Welcome, ladies and gentlemen. We'll start the 19th meeting of the Standing Committee on Industry, Science and Technology and continue our study of the manufacturing sector.
Before I turn to our witnesses, I want to welcome a very special guest at the committee. Dr. Isolde Victory is head of research services at the House of Lords in Britain, and she will be observing the committee for about thirty minutes, I believe. She is here for about ten days to observe how the research services work. She is leading a project to review the House of Lords library research services in light of its own development plans and its changing client base.
Dr. Victory, would you stand up and be recognized by the committee?
Some hon. members: Hear, hear!
The Chair: Dr. Victory is observing the excellent work done by our analysts and researchers.
I want to point out to members that a briefing book on manufacturing should have been sent to your offices. I hope you've received it. If you haven't, then certainly contact me or the clerk.
I'll move right to our witnesses, and I'll start with the Canadian Association of Railway Suppliers. We welcome Glen Fisher, who's with the board of directors; Jay Nordenstrom, the director of government and industry affairs; and Rachel Pereira, the associate director of industry affairs.
After opening presentations of about ten minutes, we will go right into questions from the members.
Mr. Fisher, I believe you are making the presentation on behalf of your association. Please go ahead.
:
It's an honour to be invited to speak to members of Parliament, members of this committee. I thank you for the invitation, and I'm impressed with the fact that there are probably people here who know as much about railways and transportation as I do. I will include that importance in my presentation and my explanations.
The Canadian railway sector is of key importance to the Canadian economy and Canadian development. As all Canadians are aware, the country really was knitted together by the railways. The railways account for moving something like 24% of all of the exports from Canada, and quite a large proportion of internal freight, about 60% on a tonnage basis, moves by rail.
One of the lesser-known things about the rail industry in Canada is that through all of the debate and discussions and changes in technology and infrastructure, we actually do have the most efficient railways in the world. Canadian freight rates are slightly lower than the U.S., and that really is what puts us in the category of having the lowest per tonne kilometre freight costs in the entire world. We really do have efficient freight railways.
Another important part of that, of course, is that some of our products, such as grain, have to move further to port, to ocean, to tidewater, in Canada than in any other country in the world, except possibly Russia. For these reasons we really have to stay on our toes to be competitive all of the time.
The Canadian Association of Railway Suppliers is an association with about 130 members out of about 500 small and large--some very large--manufacturers and supply organizations. We supply the services and products that keep the Canadian railways running. A great deal of our effort in maintaining our market with our own railways is keeping on our toes in providing innovation that is specific to the Canadian railway needs. Again, that relates to things such as fuel efficiency, being able to operate in the winter, having products that will work in minus 40-degree, minus 50-degree temperatures. Indeed, some of the lowest recorded temperatures in Canada were in northern Ontario, in the minus 70-degree range. To have lubricants and airbrake systems that will operate in those temperatures is no easy task, but our railways do it, and we are the people who provide them with the material and equipment that make that possible. We're also fortunate to be able to export to other countries. Of course, the United States is one of our largest sources of business as well.
The Canadian Association of Railway Suppliers members total over 60,000 employees. There's a big labour pool involved. We probably have more employees than the railways themselves. That is to say the labour that goes into making components, everything from paint to consulting engineering, that the railways use represents even more labour than the railways themselves.
Everything the government does in relation to transportation legislation, industry legislation, tax, and so forth affects our members and our industry. It's important that we cooperate with each other.
I'm very pleased that this is really our first presentation to your committee, and I hope we'll be invited frequently as things change in the future.
We have a list of things that we consider shortcomings or disadvantages in existing government policy. One of the things that is hurting us now that free trade has evolved is the capital cost allowance for tax purposes, depreciation for tax purposes, of railway equipment. The reason this is hurting us is that there's a big difference between the writeoff rates in Canada and the United States.
With a lot of our equipment being acquired on either side of the border, and the U.S. railroads also buying in Canada, the leasing companies are seriously affected by this difference in the capital cost allowance.
If a U.S. leasing company is leasing equipment to a Canadian railroad for a particular purpose, chances are that they will not only buy their equipment from a U.S. supplier, but neither the Canadian government nor our association will see much in the way of income taxes and so forth from that industry. We won't see any employment from it. So it's a negative incentive to do business in Canada in terms of equipment purchases.
