[Recorded by Electronic Apparatus]
Wednesday, February 12, 1997
.1535 
[English]
The Chairman: Order. We have a very simple agenda today, to listen to our witnesses. We're very pleased to have Mr. Gordon Ritchie, the president and CEO from Strategico Inc.; and from the Department of Foreign Affairs and International Trade, Ian McLeod, the counsel for the trade law division; Mr. William Crosbie, the director of trade policy planning; and Mr. Dean Sherratt, head of the treaty division.
Thank you very much for joining us.
The format is very simple. I will invite you to make introductory statements, if you wish to make some. Then we'll just proceed as usual with questions and answers.
Over to you, Mr. Ritchie.
[Translation]
Mr. Gordon Ritchie (President and CEO, Strategico Incorporated (Ottawa)): I understand that the clerk has distributed the brief note that I had prepared. I apologize for not having been able to submit it to you in French and English because of time constraints. However, this will allow me to limit my comments to certain fundamental points or highlights.
First of all, I would like to explain my viewpoint since everyone's view of the world depends on their experience. I worked for the government for a few years in the framework of the Free Trade Agreement negotiations and later as an official responsible for the free trade implementation act. I later worked as a consultant for various governments regarding NAFTA and WTO-related issues. Finally, I worked as an advisor with various Canadian industries and companies that sought to use these agreements to promote their own interests.
I will make comments of a rather general nature, as I know I will be followed by major experts in the field who will examine further the issues that really count. As you well know, in trade policy matters, broad principles are only worth so much: it's the details that count.
[English]
Perhaps I could begin by making just a couple of points that will to you be obvious but that are not always appreciated. The fundamental one is that when you strip away the pseudo-juridical facade of international trade, it really comes down to a raw confrontation of economic power. The power goes with the market. Therefore, the big import market has the big leverage, and the biggest import market in the world, the United States, has the biggest leverage. So if we did not have international trade rules and dispute settlement machinery and went head to head with the Americans, we would lose ten times out of ten.
The rules are designed to increase our opportunities somewhat, but by no means do they redress the fundamental economic imbalance. As I've said on other occasions, it's a bit as if the fates had put us in the ring with a great big sumo wrestler, who has undertaken, for the moment, to play by Marquis of Queensberry rules. So long as he sticks by the rules, we have to be quick, we have to be nimble, we have to be alert, but we have a fighting change. If every now and then he decides not to play by the rules, we will find very quickly he has the capacity to impose some very unpleasant results on us.
This is by no means to suggest that we are not able to do well. As you know,Mr. Chairman - and indeed, if I may say so, you've been one of the great commis de l'État in the past who have ensured we were disproportionately successful - we've been more successful than our raw size would justify, by virtue of the quality of the diplomatic service and the public service that has been at the service of the country.
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But that said, when it comes to it, we should always remember that these rules and these mechanisms are designed to improve our chances but do not fully level the playing field.
I guess the corollary is that we don't like rules because we're more virtuous, but because they're clearly in our self-interest, whether it's the FTA and the subsequent NAFTA, or the GATT and the subsequent WTO. Over the years we have steadily improved these rules and the machinery to apply these rules, and I think we can look with some pride on the contribution Canada has made to those rules.
But there remain some problems. Let me now turn to them and, by way of illustration, let me cite three examples. One of them involves the FTA, one of them involves the NAFTA, and the other the WTO.
The first is the softwood lumber case, the classic big trade dispute between Canada and the United States. As you know, in the negotiations we failed to persuade the Americans to abandon their unfair trade laws, which are as politically popular as they are economically nonsensical. We were able to introduce some innovative new dispute settlement machinery, designed nonetheless to ensure that those unfair laws were fairly applied. From the beginning, we recognized that the acid test would be the softwood lumber case, and indeed it was.
I won't recap beyond pointing out that Canada won every decision at every step in the process. At the end of the process we were rewarded with the repayment of some $2 billion, representing the duties unfairly collected and the interest on those duties. You'll see a lower number in other documents, but it uses U.S. dollars and leaves the interest out. The final figure is around $2 billion. That's the good news.
The bad news is that it took much longer than it should have and it cost much more than it should have. The Americans fought savagely every step of the way, sometimes exceeding the bounds of what I would consider good faith behaviour, and then when they lost, as bad losers they changed the rules. They changed their own trade laws contrary to the WTO agreement, in my judgment, but that's small comfort in that the new laws are designed to increase the possibility that in a future case they could again impose duties on Canada.
Under pressure, the Government of Canada, strongly supported by the industries and the producing provinces accounting for the bulk of production, accepted a compromise arrangement, which on the one hand guaranteed duty free entry free from any threat of trade action, but up to a certain level, a level slightly below the historic peak. It took the big issue off the table between the two countries, but it demonstrated again that the best machinery in the world - and this machinery worked pretty well - ultimately only increases the opportunity for the smaller country to defend its interest against the bigger. That was under the original Canada-U.S. free trade agreement.
The second case is that of dairy and poultry, where the Americans challenged our right to continue our protection for those industries, in this case under the NAFTA, chapter 20, as opposed to the softwood lumber case, which was under the FTA, chapter 19.
Again, in a sense the background is parallel. The Americans, in our FTA negotiations, failed to persuade us to abandon the import restrictions that are essential to the maintenance of the supply management regimes for dairy and poultry. Again, I would argue, I think objectively, that these instruments are as economically nonsensical as they are politically popular, but they are politically popular, and the fact is that in the FTA negotiations - and carried over into the NAFTA - the Americans were unable to persuade us and unable to pay us to dismantle those restrictions.
Then in the WTO negotiations we replaced the import restrictions with prohibitive tariffs having the same effect. The Americans invoked the NAFTA dispute settlement machinery to challenge our right to do that. We won the case, not on the objective merits of our policies, but on the fact of the case, which was again that the Americans had no right to demand we remove those tariffs that were successors to import restrictions they had accepted could continue.
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That said, I notice my friend Charlene Barshefsky the other day announced, as the U.S. trade representative, in her hearings before the Senate committee, that this will be one of her major targets and she will continue to be pressing on this, as indeed she will be pressing in other areas such as wheat.
So this was a case where the machinery worked in our favour. It preserves our right to maintain these policies, again whether they are sensible or not. But that is not the end of the story. There will be continuing pressure on that.
The third example is a WTO example. The most topical one would be the Canadian cultural issues raised by the magazine case, which has been the subject of an interim confidential decision by the WTO, which I assume everybody has read. It is widely available.
Let me just say, as you know, Mr. Chairman, as a committed free trader I profoundly believe cultural industries, including magazine publishing, are not like widgets. The best option, as the trade minister indicated the other day, would be to negotiate trade rules that reflect Canada's cultural interests. This we have failed to do. We failed to do it in the FTA and the subsequent NAFTA. We failed in the GATT and we failed in the recent WTO.
The second-best option, in my view, is to exempt these industries from the application of the traditional trade agreements. This we did in the FTA, and we carried that exemption over to the NAFTA. There is an exemption, and the exemption does mean something. It means Canada, in those negotiations, insisted that the traditional trade rules did not apply to these cultural industries. What it did not do was strip the Americans of their right to take action against us if they believe we are acting contrary to their interests and contrary to their rights under other international agreements, for example the GATT and the WTO. It did, incidentally, impose an important new element, which was to limit the scope of their retaliation to an equivalent commercial value, and that is a significant undertaking.
