On NAFTA’s renegotiation: ‘It’s been baptism by fire, for sure.’

| September 30, 2017 | 0 Comments
(Photo: Wanda Goodwin)

(Photo: Wanda Goodwin)

Dennis Darby, who had been CEO of the Ontario Pharmacists Association (OPA), became CEO of Canadian Manufacturers & Exporters (CME) in January 2017. Before serving as CEO of the OPA, he spent 24 years with Procter & Gamble, starting his career as a product engineer and rising to director of North American External Relations. He has a degree in chemical engineering and management from McMaster University and earned an Institute of Corporate Directors Designation from the University of Toronto’s Rotman School of Management in 2011. He spoke with Diplomat’s editor, Jennifer Campbell, about the state of trade in Canada.

Diplomat magazine: I was surprised to read that through your membership, you speak for a group of businesspeople who are responsible for 90 per cent of Canada’s exports. That’s a considerable portion of our economy.

Denis Darby: A full 75 per cent of everything we trade is in manufacturing and we represent 90 per cent of those companies, so it’s a fairly broad business association.

DM: And a pretty influential one, I would think.
DD: I wish it were more influential, but we’re doing our best.

DM: Does government listen when you speak?
DD: Yes. We do get a hearing. We have a good relationship with the government and the bureaucrats and the ministers of the day. Principally, we deal with Navdeep Bains [minister of innovation, science and economic development]; Kirsty Duncan [minister of science]; Chrystia Freeland [foreign minister] and [International Trade] Minister [François-Philippe] Champagne — the people who are dealing with investment or trade in Canada.
A good example of us being listened to is that as the government of Canada was preparing its NAFTA team, its chief negotiator Stever Verheul, who also negotiated CETA and is a fantastic and experienced negotiator, asked us to be on a small advisory group. So it’s the CME, along with the Chamber of Commerce and the Business Council in this group. We’re the one group that actually represents the traders.
We don’t tend to have the national or protected industries as part of CME — we tend to be the free traders. We don’t have Bell, we don’t have banks, we don’t have very much dairy. Most of our members are manufacturers or processors or fabricators or the people who build equipment or make products. So our messaging tends to be around the benefits of free trade because more than any sector, manufacturing has changed irrevocably from 25 years ago when NAFTA was negotiated. It has continued to evolve. So you either compete or you’re out of business. It’s not a protected cultural industry, it’s not telecom, it’s not banking. If you’re not good, you’re out.
I think it’s interesting that our members have said they want to improve NAFTA, that they want more access, better access and more fair access to be able to compete.

On NAFTA: “Our members want more access, better access and more fair access.” (Photo: Wanda Goodwin)

On NAFTA: “Our members want more access, better access and more fair access.” (Photo: Wanda Goodwin)

DM: With the NAFTA renegotiation, it was really baptism by fire when you started this job.
DD: We walked right into a budget and then after that, NAFTA. We knew NAFTA was going to be on the table, but it’s been a challenge to try to keep up with where the U.S. wants to go. And then in June, the U.S. finally articulated what its priorities will be when the trade authority comes back from Congress. It gives us at least a template. It’s been baptism by fire, for sure.

DM: Can you talk about your organization’s NAFTA wish list?
DD: Hopefully it’s better than a wish list. We heard from members across the country. More than 500 companies responded to our request for input and then we had a number of committees look at the responses. North American trade is deeply integrated and we don’t want there to be any harm to that environment. No Canadian manufacturer wants more restrictions or barriers to what is already an integrated trade zone. Canadian companies are often already integrated [into the U.S.] supply chain. We always hear from big American companies investing in suppliers and customers in the U.S. So, No. 1, let’s not make it worse. I know that sounds very Canadian. But that doesn’t mean you can’t improve it. We recommended to the Canadian government that they eliminate the remaining barriers, the red tape that exists now, whether it’s customs or regulatory restrictions. If one country has done the regulatory approval, it should be good for all. We have to harmonize our regulatory processes because [as it is now,] that can be a non-tariff barrier.

