europe, obviously, with the common market and the Euro. You can see it in just the U.S. in that if other countries join it in a larger free trade area with maybe even a common currency, you'll have that bloc. And then you have Japan and the other Asian countries that may eventually come together.

Think of the G-7, the group of 7. We're sort of flattered to be the seventh member of that. And we deserve to be. We are the seventh-most-important industrialized country in the world right now. But we're just sort of holding on. France, Germany and Italy have already joined together through the EMU, so think of them as one. You have the U.S. and Japan forming two other blocs, so you have three big blocs incorporating five of the G-7 countries. And then you have the U.K. and Canada. Well, if the U.K. were to join the EMU, we'd kind of be an orphan. The G-7 will have effectively collapsed into a G-3 plus Canada, and it's unlikely we'd be able to maintain our membership in that group.

Some people worry about the Australias, the Canadas, and the Switzerlands of the world. What's life going to be like in a world where, increasingly, you have three big hegemonies, Japan, the U.S., and Europe? Is it going to be rough sailing? Some people see tremendous advantage in that and note that small countries have not necessarily done badly historically. Switzerland has done pretty well for itself, and just recently it again voted not even to join the EU, let alone form a common currency with the rest of Europe.

So being an orphan isn't necessarily bad, but it does create some uncertainty and some anxiousness.

The Chair: Thank you very much.

We still have three questioners, and I would say we have another 12 minutes. We'll move on to Mr. Eyking and Mr. Paquette.

Mr. Mark Eyking: Just as an observation on Europe, they seem to go slowly and steadily with their economy. The Eurodollar doesn't seem to be taking great leaps and bounds, but there are reasons for that. They're not as flexible with their labour market. In the United States, they slash, they do a whole bunch of layoffs, and then there's a big boom and bust. So if you look over the longer picture, sometimes Europe just keeps chugging along in that way.

• 1715

I wouldn't underestimate the Europeans, because for a lot of these poorer countries, such as Greece or whoever has just come in there last, they're kind of waiting for them to catch up—and you probably realize that. At the end of the day, I think they're on the right path.

We're having a lot of discussion in the Commons about agricultural issues. If we had a common currency in North America, we'd have to have a lot of systems similar to those of the States, because that's what they do in Europe. Take labour laws and agricultural policies. In order to keep it all under the umbrella, they have the same ones. We would have to have the same subsidies and the same things as the States would if we had a common currency, wouldn't we?

Mr. John Murray: I don't think so. This is an important and common misperception. I think people credit more to a common currency than it is owed. I can understand the misunderstanding, because the common currency in Europe is part of a much broader program into which they moved even years ago. Even before they had a common currency, they'd moved to a common agricultural product, to common markets, to the free flow of labour and capital.

It's very easy to think of this as one package—if you have a part of it, you must have all of it—but there's nothing about a common currency that would force you to do anything.

Mr. Mark Eyking: Common policy.

Mr. John Murray: You just have a common currency. You'd have a common monetary policy, but that would be it.

It's similar to the free trade debate: if we have free trade, we'll have to have a common social policy or harmonize with the U.S. Well, you don't.

Economists regard free trade as a very interesting test. If Canadians really valued their social programs and their subsidies, they'd be willing to pay for them in the form of higher taxes and lower after-tax income. Provided they're willing to do that, there's no reason they can't compete with anyone. But you can't have it both ways. You can't have the subsidies and the social programs and still want U.S.-style after-tax incomes. The interesting test is that you have to be willing to pay for them, but there's nothing about free trade that forces you to sacrifice or go one way versus the other.

Mr. Mark Eyking: One more part of that is the financial institutions. Would we be better off as consumers if we started opening up more with the States through the Bank of Canada?

Mr. John Murray: Here I'd have to speak very personally and not as a representative of the Bank of Canada—not that some of my feelings might not be shared.

Personally, I think that, just as with free trade in other areas, as well as free right of establishment, a more open policy would have a lot to recommend it. You need safeguards in the form of ensuring financial stability, but provided you can pick and choose which institutions you allow in, which is something you always have the right to do, there's no reason we couldn't operate like other countries, like the U.K., like the U.S., which are much more accepting of foreign financial institutions to promote competition and efficiency.

Mr. Mark Eyking: That's your personal opinion.

Mr. John Murray: That's going further than policy.

The Chair: Thank you, Mr. Murray, and thank you, Mr. Eyking.

[Translation]

Mr. Paquette.

Mr. Pierre Paquette: I would like first to make a short comment.