That was a second-best option, but clearly not as good as would have been a more formal recognition that culture was sacrosanct. The worst option, which is the one we find ourselves with in the WTO, is to have the cultural industry subject to the same rules as the rules that apply to widgets. That is a real problem.
We failed in the WTO to get good rules or to get an exemption from the rules. Those who are familiar with the negotiating context will realize it would have been virtually an impossible mission. In any event, it was not successful.
That is why the Americans took our magazine tax to the WTO. They picked their preferred battleground and they won on that battleground.
The battle isn't over. There will be appeals. They will work their way through. But I would not encourage members of the committee to hold their breath for a major reversal of that decision.
It's important nonetheless to keep that in perspective. That decision is a narrow technical decision. It does not mean the end of cultural policies. It does mean we have to rethink very clearly our cultural industry objectives and the instruments we use to achieve them. Again, I believe the trade minister's speech was a useful step towards beginning that process.
There, Mr. Chairman, are three examples of attempts on our part to negotiate rules and rules for the settlement of disputes about their application and the way those three examples have worked in recent cases.
The Chairman: Thank you very much, Mr. Ritchie.
Mr. McLeod, would you like to take the floor?
Mr. Ian McLeod (Counsel, Trade Law Division, Department of Foreign Affairs and International Trade): Thank you, Mr. Chairman. I come here as counsel in the trade law division of Foreign Affairs and International Trade. I would like to talk a bit today about how we move a trade agreement, reached by negotiators, into implementing legislation, which is the product, of course, members of Parliament see in front of them.
It's a privilege to be sitting here with Mr. Ritchie, a former deputy chief negotiator. I've been involved in trade negotiations, but only as a soldier, at the lowest levels. I think Mr. Ritchie is the person to speak to on how you negotiate an agreement, the tactics one uses, and how the teams are organized as the resources are drawn upon.
.1550
I want to pick it up at the moment the chief negotiators initial a document and talk about what happens from there until Parliament sees a piece of implementing legislation.
My colleague Mr. Sherratt from the treaty section will talk a bit about the context of treaties, their status in Canada, and why we implement treaties through domestic law, whereas in other countries there are different mechanisms for doing it. So when you're implementing a free trade agreement there's one process going on in Canada, but there will be different processes in other countries, different legal regimes. I will leave that for him to explain.
Once negotiators have reached the deal on a text, the first step is to obtain approval of ministers. This is done by way of a memorandum to cabinet. This is a lengthy document that is prepared for submission to ministers. It outlines in detail all of the elements of the agreement and seeks their approval.
From my perspective, one of the key parts is what we call drafting instructions. The ministers provide instructions to legal counsel to initiate the drafting of implementing legislation. It also provides them with some guidance as to how it should be drafted and whether there are any particular details that should be looked at. It can be very general or it can enter into more detail.
Once ministers have provided that guidance to legal counsel, a team leader is identified: a senior legal counsel from inside the Department of Justice. The first step is for him to circulate the text of the free trade agreement amongst the various departments that may be affected by this free trade agreement. The various legal counsels, in consultation with the policy people who are involved, assess the agreement - they've already done this in advance, but they assess it in formal terms - and provide guidance back to the team as to what amendments to domestic legislation are required.
The next step would be for an assignment of legislative drafters from the legislation section of the Department of Justice. Of course, there are two drafters, one writing the English text and one writing the French text. They are drafted in parallel and work together simultaneously.
Throughout the negotiation process there's usually a small group of lawyers who are working with the negotiators in putting the agreement together, partly to work on the text itself, but also to make it much easier to move from the text of the agreement later into legislation. They are familiar with it. These people form the core of the implementing team. Once the instructions are received by the drafters from the various legal counsel, they prepare a first draft of this implementing legislation.
I'd just like to say a word about what implementing legislation is, which is what members have seen in the past. It essentially consists of two parts. There's the general part and a more specific part that deals with consequential amendments for the various pieces of domestic legislation that are affected.
The general part deals with a statement of purpose and statements of interpretation. If there is any doubt about the legislative amendments, they are to be interpreted as the agreement itself states, so the bias is toward the text of the agreement. It also provides certain administrative authority. If you're setting up a secretariat, you need to be able to have financial authority for this establishment - powers of appointment to committees or to the secretariat. These make up the general background structure to implementation.
.1555
The largest part of any implementing legislation is part II, which is all of the various amendments to existing pieces of domestic legislation. The classic example is the customs tariff. In a trade agreement, almost as the first item of business, you're talking about tariffs, and you'll negotiate some reduction, elimination, or phase-out of tariffs. If you have done that with a trading partner, it will be necessary for you to amend the customs tariff, which is legislation the Department of Finance is responsible for, so those amendments will be at the core of this part II.
In addition, when you're dealing in a free trade agreement, you're giving priority or privilege to the goods of the other country - your other trading partner. If it's the United States, you have to determine what is the good of the United States. Then you get into the terrible world of rules of origin, which is an exceedingly technical area that provides specific technical rules as to how to judge when an automobile or a widget is or is not American and when it qualifies for these privileges.
In order to do that, you will need to give verification processes to Canada Customs, and hence there may be extensive amendments required to the Customs Act to assist Canada Customs to do that. There will be various other amendments, depending on the particular trade agreement. If you have negotiated with your trading partner that you have the right for a snap-back on the tariffs if there is some sort of flood of imports coming in, you will want to put provisions in our trade laws like the CITT Act to allow you to do that.
If you've made some sort of agreement with your trading partner affecting your countervailing duties, again you may be required to make amendments to the Special Import Measures Act or some other pieces of legislation that are affected. I believe in the case of NAFTA there are 20 or 30 pieces of legislation that are so affected.
The bulk of those amendments tend to be in a few pieces of legislation: the customs tariff, the Customs Act, the Canadian International Trade Tribunal Act, the Special Import Measures Act, and the Export and Import Permits Act. That tends to be the core group, and there are many other pieces of legislation that may require minor amendments.
That's the structure of implementing legislation. When the various legal counsel, on an inter-departmental basis, produce a draft of this, it is circulated inter-departmentally for comment and then it is finalized. Usually you're working against fairly tight deadlines; ministers have indicated they have a target for its introduction into Parliament, so you're working against that.
Once everyone is satisfied the legislation is correct, it then passes scrutiny with the Privy Council Office and the government House leader, who want to ensure themselves that the legislation meets the requirements of the drafting instructions that legal counsel were given in the beginning. It is submitted to cabinet, and if cabinet agrees it is then submitted to Parliament for its consideration.
One further point is the question of regulations. Regulations are subsidiary legislation or rules that are passed by the Governor in Council, on the authority of Parliament having given that authority to the Governor in Council. Regulations in the context of a free trade agreement tend to be in areas that are highly technical.
.1600
I referred before to rules of origin. These are rules that say the following processes must be present or the following transformations must be present and must have been carried on in the other country if the good is to qualify as being American or Mexican or whatever.
Technology changes very fast. Circumstances change very fast. Further negotiations with your partners are probably going to be ongoing in this area to provide flexibility, which is delegated into regulations. So a large package of regulations is prepared, and if Parliament passes the implementing legislation, these regulations are ready to be passed by the Governor in Council and brought into force when the legislation itself comes into force.
