Free Trade With the U.S.—Only in a Dream World

Head Table Guests

Leland Ausman, Honorary Director, The Empire Club of Canada; Karen Lai, grade 12 student, Riverdale Collegiate Institute; The Rev. Cameron Brett, Minister, St. Andrew's Presbyterian Church; Dr. Fraser Mustard, President and Bell Canada Fellow of The Canadian Institute for Advanced Research and a Director, Stelco Inc.; Alfred Kennedy, Consul General, United States of America; Diane Francis, Editor, The Financial Post; Bill Brock, Vice-Chairman, Toronto Dominion Bank; Carlyle Dunbar, Financial Journalist and an Honorary Director, The Empire Club of Canada; Edward Reeser, Vice-President, Finance, Timminco Ltd.; Peter George, President and Vice-Chancellor, McMaster University; and Arthur Scace, Q.C., Managing Partner, McCarthy Tetrault.

Introduction by David Edmison

In 1856, in a paper to the British Association, Sir Henry Bessemer outlined his revolutionary process of decarbonising cast iron, making it possible to produce steel economically. Shortly after his discovery England's steel production expanded over 30 times and the price of steel declined 80 per cent. Bessemer was drawn to the problem of producing steel economically in order to improve the manufacturing of guns. Even Bessemer might have been surprised at the spectacular growth in the steel industry over the past 150 years. It is used in thousands of applications from beams to bicycles, from ships to surgical instruments.

Over the years there have been many refinements and innovations made in the production process and the steel industry today is one of the most competitive in the world, requiring huge capital investments. In North America the signing of the "North American Free Trade Agreement" has ushered in major changes to the marketplace. Many companies have restructured and realigned their core businesses in order to be more competitive and productive. Since NAFTA the volume of business with Canada's major trading partner, the U.S.A., has grown substantially. Not everyone has had a fair share of this increase in business and there still are a number of bilateral and, with the entry of Mexico, trilateral trade issues yet to be resolved. There has been much written in the press about the various trade disputes between Canada, the U.S. and Mexico involving allegations of dumping. Among those caught in the midst of this controversy are the Stelco Group of businesses, who are collectively Canada's largest producers of steel. With us today to discuss the major trade issues facing the Canadian steel producers is the energetic Chairman and CEO of the Stelco Group, Fred Telmer.

Mr. Telmer heads a company which produces over four million tons of steel per year, generates close to $3 billion in revenue and employs almost 12,000 people. Mr. Telmer joined Stelco in 1963, working first in the Industrial Relations Department and then in the Marketing Division where he held various managerial positions. In 1984 he became General Manager, Corporate Affairs and Strategic Planning and a year later was named Vice-President of this Group.

Our guest quickly climbed the ranks and became President of Stelco Steel in 1988. A year later he was elected to the Board of Directors and was named Chairman and CEO in 1991. Mr. Telmer is a Director of Inco and CT Financial Services. He is a Director of the International Iron and Steel Institute and the American Iron and Steel Institute and is Chairman of the A.I.S.I.'s North American Steel Council. He is also a Director and Chairman of the Canadian Steel Producers Association; a founding Director of the Japan Society and serves as Vice-Chair of the Canada-Japan Business Committee. In addition to these responsibilities he is Vice-Chair of the Institute for Work and Health and is Chairman of the Board of Governors of the Chamber of Maritime Commerce.

Ladies and gentlemen, I ask you to welcome our special guest, truly a man of steel, Mr. Fred Telmer.

Fred Telmer

Good afternoon, ladies and gentlemen:

I would like to thank The Empire Club of Canada for giving me the opportunity of speaking to you this afternoon. Since its founding in 1903, The Empire Club has acquired a well-deserved reputation as one of Canada's leading and most prestigious public policy forums.

Let me get right to the theme of my remarks by making a simple straightforward statement. We do not have free trade with the United States. Anyone who thinks otherwise is living in a dream world. Anybody exporting to the U.S. who believes that the Canada-U.S. Free Trade Agreement (FTA) and its successor, the North American Free Trade Agreement (NAFTA), gives them some kind of protection or special status in dealing with U.S. trade laws is putting his company at risk.

This might seem a strange observation to make when you consider that, over the past eight years, Canada-U.S. trade, which accounts for more than 80 per cent of NAFTA trade, has escalated in value from nearly $190 billion in 1988 to a current level of about $330 billion. We often hear that only five per cent of this total is involved in trade disputes. So where is the problem? The problem is that the other 95 per cent is also subject to the full force of U.S. trade laws in the same way as U.S. trade with Italy, Japan or Brazil.