On Trump's wish list: “[Our worries are] Chapter 19 and language that talks about Buy America.” (Photo: Wanda Goodwin)

On Trump’s wish list: “[Our worries are] Chapter 19 and language that talks about Buy America.” (Photo: Wanda Goodwin)

We all know that NAFTA was negotiated before the internet, cellphones or really accurate GPS. Right now there are barriers to investment and technological use. We do have the advantage of there being both TPP and CETA that have been negotiated. In those, there have been improvements around areas of digital trade, digital economy and digital manufacturing. We think there are ways to get rid of, wherever you can, subnational trade barriers that exist.
In that modernization, we’d even be looking for improvements to trade remedies because the one thing the U.S. did put in its wish list was that it wanted to eliminate Chapter 19, which is something that the Canadian government is opposed to and we’ve told them that it’s something that manufacturers rely on.
An independent trade resolution mechanism makes total sense. Canadian companies don’t want to have to rely on American or Mexican civil courts. And maybe the Americans don’t want to rely on Canadian civil courts. The U.S. has said they want to eliminate it, but our lawyers would say you can probably make it stronger and more useful. We’d be against getting rid of it.
The wording we use is that we should enhance Chapter 19 by eliminating a few of the articles to basically make a common North American approach to what constitutes an offence.

On CETA: “It's extremely important for Canadians to diversify their dependence on the U.S.” (Photo: Wanda Goodwin)

On CETA: “It’s extremely important for Canadians to diversify their dependence on the U.S.” (Photo: Wanda Goodwin)

The last thing is one where I think there is alignment with the U.S. and it’s the fourth pillar for us: Leveraging NAFTA for common approaches to trade outside of the region. Co-ordinating and dealing with mutual threats like unfair trade practices and dumping outside of NAFTA [is what we’re talking about.] It’s no secret when you’re a country the size of Canada, it would be better if this North American free-trade bloc was able to deal with illegal dumping, currency manipulation, non-tariff barriers that exist outside by working together as one. If you go back to the original NAFTA, it was to create a large trading bloc that could go head to head with the European Union or the Asia-Pacific Partnership. The idea of using NAFTA as a vehicle through which the three countries deal with unfair trading practices is important. That was on our list and it also ended up in the language from the Trump administration. By and large — other than things like Buy America, which Canadian manufacturers would say are counter to free or fair trade, and Chapter 19 — I think we’re mostly aligned.
At this point, we’ve given our advice to government and we’ve shared our input and then we’ll be part of that feedback loop [throughout the negotiations.]
The government has been forthright in saying it’s not going to negotiate in the media, [Prime Minister Justin] Trudeau has said that the whole idea of a trade dispute mechanism is part and parcel of a modern trade agreement.

DM: What most worried you when you saw the Trump wish list?
DD: Chapter 19 and the language that talks about Buy America or U.S. content versus North American content. At the end of the day, we want free trade and access to markets. Canadian companies have a very low proportion of government procurement now, so why put more rules in to restrict that?

Included in procurement with the U.S. — something U.S. President Donald Trump wants to renegotiate with NAFTA — are such items as transportation infrastructure, engineering and construction services, buses and pipelines. Canada's Vantage Airport Group has a $4 billion contract  to redevelop New York City's LaGuardia Airport, shown here. (Photo: Patrick Handrigan)

Included in procurement with the U.S. — something U.S. President Donald Trump wants to renegotiate with NAFTA — are such items as transportation infrastructure, engineering and construction services, buses and pipelines. Canada’s Vantage Airport Group has a $4 billion contract to redevelop New York City’s LaGuardia Airport, shown here. (Photo: Patrick Handrigan)

DM: What share of U.S. procurement does Canada get?
DD: We tried to get the answer to this, but unfortunately they’re not available.

DM: I would have thought Canada would have a much bigger stake in procurement.
DD: We don’t always think about what’s in the government procurement bucket in the U.S. When you talk about government procurement, we think about roads and bridges, but a number of products and services are covered. There is a statistic somewhere that talks about the dollar value of what the U.S. government buys and it dwarfs anything else, which is why we’re small potatoes, but we’re important. Our members who sell buses or pipelines, they’re important and it’s important to their business so they don’t want it restricted. Engineering services and construction services are also important in terms of modernizing. They weren’t as explicit about this 25 years ago. We talk about the American or North American content, but it may be engineered by one, fabricated by another. So the question is, can you assign a nationality to it? There are all these things that weren’t even thought about 25 years ago.