Thank you.
The Chairman: Thank you very much, Mr. McLeod.
Mr. Crosbie, would you like to say something?
Mr. William Crosbie (Director, Trade Policy Planning, Trade and Economic Policy Division, Department of Foreign Affairs and International Trade): Thank you, Mr. Chairman.
I believe I was asked to come and talk a bit about how Canada selects its partners for free trade agreements. I'm not going to go into a long history as to how we entered into some of our various FTAs, as they're known. I'll just talk a bit about the general approach we take towards trade policy, the kind of priorities we set, and the specific considerations that come to mind in determining when and with whom we enter into free trade agreements, be they regional, bilateral, or multilateral.
First of all, in terms of our basic approach, as Mr. Ritchie alluded to, Canada seeks to build up support for a rules-based and multilateral trading system, always with our eye on our relationship with the United States.
Using the rules and the dispute settlement mechanisms, we're able to even the playing field somewhat. We do this through strategic alliances, through the force of our ideas, and through timeliness, by being very active and energetic in putting forward our ideas at the right time in the right forum. We always keep our eye on the U.S. and try to anticipate what the U.S. is going to do, particularly if it is trying to play to particular audiences in the U.S. who, in many cases, are often our best allies in terms of some of the rules we want to achieve.
Our priorities are threefold. First of all, we want to secure and expand our access to the U.S. market. That's our first priority. Secondly, we want to promote and expand the rules-based, multilateral trading system through the WTO, the World Trade Organization. Finally, we want to pursue regional and, on a selective basis, bilateral free trade agreements in support of our U.S. and multilateral objectives and to achieve specific market-access opportunities.
Using these as our guides, we have entered into the FTA and the NAFTA with the United States and of course Mexico. We hope to include Chile soon.
We have negotiated the World Trade Organization with over 100 other countries during the Uruguay Round. We are actively participating in two regional initiatives: the free trade area of the Americas, and second, APEC, the Asia-Pacific economic cooperation initiative, both of which have set as goals the creation of free trade areas.
In addition, we have recently negotiated two bilateral free trade agreements, one with Israel and one with Chile.
What are the sorts of considerations the government brings to bear when it determines whether or not to enter into an FTA?
I suggest the following considerations. First, what are the market-access interests in the other market, the partner with whom we propose to enter into a free trade agreement? Second, perhaps just as importantly, what is the impact on the Canada-U.S. relationship? And third, how can the free trade initiative be supportive of the multilateral trade system?
In this last area, for example, looking at NAFTA or the FTA before it, we could say that in some areas they broke new ground in terms of creating new rules and new dispute settlement mechanisms as options that we could offer up multilaterally and that, in some cases, could influence the multilateral negotiations. Or perhaps in the case of certain other free trade initiatives such as the FTAA or APEC, it may be the case of bringing up other countries to a somewhat higher level of rules-based obligations, not surpassing what we have achieved in the WTO but meeting that same level.
.1605
Finally, I think we would have to ask ourselves whether or not Canada or Canadian business would be disadvantaged if we did not participate in a free trade initiative.
Taking those considerations into account and applying them to the kinds of initiatives in which we are involved, I think they explain why Canada, for example, negotiated a bilateral free trade agreement with Chile. It was a bridging mechanism to assist in bringing Chile into NAFTA. It demonstrated our commitment to Latin America and it helped extend the kinds of disciplines we would like to see in NAFTA applied to our other trading relationships.
About Israel, Canadian business had a specific problem. They found they were the only exporters to Israel who did not enjoy tariff-free treatment as compared with their major competitors in the United States and in Europe, both of which had and have free trade arrangements with Israel. To meet that specific problem and to respond to their needs we entered into an FTA with Israel.
The Chairman: Thank you very much.
Mr. Sherratt, do you have a statement?
Mr. Dean Sherratt (Head, Treaty Division, Department of Foreign Affairs and International Trade): A very short one, Mr. Chairman. I'm the head of the treaty section in the Department of Foreign Affairs, and I thought it would be useful if I provided a very quick overview of the treaty-concluding process, since that was one of the subjects you wished to have dealt with today.
First of all, a treaty is a binding instrument concluded between what I would call ``subjects of international law'', which in the context of trade agreements are states, countries. In Canada the treaty power, the capacity to enter into treaties on behalf of the Government of Canada, on behalf of Canada, is one of the residual powers of the royal prerogative, which is the inherent power of the sovereign to conclude treaties binding on behalf of the state. In 1947 this power was delegated by Order in Council signed by the then Majesty, King George VI, to the Governor General of Canada acting in council. Since that point, in order to conclude a treaty on behalf of Canada, you require Order in Council authority.
Under the Department of Foreign Affairs and International Trade Act overall responsibility for the conduct of foreign affairs is held by the Minister of Foreign Affairs. When you marry the two together, you get the happy situation in which in order to conclude a treaty you must have Order in Council authority to do so, and because of the Minister of Foreign Affairs' responsibility for foreign affairs he must sign that Order in Council submission. He retains, if you will, the capacity to exercise the treaty power that is approved by Order in Council and signed by the Governor General.
Our treaty-making process is a fairly simple one. You will have, as already generally discussed, a decision that you wish to enter into discussions leading to an agreement or a treaty binding in international law. As has already been discussed, one must have two elements of authority in order to do that. The Order in Council authority through the Governor General provides what is called ``executive authority'' literally to sign and bring into force an agreement. The Order in Council will typically provide a very bare-bones description of the nature of the instrument you want to conclude and will ask for authority for certain named individuals, often four or five, who actually will be granted the authority to sign the agreement on behalf of Canada. Once that is obtained, those persons, and only those persons, can sign the agreement on behalf of Canada.
There is also, of course, the policy approval, which goes more to the content and which can be much more extensive and large. That has already been described in terms of the memorandum to cabinet.
.1610
When you sign an agreement, it can come into force and therefore become binding either on signature or at a later date, in which case it is typically subject to ratification or a kind of ratification process.
The reason you would wish to do that is that often, particularly in the trade area, you will enter into agreements in which certain legislative or regulatory changes are necessary in order for you to be able to implement in Canadian law the obligations you've entered into in your agreement. In the case of Canada, this is a parallel process.
Under the constitutional systems of a number of states, agreements themselves, when you enter into them, become the law of the land, and you have international obligations translated by the very act into domestic implementation. A number of European countries have this process: Slovenia, as a new country, for example, where any treaty concluded on behalf of the state must be submitted to Parliament for their approval, and when they do so it becomes the internal law of Slovenia.
In the case of Canada, that is not so. The treaty-concluding power is purely a matter for the executive, but at the same time what that means is that if you do conclude a treaty, it does not by and of itself make any changes to the domestic law. Therefore, you need a two-track parallel process in order to conclude a treaty where the obligations you're entering into require some changes in legislation.
Hence, what will typically happen in the treaty is you will reach an agreement, which is often initialled. When you have what you consider your policy and executive authority to conclude the particular agreement, you then will proceed to signature. Once you have the regulatory and legislative changes in place, then you can proceed to either an exchange of instruments of ratification that are signed by the foreign minister, or, if it's a simpler matter, there are often provisions in treaties where you bring them into force simply through an exchange of notes in which you've indicated that you've done already what you have to do under your domestic legislation in order to give effect to your obligations.