If the FTA or the NAFTA is not a free trade agreement, then what exactly is a free trade agreement? A free trade agreement is basically an arrangement that provides for a free flow of tradeable goods, services and investment across national borders. It is based on the premise that trans-border trade should be conducted in the same manner as unencumbered local trade within any of the participating nations.

The flow of trade is like water. It flows from advantage to disadvantage until equilibrium is achieved. In the case of water, the flow is governed by physics; in the case of trade, by Adam Smith's "Invisible Hand." Any constriction of the flow, with concrete in the case of water or protectionist trade barriers in the case of trade, will impede the achievement of equilibrium and the full benefits of the process will not be realised.

This does not mean that a free trade agreement should be a free-for-all bereft of any rules. What is essential to the effective functioning of such an arrangement is a mutually agreed-to set of common trade rules or protocols that dampen any short-term fluctuation and deal with any predatory actions on the part of participants.

The Australia-New Zealand Free Trade Area is an example of how a properly constituted FTA or NAFTA should work. Australia is New Zealand's most important trading partner, while New Zealand, in turn, is Australia's largest single market for manufactured exports, not unlike the relationship between Canada and the United States.

In creating their free trade arrangement, both countries concluded that anti-dumping and countervail actions against production in either country made absolutely no sense. They have taken the position that trade across the Tasman Sea should not be treated any differently than trade across the great expanse that is Australia. Should anti-competitive or predatory practices give cause for concern each country will apply its respective competition laws.

This, unfortunately, is not what we had in the FTA and it's not what we currently have in the NAFTA. When the FTA was being created in 1987, negotiations had gone right down to the wire without agreement having been reached on how to handle anti-dumping and countervail. By way of explanation, dumping is defined as selling your product in a foreign market for less than you would in your domestic market. Countervail laws are designed to counter government subsidies that are deemed to have assisted exports.

At the eleventh hour, Canadian and U.S. negotiators reached a compromise on these contentious issues. This compromise provided for an extra five to seven years to negotiate common trade rules that would address antidumping and countervail concerns. As an interim measure, a temporary adjudicative process was established in the form of binational panels. The compromise also stipulated that binational panels would only exist until an agreement could be reached on anti-dumping and countervail. If the time limits expired without agreement being reached, the binational panels would disappear.

The commitment to negotiate common trade rules proved not to be worth the paper it was written on. The Canadian government was unwilling or unable to get the U.S. to come to the negotiating table. The U.S., on the other hand, clearly had no interest in modifying its trade laws. To the contrary, it was seeking to strengthen these laws in tactical response to the tariff-reducing trend of the Uruguay Round of the General Agreement on Tariffs and Trade Negotiations. The five-to-seven year negotiating period came and went without any action being undertaken.

Canadian suspicions that the U.S. commitment to negotiate common trade rules was nothing more than a sop to Canada that was never meant to be acted upon were reinforced when the first draft of the NAFTA appeared on the scene in 1993 minus any reference to a common trade rule regime. In December of that year, at a meeting with President Clinton in Seattle, Canada's new Prime Minister, Jean Chrétien, made Canada's proclamation of the NAFI'A conditional on a renewed commitment toward developing such rules. A deadline of December 1995 was set for completing this task. Once again, this deadline has come and gone with nothing being achieved. What was heralded by the Canadian side to be a specific U.S. commitment turned out once again to be nothing more than a sham. These observations reflect very clearly the degree to which the formulation of U.S. trade laws and how they are implemented is a politically driven rather than an economic or trade-driven process.

The U.S. system of government encourages open and wide-ranging debate on public policy issues. When trade agreements, such as the FTA and NAFTA are involved, this debate focuses not only on the merits and demerits of the agreement itself, but also extends to what others would deem as "technical issues," which must take into account the wishes of the special interest groups that form the backbone of the U.S. political system.

In most other jurisdictions, such as Canada, these "technical issues" would be considered administrative in nature and dealt with by the bureaucracy once the proposed agreement had been enacted into law. In the U.S., since sides are taken on these issues during the political debate, they continue to be politically driven during administrative implementation. When the formidable coalitions of members of Congress, trade lawyers, lobbyists, industry groups and other special interests that inevitably come together when trade issues are involved press the button, the net result is that the United States trade representative invariably responds.

This is not a criticism of the U.S. system, merely an acknowledgment that it is the U.S. system. What I am critical of is the fact that the Canadian government is either unwilling or unable to recognise this reality. Let's face it: the U.S. has consistently demonstrated a tenacious attachment toward protecting the sanctity of its trade laws. Nowhere has this been demonstrated more intensely than in the steel sector. Given this reality, it is certainly not coincidental that throughout the eight years the FTA and NAFI'A have been in existence, there have been more antidumping disputes involving steel than any other product category.

