CIIT Committee Report

INTRODUCTION

The trade relationship between Canada and the United States remains the largest bilateral trade relationship in the world. In part for this reason, the relationship should be continually monitored to ensure that it is as easy and low-cost as possible for legitimate goods, services and people to cross the shared border.

In response to the recent global financial and economic crisis, the U.S. Administration faced pressure to impose protectionist measures on its trading partners. The Buy American provisions in the American Recovery and Reinvestment Act of 2009 are an example of such protectionist measures, and they temporarily limited access for Canadian companies to U.S. state and local procurement markets. The emphasis on security in the United States following the terrorist attacks of September 11, 2001 has also led to what some consider to be a “thickening” of the Canada-U.S. border in the last decade.

It is in this context that the House of Commons Standing Committee on International Trade travelled to Washington, D.C. on March 1 and 2, 2011. As with past visits of the Committee to Washington, the focus was not the identification of new trade and investment opportunities, but rather the education of U.S. elected officials and representatives from the U.S. federal government and Administration (hereafter, officials, unless otherwise specified) about the value of the trade relationship with Canada as well as the degree of integration of the markets, supply chains and economies of the two countries. The visit also provided an opportunity to raise awareness in the United States about existing impediments to trade between Canada and the United States as well as to promote Canadian interests on key issues.

The specific objectives of the Committee’s mission to Washington were to exchange views on the current state and the future of trade relations between Canada and the United States as well as to highlight Canada’s position on some key trade issues, such as the efficient movement of goods and people at the Canada-U.S. border, government procurement and selected agricultural issues. To meet these objectives, the Committee met with members of the U.S. Congress, U.S. officials, and a research institute with an interest in the trade relationship between Canada and the United States.

This report summarizes what the Committee heard, learned and conveyed during its two days in Washington.

THE BILATERAL RELATIONSHIP

Canada and the United States are each other’s most important trading partner. In 2010, Canada’s bilateral merchandise trade with the United States totalled $501.4 billion, consisting of $298.5 billion in Canadian exports to, and $202.9 billion in imports from, the United States. That being said, the United States is falling in importance as a trading partner for Canada. The United States accounted for 75% of Canada’s exports in 2010, down from a high of 87% in 2002. Similarly, one-half of Canada’s total imports in 2010 came from the United States, down from a high of 68% in 1998.

While the Canadian economy is relatively small compared to the U.S. economy, trade with Canada has a considerable impact on economic prosperity in the United States. More than $1.6 billion in goods and services as well as 300,000 people cross the Canada–U.S. border every day. It is estimated that more than 8 million U.S. jobs depend on trade with Canada. In 2010, Canada was the most important foreign export destination for 34 U.S. states. Furthermore, Canada is the largest supplier of oil, natural gas, electricity and uranium to the United States.

The predominant message that the Committee heard in Washington is that Canada is perceived positively in the United States. A majority of the people with whom the Committee met understood the integrated nature of many supply chains in Canada and the United States as well as the reasons why trade facilitation is in the interest of both countries.

That being said, in terms of trade issues, many of the members of the U.S. Congress that the Committee met, particularly newly elected ones, were surprised to learn that Canada and the United States are each other’s largest trading partner. The Committee noted that there is a lack of appreciation of the importance of the Canada-U.S. trade relationship. At the moment, China is the main focus of policy makers, including members of the U.S. Congress, on trade issues, as evidenced by some government actions and bills, such as the proposed Foreign Manufacturers Legal Accountability Act of 2010.[1]

Committee members were repeatedly told that the U.S. Administration’s objective to double U.S. exports within five years should provide Canada with an opportunity to increase trade with the United States further and to encourage stronger cooperation in the removal of existing bilateral trade barriers. In accordance with the Executive Order issued by President Obama on March 11, 2010 that set outs the objectives of the National Export Initiative, federal departments and agencies are ordered to work towards the removal of trade barriers abroad, among other things. The Committee heard that this initiative should not only facilitate discussions to address bilateral trade irritants, but also provide a chance for both countries to work together in overcoming the hurdles to entering third-country markets.

