feat. Colin Robertson

Standing Senate Committee on Foreign Affairs and International Trade
September 25, 2014

OTTAWA, Thursday, September 25, 2014

The Standing Senate Committee on Foreign Affairs and International Trade met this day, at 10:32 a.m., to examine the potential for increased Canada-United States-Mexico trade and investment, including in growth areas in key resource, manufacturing and service sectors; the federal actions needed to realize any identified opportunities in these key sectors; and opportunities for deepening cooperation at the trilateral level.

Senator A. Raynell Andreychuk (Chair) in the chair.

[English]

The Chair: Honourable senators, we're convened as the Standing Senate Committee on Foreign Affairs and International Trade. We are continuing our study of the potential for increased Canada-United States-Mexico trade and investment, including in growth areas in key resource, manufacturing and service sectors; the federal actions needed to realize any identified opportunities in these key sectors; and opportunities for deepening cooperation at the trilateral level.

We started our study yesterday with some excellent witnesses who gave us much information and opinions on our present relationship with Mexico, Canada and the trilateral. Today we're very pleased to have Mr. Eric Miller, Vice President, Policy, Innovation and Competitiveness from the Canadian Council of Chief Executives; and Dr. Christopher Sands, Senior Fellow at the Hudson Institute.

Gentlemen, welcome to the committee. You are not unfamiliar with Senate committees and house committees, so any short statements to open would be appreciated and then questions will follow if you're prepared to answer them. Welcome to the committee. Who shall go first? Mr. Miller. We will take you in the order you are listed.

Eric Miller, Vice President, Policy, Innovation and Competitiveness, Canadian Council of Chief Executives: Madam Chair, thank you so much for the kind invitation to appear today.

First a note that the Canadian Council of Chief Executives is a non-profit, non-partisan organization composed of the CEOs of Canada's largest enterprises. Our members collectively administer $6 trillion in assets, account for most of Canada's exports and foreign direct investment and are keenly interested in this topic.

We see the future of North America as something that is crucial to the membership. Almost all of our members have major operations in the United States, and many have significant operations in Mexico. The supply chains that underpin the North American neighbourhood have created significant wealth over the last 20 years, but we have significant work to do if we are to continue this in the future.

So first a note of context: There has been this vigorous debate about bilateralism versus trilateralism. I see that as a false choice. A better course of action would seem to me to adopt the principle of subsidiarity, that the countries of North America will do what makes sense at the level at which it is sensible to do it. So the Canada-U.S. relationship is deep, complex and long-standing. So, I might add, is the U.S.-Mexico relationship. The Canada-Mexico relationship has intensified but can go much deeper, yet by virtue of our integrated supply chains, shared geographic space, abundant energy reserves and regional economic synergies, there are a wide array of issues that are optimally addressed either wholly or partially on a trilateral basis.

First of all, let me offer some comments on Canada's relationship with the United States. Having a country of 318 million people on our southern flank that has a dynamic economy will always make Canada have its largest trade relations with the United States. In that way, geography is, in a sense, destiny.

But the U.S. is a complicated and labour-intensive place in which to get things done. Besides its sheer scale, the distinguishing characteristic of the U.S. is separation of powers. You have battles with the White House and Congress, the federal government and the states and a whole lot of decision influencers in between. So in order for Canada to be effective in this market, it needs an adequately resourced network of representatives throughout the country. They develop a lot of trade leads and they counteract a lot of protectionist proposals, so this boots-on-the-ground idea is something that is very significant.

Also, one looks at how the bilateral relationship is talked about these days. It's all about Keystone XL and Detroit customs plaza and country-of-origin labeling. While Canada needs to work vigorously to achieve positive results on these issues, we cannot let them define the whole relationship.

A key area of collaboration where we have worked a lot together and where we can work more together is with respect to the border. I see it as fundamental, and we as an organization see it as fundamental that we get full completion of the Beyond the Border Action Plan, including with the preclearance agreement and also, dare I say, converting the trade facilitation pilots into permanent border methodology. With this tri stuff, you take what works and you generalize it.

But the U.S. has also expressed a significant interest to begin thinking about Beyond the Border 2.0, and that is something I think we should welcome because we could do 1.0 concurrently with planning for 2.0. Dare I say it? We can walk and chew gum at the same time.

As we think about 2.0, we should be bold. Let us, for example, reimagine cargo security by exempting firms from customs penalties that deploy monitoring technology and big data methods in their supply chains. In short, you know what's going on in your supply chains, you share that with the government, they're a reliable security partner, so why would you come back five years later and pin them $5 million in administrative fines for an administrative error? If they're a partner in security, treat them as such.

Let's significantly expand the use of onsite customs clearance for high-volume facilities. If you've got a major facility, let's put some customs people in there. Dare I say it; I think that companies would be willing to pay to have that. You see that with companies such as FedEx in Memphis; they have U.S. Customs on site and they pay for that.

We need a trade facilitation advisory board. I've spent too much of my life talking to technical trade experts, and they're always complaining about this or that measure that customs is doing that impedes the flow of trade. Let's have somebody charged with looking at all of these technical rules and determine if we're moving in the right direction, and if not, calling them out. These are not things that rise to the level of dispute settlement, but if the plumbing doesn't work, the whole system of the house doesn't function.

Then another idea I'd throw on the table is let's get some experts in borders and financing together and think of different ways to pay for border infrastructure that aren't fees or appropriations. We've had a huge amount of innovation in financing in the last 30 years, so let's bring that to the border.

When one looks at the relationship with Mexico — I was last in Mexico in June — I see the leadership of President Peña Nieto as visionary. Mexico has become one of the most dynamic economies, and the energy reforms are real and will yield economic growth benefits that are significant for the long term. Mexico also has a strong manufacturing base because it's got a favourable policy environment and strong transportation linkages and its costs are 4 per cent lower than China's.

When you look at the FDI relationships, Canada's stock of foreign direct investment, give or take, is about $5 billion. Mexico's stock of foreign direct investment is less than $150 million. While Mexican firms are increasingly internationalizing, they are not coming to Canada as much as they could.

Why is the relationship so one-sided? A key part of the story is that we make it hard for Mexicans to come to Canada and they make it easy for us to go there. The visa, which Canada introduced in 2009, has hurt our relationship with the Mexican government and private sector leaders and undermined Canada's brand in the country. The single best thing that the federal government could do to improve Canada's economic linkages with Mexico is to establish a path to eliminate the visa.

I've repeatedly heard stories about Mexican business people who cannot travel to Canada because it takes too long to get a meeting. Let's say someone calls you on a Monday and asks to meet on Thursday to close a deal. They can't get the visa in time. This is not helpful. Sadly, it would appear from my vantage point that we are leaving considerable sums of money — in other words, trade and investment — on the table in a fast-growing market to defend a highly untargeted policy instrument. Surely there is a better way to deal with security concerns that we might have in some elements of a country with 117 million people.

Finally, there is the trilateral relationship. The leaders in Toluca, in February, committed to a road map on regional competitiveness, and there is much to be done. One idea we have put on the table is that Canada should join the North American Development Bank and work with the U.S. and Mexico to transform this small institution, which finances principally environmental projects on both sides of the border, into a real North American infrastructure bank. I've also, dare I say, chided some friends at Transport Canada that it would be a handy place in which to get $250 million for a customs plaza, but I digress.

We hear regularly about the difficulty of getting people into Canada for training. Companies should be able to submit a list of people they want to bring in for training and get a response within five days. Training is good for the economy and good for the community, and it's really hard to get people into Canada and, dare I say, into the other countries in North America for training. We also need to update the NAFTA professionals list. Canada should take the leadership and call a meeting of the dormant temporary entry working group.

Finally, let me say something about the auto sector, which is close to my heart. The Center for Automotive Research in Michigan notes that a shipload of 4,000 vehicles assembled outside of North America enters with a single customs inspection. But for 4,000 vehicles assembled within North America, because they move back and forth across the border, this same number of vehicles is subject to 28,000 customs inspections, so it's 1 to 28,000, and the associated compliance cost they estimate is some $800 on the price of a vehicle.

Next year is the fiftieth anniversary of the Auto Pact. Canada and the U.S. need a new competitiveness agreement for today's Auto Pact. In doing so they should look holistically at the sector with a view of building partnerships with the assemblers and suppliers and use technology and process improvements to get compliance costs for North American assembled vehicles to as closely approximate the single inspection of importers as possible. Canada's auto industry will face significant challenges in the future, and indeed it already does, if we cannot minimize the impact of the border. Let's try using trilateralism as an instrument to do that.

Christopher Sands, Senior Fellow, Hudson Institute, as an individual: It's an honour to be here, not just because I'm with my friend Eric Miller, who is very distinguished and I always like listening to what he has to say since I learn a lot every time I do, but also because I'm just a kid from Detroit. Senator Demers is here. He's a legend with my family. I think he's more popular than I am with my parents. They'll be thrilled that I was actually here and breathing the same air.