As a Canadian-based steelmaker, I can relate to the concern U.S.-based steelmakers have over off-shore imports because we have that same concern. For all too long, the United States and Canada have been the last truly open steel market in the world and import penetration of that market has been the highest among the industrialised economies.

Many of these imports are of the "dump and jump" variety--large volume boatloads of steel from international traders that are sold at distress prices that set the new pricing level for the market. What I find highly ironic and, indeed, perturbing, is that U.S. trade laws have in their application proven much more effective in inhibiting legitimate, cross-border, long-standing supplier-customer transactions carried on within a Canada-U.S. free trade environment than they have in dealing with these "dump and jump" boatloads of predatory imports.

U.S.-based steelmakers have made it very clear on many occasions to their Canadian contemporaries that, as far as they are concerned, U.S. trade laws are sacrosanct and that their preservation was a precondition to the U.S. entering the FTA and, subsequently, the NAFTA. This attitude certainly explains why discussions on the part of NAFTA working groups and at the North American Steel Council of the American Iron and Steel Institute to devise common trade rules moved at such glacial speed and, more significantly, why nothing was ever accomplished.

As one justification for the position they have adopted, U.S.-based steelmakers contend that, in their view, the Canadian and U.S. economies are not integrated. I beg to differ! Two nations with the world's largest bilateral trading relationship valued at an estimated $330 billion annually and whose automotive, appliance, agricultural implement, electronic, computer and financial service industries operate as if the border did not exist would seem to me to be far along the road to integration.

The Canada-U.S. Auto Pact illustrates perfectly the degree to which the Canadian and U.S. economies are integrated. Under this treaty, auto production has been rationalised to the point where, depending on the vehicle model involved, the entire North American demand for that model is met from facilities located in either country. As an example, the Chevy Lumina is assembled in Canada for the entire North American market, while the Saturn is assembled in the United States. Ford's Grand Marquis and Crown Victoria are Canadian-assembled, while the Sable and Taurus are U.S.-assembled. Production of Chrysler's Cherokee sports utility line is centred in the U.S., while the LH line is predominantly assembled in Canada. None of these models has a Canadian or U.S. designation. Unlike Hyundai which has a Korean and BMW which has a European designation, they are all North American.

We see the process of integration at work within our own steel sector. Canadian and U.S.-based steelmakers jointly own raw material and manufacturing facilities in each other's country. They draw their refractories, reagents and machinery from the same continental supply base. They operate under similar labour and environmental laws. They participate together in the technical and commercial committees of the American Iron and Steel Institute, where they undertake joint research projects and activities to promote the expanded use of steel.

Canadian and U.S-based flat-rolled steel producers serve the same North American customer base. Canadianbased producers ship to long-established customers in the United States and U.S. steelmakers do likewise to customers in Canada. Ten to 12 steel producers--the U.S. majors plus the Stelco Group of Businesses and Dofasco--bid for all or part of the steel requirements of General Motors, Ford and Chrysler. All three of those giants look upon the United States and Canada as one marketplace and one production environment.

Ladies and gentlemen, I suggest that anyone who continues to deny the reality of an integrated North American economy and marketplace in the face of all this and other evidence to the contrary is probably well on his way to taking out a membership in the Flat Earth society!

Even more ludicrous is the contention that the sanctity of U.S. trade laws must be maintained because of the unfair advantage Canadian manufacturers supposedly enjoy because of the lower Canadian dollar. This presupposes that the value of a nation's currency is set by political or administrative decree rather than by the movement of market forces.

From a Canadian steelmaker's perspective, the difference in value between the Canadian and U.S. dollars is a two-edged sword as our U.S. colleagues know full well. Canadian steelmakers purchase a significant proportion of their manufacturing inputs from the United States and, as a matter of fact, the value of these purchases exceeds the value of what we sell there.

U.S. steelmakers also complain about the degree to which Canadian steel producers supposedly benefit from subsidies. In actual fact, only one small Canadian producer, Sydney Steel, in Nova Scotia, has received government subsidies. I would suggest that as far as other Canadian steel producers are concerned, the impact of these policies fades into puny insignificance when compared to the lavish subsidies offered by individual U.S. states to have steel producers set up within their jurisdictions. Ironically, two Canadian steelmakers, having adopted the "if you can't beat them, join them" philosophy have established Gallatin Steel in Kentucky and in this process received subsidies to the tune of U.S.$365,000 per job.

If I were asked whether I believed there was any chance at this point of completing the NAFTA by negotiating a common trade rule regime, my answer would be a categoric "no." If you were also to ask me if we currently have a level playing field in Canada-U.S. trade, my answer again would be "no."