A clear message the Committee received during its visit is that it has more work to do in reinforcing how important the Canada-U.S. trade relationship is, not just for Canada, but also for the United States, many U.S. enterprises and U.S. jobs. The Committee has more work to do in communicating the facts of the relationship to illustrate that importance. In that regard, new members of the House of Representatives need particular attention. According to the people with whom the Committee met, the meetings undertaken by Committee members with their congressional counterparts are an effective and efficient way to achieve this goal.

On the issue of educating U.S. decision-makers, the Committee was briefed on the annual Rising State Leaders tour organized by the Embassy of Canada in Washington. Launched in 2006, the program provides U.S. state leaders with an opportunity to participate in a working tour of Canada that lasts from seven to ten days and that enables them to meet with Canadian counterparts, business contacts and cultural representatives. In cooperation with provincial governments, the program is designed to foster relationships with U.S. leaders at the state level while providing participants with a deeper understanding of the Canada-U.S. relationship. Participants are nominated and selected by the Embassy and the Canadian consulates in the United States. Past alumni include several members of the U.S. Congress and U.S. state legislatures.

BORDER MANAGEMENT AND SECURITY

The “thickening” of the Canada-U.S. border was a central element of all of the Committee’s meetings in Washington. The Committee learned that border issues, including border-thickening measures, are also a primary concern of officials and many members of the U.S. Congress. As a result of the terrorist attacks of September 11, 2001 and experience with the border that is shared with Mexico, border issues are often considered from a different perspective in the United States than in Canada. In that context, the Committee was told on numerous occasions that Canada often becomes “collateral damage” in the fight to secure the U.S.-Mexico border.

While border security is a predominant U.S. focus, the importance of the trade relationship between Canada and the United States was acknowledged by all parties with whom the Committee met. Discussions in this area highlighted the interdependence of the two countries’ economies, security issues that sometimes unnecessarily take precedence over trade, and the efficiency of border crossings for people and goods, including the recently proposed U.S. customs user fee for Canadians travelling by air or water to the United States.

A key message that the Committee repeated to officials and members of the U.S. Congress is that Canada and the United States have many integrated supply chains. Members of the Committee reminded their U.S. counterparts that, because of this interdependence, U.S. legislation that affects trade with Canada also affects American firms. The Committee was provided with a specific example of a beef processing plant in Nebraska that had to close as a consequence of the U.S. decision to prohibit imports of cattle and beef from Canada in 2003. It was also noted that legislative measures that are aimed at other countries, such as China, can have negative consequences for Canadian exports to the United States, and thus for American firms supplying Canadian exporters.

During its visit, the Committee heard several examples of the integrated nature of many supply chains in Canada and the United States, and of the importance of facilitating the movement of goods and people between the two countries. The U.S. beef industry, with Canadian animals being exported to the United States for processing, the manufacturing of the large trucks required for oils sands extraction in Alberta, with wheels manufactured in South Carolina and engines built in Indiana, and the automobile industry, with cars crossing the Canada-U.S. border several times during their assembly, were examples that were brought to the Committee’s attention.

The Committee conveyed the message that, in many industries, the market is “North American” in scope; consequently, it is in the interest of the two countries to facilitate cross-border trade while at the same time ensuring the security of both countries. The Committee received positive responses to this message as well as commitments from members of the U.S. Congress and Administration officials to continue to work with Canada on the removal of unnecessary trade barriers.

The Committee was told on a number of occasions that the security and safety of citizens remain a key responsibility of governments, and that more cooperation between the countries on security concerns is welcomed. Moreover, the Committee was informed that there is a need for Canada and the United States to increase their collaboration in respect of finding and arresting people involved in illicit and criminal activities. Both the Committee and some U.S. participants highlighted that security threats can also be domestic. The Committee welcomed these suggestions for greater collaboration but reiterated the belief that the United States should treat its borders with Canada and Mexico differently on security matters. Committee members and the people with whom they met agreed that a number of border-related issues, such as trucks being delayed at the border because a border office is closed, should be easily resolved.