Senator Demers: Thank you, sir.

Mr. Sands: I've had a chance to speak to the committee before but usually when you've been in Washington, D.C., and I happen to be in town because there's the Borders in Globalization Conference at Carleton University and the University of Ottawa — which is funded by a SSHRC grant, so your tax dollars at work — trying to build a network of people talking about how we overcome the barrier that borders have become between peoples, including Canada, the U.S. and Mexico. It has given me an opportunity to be here.

Maybe 20 years ago, around the time of NAFTA, I graduated from Johns Hopkins SAIS, the School of Advanced International Studies, with a degree in Canadian studies. I was really interested in the Canadian-American political economy that we've all lived with, and obviously, coming from Detroit, that made sense to me. I went straight out of the grad school to the Center for Strategic and International Studies, where I suddenly realized I was going to have to spend a lot of time focusing on Mexico. With NAFTA coming in, I assumed that Mexico now had a seat at the table and North America was changing and I needed to understand Mexico even though I thought I knew Canada and the U.S. pretty well. They were going to affect the relationship.

Really, though, I've been surprised at how little they have. The NAFTA model of a sort of equilateral triangle where three sovereign countries partner to govern the political economy together as peers has become an isosceles triangle, with the U.S. at the pinnacle of two very long, deep relationships with Canada and Mexico and a kind of short end, which is the Canada-Mexico relationship, which hasn't developed in a way that we might have expected 20 years ago.

What I want to talk about today is, first, why would the U.S. care? After all we're at the peak of the isosceles triangle so we're the boss. That seems pretty good, but why would we care in the United States about the state of the Canada-Mexico relationship? Second, why should Mexico want a better relationship with you, and third, why should you want a better relationship with Mexico? In that process I'll try to touch on some of the things but probably lean heavily on what Eric has said about some of the economic opportunities and talk instead about the geostrategic psycho-cultural benefits this relationship has to offer.

The first thing I will say is that although in the United States we have been pushing for a trilateral approach to North America, it isn't because we are ignorant of the differences between Canada and Mexico as neighbours. We know you're in different places. It's because we want to narrow those differences so that we're all on the same page. We don't want to narrow those differences with the lowest common denominator and drag Canada down to the Mexico level, although sometimes on the border that's how we come across, but because we want to lift Mexico up so that they are part of the developed world and part, as peers, of North America. That's a hard job.

The North American Free Trade Agreement had built in a series of NAFTA working groups that were designed to realize more than just tariff reduction — the common market, the single market in North America. The way they were going to go about that was with trilateral working groups of civil servants, public officials, who were going to work to harmonize standards for regulation and inspection of economic activity so that you could produce a good and take it anywhere in North America because it met everybody's standards.

Those NAFTA working groups really died on the vine and they died because the way we ratified NAFTA was about as contentious as the way you ratified the Canada-U.S. Free Trade Agreement. It left a bad taste in a lot of politicians' mouths but, worse, the civil servants were terrified to start taking down barriers against Mexico because they figured that Ross Perot would come and get them. That was important. It meant that the NAFTA working group structure that NAFTA was supposed to have didn't work.

Then came September 11 and we put border barriers up that had not existed before, not even in some cases ever before. Not to put too fine a point on it, but those border barriers clawed back market access for Canadians and Mexicans to the United States market — market access you had negotiated for with NAFTA and the Canada-U.S. Free Trade Agreement but we were now conditioning on your meeting new security agreements. That was a new burden. It added to the compliance costs of every business, big and small. It made it harder and more expensive to access the U.S. market and it discouraged a lot of small and medium-sized enterprises away from trading internationally, especially with the United States.

In the second Bush term, President Bush, Prime Minister Martin and Mexico's Prime Minister Vicente Fox met in Texas to launch something called the Security and Prosperity Partnership of North America. This structure of 20 working groups was again made up of officials who were going to try to look at security and prosperity standards, security and the economy, to try to harmonize and get back towards a single market that we started 10 years earlier and have still yet to achieve.

The Security and Prosperity Partnership didn't work. It was grand. It included annual summits. We still do those and that's good, but it simply didn't make the major gains we'd hoped. It was incremental, and it became a bit of a lightning rod for people who were worried about globalization and its effect on them and their prosperity.

When President Obama came in, he looked again at this issue. Partly in response to ambivalence from both Canada and Mexico about a trilateral dialogue, both sides feeling that their own distinct issues were being ignored and bogged down in process, we adopted what is now a dual bilateral approach, with border and regulatory and even green energy talks that are bilateral between Canada and the U.S. and the U.S. and Mexico. Because they are bilateral, it looks like we're doing twice as much on the U.S. side, with the same officials who have to do double-duty often rushing back and forth between the dialogues.

In the American mind, the goal is convergence because we're trying to create a single market, a common market in which we all participate, even if we're moving at two speeds. The challenge for us in this environment brings us back to trilateralism as much as we can do it, but the reason trilateralism fails is that while the U.S. has deep relationships with its neighbours, Canada and Mexico don't have the trust and confidence with each other.

Why would Mexico care? After all, they do get a bit more attention. They're more the problem child. You guys are the "A" students, and they're still getting detention from time to time. Why would they care about a better relationship with you? Part of it is what Eric talked about, the remarkable reform path they've been on. They saw NAFTA as their ticket to the First World, the chance to grow, and they have grown. They have a middle class now that's as large as the entire Canadian population, which is not insignificant, and that's a middle class by OECD standards, not just by local standards. They have become a successful economy.

Like Canada, they have oil, but they've been depleting that oil, and they need technology to be able to continue their resource development. At the same time, they have what every middle-class society wants, consumer needs and consumer tastes that aren't that different from the rest of us in North America, even if they have a Spanish flare. What they need to do is improve their education levels. They need to improve their manufacturing levels so that their auto industry remains competitive, aerospace and agri-food. They have a greater growing season than even the U.S. does, and certainly better than Canada's, but they need to produce food that will pass the safety and health standards that we have in North America, which means they can learn a lot from Canada on the business and commercial side as well as on the educational, technical, service delivery side.

I don't have to tell you, but I will, that while life, liberty and the pursuit of happiness are great aspirations, what Canada understood fundamentally at its founding was that peace, order and good government are essential. Mexico needs all three. They need peace at home, they need order and they need the rule of law. They can learn to do that soberly by partnering with Canada. I think there is a tremendous opportunity for them if they can really establish a better relationship.

At the same time, you would be surprised at how well they get you, because they are also trapped next to a gorilla of a neighbour who doesn't pay enough attention or understand them particularly well. While we're celebrating this year 200 years of peace since the Treaty of Ghent ended the War of 1812, which the Harper government will not let any of us forget, on the other hand, we haven't yet hit the centenary of the withdrawal of U.S. troops from Mexico in 1917 in the middle of their revolution, which we only withdrew because we needed to send them off to World War I to fight in Europe, where we of course arrived late and took all the credit. Nonetheless —

Senator Dawson: You saw the movie.

Mr. Sands: Yes. The problem for both Canada and Mexico is that they have these conflicted and fraught relationships with the United States, but for Mexico, the wounds are more recent. The anxiety is more intense, and the asymmetry that leaves them feeling the weaker partner is just that much more heartfelt, not just at the level of officials but at the level of the common man. As a result, they need to learn how to mature the relationship to manage as you do. You didn't give up half your territory to an invasion. You negotiated on the border person to person, and you held on to the forty-ninth parallel. You didn't find yourself continually intervened in. You managed to hold your self-respect, not just with a British counterweight but eventually as a proud partner. You showed the way with the Boundary Waters Treaty that the Americans can respond if you treat them as an equal and insist on that treatment in return. That's what Mexico needs. Just as it needs it from the United States, it needs it from you. What's missing here is mutual respect and mutual trust, and it takes time to build that.

What I think Canada can gain from its better Mexican relationship is a return from that isosceles North America that leaves the Americans in charge, which eventually will force Americanization as an agenda for North America on Canada, to a return to the equilateral model where Canada is an equal, Mexico is an equal and the United States is an equal, and we work on North America together. This is something that I think the committee can encourage through policy by encouraging every possible exchange, educational exchanges, supply chain connections, business and professional association encounters, tourism, whatever will bring our peoples together to build that kind of trust and mutual understanding from which come respect and from which will come, I'm sure, a better North America for all three of us.

The Chair: Thank you. Both presentations were extremely interesting, and you've generated the questions that I was quite confident you would. Just before we start, Mr. Miller, there is a conference coming up in October, I'm told, October 30 and 31 in Toronto. Your organization will be presenting a paper setting forth a specific set of action-oriented proposals to do with the North American competitiveness. Is that blueprint available to us?

Mr. Miller: Madam Chair, I must be honest. I presented it internally on Monday, and it's going through a process of some refinement. We will be sure you get that in relatively short order.

The Chair: Okay. That might be a document that would be extremely helpful in our study.