I think this matter should be the subject of a more serious debate in Canada. If we think there may be a move towards a common currency, if we want to avoid dollarization, then Canada will have to be proactive. More and more South American countries are moving towards adopting the American dollar. Therefore, we might end up being stuck with dollarization, if we don't take advantage of the time that we have now to negotiate a Canadian presence as well as the participation of other countries in a bank of the Americas, to think about the transition, etc.

Therefore, I think we need a serious debate on this issue, because the greater the economic integration, the greater the pressure will be. It will come from the corporations. We know that a company such as Alcan does all of its accounting and all of its trade in American dollars.

You might want to add something to that. That is one aspect that you did not touch upon, and I would like to hear what you have to say.

• 1720

You are correct in saying that the growth rate in the European Union was lower than that of the United States. The economies were integrated at different levels, but one of the long-term successes of the European Union is perhaps its capacity to cause countries such as Ireland, Greece, Portugal and even Spain—I mustn't say that too loud, because the Spanish don't like it—to raise all of their economic infrastructures.

There is a certain convergence of the economies that has slowed the average growth rate in the European Union, but it can bring about a greater development potential than has been the case over the past few years in Europe.

Mr. John Murray: Precisely.

[English]

We hope they do well. Indeed, there's every reason to expect them to do well as their economies begin to converge, hopefully like ours, to something like U.S. levels of income and growth. They are starting in many cases from a lower level and have a lot of potential, so the future could be very promising if they introduce the right policies and liberalize their markets the way the U.S. has done. That is not to say you have to copy the U.S. in everything, but I think there are some lessons there—some reasons why they have done so well and other countries have not done as well.

But Europe shows every intention of copying...learning some of those lessons. We hope they do well. I think they will, and we want to ensure that we don't do anything that would reduce or in any way inhibit our ability to benefit from their success, in a sense, or to inhibit trade relations with them. We want to be encouraging. We want to make sure that we aren't overtly or perhaps unintentionally frustrating trade relations with Europe.

I guess my earlier comments were just to say that, historically, if you had to choose one or the other, it's probably just as well that we were sitting beside the U.S. as opposed to Europe and to beware of.... Even while it makes sense to remove barriers and encourage trade in terms of informing one another, you don't want to go to great lengths to provoke or promote what would be an artificial arrangement in which, for example, you subsidize exports to Europe just as a way of establishing greater diversity. There's a difference between encouraging as opposed to subsidizing or redirecting trade in an artificial way. I was really just warning against that.

On your first point, I realize it was more of a comment on the common currency. I would just like to note that certainly I don't preclude the possibility of North America sometime in the future moving to a common currency as the most sensible solution if our economies become integrated to a point where that makes sense and similar enough that a common monetary policy wouldn't hurt. Maybe in fact we have underestimated the microeconomic advantages of a common currency in terms of reduced transaction costs. Certainly we are prepared to be informed by the European experience as well as others, so I wouldn't preclude that.

Indeed, I wouldn't preclude the world from moving to a common currency at one point if we become integrated enough. It isn't just sets of countries. You could imagine a world where, just like nationally it makes sense for every province to use the same currency for efficiency reasons, why not the world by extension? I just don't think it's going to happen right away.

This is another boat that I'm not worried about missing. If South American countries are racing to dollarization, many of them are doing it because of disastrous domestic policies. For them it makes a lot of sense, because I would trust Greenspan more than, historically, many of their finance ministers or central bank governors. They just have a very sad track record. They have different reasons for wanting it. Basically they distrust themselves and their ability to conduct policy, so they want the discipline. They view that as a virtue.

• 1725

I'm not sure all of those countries are as eager to join the dollarization initiative as some accounts suggest, so I'd wait to see the evidence. Even if they do, I guess what I'm saying is, I think we're in a different situation, and I wouldn't be stampeded into that decision just because others are making it.

[Translation]

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

[English]

With your permission, Mr. Murray, our economist, Mr. Berg, has a couple of questions for you.

Mr. John Murray: Oh, yes.

Mr. Peter Berg (Committee Researcher): Last and definitely least, I'm sure.

First of all, thanks for coming, John, on such short notice.

I have three questions. First, your graph 6 shows that over 50% of our exports to Europe are in the form of raw materials. This is a little bit higher than the share in the U.S., which is about 41%.

You've also told us that we have a comparative advantage, and this isn't necessarily a bad thing to do. There are two problems in Europe. One is that we seem to have an image problem. This subcommittee has been told that we have an image problem in Europe, that we are seen as hewers of wood and drawers of water. There's a focus now by ministers and by officials to rebrand ourselves in Europe. Mr. Martin has been over there. Mr. Tobin has also been there.