As bilateral relations consist of more than goods crossing the shared border, discussions about the movement of people also occurred. A key issue that was raised by the Committee with many elected officials is the proposal for a $5.50 U.S. customs user fee for Canadians travelling to the United States by plane or boat contained in the 2012 budget of President Barack Obama. Although few of the legislators had heard about this proposal, there was unanimous support for the Committee’s position that the proposed fee should be abandoned. The Committee was informed that budget proposals are examined by congressional committees, and that the Ways and Means Committee of the House of Representatives has asked the White House to justify this proposed measure and is awaiting an answer. Most members of the U.S. Congress with whom the Committee met were confident that this proposed measure would be abandoned, but thanked the Committee for bringing it to their attention.

REGULATORY COOPERATION

The issue of regulatory differences between Canada and the United States was another topic that was raised frequently during the Committee’s visit. According to some officials, U.S. companies wishing to trade with Canada believe that regulatory differences are a hurdle that must be overcome. Such differences in the automobile industry, including in relation to seatbelts and daytime running lights for vehicles, were cited as an example of unnecessary barriers in an industry where many Canadian and U.S. supply chains are highly integrated.

Discussions between the Committee and officials referred to the newly created Regulatory Cooperation Council, specific examples of regulatory differences between the two countries that may be impeding trade, and the need to work toward more compatible regulations and regulatory approaches, while preserving the public interest.

The Committee was told that the U.S. government is consulting with U.S. stakeholders to identify the most important regulatory issues and that improving regulatory cooperation is one of its priorities. Moreover, it was noted that the White House issued an Executive Order on January 18, 2011 aimed at improving regulation; the order instructed regulatory agencies to develop and submit a plan on how to conduct a review of existing regulations.

In discussing the U.S. mandatory country-of-origin labelling (COOL) requirements and some other issues, some members of the U.S. Congress told the Committee that they felt that the United States has become overly regulated and believe that regulations are often drafted and implemented in a way that ensures short-term popularity but results in long-term harm to the economy. The Committee was also informed that governments need to do a better job at quantifying implementation costs when bringing new regulations into force.

ENERGY RELATIONS

During its meetings, the Committee also focussed on energy relations, since trade in energy represents a large proportion of the value of total trade between Canada and the United States. Canada is the largest supplier of oil and gas to the United States, and the electricity grids of both countries are highly integrated.

The Committee was told that the U.S. Administration is committed to reducing U.S. dependence on oil from the Middle East and Venezuela. To do so, the construction of the Keystone pipeline that would transport crude oil from Alberta’s oil sands to refineries in the United States has been proposed. The Committee heard that the pipeline’s capacity would equal current U.S. oil imports from Saudi Arabia. Most members of the U.S. Congress with whom the committee met supported the pipeline project. As well, the Committee was informed that the extraction technology for oil sands is always evolving and that a pipeline is needed in part as a means of stabilizing the U.S. oil supply. It was noted that a refinery in Pennsylvania had to lay off a number of employees after a pipeline from Michigan broke and reduced the oil supply.

Recognition of Canadian hydroelectricity as a renewable resource was also discussed during the meetings in Washington. The Committee learned that U.S. states have recently adopted minimum requirements for electricity supply to be considered as coming from renewable sources, although hydroelectricity is not always recognized as such. The Committee heard that the main reason for this treatment is that hydroelectricity in the United States is a mature industry, with capacity that is nearing the maximum potential. Consequently, recognition of hydroelectricity as a renewable resource would not result in new business opportunities in states where hydroelectricity is at the maximum of its potential output. Furthermore, considering that hydroelectricity already represents as considerable source of energy for many U.S. states, recognition of hydroelectricity as a renewable resource would reduce incentives to invest in other renewable and greener energy sources.