Mr. Miller: It includes 35 specific recommendations and also some suggested paths for how we do that. You'll get that in very short order.

The Chair: We should have waited until then to have you present to the committee.

Mr. Miller: I gave you a little hint of where we're going with a few elements in the paper. We felt it's important to go from vision to action and lay out some specific proposals, not only of saying we should make trust and trade better, but here's how to make it better.

Senator Dawson: I had to check on an isosceles triangle. What it said was the triangle stays the same size even if you change the length of any side. Part of what we should be looking at is how we try to make it bigger. How do we increase not only our relationship with Mexico, obviously, but be sure that despite the obstacles that you talked about, 9/11, our commercial relationship with the United States also keeps growing at the rate it used to? It's growing, and I think we can be satisfied, but it is certainly not at the level it was before 9/11, obviously. We have a more competitive environment from Europe and from the other states south of Mexico, which in a way is pushing us to go towards Asia and Africa. How do we come back to the biggest market, which is the American market? How do we grow it together with the Mexicans? How do we assure ourselves that what you talked about, the equality of the partnership, is resumed? How do we get our dialogue with Mexico? Apart from having the Americans at the table, how do we talk with them alone about the future, not always in a trilateral aspect?

Mr. Sands: Thank you very much, senator. I have a couple of quick observations in that regard. The first is that I think, unlike the old line of the British Empire where in many ways trade followed the flag — Britain would go and businesses would follow — what's been remarkable about North America is it's been the opposite. Businesses have gone and blazed a trail, and governments have been catching up trying to facilitate that exchange. It's interesting because very big businesses that have the ability to absorb risk have gone to Mexico. Our auto industry is there. Bombardier is there building planes. We have major companies, banks and others that have gone.

When we signed Canada-U.S. free trade and NAFTA, one of the great miracles of those agreements is that we opened up the benefits to small and medium-sized enterprises, and both Canada and the U.S. have lots of small businesses and entrepreneurial start-ups and mom and pop stores that benefit from tourism but don't technically trade or travel. I think those businesses have suffered the most from the post 9/11 clawback because it's been harder for people to travel. It's been harder for them to get a UPS or FedEx shipment across the border, and there's the additional compliance cost of paperwork and the risk that if they get on a plane with the wrong thing in their suitcase the Americans will throw them in some sort of clink. Those have all increased, and they've had a chilling effect on the risk taking of the very entrepreneurial class that has made us the societies that we are. As much as I love GM and the big companies, I think the attention has got to be on those smaller companies.

There is some activity we are missing, though, and this is one of the hopeful lines I will leave with you. This is a very nerdy comment. I pass this on because I'm a nerd. One of the problems with our trade data is that we record trade data on the basis of where it enters, so a good deal of our North American trade that moves by truck and rail is counted from Canada entering the U.S., Canada-U.S. trade. But it keeps going and it ends up in Mexico.

The Obama administration, somewhat different from the George W. Bush administration, has been very data focused. Partly I think they won election on big data and they love big data, but I think there's a real opportunity now that we have electronic manifests for most shipments big and small, even the FedEx shipments, to mine that data and tell a more rich story about where the trade is going, where the people are travelling and the services are rendered but also where the goods are arriving.

A truckload of goods that drops off parts at three or four cities may be mostly going to St. Louis, and yet now we have to reverse engineer the importance of Missouri to Canada's trade. I think we can tell a much better story. When people started to realize that individual Mexican states are really welcoming to Canadian business and that there are some opportunities there, that would really grow, but that's one of the reasons that I've emphasized education, tourism, professional associations. I think that's where you get small and medium-sized entrepreneurs, get them to Mexico, get them into the United States to re-establish the ties of friendship and trust that let them do business together because I think that's where we really harmed things with the post-9/11 security.

Senator Dawson: How do we become your partner in trying to solve the visa requirement issue with Mexico? I think obviously the government had reasons to do it. Now I think there's a will on the part of the government to try to back away from it. We are going to report on this issue. How do we become your partners in trying to put pressure to have that change come as quickly as possible?

Mr. Miller: You have, first of all, enormous convening power, so you can ask a lot of questions on this and look at it, but I think where the government is struggling at the moment is with a path of how to do it. My notion of how to do it is essentially take your senior business leaders, your elected officials, your top advisers to the president, a few other categories of people and those who've had two or more visas into Canada who've gone back and say they no longer require a visa.

Then we're going to look at that and we'll say: Is there a surge of, say, 15 per cent of refugee claimants over the baseline level? Probably there will not be, so then you clear those people and you go to those who've had one visa, and a broader group. So suggesting to officials, first, that this has to be done is crucially important because I think there's a reflexive attitude about Mexico and that somehow if we don't have a visa that the Sinaloa Cartel will be in Toronto doing what it does. Probably the Sinaloa Cartel is already in Toronto. My study of economics suggests that —

Senator Dawson: In the mayor's office.

Mr. Miller: My study of economics suggests that any product with a 17,000 per cent profit will get to where it's going. That's not the point. The point is, number one, we need to clearly establish and you need to ask questions about what is the security path that you need from the Mexicans. They have said we need electronic travel authorization. Okay, how do we do that? What is your path on electronic travel authorization? What is your specific path? Unwind it.

In my discussions with the Mexican officials and also some Canadian officials, they say, look, it's not a matter of lifting it overnight but a matter of establishing that path. And given your convening power, your ability to ask questions, call witnesses, you can ask them to present that path very specifically and push the good people at CIC, at PCO, in PMO to say where they're going.

President Peña Nieto is due to come to Ottawa sometime in the winter, probably in February, for the North American Leaders' Summit. It will take an already frosty day and make it even frostier if this issue is not resolved, I would submit.

[Translation]

Senator Fortin-Duplessis: Thank you, Madam Chair. First of all, I want to thank both of you for your presentations. They were really very dynamic and very interesting. My first question is simple and you may already have replied to it in part.

I am surprised to see that there are still irritants in connection with exports to the United States. Could you provide us with further detail on these irritants that are bothering exporters and the companies that are a part of your group?

[English]

Mr. Miller: Senator, with respect to the irritants going into the U.S., any time you have a relationship with as much bilateral trade, there are going to be issues. I generally think if you get 99 per cent or 98 per cent irritant-free trade, in any human endeavour that's a pretty good place to start.

What we have said, though, is that we need to present a very specific and dynamic path in which to reimagine border security and supply chain security, and this is a real partnership. What customs is looking for and other agencies are looking for is data, and what they don't have is enough of it. So the current situation and part of why you do get decisions which get made in rather arbitrary fashions is because we haven't given them the information.

So for example, you have a lot of goods where the company that is the legal importer does not really know what went on eight stages back in their supply chain in China, and so you have the problem that they are making a legal declaration when it arrives at the Port of Vancouver about what it is and where it's from based on information they did not create and did not verify. And that's a problem.

Similarly, everybody who has their NEXUS card has gone in and filled out the profile. We think that you should have a situation where, much like on the good side where you get real-time dynamic information that's shared with customs so they have less reason to take these kind of arbitrary decisions, if you are travelling on a regular basis, you should have a mechanism whereby the general counsel of a company or somebody who is so empowered could go in and enter information not only to say this person is a NEXUS cardholder but also this person is going for this particular reason and here is the legal justification. So they are doing after-sales service, which is legally permissible under NAFTA, but if they show up at the border and say they are going to work, they're going to have a lot of problems.

And so we need to find a way to demand more data, share it more dynamically and, dare I say it, take a little bit less discretion away from the communication process which goes on at the PIL. With clear data, it's harder for people and goods to be refused or for things to go to secondary if you're providing that information.

There are always going to be irritants. In any human endeavour, any marriage, any relationship, there are always irritants. But I think if we get to the point of actually upping our game about data, looking at procedures, getting more people in Trusted Traveler and making Trusted Traveler and Trusted Trader meaningful, then we'll go a long way to mediating that.

[Translation]

Senator Fortin-Duplessis: My second question was put in part yesterday to witnesses who appeared before us then; you represent the companies that do business with the United States and Mexico. We know that Asian economies now have a far greater presence in Canada. Do the companies you represent tend to want to trade more with Asian or European countries, or others, and perhaps less with the United States and Mexico?

[English]

Mr. Miller: So here's the funny story. They've looked at what is the most American car, and it's actually the Honda Accord, so if you add up all of the value that is made, the most American car is actually the Honda Accord. It has 87 per cent North American content.

The relationship with China, with Japan, with Korea, with TPP is complicated, but it doesn't mean that we shouldn't trade with them, and it's not a choice of one or the other. They may have different approaches, different supply chains. They've done studies which have found that 25 per cent of Canadian exports to the U.S. have U.S. content. In Mexico, it's 40 per cent. So the supply chain relationships are deeper. It's about 4 per cent for U.S.-China trade.

Proximity makes the relationship much richer; but for those that come into the market and invest, like Honda, which has a plant in Alliston, Ontario, or like Toyota, which has a number of facilities in Cambridge, they become North American companies.

