Enhancing Canada, Question & Insight

n December 2003, Canada’s new prime minister, Paul Martin, appointed Jim Peterson as his minister of international trade after sweeping into office himself earlier in the month. Martin, a former executive in the shipping and power industries, served as the country’s Minister of Finance from November 1993 until June 2002. Peterson worked under him for half that time as secretary of state for international financial institutions.

        Peterson said upon his appointment that the U.S.-Canadian dispute over softwood lumber would be his number one priority – a stance in line with his prime minister’s stated drive to better relations with the U.S. His extensive background in international trade and international law affords Peterson the commensurate respect from his counterparts worldwide as well, whether negotiating the recent Trade Investment and Enhancement Agreement (TIEA) with the European Union or working to improve opportunities for interaction with developing nations.

        That background also affords Peterson a unique viewpoint on how multinational corporations view Canada as a place for investment – and how that view has changed over the years.

        In late March 2004 – after a week that included the release of a new national budget, the signing of an historic trade agreement with the European Union, a WTO ruling on softwood lumber that was favorable to Canada and the breaking off of his department from the Dept. of Foreign Affairs – Minister Peterson took some time to talk with Site Selection Managing Editor Adam Bruns.

Site Selection: On coming into office you stated that the softwood dispute was a top priority. Now the WTO ruling has been made in Canada’s favor. What’s next, and how much does such an issue hover over all the other trade issues between Canada and the U.S.?

Minister Jim Peterson: About 96.8 percent of all our trade with the United States is free of dispute, and that takes into consideration BSE [bovine spongiform encephalopathy, or mad cow disease], softwood, and all the rest. If you look at the overall statistics, we still have the world’s largest and best trading relationship.

        Having said that, softwood lumber is a difficulty. We have talked with our provincial and territorial counterparts, and we agreed we would make a counteroffer to the December 6th U.S. proposal on the table. We agreed that we would not do so until the NAFTA ruling comes down April 30. And we agreed that in the counteroffer, we would be looking for a clearer exit from quotas from free trade, we would want a bigger share of the U.S. market, and the 52/48 split of duties already on the table was not adequate.

        That’s where we are right now. I’m having ongoing discussions, of course, with stakeholders in industry and counterparts in government, and it still remains my highest priority.

SS: Talk about specifics of the TIEA announced recently with the EU, as they relate to multinational corporate facility investment. How would you compare and contrast the tenor of these negotiations with the tenor of various negotiations with the U.S.?

Peterson: In terms of the NAFTA, since Sept. 11, we have put in place our 30-point Smart Border program, which has been highly successful. But we have also put in place 30 working groups to further facilitate cross-border investment and movement of people and goods. So that’s a very constructive working relationship we have, and it’s much further advanced than that which we have with the EU.

Having said that, the Trade and Investment Enhancement Framework we put forth when [EU Trade Commissioner] Pascal Lamy and [Irish Prime Minister and current EU President] Bertie Hern were in Ottawa is a whole new concept in terms of trade and investment. It goes well beyond traditional types of free trade agreements, and it’s dealing with issues that are not being touched, for example, by the WTO, which is mainly a question of market access and eliminating barriers.

In this new framework, which we’ve agreed to, we’ll be looking at things such as cooperative regulation and sharing best practices, and dealing with a lot of the things the 30 working groups are dealing with on the NAFTA issues. We’ll be leaving the question of market access as well as agricultural support and subsidies up to the WTO. I think it’s a very innovative approach, and my guess is we will not only prove successful, but it will become a template for a lot of future bilateral and multilateral negotiations.

SS: Last year DaimlerChrysler decided not to go forward with an expansion in Windsor, one of several recent instances where there were concerns aired about Canada’s, and Ontario’s, historic reticence to play the incentives game when it comes to corporate facility attraction. Is that in the process of changing at all?

Peterson: No. We are very much against becoming engaged in a race to the bottom. I had a meeting two or three weeks ago in Halifax with my provincial counterparts, and this was very much at the forefront of discussions. That provinces would not engage in competitive tax incentives in order to attract investment against one another. That we would very much pursue a Team Canada approach in attracting foreign investment. And I’m very encouraged that the premiers are now working cooperatively to end any inter-provincial barriers to trade and investment that exist within Canada. So our big advantage is that we will act as a country, and in concert with the provinces and territories, to make sure our investment climate is competitive with the United States. At the heart of that is our overall corporate tax level, which is five to six percentage points better than the United States. When you compare Alberta at 30 percent, with Michigan at 36 percent, New York at 40 and California at 41, we have a big incentive for companies to make their North American money in Canada.

SS: Over the course of your international experience, characterize how multinationals’ view of Canada as a place to do business has evolved.

