Prosperity Through Trade

Prosperity Through Trade CANADIAN AGRI-FOOD TRADE ALLIANCE Suite 1402 150 Metcalfe Street Ottawa, Ontario K2P 1P1 Tel: (613) 560-0500 Fax: (613) 233-2860 www.cafta.org Email: office@cafta.org Introduction Canada/U.S. Trade Issues Disputes and Dispute Settlement A Submission to The Sub-Committee on International Trade, Trade Disputes and Investment By The Canadian Agri-Food Trade Alliance December 14, 2004 The Canadian Agri-Food Trade Alliance (CAFTA) appreciates the invitation from Sub-Committee to discuss the topic of Canada/U.S. Trade, Disputes and Dispute Settlement. This submission is presented in two parts: First an overview of CAFTA, its membership and its missions and goals, and a brief overview of Canada/U.S. Agriculture trade and disputes on behalf of CAFTA s members. Then a submission from the Canadian Sugar Institute, a CAFTA member that has first hand experience with dispute settlement, both under the North American Free Trade Agreement (NAFTA) and the World Trade Organization. About CAFTA The Canadian Agri-Food Trade Alliance is a coalition of organizations, associations and companies representing producers, processors, marketers and exporters of agriculture and food products, as well as suppliers of agricultural inputs and genetics. CAFTA represents the international trade policy interests of about 180,000 producers mostly of grains, oilseeds and cattle. Its membership encompasses a large cross section of the primary processing industry; including oilseed processors, maltsters, and meat processors; and further processors or consumer product manufacturers. CAFTA also represents marketers and exporters of both raw and processed products; and at the other end of the supply chain, we represent agricultural input suppliers - of fertilizers, crop protection products and crop genetics. CAFTA is the only trade policy advocacy group in Canada that represents the entire supply chain. Our members recognize the importance of the relationship between suppliers, producers, processors and exporters. We work together to achieve the best results for the entire value chain. Canada/U.S. Trade CAFTA was asked to provide comments specifically about Canada/U.S. trade and trade disputes between our two countries. A survey of CAFTA s membership was conducted to obtain a general overview of the trade and dispute situation. For more detailed information and impressions, the sub-committee is encouraged to contact CAFTA s membership directly. The Canada/U.S. Free Trade Agreement and the North American Free Trade Agreement have been the main drivers of increased exports for the Canadian agriculture and food sector. Since the implementation of the Canada/U.S. Trade Agreement, agricultural trade between the two countries has increased by 82%, reaching well over $25 billion. Canadian exports have grown by 92% to reach over $14 billion. Sub Committee on International Trade, Trade Disputes and Investment Page 1

More specifically, Agriculture and Agri-Food Canada reports that: Canadian canola oil exports to the United States increased by 44 percent; soybean oil exports increased seven-fold and exports of sunflower oil quadrupled, Exports of dried beans from Canada to the U.S. tripled Beef exports before BSE had more than doubled, and pork exports increased by 87% Exports of Canadian malt to the U.S. increased five times; pasta exports more than tripled and exports of frozen French fries increased four-fold. It s important to note that Canada/U.S. Trade is important to both Canada and the United States. Overall, Canadian per capita consumption of U.S. agricultural goods is about six times American per capita consumption of Canadian agri-food products. In other words, we are each others best customer. For the most part, trade in agriculture and food products between Canada and the United States has been harmonious. However, there are some very notable exceptions. Cattle and Beef The United States is Canada s largest export market for cattle and beef, and the industries in our two countries are highly integrated. However, even before the discovery of a single case of Bovine Spongiform Encephalopathy (BSE) in May, 2003, the trade between our two countries has not been easy. In the words of Dennis Laycraft, Executive Vice-President of the Canadian Cattlemen s Association (CCA), trade in live cattle and beef between Canada and the United States has been plagued with difficulty: We have had to defend against U.S. actions on antidumping (AD) and countervailing duty (CVD) investigations, country-of-origin labeling initiatives targeted to beef products sourced predominantly from Canada, border protests, State introduced non science based testing requirements and false allegations about pharmaceutical product usage, petitions to eliminate grading of imported Canadian beef, and so forth. Harmonization and Mutual Recognition - The CCA is convinced that Canada s inability to address some very important harmonization issues around animal health have resulted in chronic irritants and have