Now, where I get really concerned when I look at the trade agenda out there is in things such as the U.S.-Japan automotive bilateral that they're negotiating in the Trans-Pacific Partnership.

Under U.S. law, the U.S. Congress has said there's no such thing as an American car. It says "product of U.S./ Canada," so they recognize that integrated market. I have a great deal of respect for and some friends in the U.S. government who do trade negotiations, but nobody is infallible. Our argument has been strongly that if Congress recognizes the integration of the industry, Canada and Mexico should both be at the table to at least know what's going on there, because our core bread and butter is North America. Companies from other regions of the world can come and become North American and have very dynamic operations in North America, and we should welcome them. But as we structure our relationships, we need to be clear and sure that we're not undermining what we've already built here within North America.

Mr. Sands: Let me just add a little bit conceptually, because I agree with what Eric has said. We're always attracted by the new, the exotic, the exciting, and Asia is new, it's growing and it's getting past its sort of troubled days of big dictatorships. Now it's a much more open society. And the Asian markets are hungry for what we produce: our creative products, our standard of living with all the trappings — the shows, the videos, the computer games — and the opportunities for partnership are tremendous.

But for certain goods, especially manufactured goods, if you have 400 million or 500 million people, you can produce anything. Globalization is not immune to transportation costs — maybe on software, but with heavy goods it's not. Here in North America, we have that many people. We can produce anything here. We don't have to worry about any of our industries leaving. We can produce them, because we have enough consumers to make that worthwhile, as does Europe, China and India.

But where Europe has already negotiated common standards in a single market, and where China is a single market, as is India, North America is not. That dream of a single market still hasn't been realized. So sometimes it's easier to trade with Korea or with Japan than it is to trade with Mexico from Canada, and vice versa.

That's the logic that business is going to follow to expand their trade, and we shouldn't gainsay that. We shouldn't argue with them if that's what business wants to do. But where I think policy comes in is we have to look at where we have made it harder to do business in our natural markets so that our businesses see those opportunities, maybe with a nudge from us, but nonetheless can capitalize on them. Just as those countries want to get into the North American market because we have a lot of rich consumers and want to buy their things, we should want to be in our North American market, too.

Senator Tannas: Thank you, gentlemen, for being here. My questions have more or less been answered previously. I'm not a regular member of the committee and this may have already been asked and answered, but is there anything between Mexico and the United States in terms of the Trusted Traveler Program? Could that not form the basis of the first wave of approved, no-longer-required visas for us? Could you just maybe talk about that?

Mr. Sands: Sure, and I know Eric will want to add to this.

Canada and the U.S. developed together the NEXUS program very early, out in the Pacific northwest. They kind of pioneered this idea. It took a couple iterations before we got it right.

The U.S. developed a similar, but not identical, system called SENTRI for U.S.-Mexico, which deals with a fairly regular group of commuters and travellers. It is not nearly as participated in and hasn't been as successful.

During the beginning of the Obama administration, Department of Homeland Security thought, "Let's take this idea and go global," and we created Global Entry, which is an American system. I remember my immediate concern with Global Entry was that it was the next wave, and yet, if you look at NEXUS, it's 50-50 cost-shared between Canada and the U.S., but it's 75 per cent Canadian participation and only 25 per cent American. We just created a program that was only available to American citizens and permanent residents that was going to get all the resources, and you could see it coming: Someone was going to say, "Why are we paying for this Canadian program?" And the risk was that NEXUS would become sort of the Canadian ghetto that wouldn't be well serviced or whatnot.

From that came a dialogue about how NEXUS can be duplicated with Global Entry, and if you're in one, you're in both. From that, TSA PreCheck, which is our program for getting into airplanes, became commonized between the two.

I don't think we need to necessarily merge the programs, but what Canada and the U.S. have done is set a pace. Both countries are trying to push forward, and we need to make sure that the SENTRI program plays catch-up but also work toward a common system where travellers are willing to share their information and get privileged access to each other's countries.

I think you're right. In terms of how Canada solves this problem, the fact that you have a database available to you of information should be a great place to start, at least as an exception to the rule.

Mr. Miller: At the North American Leaders' Summit in February of last year, the three countries committed to move toward a trilateral Trusted Traveler framework. It doesn't mean a single program — but at least to make the programs interoperable.

Obviously, to do that would take us a long way down operationally to dealing with the visa issue, but Trusted Traveler doesn't guarantee admissibility. All it does is speed up and simplify the process.

So if somebody shows up with an illegal substance in their bag and they're a Trusted Traveler, they're going to get arrested. Operationally, it's tricky to have Trusted Traveler with a visa regime, but I guess bringing the two together is necessary but not a sufficient condition to solve the problem.

Mr. Sands: I just have to add to this because —

The Chair: We're running out of time.

Mr. Sands: I'm sorry, Madam Chair. We need to become a bit more like French police officers. If you know the old detective stories, the American cop typically gets a hint, kicks down a door, beats somebody up and the bad guys go to jail. But the old French police officer diligently works forensically after the crime to figure out who did it; no matter how hard they try to hide, the French police officer always gets them.

The challenge for us is to think of the border not as a gate, not in terms of how do we proactively destroy bad guys, but instead how do we use data to forensically find the problem after the fact. That requires trust. If we had the border operating like drunk-driving checkpoints on New Year's Day, we'd catch a few people but the smart drunks would always go around. If we work within society to try to address drunk driving with bars, parents and so forth, we can address the problem. That's what we need for these kinds of problems — the traveller who's slipping across the border; we need to share data and work together as governments to get the bad guys patiently and forensically, rather than proactively.

Senator Housakos: Good morning. What sectors in Canada would you say have not capitalized on the potential in Mexico? I would like for you to comment. For those particular sectors, what would be the pros and cons for them doing business in comparison to their competitors in the United States?

At the end of the day, business needs infrastructure; it needs to have a distance that's reasonable in order to ship its goods. Inevitably, when you're competing with the United States, which has the benefit of proximity and infrastructure, innately, it makes it difficult for Canadian enterprisers to be competitive, in my opinion.

The other element I'd like you to comment on is that business is done between business to business, people to people. I've never seen a government successfully engage in a commercial enterprise where it's been profitable. The reality is the United States has probably millions and millions of Americans of Mexican descent, whereas in Canada, I suspect we have maybe a few thousand. So how much of an obstacle for Canada is that lack of people-to-people relationships on which the United States has a clear edge? Comment on those two points, please.

Mr. Miller: I think you've really put your finger on it in terms of the differences in demographics. Along the southern border, people trade a lot with Mexico because it's right over the border, and they also have familial and kinship ties. We don't have as much of that with Mexico so we need to work harder to get trust in those institutional mechanisms that have been developed.

Certainly among our membership, we have a pretty broad array of those that have gone into Mexico. We have everyone from Palliser Furniture that does furniture there to Bombardier that does key parts of the Learjet 80. There's a lot of Canadian mining investment. There's a lot of Canadian logistics investment.

One of the challenges that Canada has as an economy on the whole is that we have too few in the way of consumer brands; so establishing that foundation for entry into the market in the retail realm, for example, is something we need more of. There are deeper, more structural problems in terms of brand creation and brand growth, which I think we need to encourage more of in Canada, as opposed to in other areas. Certainly if you look across at manufacturing services, probably there's space for more in the tourism sector.

I'm told more Canadians go to Mexico as a tourism destination than Americans. It's a huge market. Anyone can understand that, given weather differentials. So there's very good opportunity, but a lot of it is very specific, and we need those business-to-business, person-to-person contacts to take place; so I'm spending a fair bit of time there trying to build that out and do introductions for our members.

Mr. Sands: It's exactly what Eric said. The language is the key of the cultural affinity. So education, whether it's online education or university exchanges; research and development partnerships; business services, including after-sales services; accounting; advising; entertainment and media. Now, software is a little different because software writes in computer language, but there are a lot of those challenges. And then lastly in the area of brands, things like hotel, tourism, there are well-known brands like Fairmont and so on here, but they can break in in a much bigger way.

The last thing I add is energy. The reason I say that is that Mexico has closed on energy for foreign investment for so long. Now they're opening up oil. They are opening up some room for natural gas, and even the potential for some electrical investment as well, and I think all of that could be a huge boon for Canada, which happens to be excellent in every one of those sectors.

Senator Downe: Mr. Miller, in your presentation you talked about infrastructure and tolls, and I thought I heard you say there's some creative way that we could get around that. I'm wondering if you could expand on that.

Mr. Miller: Yes. I think the way that border infrastructure is typically financed is you put a fee on it or you appropriate money for it. You've had some experimentation; so, for example, there's this airport in Tijuana. San Diego's airport is hemmed in, and so they've decided they're going to turn the Tijuana airport into the new San Diego airport. You've had a private investor who's come in and built a parking lot and a footbridge across the border to Mexico, and the investor himself pays to staff that with Customs and Border Protection officials 24 hours a day.