That basically concludes very quickly what the treaty process is all about. If you have any further questions, I would be delighted, with my colleagues, to respond to them.
The Chairman: Thank you very much.
[Translation]
We have a lot of subject matter on the table. Mr. Sauvageau, do you have a few questions?
Mr. Sauvageau (Terrebonne): Yes, I will dare to ask a few questions.
First of all, I thank you very much. As an introduction to the work of this subcommittee, it was very enriching to hear all of the interventions and explanations on various stages of the treaties, conditions, etc.
Despite the information you've provided, which was accurate and relevant, I did not receive an answer to one question that I had put at the outset. I would therefore like to ask you that question, which concerns consultation versus negotiations. I'm aware that not everything can be done in public, but when you sign something, when you define the eligibility criteria and conclude that it is in your interest to sign a free trade agreement with a given country, especially a bilateral one, what is the role of the following three stakeholders: parliamentarians, provinces and the management of the companies affected?
Let me explain that I have one prejudice regarding the response of parliamentarians; in English, it could be said that they're satisfied with just being a rubber stamp. I get the impression that that's what we did with Israel and Chili, and that disturbed me somewhat. That's why I ask you this question. Thank you.
Mr. Ritchie: I will give you an initial answer that is drawn from practice. We could discuss legislative formalities, but I will talk about practice.
Obviously, an agreement has to be supported by the majority of parliamentarians.
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Having said that, you cannot ask 300 of our parliamentarians and some 500 of their American counterparts to negotiate. That's why the executive branch was given the power to negotiate the agreement. It is true that in a sense, the power of parliamentarians consists in accepting or rejecting the agreement itself. The consultation process that took place in the context of the Free Trade Agreement may be the most studied subject in the history of Canada except for the Constitution.
There was hearing after hearing before committees of both Chambers. Hearings were held before the signing of the agreement and well before tabling of the bill in the House. Mr. McLeod specified the distinction between the agreement itself and the bill providing for its implementation. Our process, contrary to the American one, remained open to amendment after a bill had been tabled. In the United States, they have what is called a fast track. That process, which is neither fast nor linear, does not allow for amendments to a bill after it has been tabled. In Canada, it's the opposite. When I was the official responsible for that process, the committee imposed a number of amendments to the FTA. Most of them were of a semantic nature, whereas others had a more substantive importance, including the statement that the agreement should not affect Canada's power to control its water exports. That was at the level of parliamentarians.
In terms of the provinces, here again, it's more a question of custom, of practices. Because of the great importance of the FTA, we held three in camera meetings with the premiers, meetings which I attended. We consulted the premiers at the three stages of the process: at the first, we presented the objectives: at the second one, we said that it seemed to be going in a given direction; and at the third, we said that we had come to an agreement.
Moreover, the federal government did not request and therefore did not obtain the consent of the provinces for the reasons that Mr. McLeod or his colleagues could explain. The agreement was under the responsibility of the federal government and it was therefore not in the interest of the provinces or of the federal government that any claims be made otherwise.
I'm well aware that certain gurus in the federal-provincial arena would have liked to haphazardly amend our Constitution in this regard and change the practice, but the reality is clear and simple: it was within the power and therefore under the responsibility of the federal government, that is, the House of Commons and the Senate, to implement this kind of agreement and the government exercised that right. At the time, since the agreement was not totally uncontroversial, Ontario had made certain threats to contest the agreement before the courts. But for excellent reasons, that avenue was not pursued, and it would surely have led to failure.
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In terms of industry and other interest groups, such as farmers and other sectors directly affected, here again, we innovated somewhat at the time of the FTA by making use of the most elaborate consultation network ever seen. This network has been maintained to this day because of subsequent negotiations.
We had consulted sectoral groups, which for the FTA was done at the level of chief executive officers. Of course, the level of participation was somewhat different for smaller agreements. There we called upon industrial associations, and so forth. But for the FTA, we called upon chief executive officers. Some 400 CEOs had asked to participate in this consultation at the level of sectoral groups, as well as another group of about 30 members, if memory serves me, with a view to advising negotiators on a more global level.
To my knowledge, this consultation was conducted confidentially and, certainly in the case of the FTA, there were no leaks, no cases where this confidentiality was not respected. This consultation was open to the point where a rather large number of officials from this city were quite uncomfortable because in certain cases we had to consult the industries directly affected more than the officials, for obvious reasons from my point of view, but for reasons which were not obvious to the entire public service.
In any event, that was how the consultation process worked. As I specified, the process was adopted, enshrined, and once enshrined, it continued. In the final analysis, it must be pointed out, as did Mr. McLeod, that the power to sign the accord is that of the executive and the power to legislate the accord remains that of the House of Commons, in accordance with all the usual rules of our system of government.
[English]
Mr. Crosbie: Perhaps to update what Mr. Ritchie has said.... He described the situation during the negotiation of the NAFTA. Essentially the kind of structures that were put in place during the FTA and then the NAFTA and used during the Uruguay Round are still in place, and that is the structure of private sector advisory committees, approximately 15 sectoral groups and then an overriding group called the International Trade Advisory Committee. They have privileged access to what is going on in negotiations, including negotiations that we may be involved in today, and they meet as often as is required.
In addition to that, with respect to the provinces we have what we call the coordinating committee on trade. We bring together provincial trade representatives approximately four times a year, or more often as necessary, to talk about whatever is going on in the trade policy agenda. That splits up into specific working groups focused on specific negotiations. For example, they're in negotiations now on a multilateral agreement on investment. So there's a federal-provincial working group of the coordinating committee that meets as often as necessary and has privileged access, once again, to what the negotiating objectives are.
As Mr. Ritchie pointed out, what is key is if we are trying to negotiate a trade agreement that will fall within areas of provincial jurisdiction where we are trying to get the provinces to bind their practices, then we are going to have to bring the provinces along and ensure that the provinces are supportive of the kinds of obligations we want to enter into and want them to implement. I think we're very much aware of the need to keep them involved.
Finally, with respect to members of Parliament, again I think that's a question of the degree to which MPs wish to be involved in the process, taking into account, of course, in a negotiating context, that our negotiators have to have full authority to go out there and negotiate in confidence. Hence confidentiality is essential.
[Translation]
The Chairman: We've spent 11 minutes on the subject. I don't want to put a stop to your momentum, but
[English]
I think out of fairness we should give the floor to Mr. Morrison.
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Mr. Morrison (Swift Current - Maple Creek - Assiniboia): Thanks, Mr. Chairman.
I have some concerns, Mr. Ritchie, about the potential for dispute inside agreements, I wonder if you would advise us on this, starting perhaps by explaining to us if there are significant differences between the side agreements with Mexico under NAFTA and the side agreements in the bilateral agreements with Chile. Then, in your opinion, is there potential for dispute in these agreements, particularly inasmuch as they somewhat overlap with provincial jurisdictions in this country?
Just take it and fly. I want to hear you.
Mr. Ritchie: If you permit, Mr. Chairman, I think what you really want to hear is my colleagues from the Department of External Affairs on that. I'd be pleased to add a comment, but they are the ones who negotiated these side agreements. I have to tell you I never did like side agreements.