caused resentment on the part of some U.S. cattle producers, provoking numerous challenges to Canadian beef and cattle imports in the U.S. The best way to deal with a trade dispute is to prevent it. The Canadian Cattlemen s Association believes addressing the chronic cattle industry trade irritants between Canada and the U.S. will require better communication with U.S. industry about the benefits of free trade, and most importantly it will require harmonization and mutual recognition of standards including streamlining of meat inspection regulations; animal health requirements; and grading systems based on sound, internationally recognized science. In addition, CAFTA's cattle and beef members, support an integrated feed marketing system in North America, which will require harmonized regulations respecting feed additives and contents. Improvements to AD and CVD Rules - The Canadian cattle industry was the subject of a U.S. countervailing duty investigation and a concurrent anti-dumping investigation launched in 1998. After a year of legal proceedings Canada prevailed. However it is estimated that the industry lost $90 million in market losses ($5 million a week) while the temporary deposit rates were in effect and spent over $5.5 million in legal defence costs. Sub Committee on International Trade, Trade Disputes and Investment Page 2

In almost any free market sector in agriculture, the normal supply and demand cycle will periodically result in product being sold below the cost of production. However in a free and open market, not distorted by government interests, natural market forces do not allow real dumping to exist the market arbitrages itself. CAFTA s cattle and beef members believe that there is no justification for antidumping actions where a product is sold in a free trade environment., and proposes that anti-dumping laws be amended to narrow the definition of dumping to deal specifically with predatory price discrimination. Grains and Oilseeds Wheat and Durum Challenges - CAFTA s grain grower members have also been subjected to multiple trade actions by the United States. Since the Canada/U.S. Trade Agreement was signed, there have been four actions launched by U.S. farmers and their government against Canadian exports of wheat and durum. In 1989 a challenge was launched over Canadian transportation policy, and the United States Trade Representative s office found that there was no violation of the CUSTA. In 1989 the U.S. International Trade Commission investigated Canadian durum exports and found no dumping on Canada s part. In 1992, a bi-national panel was established under Chapter 18 of the Canada/U.S. Trade agreement to investigate durum wheat exports. Again, there was no finding of subsidy or injury. In 1994, an investigation under Section 22 of U.S. Agricultural Adjustment Act was launched. This investigation resulted a voluntary agreement by Canada to limit exports of durum for one year. Grain trade between Canada and the United States also operates in the absence of tariff barriers or tariff quotas. CAFTA s grain grower members also believe that anti-dumping law should recognize the cyclical nature of agricultural production. Where free trade exists, the cost of production should not be used to calculate dumping margins. The multiple (costly) disputes on both cattle and beef, and grains points out the need to reassess the process of launching or initiating disputes. The subcommittee is urged to consider possible mechanisms to strengthen initiation standards and, thereby, address unjustified initiations. The Canadian submission to the WTO negotiating group on rules, for example, contains proposals that would bring the process of initiation more in line with an injury investigation. Canada also suggests amendments that would require that when examining an application for the initiation of an investigation, authorities give consideration to factors other than dumping that might be prompting the applications. Support Levels - There are also other trade irritants in the grain industry, not the least is the disparity in support levels between the two countries. In 2001, the United States spent $US 14.4 billion in trade distorting domestic support, and over $US 50 billion in support they notified as non-trade distorting. In comparison, the 2000-01 Main Estimates indicated that Canada s entire budget for agricultural grants and contributions was $C 1.9 billion. 38% of the trade distorting support in the United States goes to the grains and oilseeds sector. United States wheat producers receive 30% of the value of their product as subsidies. For Canadian heat producers that figure is 18%. Harmonization - is also an issue for the grains and oilseeds sector. There is an important need for continued work towards harmonization of chemical registrations, maximum residue levels, product usage labelling and review procedures for minor use crop protection products. Commitments to work sharing to expedite introduction of newer and safer chemicals and the development of a North American Market for pesticides should be a priority. Sub Committee on International Trade, Trade Disputes and Investment Page 3