Now that's being done with private money for private purpose. All you need is to get Customs and Border Protection to work with you to do that.

So when I look at what's done at the border, and I drive down to Ogdensburg and across the Ambassador Bridge, you see these crumbling pieces of infrastructure; yet every day you put on any business channel or read The Wall Street Journal, there's all this interesting financing for long-term projects, and people from OMERS and CPPIB tell us they are screaming for long-term projects with a 40-year payout in secure markets. Let's get some of that money over there and put it over here and put it to work in border infrastructure. It's worked great for Infrastructure Ontario. There's no reason why it can't work for infrastructure North America.

The Chair: We have three more questioners. I will ask you to put your questions, and then, with cooperation from our witnesses, we can wrap up near to our time.

Senator Demers: Thank you very much for your comments. They are really well appreciated. What are the most promising opportunities for increased trade investment among Canada, the United States and Mexico in the manufacturing sector? In which particular manufacturing sector are the best opportunities?

Senator Oh: Is there a possibility that Ontario — or British Columbia, they're closer to the West — could set up a special trading zone similar to what they have been doing in Hong Kong and Shenzhen, the special free trade zone there for North American treaties?

[Translation]

Senator Robichaud: You said that there has to be a lot of trust between the people who negotiate or want to do business together.

I understand that there may be a lack of trust. What kind of people are we talking about? Where is there the greatest lack of trust? Is it among business people, officials, or politicians?

[English]

Mr. Miller: On best opportunities in the manufacturing sector, certainly, as Chris mentioned, energy, there's a big amount of opportunity there for downstream products.

You could see enormous opportunities for grown in the petrochemical sector, also the production of goods going into electricity, and then, frankly, the sheer construction of steel and iron and specialty goods going into infrastructure.

The irony is that when one thinks about manufacturing, it can be many things. I think Canada's largest manufacturing sector is now the food sector, and given the growing middle class in Mexico and the safe, high-quality food standards we enjoy in Canada, there's a great deal of opportunity in that particular space.

On the special trading zone, I've long been a fan of free trade zones. That's not been a tendency of Canadian public policy so far. The Americans have done it in a big way.

That would involve breaking a lot of new ground, but what we need to do is to stop doing a lot of the things that impose the cost on business. Setting up a separate policy regime would engender a huge debate, but I think it's the end you're trying to get to of a more efficient, less regulated, less expensive place in which to do business, as opposed to the particular regime of doing that.

And so what we need to do is dig into how we do supply chain monitoring in security. What information do we ask from traders? How do we pay for infrastructure? How do we bring people in for training? How do we do skills accreditation? And to say we're going to do the hard work of fixing this for the whole economy.

The agenda is not just about "take a regulation, leave a regulation." It's about smarter regulation and smarter processes. And so that is the best place to put the energy.

Now in terms of the question of who and where the lack of trust is, I'd say that certainly among our members they have an enormous amount of trust with their Mexican partners. If you've been to a major Mexican manufacturing facility, you will see excellent, high-quality products, excellent managers, very sophisticated people who do that work, but it tends to be a little bit more among the political class and among certain perceptions about what Mexico is versus what Mexico was and on the Mexican side about Canadian intentions.

Leaders need to lead, and this is an area where, in some respects, the private sector is leading, and we would really benefit from having the political leadership and the leadership at the government level move in a positive direction. There's some of that. I think there have been moves, but your committee could give it an enormously beneficial push forward.

Mr. Sands: The great thing about working with Eric Miller is he does the heavy lifting so I can just be the frosting on the top.

Let me add to Senator Demers' question. Plastics, moving up the downstream from petrochemicals into diversifying in the economy, they have the raw materials, but they haven't gone as far as to what you can use the petrochemicals for. There's room there. Precision tools, machine tools, as well as automation.

They do have a labour surplus, but not a skilled labour surplus. Mexico is really going to be looking to bring in robotics at a pace to catch up to where Canada and the U.S. are. I think there's a great area for manufacturing growth where Canada could be of great help.

In terms of zones, I have an idea, and I've talked about this in other settings, that we need to move from Beyond the Border 2.0, from the idea of pilot projects, discrete experiments between DHS and Public Safety Canada, towards the idea of pilot zones where we experiment to facilitate trade but now bring in state and provincial governments and local governments to get the infrastructure right, to get the law enforcement coordination right, to be able to move the products more effectively. If we broaden the circle and get more local, state and provincial input into how we manage the border, it will make a tremendous difference. There's a lot we can do there.

Eric is right — free trade zones were great when tariffs required manufacturing for export. Tariffs aren't our issue, but we really do have management issues. Concentrating on zones expands the idea of experimenting with pilot projects to something potentially quite helpful, especially in places like B.C.

Then on lack of trust, before we started talking about North American integration or Canada-U.S. integration, we used to think of integration, at least in the United States, of African-Americans into the workforce and women into workforce. That was integration as we knew it; that's how we experienced it. What we should learn from those experiences, mainstreaming them into our workforce, into our lives, is that it always starts crudely. You've seen "Mad Men" and you remember these shows with bad stereotypes, with terrible jokes, with attitudes that are clearly going to have to change. I think the only way to break that down is with interaction — define the stereotype with the fact of a person who is a person who is not living up to that caricature.

The way to do that goes back to what we said earlier, to get Canadians and Mexicans to interact and not have an image of each other that comes from a 1950s American cowboy movie but maybe something even richer, a friendship. I think the business class has invested in it. The political class could do a lot, premiers talking to governors, trade missions back and forth, exchanges between legislators. There's a lot of room for it. The Mexican Senate is quite a distinguished body. You have counterparts there. The more we build those ties, the more we break down what are unfair and inaccurate images that we have of each other. That's the way integration has tended to work. I know it will work here.

The Chair: Gentlemen, thank you. We have finished almost on time, just a little over. I want to thank Dr. Sands for being here. The information that you've put before us in such a succinct way has been extremely helpful. You've covered so many areas, and those were exactly the areas we are concentrating on. Your evidence today is extremely valuable to us. We may look to you for further information, and we appreciate your cooperation and attendance here.

Honourable senators, the Standing Senate Committee on Foreign Affairs and International Trade is continuing its study of the potential for increased Canada-United States-Mexico trade and investment, including in growth areas in key resource, manufacturing and service sectors; the federal actions needed to realize any identified opportunities in these key sectors; and opportunities for deepening cooperation at the trilateral level.

In person, we have before our committee here today Mr. Colin Robertson — well known to our committee — Vice President of the Canadian Defence and Foreign Affairs Institute and Fellow of the School of Public Policy, University of Calgary; and from Calgary by video conference, Mr. Carlo Dade, Director, Centre for Trade and Investment Policy, Canada West Foundation. Welcome to both of you. We are running a bit late, so we are going to start immediately. Mr. Robertson, if you can give us your opening statement, followed by Mr. Dade, then we will go to questions. Welcome to the committee.

Colin Robertson, Vice President, and Fellow, School of Public Policy, University of Calgary, Canadian Defence and Foreign Affairs Institute: Thank you, Madam Chair. By way of introduction, I served in the Canadian foreign service for almost 33 years with a concentration on Canada-U.S. relations, including postings to the UN in New York while we were on the Security Council in 1977, returning to the consulate general in 1978 during the later Carter and early Reagan administration as one of the crop of junior officers sent to get to know the local congressional delegations as part of our diplomacy in the United States under Allan Gotlieb, which embraced Congress as well as the administration. Gotlieb's I'll Be With You In a Minute, Mr. Ambassador remains the best how-to diplomatic guide for Canadian diplomacy in the United States.

I was a member of the Canadian teams for both the Canada-U.S. free trade and North American free trade negotiations during the Reagan, George H.W. Bush and early Clinton administrations. I served as our consul general in Los Angeles during the later Clinton and early George W. Bush administrations. Prime Minister Martin appointed me as the first head of the Advocacy Secretariat in Washington to advance our interests on Capitol Hill, working closely with our provinces and using public diplomacy.

During my last two years in the foreign service, I worked on a major study on Canada-U.S. relations with Derek Burney and Fen Hampson at Carleton University to help prepare Canadian policy for what turned out to be the Obama administration. On retirement from the foreign service, I joined CDFAI and McKenna Long &Aldridge, a Washington-based law firm.

By conviction and experience, I favour closer North American integration because it will strengthen Canada and sustain those things that define what it is to be Canadian.

I'll start with a story. On the seventh day, God created Canada, a country of mountains, lakes, forests and fish, abundant resources, a peaceable kingdom with people from every land, fleet of foot — especially on skates, Senator Demers. St. Peter asked God, "Don't you think you're being a bit generous to these people?" God smiled at St. Peter and replied, "Just wait until you see the neighbour."

A foreign service career gives you the privilege of speaking with our prime ministers, and each one has told me that prime ministers have three main files on their desks: national security, national unity and the U.S. relationship.