Mr. Morrison: I was wondering what you would say on that. Now we already have one answer, so carry on.
Mr. Ritchie: But if you wish someone to explain the side agreements and how they work, I think I'll defer to my colleagues, if I may, sir.
Mr. Morrison: It wasn't so much how they work; I want to know how they're going to affect us down the line when the stuff hits the fan.
Mr. McLeod: I'm in a little bit of a difficult situation here because I'm not really in a position to discuss the side agreements per se. I see on the committee's agenda that you do have sessions coming up in which you will have extensive discussions of the dispute settlement process, including chapter 20, NAFTA 19, and side agreements.
I think it would be best if we bring in the people who are specifically involved in negotiating the side agreements - I know what they are - and the dispute settlement provisions in it. They would be able to discuss this with you, certainly with far more expertise than I have, if that would be agreeable to you.
Mr. Morrison: Are you deferring back to Mr. Ritchie?
Mr. McLeod: I'm sorry, I'm not deferring to.... I see the committee has a program, and I think this is a question that's best in your next session.
Mr. Ritchie: Perhaps, Mr. Chairman, I might make a gratuitous comment, nonetheless, that might help you in considering the sort of questioning you might subject your next victims to.
There's a very good reason why there are side agreements. It's because they have no place in the main agreement. These are additional measures that were introduced entirely at the behest of theU.S. administration in order to accommodate certain domestic political requirements. It happens that some of those political requirements also had some resonance up here; therefore, the successor government here found that those side agreements made the overall package of the NAFTA somewhat more acceptable.
For the old trade warriors, I would have to tell you that we believe you make agreements. You don't make side agreements; you make agreements. You put in those agreements the things that are important. You put the real cutting edge, the real obligations, and the real enforcement of those obligations in that agreement.
Incidentally, matters such as labour standards and environmental standards, while noble in themselves, have historically tended to be, all too often and even today, very useful camouflage for old-style protectionism. We could probably give you a list right now of 20 instances in which those sorts of considerations are being used as a camouflaged way of keeping Canadian product out of export markets, which is why most trade negotiators do not like those kinds of agreements.
That said, I repeat that there were political reasons in the U.S. initially, and then later in Canada, that led to the conclusion of those agreements. Having made them, of course, both countries and Mexico will do their best to make them work, and work to the interest of Canadians.
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Mr. Crosbie: The only thing I would add, Mr. Chairman, is that as Ian McLeod pointed out, it would be best to get the people who have been directly involved in the side agreements because they are quite complex, indeed also complex in terms of the federal-provincial relationship in those side agreements, which in themselves have intergovernmental agreements. They are worth looking at.
The other point I would mention is that they are agreements of cooperation. That's often overlooked. Everybody wants to look at the enforcement mechanisms immediately, but the major thrust of those side agreements and most work that goes on under those commissions and side agreements are really in the area of cooperation among the NAFTA parties. It's somewhat different from NAFTA itself.
The Chairman: Mr. Cullen.
Mr. Cullen (Etobicoke North): Thank you, gentlemen. In the next round I would like to come back and talk about the sugar re-export program and find out - maybe from you, Gordon - what your impression was during the FTA - I think it was negotiated during the FTA - about what was going to happen to those types of programs, because it has become a serious issue for a number of companies in my riding.
But I would like to talk a bit about softwood lumber, an area I've been quite involved with in different capacities over the years, much to my chagrin. I was involved recently in the SIMA review and I had to acquiesce that there's nothing...you know, it's very hard with the U.S., this giant up there, to win in a battle on some of the trade dispute mechanisms. There are a few areas that really bother me about the softwood lumber, Gordon. It's a good example of a big trade dispute and a messy one -
Mr. Ritchie: The biggest.
Mr. Cullen: The biggest.
One is the one you touched on, the U.S. changing the rules to suit their needs. The other one is this issue of no public interest considerations. As you know very well, the industry has tried to get around to the builders of homes and the buyers of homes to remind people it's costing them $3,000 more a home by putting in these sorts of trade laws with Canada on softwood lumber.
But the other thing that really bugs me, and in fact I'm doing some work on this and I may get back at this later, is this whole question that when we are responding to a countervail, they are looking at our subsidies and we have no way of challenging what they are doing. This is by virtue of the process.
We all know, those of us who have worked in the industry for a number of years, that in the U.S. there is a whole host of subsidies and supports to the forest industry, even at the federal level, in letting people off the hook for auction timber and in speculative pricing in that market. I've seen a number of good presentations by very well-versed people in the Pacific northwest who argue that auction prices in the Pacific northwest are wildly too high because of speculators. There are other things, of course, at the state and local levels, from industrial land to tax-free bonds to regeneration, and on and on. But in terms of the process, in responding to a countervail, we can't attack their system, their supports.
It's a concept I've been working on, a concept of net subsidies. If you are not familiar with the term, in very simplistic layman's terms, to my mind it's to say.... Let's say the U.S. could not really launch a countervail unless they could demonstrate that our subsidies were greater than their subsidies over a certain de minimis. I know some people in the trade and tariff policy area have arguments why we shouldn't proceed on a net subsidy basis, but I would like the views of this group. Do you think net subsidies are a policy option we should be pushing in our discussions with, say, the Americans?
Mr. Ritchie: Let me first just touch on the other two points you made. I should at the outset say that, as you know, I do from time to time advise the Canadian softwood lumber producers on how to protect their interests, but in no way do I represent them here or anywhere else. Still, you will have to take my comments with that in mind.
On the WTO rules, even if one is convinced, as I am, that the U.S. implementing legislation not only did not accurately implement the WTO agreement but in fact went contrary to the WTO agreement; even if that were the case, so what? This would become germane only after the Americans had successfully brought a case against Canadian lumber, and if the WTO concurred that their legislation had been jiggered in order to pre-cook the result, the Americans would be encouraged to bring their legislation into conformity.
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That would not be a great deal of warm comfort to the industry, including those in your constituency, sir, who would nonetheless be stuck with paying duties at the border with no prospect of getting them back. As a result of those changes to the U.S. domestic law and to the guise of implementing the WTO, as the trade minister has said, it unfortunately is the case that they were designed to close off some of the defences that were so successful for the industry last time around. It may well win another case, but if it lost the case, the fact that it had lost it because the Americans had tilted the playing field really would be of very little comfort.
Secondly, of course, it is of very little comfort that the American political process - and it may not be unique in this regard - is driven much more by special producer interests than by a broad public consumer interest. The home builders in the U.S. have finally awakened to the fact that as a result of allowing the producers to get away with murder, or attempted murder, on this, their clients are paying substantially more for their homes. It's a little late. At the end of the congressional day those producer interests and their legal mercenaries, with their war chests, carry more weight on the Hill than any sense of public interest.
The last time around you may recall the Federal Trade Commission actually testified that this was outlandish; this countervailing duty investigation was clearly against the U.S. national interest. That didn't change one opinion either in the administration or in the Congress.
On the net subsidy issue, as you know, that's not new. We attempted it in the FTA negotiations. Your logic is impeccable: it makes no sense at all. It makes no sense at all to have either countervailing or anti-dumping legislation within a free trade area. It makes no sense at all. If you're going to have it, it certainly makes no sense to have legislation that will punish a product from Alberta going into the United States because it benefits from the same assistance as, or even less assistance than, a competing product from Michigan going into California. It makes no sense at all.