We would like to see matching of the capital cost allowance with that of the U.S. for railway equipment.
We need to invest in environmentally sustainable transportation, that is to say, to continue to improve our fuel efficiency. We already, on a tonne-kilometre basis, are about 500% better than trucks. That is, we use about 20% of the fuel that trucks use for the same tonne kilometres.
This all has to do with the equipment, the roads, the tires, and the steel wheels on steel rails, which have substantially less friction, and so forth. Also, we have very much bigger engines in our locomotives that are more fuel efficient. That's an important factor. Over the last twenty years, the railways and the railway equipment manufacturers have squeezed another 7% efficiency out of locomotive fuel consumption for the same tonnage of freight movement. And we see other improvements possible.
We need to look more at using environmentally friendly fuels, such as biodiesel. It has been done experimentally. It works. It's exactly equivalent in performance to petroleum diesel, and it's certainly readily available in Canada and is a sustainable fuel; it will be there forever. We can use it and we can grow it. We get it as waste fat from animal processing, and there are many sources. In fact, a subsidiary of Maple Leaf Foods in Montreal is the biggest producer of it in Canada.
So there are things like that that are important to research and development.
Commercialization of research is important to us; that is to say, we would like to see our own members more involved in innovation and research. Programs such as the freight incentives program didn't have a very large budget, but it was a step in the right direction.
If other programs, such as the rail technology development fund, could be directed to suppliers' research that the railway equipment companies can perform, that would be a very, very positive application of funds released from the fuel tax.
And last, I'd like to mention the scientific research and experimental development tax incentive program tax credits. Some of our members have used those extensively. This is the nice thing in that when a tax credit helps a company justify spending money in R and D, and then, when the R and D is completed the product is developed and sold, the money certainly comes back to the government in the form of economic progress and taxes on the earnings from those products. So it's a nice feature.
But our request would be that it be made easier to use. That is to say, perhaps Industry Canada could be the intermediary for acquiring those tax credits, because at the present time, the tax auditors in CRA really don't know much about the industry, and their approach has to be a defensive one wherein they're defending reducing these credits or vetting them so they're reduced in size and magnitude, even though they were approved in the first place and the company has gone ahead and done the development. I don't think the tax people would be upset by having that responsibility moved over to Industry Canada, because it really is a nuisance to them too. They don't have the qualified people to evaluate these.
That's a very quick summary of our industry thoughts and needs. I hope we'll be able to have some interesting discussion and answer any questions you may have.
:
Thank you very much, Mr. Chairman.
We are certainly pleased to have this opportunity to brief you on the Canada-Korea free trade agreement negotiations, for which I lead Canada's negotiating team.
Joining me today are some colleagues from the Department of Foreign Affairs and International Trade: David Plunkett, the director general for bilateral and regional trade policy; Marvin Hildebrand, director of the bilateral market access division; Kendal Hembroff, deputy director of the bilateral market access division; and Cam MacKay, deputy director of the regional trade policy division and also the deputy chief negotiator for the Canada-Korea talks.
[Translation]
Before going into greater detail about the Canada-Korea Free Trade Agreement initiative, allow me to give you some background.
Committee members are well aware of the importance of trade for the Canadian economy. In fact, almost one job out of every five in Canada is trade-dependent. To maintain job growth in the country and to ensure prosperity, we must open our markets and create more opportunities for Canadians to do business abroad. Unfortunately, all WTO negotiations were suspended in the summer, and we still do not know when they will resume.
[English]
At the same time, Canada's key competitors are now accelerating the already aggressive pace of their bilateral negotiations. They are seeking, and obtaining, preferential access to dynamic markets around the world, putting Canadian firms at a competitive disadvantage.
As Minister Emerson said on a number of occasions, Canada has not been keeping pace on this front. For example, since the WTO negotiating round was launched in late 2001, the United States has concluded FTAs with 15 countries while Canada has concluded none. In fact, we're the only significant trading nation that has not concluded a single FTA in five years.
While some have suggested lately in the media that this does not matter and constitutes a poor rationale for pursuing FTAs, the reality is that our relative performance in negotiating FTAs can and does have a material impact on the competitiveness of our firms in foreign markets. This is not an academic concern to our exporters or investors. Canadian companies are already telling us they're losing markets, and they're losing sales in foreign markets, due to the FTAs of other countries. They're calling on the government to level the playing field.