The Committee observed that the Embassy of Canada in Washington, Canadian consulates in the United States and provincial offices in the United States are advocating for recognition of Canadian hydroelectricity as a renewable resource. U.S. state-level decision-makers are receptive to this message, with some states having changed their laws and regulations to recognize the renewable nature of hydroelectricity.

GOVERNMENT PROCUREMENT

The negative consequences for Canada resulting from the Buy American provisions in the American Recovery and Reinvestment Act of 2009, which require that all iron, steel and manufactured goods used in the construction, maintenance or repair of a public building or public work funded by the Act be produced in the United States, are an example of what a number of people with whom the Committee met referred to as the “law of unintended consequences” toward Canada. Members of the U.S. Congress and the U.S. Administration confirmed that Canada was not targeted by these measures, even though their initial effect meant that Canadian companies were denied access to U.S. state and local procurement markets.

One of the main points the Committee stressed in its meetings in Washington is that, in many sectors, the majority of Canadian exports are inputs to American supply chains, and that approximately one-third of Canadian exports to the United States involve American firms that have established a Canadian presence and that ship goods to the United States. Therefore, measures such as the Buy American provisions are damaging for Canadian and U.S. interests.

According to members of the U.S. Congress and the U.S. Administration officials with whom the Committee met, the fact that Canada is the only country worldwide that has received an exemption from the Buy American provisions demonstrates that, in the end, the United States realized that it was also in its interest to reach an agreement that provides Canada with privileged access to U.S. state and local procurement markets.

Realizing that the February 2010 Agreement between the Government of Canada and the Government of the United Sates on Government Procurement will expire in September 2011, the Committee spoke about its desire to see Canada and the United States work toward a more comprehensive and longer-term bilateral procurement agreement that respects the interests of Canada and the provinces as a way for both countries to ensure joint prosperity. The Committee was told that this desire is also shared among elected and government officials in the United States.

For the bilateral procurement commitments to be broadened and lengthened, the Committee was reminded that Canada will need to make concessions. In that context, people with whom the Committee met expressed satisfaction with the inclusion of provincial commitments regarding procurement markets in the bilateral agreement on procurement, and indicated that they are monitoring negotiations between Canada and the European Union for a comprehensive economic and trade agreement, including concessions that Canada might make on procurement as part of these negotiations.

The Committee also highlighted administrative difficulties that some Canadian companies have experienced when bidding on local contracts since the Agreement between the Government of Canada and the Government of the United Sates on Government Procurement was signed. U.S. Administration officials admitted that the process used to inform state and local authorities of the Buy American requirements in the American Recovery and Reinvestment Act of 2009 and the subsequent agreement between Canada and the United States was not perfect and may have prevented some Canadian companies from bidding on contracts for which they were eligible. The Committee noted that this area is one in which there are lessons learned for the future.

AGRICULTURAL ISSUES

Most of the discussions about agricultural issues during the Committee’s visit to Washington focussed on U.S. food safety and labelling requirements that are negatively affecting Canadian agricultural exports to the United States.

Some members of the U.S. Congress with whom the Committee met noted that the United States has become overly regulated, with the country’s food safety regulations being one illustration of this phenomenon. The Committee learned that, while the U.S. Department of Agriculture’s Food Safety and Inspection Service and the U.S. Food and Drug Administration are the primary agencies responsible for food safety in the United States, there are 15 agencies sharing oversight responsibilities in the U.S. food safety system. The Committee was told that, as a result, it is very difficult for the United States to have a coherent and streamlined approach to protecting the health and safety of Americans while at the same time facilitating trade with foreign countries. This complicated structure is also making it difficult for members of the U.S. Congress to oversee these entities effectively.