That said, it makes eminent political sense if by using that egregious legislation - and the Americans are the biggest users in the world; 90% of the countervailing duty cases brought in the world are brought by the Americans...and the WTO is not going to improve that situation one whit. They will continue to bring it, for the very good reason that they impose substantial disruption on their competitors, they impose substantial legal fees even if their competitors ultimately win the case. They put them through a Star Chamber that is loaded against them, with the very high probability, almost the guarantee, that the commerce department will find against the import and that the International Trade Commission will automatically rule that it has injured the U.S. producer, and therefore the high probability that duties will be imposed. And those duties are designed to raise the level of prices in the U.S. market - again, your point about the public interest. They do exactly what they are intended to do.
My own estimate is that the countervailing duty case the Americans brought against softwood lumber, which was trumped up from beginning to end, probably cost the American consumer in excess of $5 billion, of which a portion was returned to the Canadian producer but the bulk was pocketed by those companies that had brought this action. You can pay even Washington legal fees, quite a lot of Washington lawyers, with $4 billion or $5 billion.
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So I agree completely with the principle. The negotiating reality is that as long as the Americans, who control that big import market, are bound and determined to keep that unfair weapon against imports, and as long as other countries are prepared to make the judgment that even with that it is in their interest to trade into that market, they will keep their legislation.
The Chairman: If I may, I will just put a question to you. Some of your comments raise an important question, a question that is broader than what you've said. During the hearings we had on the Special Import Measures Act, we heard a number of witnesses saying roughly what you suggest: don't expect any willingness from the United States to enter into any negotiation or to alter their trade remedy laws in a way that would be more favourable to international trade.
But the experience that you flagged with the U.S. implementing legislation suggests that far from being able to hope for improvements, we're headed for deterioration, since the United States, after signing an agreement, has to get implementing legislation. Since the Congress draws the bottom line, are we not moving in the direction of an erosion through these opportunities given to the Congress to be even more protectionist?
To be even more precise, whenever we negotiate or try to negotiate a free trade agreement that is, let's say, hemisphere-wide, let alone Pacific-wide, are we not simply going to spur the United States Congress to take even more protectionist action whenever they have to pass implementing legislation?
Mr. Ritchie: I think that's an issue of very great concern, and frankly, that was one of the reasons why I was not enthusiastic about entering into the NAFTA negotiations, precisely because I feared the opening up of these provisions would inevitably work to our disadvantage, and indeed it did. The NAFTA provisions with respect to chapter 19 are weaker, in my judgment - as you know, I'm on the record on that - than the original FTA provisions. As we discussed, when it then came to the guise of the WTO legislation, the American Congress in fact acted in a way that even further eroded that advantage.
The only comment I have is that the American Congress doesn't need a trade agreement in order to jig around with their law. If Congress is determined to behave in that kind of fashion, it will. The recourse open to other countries will be there, but it will be fairly limited.
On the other hand, by reaching agreements with the United States - although the agreements are far from perfect and there are defects in them - we have made some progress, as you know,Mr. Chairman, from your very substantial experience in dealing with this. We're in a better position now than we were in dealing with the Americans in the 1960s when they hammered us with the interest equalization tax and when they threatened to repeal the auto pact and a few other things. We had less recourse then than we have now. We had less recourse in the 1970s than we have now.
We at least now have a situation in which we have a better opportunity to mobilize allies in the administration and in the Congress to neutralize the protectionist forces that will always be latent and very powerful in the American system.
I do very much share this concern. I will underscore the fact that I think some Canadians were a bit misled by the rhetoric around the American fast track as if, magically, a bill is put on the table perfectly in tune with the agreements they reach and then automatically goes through the Congress. That's true, but before that there is an extended process of consultation, and it is in that process that the dirty little gnomes of Capitol Hill play their dirty little games. It's in that process that you get, if not changes in the actual legislation itself, which can happen - the Baucus-Danforth amendments were the classic example in the FTA instance - or you get changes in the accompanying statement of administrative action, as happened in the WTO case. Under the American system some credence is given to those statements.
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So yes, even with the fast track we're clearly in a much better position than we would be if there were no fast track. If there were no fast track, we simply could not negotiate trade agreements with the United States. With the fast track we are still vulnerable to jiggery-pokery by the U.S. Congress.
The Chairman: Thanks for yielding, Mr. Sauvageau.
Mr. Morrison: I have a looming trade problem in my part of the country, which is central western Canada. As you may know, not too many years ago the exports of live and dressed beef from western Canada were more or less in balance with the imports of dressed beef into the east. That is no longer true. The producers in the northern-tier states are starting to make noises about unfair competition. The fact is that their industry is probably more subsidized than ours is, indirectly, but I'm certain pressure is going to be brought to bear within the next year or whatever. In your opinion, what are the worst pitfalls we have to watch for? We want to take defensive action, if you will, be a little proactive. What can we do to keep the wolf out of our pen?
Mr. Ritchie: Let me attempt a very pragmatic business answer, and if any of my colleagues on this panel want to jump in I will give them every opportunity.
First, any Canadian industry, particularly in sensitive areas such as lumber or agriculture, which captures a significant share of the U.S. market, can expect pressure. The free trade agreements have not repealed human nature and they have not repealed the nature of the political process. We talk about lumber. In fairness, we're talking about a situation where Canadian lumber is capturing a third of the American market. That's pressing on some pain thresholds. Similarly, if we're talking about dressed beef, if we're talking about wheat, if we're talking about potatoes, if we're talking about a whole range of products, we know from experience that at some point our very success will bring American political reaction.
That's number one. Number two is that reaction really has nothing to do with whether we subsidize or whether we dump or whether we don't.
I had a private meeting the other day with a group that included a highly respected American trade theorist, who said of course if you want to escape the risk of countervailing duty action the solution is don't subsidize. I had to say that is the typical, arrogant, pig-headed stupidity of someone who lives within the beltway in Washington.
There is no relationship between the likelihood of an action being brought and succeeding in the American system and the actual practices in Canada. In other words, you can be as clean as a hound's tooth and if you start capturing a substantial share of the American market you're going to get political pressure, and if it translates into an action before the commerce department you're going to be found guilty and the ITC is going to find injury and you're going to get hit. That's the bad news, but it's the real world.
The good news is that thanks to the FTA dispute settlement mechanisms, that will ultimately be overturned and you will get the money back. In the meanwhile you are still going to face some difficulties. I wish that weren't the case, but that's going to be the case.
That takes me to the third point. There really is very little you can do to immunize yourself from that, short of self-limiting your access to the American market. It's a very unpalatable thing for a free-trader to admit, but that again is the reality. That is the reality the lumber industry faced.
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So you have an option. You don't press beyond the point of extreme sensitivity, and if you're not capturing enough of their market to make them upset then you're not doing very well and you should get to work. Threats are easy and cheap and investigations are easy and cheap, but with real pressure translating into real counteraction, if you press that hard you should expect to be treated unfairly in the American system.
There's a real limit to what you can do. You should obviously minimize the extent to which you are too clearly and transparently engaging in practices that can be found actionable under U.S. law. The U.S. law is so vague and remains vague after the WTO that almost any practice can be caught, and the fact that the Americans are doing the same and worse is no defence.