Looking ahead, while we'll continue to strengthen our NAFTA ties and work to secure a successful outcome to the WTO talks, at the same time we have to put greater emphasis on our regional and bilateral agenda, including initiatives such as the Canada-Korea FTA negotiation, which I'll turn to specifically now.
With a population of 48 million and a GDP approaching $1 trillion, Korea is the largest of the four Asian tigers and already the world's eleventh largest economy. That makes this the most ambitious bilateral FTA negotiation that Canada has launched since NAFTA, more than ten years ago. What we're seeking is a comprehensive, high-quality agreement with Korea, modelled on NAFTA.
In the core area of market access for goods, services, and investment, we're seeking ambitious liberalization and comprehensive coverage. A particular area of emphasis with Korea continues to be on non-tariff barriers, such as regulatory and transparency issues, which have been identified by our stakeholders as important impediments in the Korean market. Fundamentally this initiative is about enhancing opportunities for Canadian business.
Why Korea specifically? For starters, Korea is a large, prosperous, and fast-growing market for Canada, strategically situated in one of the most dynamic economic regions of the world. Korea is already Canada's seventh largest export destination. In fact, we exported more to Korea last year than we did to Brazil, India, and Russia combined.
Korea is also becoming a major services market for Canada, with over $700 million in services exports last year, and two-way investments stand at $1.1 billion. An FTA with Korea could generate much more two-way business by dismantling the tariff, regulatory, and other barriers to commerce that limit opportunities.
Korea continues to maintain relatively high tariffs, 13% on average, versus only 4% for Canada. Therefore, the elimination of tariffs in an FTA would generate substantial opportunities for Canada and, one could argue, would have a disproportionately favourable impact on Canada.
The Korean market is particularly important for the agriculture- and resource-based segments of the economy, with an FTA expected to generate gains in areas such as agrifood, fisheries, metal and metal products, a wide range of forestry and wood products, and coal and other minerals.
In the agriculture sector alone, Korean tariffs average around 53%, substantially higher than Canadian tariff levels. In the fisheries sector, Korean tariffs average 18%, while ours are a little over 1%. So eliminating Korean tariffs would clearly provide major opportunities for Canadian exporters.
We also expect gains in a variety of industrial and manufacturing sectors, including chemicals, aerospace and urban transportation equipment, fertilizers, auto parts, pharmaceuticals, cosmetics, prefab buildings, environmental goods, and machinery and equipment, to name a few.
I believe these are some of the sectors that this committee has been looking at.
As well, we believe there are opportunities in the services sectors of the economy, where 80% of new jobs are created in Canada today. Some examples include financial, high-tech, and environmental services.
An FTA would also provide a more secure and predictable climate for Canadian investors in Korea and would assist in attracting Korean investment to Canada. That in turn would help open doors for Canadian businesses in neighbouring markets, such as China and Japan. Intraregional trade has been growing exponentially, so Korea could become an important entry point for Canadian companies.
[Translation]
As I said earlier, Canada's bilateral FTA program is also guided by the need to ensure that Canadian companies can face competition on an equal footing.
Korea is perhaps a newcomer in the world of free trade agreements, but it has already signed agreements with 15 countries in recent years and is actively attempting to negotiate others with several other countries. The free trade negotiations currently underway between Korea and the United States are of course of specific interest to Canada, given how integrated our industries are in certain sectors, like the automobile industry and our aggressive competition with the United States on world markets in agriculture for instance.
More recently, we have learned that Korea and the European Union are considering the possibility of negotiating a bilateral trade agreement. There is no doubt that that raises the stakes for us and highlights the importance of preserving Canada's competitiveness in this important market.
[English]
Where are we now? Since launching negotiations in July 2005, we've held seven rounds of talks with Korea at roughly two-month intervals. The most recent round of negotiations was just last week here in Ottawa and the next is scheduled for the week of November 20 in Seoul.
We've made good progress to this point, but we're now touching on the key sensitivities on each side. Canada is pressing for improved access to Korea's highly protected agriculture, fish, and forestry markets, and Korea is seeking faster cuts to Canada's tariffs in sensitive manufacturing sectors such as autos. There's no deadline for concluding these talks, and Minister Emerson has made it clear that our emphasis is on seeking a good agreement with Korea, not a fast one.