Read Richard Gwyn's splendid biography of Sir John A. Macdonald and you will appreciate that a preoccupation with our southern neighbour is older than Confederation. The Mexicans have a similar perspective. Mexican President Porfirio Díaz, a contemporary of Macdonald, would lament of his nation's propinquity to the United States: So far from God, so close to the United States.

But as much as we might complain about Uncle Sam, I have never forgotten the perspective I received as a junior officer at the UN. A group of us were dumping on the United States after the Carter administration's failure to embrace and ratify the East Coast fisheries agreement. A Polish diplomat, his country still under the boot of the Soviet Union, listened to us complain about the Americans. He then asked us, "Would you rather be us?" It stopped us short.

Anti-Americanism is a virus that is deep in our DNA. My view is that God did us a great favour, not just in our place and people, but also in our neighbour. We are friends, allies and partners, whether we like it or not and whether they know it or not.

Franklin Roosevelt, probably the president who best understood Canada's strategic importance to the United States, established with Mackenzie King the framework through which we have conducted relations since 1938.

In return for preferred access to what is still the biggest market in the world, we undertook to be a reliable ally, benefiting from the U.S. security shield. Having carried more than its fair share of the security load, the U.S. is now asking its allies to step up and do more. For our own security and to demonstrate our commitment to collective security, we need to invest, especially in building the ships to sustain the maritime order on which our commerce depends.

Successive presidents and prime ministers, the smart ones anyway, have followed this formula of sustaining institutions, security through NATO and NORAD, trade through our multiple trade agreements — notably the FTA and NAFTA and leading now to CETA and the Trans-Pacific Partnership — and on the environment, beginning with the IJC and including the acid rain agreement and the Montreal ozone protocol.

Institutions level the playing field, and they work to the immense benefit of Canada.

Brian Mulroney, the prime minister who probably best understood the United States, recently observed:

If you can't do that, you don't have much clout internationally. The relationship with the United States is something the prime minister alone has to nurture the same way he would tend to the most delicate flowers in a garden. It's that important.

Mulroney understood that our leverage internationally comes from the fact that because we understand the United States better than anyone else, we can interpret the rest of the world to the United States and the United States to the rest of the world. This means reinvesting in our diplomatic service.

We are a North American nation. We can't change geography, nor would we want to. Let us get on with deepening the integration that is already taking place through investment and supply chain dynamics, as well as through the people-to-people ties that we enjoy with the United States and that now include Mexico.

I'll conclude with three recommendations. First, on the U.S., we like to think we know everything about them and they like to think they know everything they need to know about us. We're both wrong, but because of the asymmetries of trade and investment, they matter much more to us than we do to them.

As a start, we should have a representative in each U.S. state to act as our ears, eyes and, when necessary, our mouths to make the Canadian case. When Congress and the states act, it is usually not malice but lack of appreciation of the Canadian perspective. We need to be there to set the record straight on urban myths like the one still there about the 9/11 terrorists coming from Canada. It's not nice diplomatic notes but rather straight talk between friends. As I have learned, be brief, be blunt and be quick because once a myth takes root, it's hard to undo it.

Let's do diplomacy differently and cost-effectively by hiring from the star-spangled Canadians already living in the United States. Get them to establish business groups like what we have done in Arizona with the Canada Arizona Business Council. This clever initiative set as its goal to increase the number of direct flights to Arizona. In a decade, under the leadership of Glenn Williamson, now our honorary consul, they've increased from eight to a hundred flights a week. That translates into an awful lot of trade and investment. Let's get to it.

President Obama may be a lame duck, but lame ducks can get a lot done. We didn't begin negotiations of the Canada-U.S. Free Trade Agreement until the final two years of the Reagan administration. The acid rain agreement and the North American FTA were negotiated in the last two years of the Bush administration. The Canada-U.S. partnership came together in the last years of the Clinton administration, and it morphed into the Smart Border Accord.

Let's take the initiative and keep pushing on shared issues like Beyond the Border, regulatory cooperation, as well as the Arctic, energy and environmental collaboration. Sustainable development is not a choice between the environment and the economy; it's both together.

Ambassador Bruce Heyman wants to get things done, but he needs our help to resolve problems constructively. Hectoring and hazing may make for headlines, but it's not smart diplomacy, and history suggests it's also poor politics. Canadians expect mature behaviour when dealing with the U.S.

On Mexico, a window is now open to significantly increase our commercial ties, thanks to the reforms of the Peña Nieto administration, especially in terms of selling them our energy know-how, our engineering and infrastructure expertise and in educating the future Mexican leadership at our schools and universities.

The Mexicans want to do business with us. Our private sector wants convergence on border facilitation and deregulation. There are real opportunities for Canada in Mexico's ambitious infrastructure program, including railroads, expanded metros, Mexico City's new airport and over 10,000 kilometres of new pipelines. The North American energy revolution means cheap gas will reindustrialize our countries, especially in energy-intensive industries. It's more than oil and gas; it's investment in electricity plants based on gas. These are all areas of Canadian expertise.

President Peña Nieto personally selected Ambassador Francisco Suarez to open the doors. Suarez is a doer, but he needs a partner.

To do business, Mexicans need to get here. Our current visa process is long, arduous and humiliating. We figured it out with the Czechs, on whom we imposed a visa at the same time as the Mexicans.

The immediate fix would be to recognize Mexicans who qualify for preferred entry to the U.S. in the same fashion that the U.S. gives Canada preferred access through the NEXUS program. Ultimately, we need to bring these trusted traveller programs into alignment.

We should match the Mexican efforts to establish close relations between our universities, not just increasing student exchanges — why not aim to quadruple them in the next four years — but also in joint research projects.

For strategic reasons, Mexico should be at the top of our development assistance list, with help in policing and judicial training. There are still some who think we would be better off just dealing directly with the United States. They argue trilateralism complicates things. It does, but surely we can walk and chew gum at the same time. If the rapidly increasing Canadian investment in mining, banking and now manufacturing in Mexico doesn't persuade you, then consider these two facts: Mexico, with 122 million people, is already America's second largest trading partner, and their trade is growing faster than our own. Forty per cent of what Mexico sends to the U.S. was sourced out of Mexico. The figure is 25 per cent for Canada, underlining our integrated trade.

There are 51 million Americans with Latino roots, most of them Mexican. This is a vital voting block. There are legislators with Latino roots in state houses, Congress, the governors' mansions and cabinet, and it will not be long before there is one in the White House.

The hidden wiring of Canada-U.S. relations is the web of relationships beyond the Prime Minister and President and our cabinets, especially premiers, governors and legislators, federal and state. We need to expand this wiring with Mexico.

I applaud the work of the revitalized Canada-United States Inter-Parliamentary Group, under the leadership of Senator Janis Johnson and MP Gord Brown. We should integrate the Canada-U.S. and the U.S.-Mexico groups to create a North American inter-parliamentary group. This would give us a much better chance of sustaining attention from U.S. senators and members of Congress, and with our Mexican colleagues we could put pressure on the U.S. to deal with shared interests, like challenges around trucking, border infrastructure and improving the logistical challenges of the supply chains that now cross all our borders.

Like the Canada geese now flying south that I heard this morning, North American integration has become a force of nature. Embrace it con mucho gusto to our mutual benefit. Let North America demonstrate to the world what it means to be a good neighbour.

The Chair: Thank you, Mr. Robertson. I will turn to Mr. Carlo Dade and, before he speaks, I will indicate to him if he sees a change in chair it has nothing to do with his performance. I have a command performance with the Speaker, so the deputy chair, Senator Downe, will take over my duties here. Welcome, Mr. Dade.

[Translation]

Carlo Dade, Director, Centre for Trade and Investment Policy, Canada West Foundation: Good morning everyone. First of all I must thank the Senate and you, Madam Chair, for your invitation to testify this morning and express some views on North America.

[English]

It is indeed a pleasure to be back in front of the Senate, the Foreign Affairs Committee, to talk about an issue that is of great concern to Western Canada. By way of introduction, before joining the Canada West Foundation I served as the executive director of the Canadian Foundation for the Americas. This was Canada's think tank on Latin America.

As part of our work, we had a major focus on North America and specifically on Canada-Mexico relations. We had a three-year special project and initiative with the Mexican Council on Foreign Relations to look at the Canada-Mexico relationship and ways to strengthen and revitalize it. Some of my remarks this morning will be informed by that deeper work we were able to do for many years with colleagues throughout Mexico.

Some of the ideas, interestingly, are still current. The idea on the NEXUS issue that Colin was kind enough to mention is the type of thing that has been in discussion for some time with Canada and Mexico.

The questions before us today are growth areas, manufacturing and services and the federal actions required to realize these opportunities, also opportunities for deepening tri-national relations, right into what I see as opportunities in the rise of Mexico or Canada to help strengthen North America for its benefit and the benefit of our neighbours.