The people with whom the Committee met in Washington praised Canada for its high standards of food safety, and commended it for its reaction when bovine spongiform encephalopathy (BSE) was discovered in a domestic animal in 2003. Officials from the U.S. Administration recognized the need to work collaboratively with Canada to reach a higher level of compatibility in respect of food safety regulations and standards in the two countries.

Members of the U.S. Congress with whom the Committee met were particularly impressed by the Canadian industry-led animal identification systems that exist for cattle, bison and sheep as well as the identification requirements enforced by the Canadian Food Inspection Agency under the Health of Animals Act.

The Committee learned that, during U.S. Department of Commerce-led consultations with industry stakeholders, food safety regulations and standards were identified as one of the targeted areas for increased regulatory cooperation with Canada. U.S. officials are convinced that the Regulatory Cooperation Council, announced by Prime Minister Harper and President Obama on February 4, 2011, will be an effective mechanism for addressing some of the conflicting food safety regulations and standards between Canada and the United States.

The U.S. mandatory COOL requirements, which were contained in the 2002 U.S. Farm Security and Rural Investment Act (Farm Bill) and came into force in March 2009, were also mentioned by the Committee during meetings with officials and members of the U.S. Congress. In that regard, one of the Committee’s objectives in Washington was to voice its concerns regarding the implementation of such labelling requirements. The Committee stressed that many U.S. hog farms rely on Canadian feeder pigs because of insufficient supply in the United States and that many U.S. farm operations, particularly those located close to the Canadian border, are financially vulnerable as a result of the loss of Canadian feeder pigs due to COOL requirements.

Furthermore, in accordance with provisions included in the North American Free Trade Agreement and World Trade Organization (WTO) agreements, the Committee argued that the location where an animal is slaughtered should confer origin on the meat and that finished goods should not be required to be labelled with information on the source of inputs.

Most members of the U.S. Congress with whom the Committee met agreed that COOL requirements are unnecessarily trade-restrictive and voiced their lack of support for the requirements. That being said, the Committee was told that U.S. hog producers and consumer associations strongly support COOL requirements and that the inclusion of these requirements in the Farm Bill was necessary to gain the support needed for the bill’s enactment. Members of the U.S. Congress agreed that, following the release of the WTO panel report on the case that Canada brought against the United States regarding COOL requirements,[2] both countries should make efforts to reach a mutually satisfactory agreement.

Officials from the U.S. Administration were more circumspect on the issue of COOL requirements, and noted that the Canada-United States Consultative Committee on Agriculture[3] provides a forum where Canada can raise its concerns about issues, and enter into dialogue with appropriate U.S. departments and agencies in the hope of solving issues such as COOL requirements before they reach litigation.

CONCLUSION

As noted earlier, Canada and the United States enjoy the largest bilateral commercial relationship in the world, with markets, supply chains and economies integrated to varying degrees. In addition, Canada is a major supplier of energy to the United States, having supplied that country with 9% of its total energy demand in 2008. In that context, it is in both countries’ interest to eliminate unnecessary trade barriers between them and to facilitate the movement of legitimate goods, services and people across the common border. The recent financial and economic crisis, and the continued emphasis on security resulting from the September 11, 2001 terrorist attacks, have led to what many consider to be a “thickening” of the Canada-U.S. border.

The Committee recognizes the importance of reaching a balance between ensuring a safe and secure environment for citizens of Canada and the United States on the one hand, and facilitating the flow of legitimate people and goods between the two countries on the other hand. In the view of the Committee, in recent years, the balance has shifted too far toward security and safety concerns, and some of the U.S. actions that have been taken may not have improved security. The Committee is hopeful that its efforts have been successful in reminding officials and members of the U.S. Congress about the value of the trade relationship as well as about the negative and unintended effects that some U.S. policies and measures are having on trade with Canada.

The Committee feels that these regularly scheduled bilateral exchanges with the United States are important and beneficial, and should be undertaken on a frequent basis.