DM: What does CETA mean for your members?
DD: We’ve [appreciated] the chance to improve our trade with Europe. After the U.S., Europe is No. 2. To the best of our ability to get data from our members, it’s a small number of companies that do the majority of trading with Europe, so we’ve been strongly encouraging our members to take advantage with CETA. We do have relationships with companies that are trying to promote trade. We have relationships with Export Development Canada and Business Development Bank of Canada. We were heavily involved as an adviser on CETA negotiations and we think it’s extremely important for Canadian companies to diversify their dependence on the U.S. and that’s a message that’s resonating. There’s a huge upside for Canadian companies from CETA.

Though NAFTA has been in place since 1994, there's st Enrique Peña Nieto ill a lot of untapped potential for when it comes to trade with Mexico — as Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto have discussed. (Photo: Presidencia de la República Mexicana)

Though NAFTA has been in place since 1994, there’s st Enrique Peña Nieto ill a lot of untapped potential for when it comes to trade with Mexico — as Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto have discussed. (Photo: Presidencia de la República Mexicana)

A lot of companies had a very north-south focus for many years. We’ve talked to Minister Champagne and he’s come to talk to our members to encourage people to look beyond the U.S. Europe isn’t top of mind; there’s a lot of work to do to get people focused on Europe. CETA [came into effect in September.]
There’s a tendency to go with what you know. The good part about NAFTA is that it’s forced companies to be competitive. NAFTA has forced all manufacturers and processors to be much more efficient and much more competitive and that puts members in a better position to compete in Europe. Most have adopted lean production techniques, as well as green production. Those are the kind of things that will stand them in good stead as they move to Europe.

DM: You mention that there’s a tendency to go with what you know. It sounds as though you could almost blame NAFTA for Canadians focusing on the U.S. market. CETA is kind of a new NAFTA, but with Europe. Would you agree?
DD: Yes. What we’re doing is trying to encourage companies to look outside. Our trade isn’t even what it could be with Mexico. For generations, we focused only on the Canadian market, then a generation or two focused on the huge market south of us, and now we’re going global. Every time you have these changes, there are new things to consider, new regulatory regimes. There is complexity. It’s not like you can just put your product on a ship and go. So there’s work to do, but we’re encouraging companies that it’s worth the investment because diversity of trade is essential.

DM: What sectors do you represent and how do those break down?
DD: Packaged goods, consumer goods, energy, chemical processing, food manufacturing, food processing, metals and steel, automotive and transportation. Companies we represent include Procter & Gamble, General Electric, Bombardier, Suncor, Lululemon and pharmaceuticals. Basically anyone who manufactures and processes in Canada is a potential member and many of them are. It’s a horizontal rather than vertical trade association. They’re our members because we’re looking at trade, taxes, incentives, market access and exports.

DM: You’re a big umbrella for them all.
DD: We’re doing our best to keep the rain away. When it comes to some of these big issues, like energy, environment, trade, export, that’s when the groups come together. There’s often a very common interest right across the country.
DM: Which ones do you see as most threatened?
DD: I think the big companies that deal in engineering, transportation, [those that are] moving stuff, are. The Buy America policies [are most concerning.] Business hates when rules change. I think our steel and automotive manufacturers are probably concerned about not having the trade remedies or a place to arbitrate disputes. I don’t think anyone’s more susceptible than anyone else, but the whole Buy America and restrictions on Canadian companies’ access is concerning to those who do that kind of business. Canadian companies want the ability to compete and our negotiators are going to try to convince the Americans that that’s OK.

DM: What are your priorities for increasing Canadian trade worldwide?
DD: First, Canada has an agreement with Europe. There are some historic, natural connections to Europe. We know Canada is pursuing a free trade agreement with China. There are many barriers to trading with China. That is our priority and also promoting what we have become good at — we are good at processing resources; we’re good in some niche areas at developing technology that works for long-distance travel. I don’t think Canada is going to become the premier maker of pasta in the world, nor should we want to, but there are many things we can do.
We need to strengthen NAFTA, and also look to Europe and China. They’re the ones that are really on the radar. One [just came] into force, one is being renegotiated and another is being [considered].

DM: What’s the most important world market right now?
DD: For Canada, it’s always been about the U.S., but China and Asia [in general] are where all the growth is.