Let me start out by saying that for Western Canada and the Canada West Foundation, our concern is the prosperity and growth of Western Canada — a strong West is a strong Canada. The importance of what we do has come to take on more of an international focus. A strong West in a strong Canada is a strong West globally and in key markets. It was indeed what was behind the creation of the Centre on Trade and Investment Policy at the Canada West Foundation.

Interestingly, when discussing trade in Western Canada, it is assumed that our focus is Asia, that we are looking east only. The reality is, for Western Canada, North America has been, is and will for some time remain our most important trading partner in the movement of goods, services, people, ideas and money. This often gets forgotten with our recent fascination with China and other emerging economies. The truth is well-known throughout Western Canada that we need to protect market share, defend our interest and, where possible, seek to grow our markets and our market share in North America.

The issues on which our centre works, North America, defending market share in North America and, where possible, looking for new opportunities, are our number one priority. Indeed, the trade situation in North America is getting more competitive and will get more competitive still in the years to come. This requires focus and attention on our part.

In addition, some of the other issues we're looking at are obviously growth opportunities around the Pacific. We now have an arc of opportunity around the Pacific, thanks to trade agreements that have been signed recently and agreements that are pending, such as Korea and Japan. We're also looking at the rise of the global middle class, so moving the discussions from emerging markets to discussion about the rise of the global middle class, specific markets that have opportunities for Canada, and that is where I'd like to start with the discussion about North America.

One of the most profound changes we've seen in North America has indeed been the rise of the middle class in Mexico. This ties directly into the issues the Senate is looking at this morning, such as opportunities for trade and strengthening North America. When we signed NAFTA 20 years ago, Mexico was a majority poor country. The majority of the population lived in conditions of austerity, limited economic means and limited possibilities for growth and improving their situation for families and communities. That is radically different today.

If you look at the Mexico we have today, the country is, arguably, majority middle class. This has had profound changes on the politics of the country, but also on the economic opportunities that Canadians have and it has also changed the balance of relations within North America and created new opportunities for the North America that we envisioned 20 years ago when we signed NAFTA.

Quickly, on the Mexican middle class, the Mexican Association of Marketing Intelligence and Public Opinion Agencies is using Mexican household income survey data about the competition of classes in Mexico. What they find today is that they divide the country into A, B, C, D, and E classes, with A being the 1 per cent, and E being those who are marginalized and in extreme poverty. What they find today is that the largest group in the country is a group they classify as D plus, with average incomes, no high school degree but primary education, no car but the ability to meet basic needs and an upward trajectory. That group comprises 36 per cent of the population.

The D and E categories, those who live in austerity, little primary education, not enough to meet basic needs — the poor, in other words — are only 25 per cent of the population. What's interesting is that this group that's 36 per cent could be considered lower middle class. The groups above them who have high school education and a car, or have college education and two cars, who take a trip once a year, whose children are in private schools — the equivalent of public schools in Canada — comprises 32 per cent of the population in Mexico.

Again, this has had profound changes on the politics of the country. The country is now closer to the North America that we have in the United States and Canada. Those who are middle class or who are trending upwards in class have more of an interest in an open, democratic, liberal model. These are people who are working at Walmart, not working for the state. They have a vested interest in the success of Mexico in the broader North America, in the North America that's post-NAFTA, that is open, that is reforming and that will continue to grow and create jobs. That's one opportunity for Canada and Mexico.

It also changes the trade picture too. We now have the possibility for trade in an array of services and other industries that would not exist with a country that is majority poor. Mexico has changed in the 20 years since NAFTA, but in Canada our perception of the country hasn't kept pace with the fundamental shift in the country's reality, the move to becoming a middle-class country, a country that is now the world's fourteenth largest economy and, according to Pricewaterhouse, by 2034, I think, may be the world's eighth largest economy, larger than Canada. Thomas Friedman did a piece a couple years ago in The New York Times pointing to Mexico as the one country where he sees the most opportunities, ahead of China and ahead of India. Indeed, for a country that's in our same time zone, that's only five and a half hours away as opposed to 12 or 13 hours of flying, a country that is essentially North American in its business culture, this rise of a middle class in Mexico is of extreme importance for Canada.

Very quickly, on energy, as Colin and I think Chris mentioned, the energy sector reforms in Mexico have profound importance for Canada, and especially for Western Canada. Again, the reforms are in energy, not just hydrocarbons. We were fortunate to have the undersecretary in charge of the reforms at the Mexican energy ministry come to Calgary, along with the undersecretary for the environment, the ambassador and several other officials, to do the first foreign presentation on the reforms, and they chose Calgary ahead of Houston or ahead of other markets. This was an important signal, I think, to Canada.

What was interesting is that they didn't just talk about hydrocarbons. They talked about reform of electricity, renewables and the need for natural gas pipelines to produce electricity to make Mexican manufacturing more competitive. These are areas where Canada has a great deal of competence, I would say expertise, and there's demand, and the Mexicans have clearly indicated their interest in these services from Canada. There are opportunities there.

Mexico also signed an agreement with the Alberta energy regulator, another sign of interest beyond just trade, beyond just services. There's interest in our model, our way of doing business, and there's a feeling from Mexico that they can connect with Canada on these issues.

Very quickly, what can be done? I won't talk about reshoring. Hopefully somebody will ask me about that, but that's a great example of how the rise of Mexico is important for companies like Palliser Furniture, which is adding another design team in Winnipeg thanks to a more productive Mexican sector tied to better energy. So there are examples of the rise of Mexico benefiting Canada.

But what can be done? Very quickly, I will have to disagree with my colleagues. I think the success and the growth we've seen in North America have come at the sub-regional level, the level of state-provincial relationships and ties. Indeed, we don't really have a good idea of the number of agreements that provinces have signed with Mexican states. Last time we took a look, I think we found 23 agreements between provinces and states. With Canadian provinces and U.S. states, the numbers are even higher.

The issue on North America is that trying to revitalize NAFTA is a dangerous idea for any politician in Washington. The agreement with the European Union, the TTIP agreement, has come to be labelled by the critics of the agreement and their associated media as TAFTA. The thinking in Washington is that the surest way to kill any trade agreement is to rhyme it with NAFTA. This is how poisonous the situation and the mood in Washington are with regard to NAFTA. This doesn't exist at the state and provincial level. Indeed, the agreements that we have continue to grow, and we're able to solve issues at the state and provincial level.

Credential recognition, education and health are issues that are at the state level where we can have progress. Obviously, the better idea would be to have North American solutions, but that, in my analysis, was cleared earlier off the table. Plan B has got to be looking at provincial-state relations. What the feds can do there is actually to do less, to allow the provinces and states to do more and not to get in the way of this budding field of North American growth.

I would agree with Colin that we need to send a signal to Mexico. The Mexicans have been disappointed as they sought to take more of an active role, a leadership role in North America. I think the feeling in Mexico City is that hasn't been reciprocated in Ottawa. It's been recognized in Washington, but there is clearly frustration that it hasn't been reciprocated in Ottawa. Colin's idea of a parliamentary working group is a great idea. A special representative, a parliamentary secretary for Mexico and for North America, is certainly worth the cost of a few plane tickets for someone to travel to Mexico. It would send a huge signal and vastly increase our capacity to understand and work with Mexico.

As one idea that's outside of the box, if you do want something on broader North America outside of the trade area, think about the disaster response. After Hurricane Katrina, Mexican troops were massed along the border with Texas, not seeking to get back at the U.S. for wars of 100 years ago, but these were disaster response units. Mexico has a great deal of expertise in disaster response thanks to hurricanes and earthquakes, and it shares this around the region, especially in the Caribbean and Central America. We've had experience with the United States for winter storms. There's no reason why we couldn't think about a broader North American response to natural disasters. Given what we're seeing with the recent surge in storm activity and natural disaster impacts in Canada, the United States and Mexico, sharing resources only makes sense. This may be a bridge to some form of larger cooperation.

Again, I would say the state-provincial level has been the quiet story of success in North America, and anything we can do to encourage that, we should do. Thank you very much.

Senator Percy E. Downe (Deputy Chair) in the chair.

The Deputy Chair: Thank you, Mr. Dade. We appreciate your contribution and your comments.

[Translation]

Senator Fortin-Duplessis: Mr. Robertson, first of all, I want to welcome you and congratulate you on your magnificent career, since you spoke about it to us, and I admire you a great deal. Mr. Dade, thank you for your interesting presentation.

My question is for Mr. Robertson. Are there any consortiums, currently, that is to say, Canadian industries that cooperate with American industries to produce defence materiel?

I also have a second question: do the United States purchase Canadian defence products, and vice versa?

Mr. Robertson: Yes, there are Canadian and American consortiums, such as large corporations like General Dynamics, Lockheed Martin and Boeing, that all produce arms. This began during the Second World War, and we have good treaties that have served Canadian interests well. They concern mostly Quebec and Ontario, but also the rest of the country. Various products are involved, such as aircraft and tanks, but there is a gap where ships are concerned, and this is due to the American Jones Act. This prevents cooperation between Canada and the United States, and that is somewhat difficult in the context of long-term cooperation with the United States.