Let me now turn, if I might, to the auto sector, the area of this negotiation that clearly has attracted the most attention here in Canada. Given the importance of the auto sector to the Canadian economy and to our overall trading relationship with Korea, the government has devoted particular attention to issues involving this sector and this negotiation.
We've set up a working group within the negotiating structure with Korea focused exclusively on automotive issues, and to support the negotiations at the table we've established a dedicated automotive consultative group here in Canada. The group meets regularly to ensure that industry views are well understood and reflected to the extent possible in our negotiations. The work of this group has been supplemented with additional meetings with industry at all levels.
Just this morning Minister Emerson had his most recent discussion with auto industry representatives on a range of trade issues, including the Korean FTA. Two weeks ago the minister had what I would characterize as a positive and constructive meeting with a delegation from the Canadian Auto Workers, led by its president, Mr. Buzz Hargrove.
So there's been no shortage of dialogue with the industry, and their views have played an important role in shaping our approach to this negotiation from the outset. For instance, Canada's automotive sector has expressed concerns regarding a range of non-tariff barriers in the Korean automotive market. That's why the government has made addressing non-tariff measures a key priority for us in the negotiations.
At the same time, Canada's domestic automotive industry has expressed concerns regarding the potential impact of eliminating Canada's automotive tariff in the context of a Canada-Korea FTA. Members of the committee may be aware that in September the government released two studies that conclude that any negative impact on the automotive sector from an FTA with Korea would be very limited.
The first study, mentioned by the chairman, was conducted by Industry Canada and estimates a decrease in Canadian production on average of less than 1,000 units per year, which represents 0.04% of the 2.6 million vehicles we produce in Canada each year.
The Industry Canada assessment is supported by a second study commissioned by Foreign Affairs and International Trade Canada and carried out by Dr. Johannes Van Biesebroeck from the University of Toronto, a respected academic who specializes in economic analysis of the automotive industry.
Like the Industry Canada study, Professor Van Biesebroeck concludes that a Canada-Korea FTA would have only a modest impact in terms of additional imports from Korea, less than 10%, and that this would come largely at the expense of other imports. The study therefore concludes that an FTA would result in only a fractional decrease in Canadian vehicle production of 2,137 vehicles, representing 0.08% of production.
At the same time, the study projects that Canadian automotive parts exports to Korea stand to benefit from tariff elimination and forecasts increased Canadian exports of between 8% and 12%. The central conclusion of both studies that there would be little impact on Canadian production reflects a variety of factors: the low tariff, 6.1%; the preponderance of imports in our market, which account for about three-quarters of sales; and the fact that Korea has only 8% of the market by volume.
:
Thank you very much. Yes, we would note that the conclusions of the CAW study were diametrically opposed not only to our study but to the study that was carried out by Professor Van Biesebroeck.
I will say that our economists have had a chance to take a look at it and have identified quite a large number of methodological weaknesses with the study that was carried out by the CAW. I'll just mention a few.
The CAW assessment excluded agriculture. It's the sector where we would expect to see some of the greatest gains in an FTA, so obviously this skews the results.
The CAW assessment assumes, in effect, that Canada isn't trading with anybody else; that every dollar in increased imports from Korea necessarily comes at the expense of Canadian production. Well, we know that isn't so. In fact, in the automobile sector in particular, where three-quarters of the domestic market is from imports, one would expect that incremental imports from Korea would largely displace other imports, not domestic production. But that whole aspect was not covered in the CAW study.
Getting to the very high job loss figures they got to, which captured all the headlines, was not based on an analysis of Canada-Korea trade at all; it was basically an extrapolation of the total change in our trade with all of the countries with whom we've had FTAs since the beginning of those FTAs, and that number was grafted on to our current trade with Korea. This assumes there are no factors involving the increase of trade other than the FTA—growth in the economy, currency changes, terms of trade, technological improvements, and so forth.
So, for example, our imports from Chile, with whom we have an FTA, are up significantly, but more than half of that is because of the rise in the price of copper. Well, in their analysis, that immediately gets grafted on to a presumed increase in imports from Korea.
I could go on. The whole premise, though, is based on an essentially mercantilist view of the world, where exports are good and imports are bad, and that's not a perspective I think we would share. What most economists would say is that the economic efficiency gains that should arise from an FTA are the result of increased exports and imports.