Value Added Products In 2002, 67% of Canada s exports to the United States were of value added products processed in Canada, creating Canadian jobs and creating stability and wealth for Canada s rural communities. While the trade between the two countries is generally tariff and subsidy free, in this area, irritants are found in the area of non-tariff barriers, including: According to a 2002 survey by the Fraser Institute, U.S. health and safety, environmental and technical regulations have increased since the NAFTA, and have resulted in substantial increases in costs for Canadian exports Inconsistent fortification and food additive regulations and requirements, such as the Labelling and packaging requirements also result in substantial costs to Canadian processed food exporters The U.S. Bioterrorism Act has also resulted in very substantial cost increases for Canadian exporters, and has, in some cases resulted in substantial delays at the U.S. border. Mutual recognition of regulatory systems, grading, inspection, production and processes between Canada and the United States would bring trade much closer to the overall goal of free and open trade. Submission from the Canadian Sugar Institute Introduction The Canadian Sugar Institute represents all manufacturers of refined cane and beet sugar in Canada. We are a value-added industry in Canada that is highly dependent on international trade from both an import and export perspective. We depend on imports for most of our raw material -- raw cane sugar principally from developing countries in the western hemisphere. We also depend on exports of both refined sugar and sugar-containing food products given our relatively small market size and the mature nature of Canada s refined sugar market. Given our dependence on international trade, we support clear rules and effective dispute settlement mechanisms as part of regional (e.g. NAFTA) and global (WTO) agreements. Our submission provides a summary of our experience with dispute settlement as well as our recommendations for improving upon NAFTA dispute settlement procedures. Canada-U.S. Trade Issues The Canadian sugar industry was founded and continues to operate under the principals of free trade, yet is surrounded by a highly distorted NAFTA and global sugar economy. Our open market sugar policy is in sharp contrast to the US, EU and most other country s sugar policies that require extensive rules to insulate their producers from import competition. Unfortunately, the NAFTA, other regional agreements and the WTO have thus far failed to create new rules that will progressively liberalize these regimes. In this context, we have extensive experience with the trade issues and dispute settlement from both an import competition (dumped and subsidized imports) and export market access perspective. The US sugar market was not liberalized through the NAFTA and current US sugar policy continues to support high domestic sugar prices, in part by limiting imports of refined sugar and sugar-containing products (SCPs) from countries such as Canada. Through successive trade negotiations, the US has restricted market access for these products. For example, prior to the 1995 WTO Agreement, Canada s annual refined sugar shipments to the US averaged 42,000 tonnes (1992-94). The tariff-rate quotas introduced in the US WTO Schedule reduced those imports to 10,000 tonnes. In addition, new definitions under a quota for SCPs reduced Canadian exports of sugar-containing drink mixes by 54,000 tonnes. The Sub Committee on International Trade, Trade Disputes and Investment Page 4

US has also sought to restrictively interpret its Customs laws so as to minimize imports of Canadian sugar and SCPs. High domestic prices in the US sugar market have also led to surplus production and a consequent incentive to export. Exports of US sugar and SCPs are further distorted by the US Re-export Programs which were originally intended to assist US cane sugar refiners but are now applied to promote exports of all US sugar whether cane or beet sugar or exported by a refiner, a beet processor, a SCP manufacturer or some other entity. What this means is that the Canadian sugar and SCP industries face unfair import competition from US sugar and SCPs, without having the ability to ship refined sugar and many SCPs into the US market so that natural market forces can temper distorted pricing by US exporters. These facts and circumstances have led to numerous trade issues. In several cases, our industry requested that our government invoke the NAFTA dispute settlement process in response to US actions that contravened NAFTA rules. Two such cases included Canada s response to the US imposition of restrictive tariff-rate quotas on sugar and SCPs which were previously unrestricted and the failure of the US to terminate the NAFTA illegal US re-export policy with respect to US SCP exports to Canada. While these