Let me illustrate the latter point by outlining crucial differences in the application of major Canadian and U.S. trade laws that stack the deck decidedly against Canadian interests.

In Canadian dumping investigations, counsel for a Canadian petitioner does not have access to questionnaire responses of parties under investigation. In a U.S. investigation, counsel for U.S. petitioners not only has complete access to Department of Commerce questionnaire data; they are also allowed to "assist" the DOC by suggesting other areas of investigation as well as commenting on the accuracy of an exporter's responses. This virtually guarantees the establishment of the dumping/injury line required in the subsequent U.S. International Trade Commission (ITC) phase of the investigation.

Under Canadian trade law, the onus is on domestic manufacturers to prove they have been injured by imports. This process, which can last up to three weeks, takes place in a trial-like courtroom setting that permits extensive cross-examination by counsel for foreign exporters. By contrast, the focus of the U.S. injury determination process is on the evaluation of data accumulated by the ITC and the time allowed for public presentation and cross-examination is as little as one hour. In Canada, domestic manufacturers must prove they have been injured in order to win an anti-dumping case. In the U.S., it is up to the exporter to prove that they are not injuring U.S. producers.

In Canada, once a positive anti-dumping finding has been made by the Canadian International Trade Tribunal (CITT), no penalty need ever be paid by an importer provided they price at "normal value" as calculated by Revenue Canada. The U.S., on the other hand, requires the posting of a dumping duty deposit even when sales are at non-dump prices.

The differences between Canadian and U.S. trade laws lie, not so much in the laws themselves, but rather in the accompanying regulations and how they are administered. The U.S. interprets and applies these regulations with a great deal of rigidity. It's rather like what you go through when you access the Internet. If you miss a comma or period, access is denied. Canada, on the other hand, undertakes a much more lenient approach with minor infractions being overlooked or accommodated at a later date. What is the impact of this difference? The Canadian customer in the U.S. has shipment delayed, while the customer of the U.S. mill does not and is probably not even aware there was a problem in the first place.

How do we, in the Stelco Group of Businesses, manage this process? We ensure that each and every shipment meets the voluminous and demanding regulations of the U.S. Department of Commerce (DOC). Each and every transaction for all our sales is cross-referenced by a sophisticated computer model. What I am holding here in my hands is a page from an actual computer printout for just one product which we had to submit to the DOC. It's 60 columns wide and 60,000 lines deep and encompasses 3.6 million computer entries that had to be compiled in order to meet the requirements of the U.S. regulatory system.

Meeting these rigid demands imposed by the U.S. constitutes an enormous expense for Canadian exporters, in terms of both the financial and human resources that must be committed to this undertaking. These laws and regulations are among the most formidable non-tariff barriers I can think of and as I said at the beginning of my remarks you ignore them at your peril!

So, where do we go from here? There is available to Canada an option that would at least have the merit of creating more of a level playing field for Canadian manufacturers. Quite simply, the federal government must change the processes associated with administering Canada's trade laws to bring these into line with the process employed by the United States. There is ample precedent for such an initiative because this is precisely what Mexico did before the ink was even dry on its signature to the NAFTA. Let me emphasise I am not advocating changing Canada's trade laws. There is no need to change them. I am advocating that they be administered in the same way that our NAFTA partners administer their laws.

In urging such a course of action on the federal government, we are not acting in any spirit of tit-for-tat pettiness. To the contrary, we see this as an urgently required measure pending what I still hope will be an eventual end to the economic insanity of producers within a free trade environment in an integrated North American economy and marketplace slapping anti-dumping actions on each other.

Has this imbalance created any problem? Yes. In the past two years, steel imports into Canada have reached a record level of 30 per cent of Canadian consumption. Two-thirds of these imports are coming from the U.S. at the same time that Canadian steel exports to the U.S. are steadily declining. If this trade resulted from market forces and was fairly traded, I would have no complaints. However, a significant proportion of these imports are being dumped according to information provided by Revenue Canada. We are also seeing dumped product being imported into Canada from offshore, processed and then trans-shipped into the U.S. under the guise of being Canadian-produced. This, in turn, further exacerbates Canada U.S. trade relations.

Let me conclude by urging all of you here this afternoon to join us in making representations to the federal government to bring the application of Canadian trade laws into line with that of our NAFIFA partners. This is in the interests of all of us, because, as I have already indicated, what applies to five per cent of Canadian exports into the U.S. segment of the North American market today, can just as easily apply to the other 95 per cent of these exports tomorrow.

The appreciation of the meeting was expressed by Carlyle Dunbar, Financial Journalist and an Honorary Director, The Empire Club of Canada.