DM: Which emerging markets are most crucial for Canada?
DD: I think there’s an opportunity with South America. Also, our trade with Mexico isn’t where it could be. We don’t have as much direct trade with Mexico. And then there’s the rest of the southern hemisphere. There’s still opportunity there, even within NAFTA.

DM: Can you share some stories “from the field” that are instructive about where trade is going?
DD: Because I was out of the industry and in health care for the last 10 years, I’m blown away by the level of automation and technology that has gone into the manufacturing systems that exist now. The level of sophistication and the adoption of technology by manufacturers is something that gives me a lot of hope. I’ve been pleasantly surprised by this.

DM: Do you have facts and figures on where we’re trading now, and how that’s changed in the last couple of decades?
DD: The vast majority of Canada’s trade continues to be with the United States. However, that share has fallen slightly over the last 20 years due to a wide range of factors, including the rise of other markets such as China, increased difficulty in accessing the U.S. market and the proliferation of trade agreements that are eroding Canada’s NAFTA advantage in the U.S.

DM: The U.S. accounted for 76.3 per cent of Canada’s total exports in 2016, down from 81.6 per cent in 2006 and 80.9 per cent in 1996.
DD: Still, the U.S. dominates. Exports to the U.S. have risen by 76.7 per cent over the last 20 years. Total exports (to all destinations) are up 87.4 per cent over that same period. Exports to non-U.S. destinations have risen by 132.9 per cent.
Outside the U.S., China is now Canada’s largest export destination and is the fastest-growing of our major trading partners. Exports to China are up 596 per cent over the last 20 years.
However, exports to China are still just 4.1 per cent of Canada’s total exports ($20.9 billion in 2016, compared to $394 billion to the U.S.)
Other important and fast-growing export destinations over the last 20 years include: India (up 1,029 per cent), Mexico (up 506 per cent), the UAE (up 936 per cent), and the U.K. (up 323 per cent).
Although growing quickly, only China, the U.K. and Mexico are in Canada’s top five destinations.

DM: What markets are shrinking?
DD: Japan has been falling in importance for a long time. In 1996, it was Canada’s second most important export destination. By 2016, it had fallen to fourth position. Exports to Japan have fallen by 4.4 per cent.
Exports to Germany have been flat over the last decade and shipments to the Netherlands are down 7.2 per cent. However, in the latter case, that could be the result of changing shipping patterns. The Netherlands is a major port hub and many exports are recorded as being shipped to the Netherlands, but are later taken to other destinations.
DM: Where is Canadian trade going in the next five years? 10?
DD: China is expected to continue to grow as an export market. Emerging markets in general should continue to see major trade growth — Southeast Asia, the Middle East and Mexico are three areas where trade has grown rapidly and should continue to do so in future.
Free trade with the EU is expected to open new markets as well. It remains to be seen how effective that agreement will be in accomplishing that goal.

DM: What are your members most concerned about?
DD: [They’re concerned about] NAFTA renegotiations and maintaining their access to the U.S. [They’re also concerned about] gaining access to foreign markets at fair, reciprocal terms; non-tariff barriers preventing them from competing abroad on fair terms; and understanding new markets and finding new market opportunities.

DM: What is our trade volume with the U.S. and what’s the breakdown by sector?
DD: Total exports to the U.S. were valued at $394 billion in 2016. Of that total, $285 billion (72 per cent) were exports of manufactured goods. Canada’s top 10 export products to the United States are: Motor vehicles ($61.4 billion); crude oil ($51.5 billion); motor vehicle parts ($12.7 billion); natural gas ($10.3 billion); refined petroleum ($9.9 billion); lumber ($7.7 billion); pharmaceuticals and medications ($7.1 billion); unwrought aluminum ($5.7 billion); ethylene polymers ($4.8 billion); gold ($4.2 billion.)

DM: What is our trade volume with Mexico and what’s the breakdown by sector?
DD: Total exports to Mexico were valued at $7.6 billion in 2016. Of that total, $6.4 billion (84 per cent) were exports of manufactured goods. Canada’s top 10 export products to Mexico: Motor vehicle parts ($869 million); canola seeds ($761 million); motor vehicles ($722 million); unwrought aluminum ($341 million); ethylene polymers ($285 million); wheat ($241 million); miscellaneous steel products ($192 million); transmission/reception parts for phones — voice, data, images, for example — ($158 million); pork ($141 million) and pumps for liquids ($137 million.)

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