The advisers to your industry will undoubtedly suggest there are ways of doing things that are less objectionable and actionable than other ways. But the the hard reality is that in exchange for the Americans being willing more than any other country in the world to accept our product, you have to accept that beyond a certain pain threshold they will react, bend the rules, and if necessary break the rules. You just have to take that into account.
Mr. Morrison: You're very encouraging.
Mr. Ritchie: I should also say you should get very good advisers in that kind of situation.
The Chairman: And you get it free here.
Mr. Sauvageau.
[Translation]
Mr. Sauvageau: Since Mr. Morrison had to leave, I gave him my turn.
The Chairman: That was very nice of you. Now you have the floor.
Mr. Sauvageau: However, I didn't want to give up my turn twice. I'm always happy to please my Reform friends.
Mr. Ritchie, I understand that 15 permanent members were consulted during the development of the treaties. You talked about a strategy or consultation committee made up of 15 members who were consulted.
Without going through the complete list, could you tell me how the 15 members of the committee mentioned by you or Mr. Crosbie were selected? Are they permanent members or is there a rotation among committee members?
Mr Ritchie: In the case of the Free Trade Agreement, at the very beginning, there were 15 or even 16 sectoral committees, because there was one on cultural industries and another that reviewed all areas. Members were chosen among the CEOs who were clearly leaders in their industry. This was done in consultation with the industries in question. Since that time, the practice has changed considerably. The issue is no longer such a priority, and experience indicated that there was room for improvement. Mr. Crosbie could perhaps explain how members are chosen now.
Mr. Sauvageau: For example, with respect to Chile and Israel, could you tell me how the consultation committee was established and who was consulted in the industry?
[English]
Mr. Crosbie: I don't believe there was a specific advisory committee set up for Chile or for the Israel agreement. We have a standing advisory structure that is made up of 15 sectoral advisory groups. Each of those sectoral advisory groups will have 10 to 15 members. They are chosen, asMr. Ritchie suggested, in consultation with the industry to be representative of the industry.
They are selected by the Minister for International Trade and serve for a period of about two or three years. In addition to the sectoral groups, which would be on specific products such as footwear and textiles, there is a group called the International Trade Advisory Committee, which is made up of CEOs and the chair of each of the SAGITs, the sectoral groups.
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So you have the 15 sectoral groups, the chair of which served on this overriding committee. In addition, the committee would have another 15 to 20 CEOs, which again the minister chooses to be broadly selective and representative of industry across Canada. Those standing committees would be asked to advise on Canada-Chile or any negotiation we have under way.
Mr. Ritchie: What is the term? Two years? It used to be a two-year term.
Mr. Crosbie: It's two or three years. I couldn't recall.
[Translation]
Mr. Sauvageau: You just mentioned textiles, Mr. Crosbie. Canada has signed a free trade treaty with Israel so as to be on an equal footing with other countries, such as the United States and the European Union, which had signed agreements of this type earlier.
Consequently, Israel has a free trade agreement with the European Union, the United States and Canada. Canada has a free trade agreement with the United States and Israel, but not with the European Union.
If there were a specific market for which it would be to Israel's advantage to have entered into a free trade agreement on textiles with the European Union, an agreement to which Canada was not a party, how could we offset this "unfair" or unfavourable competition for Canada? In the context of its free trade agreement, Israel could get textiles without paying any tax to the European Union, which is something Canada cannot do.
Am I mistaken?
[English]
Mr. McLeod: Earlier in my comments I mentioned the horrible world rules of origin. That's exactly the sort of issue that would be referred to what we call a SAGIT, the sectoral advisory groups - that's the acronym that's used - the 15 SAGITs in the various sectors, because that's precisely the kind of issue you want to raise as they come up, if the questions are raised.
Certainly through the FTA negotiations, the NAFTA negotiations, all the negotiations, you want to go to an industry and say you know what your competitors are doing; you know where they can source products. How do we want to deal with this, with the rules of origin?
In this particular case, in any country, you say, well, they bring in most of the unfinished goods or semi-finished goods from Malaysia. They bring it in and just do a little bit of finishing, and they're going to try to ship it into Canada and call it their good. You get a rule of origin that says they're required to do a minimum amount of the work inside your free trade partner or it simply doesn't count for free trade.
That's why there has to be close consultation between the trade negotiators and the industry, because the industry is the technical expert on this. As I say in regard to rules of origin, it's a world unto itself, but it can make all the difference between having the trade arrangement work or not.
[Translation]
Mr. Sauvageau: Do the rules of origin apply to textiles?
Mr. Ritchie: Yes, they apply directly to textiles. In theory, they should prevent a country such as Israel from taking advantage of cheap textiles from Europe to Canada's disadvantage. Of course, everything depends on how well these rules work.
For example, in the case of the FTA with the United States, which at first was seen by industry as a failure and is now seen as a tremendous success, so much so that, I hesitate to mention this, the american Congress is starting to hear quite a bit about this. Canada did such a good job negotiating access that many industry representatives in Quebec that make wool suits and other products have made a fortune.
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Mr. Sauvageau: I would like now to turn to a completely different subject. In your paper,Mr. Ritchie, you mention some examples in which Canada won some trade disputes - softwood lumber, dairy products and poultry. However, the United States did not really comply with the court's decision. How can the trade dispute settlement process be improved to get the losing parties to comply with the conditions that are laid down?
Mr. Ritchie: First of all, I would like to point out that the Americans have respected the decisions, but that they have looked for other ways of getting around them. We could call this bad faith, but reactions of this type are part of life, or part of political life, as you very well know. While this is not always en encouraging fact, I would repeat that without these rules, we would have had nothing to protect us from situations of this type. We have made a great deal of progress, and I think that the dispute settlement machinery is so advanced in our favour, as a relatively small country, that we can be very proud of the progress we've made in this regard.
Are there any problem areas left? Yes, there are, but ultimately, I repeat that we must recognize that there's no international law on trade. It is a confrontation of forces. In this case, if we touch the strategic or very politically sensitive interests of a large country like the United States, we shouldn't make any mistakes. The United States will react as a superpower.
In another context, we saw what happened with the Europeans in the case of cod. I must tell you that at their worst, the Americans are much nicer than the Europeans or the Japanese at their best. I don't want to give you the impression that I'm particularly critical of the Americans. It's part of the process, it is a democratic, political process involving pressure and interest groups. There can never be any guarantees, but we have made a great deal of progress. The machinery put in place by officials and negotiators and the way in which they have used it have clearly worked to our advantage.
Mr. Sauvageau: Thank you.
The Chairman: I would like inform my colleagues that we are called to a vote at 5:30 p.m. The bells will ring for one half hour. We still have a few minutes left.
[English]
Mr. Cullen, you have other questions.
Mr. Cullen: Thank you, Mr. Chairman.
Thank you, Gordon, for the dose of reality on softwood lumber. In terms of market share, I think that's clearly what's driving it, because the last time, to get to the 15%, they threw in log exports. If there was ever a reason to know that it was a totally trumped-up thing, that was it. But it's staggering, the amount of resources required - economic resources of the industry and the governments - to fight these things.