Senator Fortin-Duplessis: Are there slightly smaller industries that also cooperate in the production of weapons such as rifles and canons?

Mr. Robertson: Yes, and also for arms. In terms of dollars, these are big amounts and this is front page news, but it is important for job creation both in the United States and in Canada.

[English]

The Deputy Chair: Thank you. Mr. Dade, Mr. Robertson referred to it in his remarks, but could you comment on the level of investment that the Canadian diplomatic and trade corps has in the United States and in Mexico? We had some witnesses yesterday at a meeting, and last evening I went home and looked at the Mexican government website, and I understand the argument has always been that a lot of it is consulate work because of the large Latino population. But Mexico has a presence in Alaska and Nebraska. They seem to be very strong in the U.S., and we have cut back recently because of restraints in the budget of the department.

I'm just wondering about the Canadian presence in Mexico. Do we have to put more investment in there to get the return we're looking for?

Mr. Dade: The Canadian investment in trade diplomacy and trade facilitation in Mexico is of two kinds. There's the Canadian Trade Commissioner Service, and I would argue that that needs to be expanded throughout Mexico, following places like Querétaro, where Bombardier is located, or the zones up north where Palliser is producing furniture. I think having more of a presence in those areas would help.

But the second aspect of Canadian trade diplomacy is by provinces. Alberta has an office in Mexico City, and also an office in Guadalajara. They have an agreement with the state there. Ontario also has an office in the Mexican embassy in Mexico City, and Quebec has its own mission.

The ability of all these has been helpful, I think, at the national level and at the provincial level.

In terms of increasing this, we've always managed to do quite well in working with the trade commissioners in accessing opportunities in oil and gas, specifically oil and gas services, so that's worked very well.

Yes, we need to increase our presence. Yes, there are key markets that are easily identified, and it would be fairly easy to do. But we've cut back our diplomatic presence in the United States. At one point in time, we were looking to cut the consulate in Houston, although it was unfathomable to us in Western Canada why we would want to cut a link to a market that's so vital for the production of oil and oil and gas services.

On Mexico and the United States, Mexico also has a two-tier approach — the consulates but also associations of Mexicans in the United States — diasporas — people of Mexican origin who have communities and organizations tied to their hometowns or communities. This is — throughout the United States. There are tens of thousands of organizations in the United States. Each Mexican consulate in the United States and the consulate in Toronto has an officer in charge of looking after the diaspora — working with these groups. So, they have a presence.

They're also about to open a consulate in Winnipeg, so Mexico will have the same level of representation in Canada that the United States does. There will be Western Canadian consulates in Vancouver, Calgary and now Winnipeg.

At the very least, the argument could be made that we need to match Mexico in terms of what they are doing in Canada.

The Deputy Chair: Mr. Robertson, do you have any comment, given your experience in the United States about the reduction? There's obviously been a reallocation in the department to other emerging markets, but when you look at the figures, every government for the last 30 years, it could be argued, has been trying to diversify the trade, but the reality is the bulk of our trade is still with the United States. It seems to me that these cutbacks may not be meeting our objective, which is to grow the trade not only with the United States but with Mexico, as well.

Mr. Robertson: Chair, I think we need to do diplomacy differently. We don't necessarily need big buildings with cars and flags and things. You do it on the ground, the way we experimented for a while under Prime Minister Chrétien when we expanded our presence in the United States and we found Canadians, as I alluded to in my remarks, who were already living there.

I will give you an example to put it into dollars terms. When I was in Los Angeles, to keep a Canada-based officer in the United States cost you about $325,000, so I traded this back. In return I hired — this person was based in L.A., which was our base — and I hired a Canadian in Phoenix and Tucson and San Diego focused on life science. I paid them between $65,000 and $75,000 and bought a car that we amortized over three years. In the case of Phoenix, with the focal operation of the Phoenix Chamber of Commerce, we installed them in the chamber of commerce so they had access in Tucson — similarly the economic council.

I should point out at the time that the Governor of Arizona was Janet Napolitano, who went on to become the Secretary of Homeland Security, so this relationship really worked.

We did the same thing in San Diego. In fact, we launched our office in San Diego on a visiting Canadian frigate that was participating with the United States, just sort of underlying the security relationship that has been referred to here.

This all was done for the cost of having somebody basically. So you can do things more inexpensively. They were, as I say, our eyes, ears and our mouth, and it worked extremely well.

We also created something in Washington — it still exists — called Connect to Canada, or C2C. It's using the many Canadians in the United States through the power of the Internet — and this is particularly effective when sometimes — because the one thing we really do have to watch out for with the United States, particularly today, given the messiness of the world situation, is this fear that the bad guys come in from Canada. You play whack-a-mole. You have to go after it each time you hear it, otherwise these myths get away and it has an effect on our trade and relationship.

So by having these Canadians who we would inform what was going on — Prime Minister Harper spoke after the arrest of the Toronto 18 a few years ago — we put this message out immediately to the Canadians, and it did a tremendous amount of good. The Canadians said, "Thank you. My neighbour was asking about this: Is Canada a bed of terrorism?" No, in fact, we are just as vigilant as others. Use the existing population of Canadians down there.

One of the things that Carlo spoke about that we believe in is use of the provinces. Our current ambassador in the United States, Gary Doer, when Premier of Manitoba, with the Western Governors' Association, hosted Mexican governors. I remember being in Gimli, where the water comes for Crown Royal. There was Crown Royal consumed, as well as tequila. That helped to cement the people-to-people relationship, working at the state-province level — particularly important in those areas of provincial responsibility, like transportation, for example.

The highway system that we want to see go, which transports so much of the goods by truck between Canada, the United States and Mexico — a lot of this is responsibility of governors, Mexican governors and Canadian premiers.

The Deputy Chair: Thank you. The last question will be addressed to the two of you. Mr. Robertson, you could start first. Do we need improved bilateral relations before we can improve trilateral ones? It appears the weakness is with our Canada-Mexico connection now.

Mr. Robertson: Right. No, I think that they become mutually reinforcing. Next year's trilateral summit takes place in Canada. The energy ministers that will meet later this year is trilateral. We can work these on several levels. Again, they are mutually reinforcing.

The Mexicans are bringing a number of ministers up. It would be useful for us to have that reciprocity in meetings back and forth. Again, as I alluded to in my remarks, encourage parliamentarians. We have a challenge sometimes of getting the American attention. I am convinced that if we brought Mexico and Canada together, we would be able to more easily access the American Congress, which is so vital in making American policy.

The Deputy Chair: Thank you. Mr. Dade? Same question.

Mr. Dade: It depends on the issue within North America. Thinking of this as one North America issue upon which we work, either bilaterally or trilaterally — the reality is there are issues that crop up every day and issues that are on the agenda, some of which lend themselves to better cooperation with the United States — perhaps the Arctic — and some which lend themselves to better cooperation with Mexico. I'm thinking about trade with Asia — work with the Pacific Alliance on some of the emerging trade integration groups.

So there are opportunities that impact North America as a regional supply chain and as a regional producer or as a bloc for producing goods, whether trilateral or bilateral.

The issue, though, with relations with the United States is that there's always been the fear in Canada that working more closely with Mexico will distance us from Washington, but the reality nowadays, as Colin has alluded to, is that Mexico is of greater attention to Washington. If you look at the number of visits by dignitaries, undersecretaries, representatives to Canada and to Mexico, even accounting for the difference in population, it's not even close.

So where we can align on issues with Mexico — again, the Mexico that is now middle class, that is a politically different Mexico from 20 years ago — I think we can move on some issues that are of importance.

Country-of-origin labelling — our best ally on that issue with the United States is Mexico. The Food Safety Modernization Act — our best ally on that issue in Washington is Mexico. We are working with them on issues, but there's a possibility to do a lot more. It just requires, as Colin has also mentioned, a bit more time, a bit more attention and resources.

The fundamental problem we have in Parliament, the Senate and in our other institutions in Canada is that we simply do not know Mexico. There is no centre for the study of Mexico in Canada, nor is there a policy research centre or university that has expertise on Mexico in Canada, yet I can think of three or four institutions in Mexico that have expertise on Canada, that have experts working focused on Canada.

So the fundamental nature, before moving ahead, I think we really have to gain the ability in Canada to understand Mexico, and also to understand the United States, as Colin mentioned in his opening remarks. We think we know the United States, but it's based more on anecdote than it is on research from a plethora of institutions throughout Canada. I can't think of one institution or one research centre on North America, let alone one on Mexico.

The Deputy Chair: Great. Colleagues, on your behalf, I want to thank the two witnesses for their presentations, for taking the time. It is very much appreciated as we continue our study, and the meeting is adjourned.

(The committee adjourned.)