Chapter 20 disputes did not progress to the panel stage, the formal consultations did provide important leverage in reaching a negotiated solution. As a result, Canada and the US currently have a bilateral agreement in place with respect to these specific sugar/scp issues. Unfortunately, this agreement has not restored past US market access nor does it provide a template for future gains that we are seeking to achieve through the WTO. On the import side, our industry continues to face significant pressures reflecting the price distortions resulting from US sugar policy. These include: the dumping of US sugar into the Canadian market, the shipment to Canada of low-priced SCPs using the US Sugar-Containing Product Re-export Program, and the shipment to Canada of beet sugar at highly distorted prices using the Refined Sugar and SCP Reexport Programs. Canada currently has anti-dumping duties in place on imports of US sugar reflecting the impact these price distortions can have on the Canadian industry. The Need for Clear Trade Rules to Liberalize Sugar and SCP Trade The best way to resolve the foregoing issues is for Canada to incorporate in its trade agreements with the US and other countries clear rules to liberalize sugar trade. The need for better rules is illustrated in the CAFTA submission to the Subcommittee. That submission outlines several important trade issues that need to be addressed in Canada s trade agreements. In the sugar sector, the current rules in the NAFTA and WTO are woefully deficient. The Need for Strong Dispute Settlement Mechanisms Where Canada s trade interests are protected by existing rules, those rules are only of value to the extent they can effectively be enforced. Effective enforcement requires effective dispute settlement. In the context of the NAFTA, this means that Canada must preserve the effectiveness of the dispute settlement mechanism in Chapter 19 of the NAFTA. That mechanism applies to disputes concerning the application of anti-dumping and countervailing duty measures by the NAFTA parties. NAFTA Chapter 19 is currently under fire in the Softwood Lumber dispute. Canada must do everything in its power to ensure that the integrity of Chapter Nineteen is maintained. Canada must also ensure the effective operation of the general dispute settlement mechanism in Chapter 20 of the NAFTA. The three NAFTA Sub Committee on International Trade, Trade Disputes and Investment Page 5

Parties have been unable to agree on a roster of panelists for Chapter 20 disputes as required under NAFTA Article 2009. Canada must do everything in its power to ensure that the roster is finalized. It is only upon the finalization of the roster that the automatic panelist selection mechanism in NAFTA Article 2011 can function and preclude a disputing NAFTA Party from preventing the establishment of a Chapter 20 panel. In the context of the WTO, Canada must continue its efforts to fine tune the dispute settlement mechanism through the current review of the Dispute Settlement Understanding. Canada must also be ready to enforce its WTO rights where a WTO Member fails to implement the recommendations and rulings in an adopted panel report. The Importance of the WTO It is very important that this sub-committee, the government of Canada and Canadian industry not lose sight of the tremendous importance of achieving an ambitious liberalizing agreement on agriculture and food at the World Trade Organization. International rules that are transparent, equitable and enforceable are extremely important to the viability and future growth of the Canadian agriculture and food sector. Canadian agriculture and food requires a WTO agreement that eliminates the use of export subsidies; reduces trade distorting domestic support in a meaningful and harmonizing way; and achieves real, meaningful and equitable gains in market access around the world for all agriculture and food products. Canada relies on exports for over 40% of its GDP, and Canadian agriculture is extremely trade dependent. 90% of Canada s producers accounting for over 80% of farm cash receipts rely on the international market, either as exporters or as international price takers. Our producers, processors and exporters are forced to compete in an international market that is highly distorted by subsidies and access barriers. While regional and bilateral agreements can improve access for some products into some markets, it is only through an international agreement at the WTO that all barriers and subsidies around the world can be addressed, providing opportunity for all agricultural industries, and for the world s poorest countries. CAFTA urges this sub-committee to devote substantial time and resources to efforts to achieve an ambitious, liberalizing agreement at the World Trade Organization, and would be very pleased to meet with members of the committee to outline its WTO goals. Respectfully Submitted by: Canadian Agri-Food Trade Alliance December 14, 2004 Sub Committee on International Trade, Trade Disputes and Investment Page 6