The second problem is that we have a lot of irritants with Europe, and they seem to be in these raw material areas—agriculture, wine, asbestos.

Do you think this rebranding exercise is wrong, or do you think we have a comparative advantage and should export but also try to encourage the high-tech community, which is a very active community, and sell ourselves as a high-tech centre? So that's number one.

Two, in terms of investing over in Europe, we have a very good success story. Our growth in investment in Europe has been just as high as it has been in the U.S. recently, if not higher. I think two-thirds of that is in the U.K. and Ireland, if I'm correct.

What do you see as a rationale for that? Is it to go behind tariff walls? Is it because the high-tech community is suddenly saturated in the U.S. market, so they're expanding into Europe? Is it to be close to customers?

Finally—and this is a lot of questions—should Canada be concerned at all with the EU enlargement? Should we embrace it or should we fear it?

Mr. John Murray: Those are good questions as well. I'll take them in the order you gave them. It will give me more time to think about the EU enlargement question, about which I have fewer thoughts.

On the image problem and the rebranding, do I think it is a mistake? I guess I would say no. To the extent that there is a misperception, there is an information problem there, I think there's a good case for public intervention in the sense of overcoming this information problem, letting people know that we aren't just hewers of wood and drawers of water.

But I wouldn't want to go too far. I wouldn't want to miscast ourselves either. We need to recognize that we have a diversified economy that benefits from both, and that's an advantage. It isn't as though we are just concentrated in high-tech products, which can be hazardous, as we have discovered, and it isn't as though we are just concentrated in oil, lumber, and agricultural products. We have the benefit of both, and I don't think we should be embarrassed about speaking to both instead of just thinking it has to be one or the other. There's obviously something more sexy about cars and computers, but there isn't anything inherently better about them in an economic sense.

So once again, I think there's potential advantage to informing, or advertizing, but I wouldn't want to take it to the point where we are actually embarrassed about the other side of our economy and undersell that. The idea is to make foreigners aware of what you have to offer and capitalize on your comparative advantage, your comparative advantages. It isn't necessarily just one thing.

• 1730

So I don't think it's an either/or story. I don't think we should be embarrassed about the old economy, which in a Canadian context has often been raw materials. You'd be crazy to pretend you didn't have them.

Investment in Europe has been very high recently, especially in the U.K. and Ireland. We aren't the only country that has been investing in the U.K. and Ireland as if there's no tomorrow. There are certain advantages to those two countries. In the case of Ireland there are the obvious tax advantages. In the case of the U.K., they had the most flexible, liberal labour markets, unlike continental Europe, so there was an advantage that way. The U.K. and Ireland have done better than virtually every other country on the continent in terms of real growth over the last few years. So just for that reason there was an obvious incentive.

I spoke earlier about the importance of what I called deep-seated or underlying institutional factors. Here I'm thinking of language and custom.

One of the other mysteries that economists try to explain is although they have very little trade with one another, the Australian and U.S. economies tend to move in a very similar cycle, and even though the U.K. and the U.S. have very little trade with one another in a relative sense compared with other countries, they too tend to follow very similar cycles. There is something out there that tends to link, and it's hard to put your finger on it. Often it does manifest itself on the investment side, and I think that's part of it. But as I noted at the beginning, we're not the only country, and it isn't just a type of Anglo alliance. Certainly, the Japanese have favoured the U.K., notwithstanding their strong currency, as an investment home, just as a more friendly business environment, I think, in many respects.

So continental Europe has some ground to make up in terms of restructuring and liberalizing in order to make themselves more attractive.

On EU enlargement and whether or not it's a threat, certainly the Europeans themselves are viewing this with mixed emotions. There's an idea of wanting to bring them in, but what does this do to our farmers and our industries? They're at very different stages of development. It produces more tension. There's a sharing of power that complicates life.

I think some of these same issues come up from a Canadian perspective. Some of these countries might compete more directly with us for certain products in European markets. But many of these countries are already doing it, so I think this would be very much at the margin. The bottom line for me is I don't think there's much in it that they're going to enlarge. 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. We also talked about that. 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 Chair: Thank you very much, Mr. Murray, for your excellent presentation. I want to thank my colleague for giving us the opportunity to hear you today.

I'd like to remind members that on Monday, March 19, at 3:30 p.m. the minister is going to appear before the subcommittee, so please make sure you are here, if you can be.

As well, we are looking at possibly having a meeting on softwood lumber sometime between March 19 and 28. Stay tuned, and our clerk will communicate with you on this.

With this, we will bring the meeting to a close. Have a nice evening.

The meeting is adjourned.