Maybe there's an interesting calculus here. When you get to 28% or 29%, just hold it. Effectively, maybe that's what the quotas have done.
But I'd like to move off that and maybe talk briefly about this U.S. re-export program. In the United States, as I understand it, sugar is priced domestically above world prices, I guess to support the sugar-beet and sugar-cane industries. There was an agreement to the U.S. sugar re-export program that would allow sugar to be re-exported into Canada, often in raw materials like chocolate batting or crumbs, or whatever. It comes in at the world price, and companies in Canada take it and make it into Mars Bars, corn flakes, or whatever. Really all you're doing is allowing the sugar to be priced at world prices, to come into Canada at world price. Based on that sort of scenario, the industry has restructured. Some of the production is taking place in the United States, some of the product mandates have been put in Canada, and now this re-export program is being challenged, I guess in terms of....
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Was it part of the FTA and NAFTA negotiations? What commitments were undertaken by the U.S. government and by ourselves on this particular issue?
Mr. Ritchie: First, the problem is intrinsic to the protected system. It's much the same as our dairy and poultry. If you put a fence around a market, you're going to have artificially high prices for that commodity. As a result, you're going to disadvantage your processors, and then they're going to press you to subsidize them in order to enable them to operate on a more competitive base. Whenever you have that kind of protected market, you have this kind of problem.
You're going to have countries outside - in the poultry case it's the Americans looking into our market and in the sugar case it's Canadians looking into the U.S. market - saying to themselves that it would be nice to be able to make a business out of getting a world-price commodity and selling it into that high-priced market. Even if they had to do a little bit of transformation in order to do that, they could still make a few bucks off it. That was the basic problem.
In the free trade negotiations, the Americans bitterly fought to keep that sugar program - the restrictions that maintain the high price - and to limit imports of sugar-containing products. It's a stupid policy. It's the policy that's going to bring Castro to his knees any day now, after having been in place for thirty years.
To go back to your point about public interest, the only two or three beneficiaries are two or three large American refiners who make a lot of money while making substantial contributions to the campaigns of certain senators and congressmen who need not be named here. That said, the Americans retained in the FTA, and subsequently in the NAFTA, the right to operate that program.
As to the current status, perhaps Mr. McLeod would like to answer.
Mr. McLeod: Were you present at the meeting with Minister Goodale?
Mr. Cullen: Yes.
Mr. McLeod: I was sitting in the back row, as well.
Mr. Cullen: It was quite a conference.
Mr. McLeod: We had the great sugar war. As you know, the industry in Canada was bitterly divided. I know what team you're on - there's another team on the other side - and I think you now know where Minister Goodale is going on this. We'll presumably be getting instructions -
Mr. Cullen: I was somewhat disappointed, but I guess it's not over yet.
Mr. McLeod: I'm going to be a little cagey about this because I'll obviously be working on preparing whatever case we have. I don't want to signal too much to USTR in advance, but I would imagine the heart and soul of the dispute would be about article 303 of the NAFTA and what it means in conjunction with the annex 303.
Annex 303 provides an exemption from the obligations. It's about no drawback, no duty, remission. It's global across all sectors. In Canada, we've very painfully removed all the drawback programs we had, and at much unhappiness. The Americans retained an exemption for refined sugar from this obligation in annex 303. It does not refer to sugar-containing products - the sort of thing you referred to - and that's what the dispute is going to be about. They're reading a little bit more into it, shall we say.
Mr. Cullen: Could I just ask a quick supplementary?
There was some confusion at that meeting about whether the Americans had committed themselves to getting rid of it. In fact, I have seen the letter Mr. Katz - who was quite involved in negotiations - wrote saying it was not his recollection that they were -
Mr. McLeod: It's carefully worded.
Mr. Cullen: It's carefully worded. Okay. I'll read it again.
Mr. Ritchie: With Julius, you have to read two or three times.
Mr. McLeod: There were three layers of qualification in that letter.
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Mr. Cullen: Yes, well I guess we'll leave it there.
Mr. McLeod: We could go on a bit, but we are running out of time.
The Chairman: That's right, but I'll put a quick one to you.
Of course, I like your remark about cultural products and services not being widgets. In the good old GATT there were different trade rules for industrial products and agricultural products. It was recognized that agriculture was something different. Is there ever a possibility of developing special trade rules for cultural products and services? Exemptions basically mean that these agreements do not touch what should not be touched, but they do not protect us from the retaliation or from some unilateral action by some of our partners. That, of course, is the negation of the rule of law.
In your view, in addition to investment rules and services rules, is there any possibility of developing some trade rules that would adequately cover the so-called cultural products?
Mr. Ritchie: It certainly would be technically possible. You're in a better position to judge than I am as to whether or not it's going to be politically possible. It's going to be very difficult. Again, there are essentially three layers of situations. The worst is the one we're in on this very narrow issue of the tax on advertising in split runs. In that, according to the preliminary determination of the WTO, it appears that we are violating rules that we ourselves have accepted. That's the worst situation.
A better situation is the exemption situation. It's one in which we have not accepted rules, which does indeed mean that the other country may be free to act against us but in practice will be less likely to act than it would if we clearly are in violation of our own commitments. It's second-best, though.
The best, clearly, is a new set of rules recognizing that these are very different from other businesses - and there are a couple of obvious observations there. The first one is that one of the major business interests and one of the major export interests in the United States is the entertainment business. One of the major instruments that the major U.S. film-makers, for example, use to control their domestic market is monopolization of external markets.
It makes me slightly nauseous when Mr. Valenti talks about his interest in markets and in letting consumers decide, and what have you. Of course, he has devoted his life to ensuring that markets are not allowed to operate and that consumers are not allowed to choose, and to trying to monopolize the domestic market. When anti-trust problems arose there, he tried to monopolize the Canadian market and other markets in order to control the domestic market.
The Americans have huge commercial interests in playing this game. It is going to be extraordinarily difficult to have them agree to a set of rules that would limit their capacity to do it. That is why I think that, at some point, the Canadian government is seeking allies. I think there may be some opportunity for allies, particularly in Europe - and again I defer to your experience on this - but at some point we have to say this is simply not negotiable, that we are simply not prepared to have widget rules applied to these industries. Before we do that, we would first be well advised to be very clear that we haven't smuggled a lot of strangers into the tent.
When we came into the FTA negotiations, the printing industry was regarded as a cultural industry. It gave me no personal discomfort at all to cut that out of the definition of cultural industries, and indeed the printing industries have done very well selling into the United States. It is therefore necessary to be very clear about the objectives we're trying to protect and promote and pursue in that field.
Secondly, as the Minister for International Trade has suggested, I think we're very well advised to revisit the kinds of instruments we used to achieve that. Some instruments are more acceptable, some instruments are less acceptable, some cost more, and some are more visible.
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Again, that's worth serious examination, but at the end of the piece I for one, as a committed free-trader, am simply not prepared to see my government caving in to demands that these industries be treated as other industries and that the American media giants are able to use clearly unfair business advantages in order to swamp the pitiful remainder of the markets that Canadian producers are now able to supply. I believe that any government that took a different view would be a former government very quickly.
The Chairman: Thank you very much, all of you. Unfortunately, we have to move on. Your comments were certainly very useful and are much appreciated.
This meeting is adjourned.