Peterson: The most interesting phenomenon is that even though we have direct foreign investment of about CA$350 billion, that is now exceeded by Canadian direct investment abroad – by about CA$80 billion. This shows the strength of the Canada-based multinationals, as they are accessing foreign suppliers and markets through subsidiaries. Of course the face of these companies is forever changing, but it shows the strength of Canada as a base for multinational operations, as well as the best way to access the NAFTA.

SS: Is there concern in Canada as there is in the U.S. about domestic companies offshoring?

Peterson: No. As a matter of fact, we recognize that offshoring is an important part of being in the global economy. The alternative of denying your producers access to the lowest cost of supply and distribution is protectionism, which over the longer term is a very self-defeating type of approach. So we are not concerned about that concept. We know if you are in a labor-intensive industry, you are not going to be able to compete with wage rates that are 10 or 20 percent of what they are in Canada. We want the high-level, value-added jobs involving entrepreneurship and innovation here in Canada. We want the head office jobs here.

SS: What proportion of the protectionist talk in the U.S. right now is election-year hyperbole, and what causes real concern on your part?

Peterson: Any talk of protectionism in the United States which criticizes the NAFTA is of great concern to us. The criticism I’ve heard so far has been quite unfair – they’re blaming the NAFTA for offshoring to China and to India, and the last tme I looked, neither of those two countries were situated in North America. I think their target, if they think it’s Canada or Mexico, is misguided.

        Having said that, I think we have a job to do in the United States of making our views known. Again, when I met with my provincial and territorial counterparts, we made this one of our priorities – to work together to take these messages to the United States. I do have the feeling that a lot of it might be election hyperbole, but we are going to see a line in the sand, I believe, between the Bush administration and the Democrats on this issue of whether free trade is good or not.

SS: What is the Enhanced Representation initiative?

Peterson: We are expanding our presence in the United States, mainly in the South and Southwest, where the new markets and industries are springing up. We’re opening seven or eight new offices. I was at the opening of the one in Raleigh, North Carolina, following my visit on Jan. 11 to Washington to meet with Mr. [U.S. Secretary of Commerce Donald] Evans and Mr. [U.S. Trade Representative Robert B.] Zoellick. It was very interesting going into Raleigh, which is really a center for biotech and high-tech. I was concerned that the local people would consider that we were coming in to poach their industries away. The attitude was just the opposite – we were welcomed with open arms, and they want Canadian companies, with their know-how and technology, to come in there and form strategic relationships with them. They feel it’s to their great advantage. To me it was a very heartening type of reception we received.

SS: Talk about the potential for the Free Trade Area of the Americas [FTAA] to become a reality. Have you indicated a city you favor as the home for the FTAA secretariat?

Peterson: No, we haven’t. We’ll know when talks resume in June whether there is sufficient movement to make the FTAA a reality within the foreseeable future. We will continue to push for that. The potential is we would constitute 40 percent of the world’s economy, a huge market. Having said that, our major focus is still going to be on the WTO, because it has the potential to, first of all, deal with the question of agricultural subsidies and support programs, which are enormous. Secondly, it has the potential to bring less developed and developing countries into a much better trading relationship. Seventy percent of the duties paid by developing country importers are paid to other developing countries. The potential to help economic growth in the developing country sector is enormous through trade. Meanwhile, we’re going to continue our TIEA negotiations with the EU, because we think they have enormous potential as well. We’ll also pursue our bilateral strategies and be dealing with the CA4 [four Central American countries], CARICOM [Caribbean Community and Common Market] and other regional groups.

SS: Toyota’s Dennis Cuneo told me one of the things that appears on his team’s radar during site selection is whether a given jurisdiction is a “litigation mill.” Describe the relative strengths of Canada’s legal and regulatory schemes.

Peterson: I have often said in the past that the term “class action” in Canada more often means a trip to the museum than a trip to the courthouse. We do not have that type of contingent-fee, litigious mentality in Canada that we’ve seen in other countries. And we are constantly working to make sure we have a regulatory regime which, while it protects health and worker safety and the environment, is one that is manageable and not oppressive. This is part of our ongoing efforts in cooperation with the provinces – again, a Team Canada approach to dealing with regulatory matters both within Canada and within the NAFTA, and now with the EU.

SS: What elements of the just-tabled national budget speak the loudest to prospective domestic and foreign sources of capital investment?

Peterson: By far the most important is the continued fiscal responsibility. We’re the only G7 country to have had a surplus this year. It’s the seventh budget surplus in a row, the best since confederation. We have paid down our national debt by CA$52 billion, down from 68 percent to 42 percent of GDP, and heading to 25 percent of GDP as our target. And that has allowed us to save over CA$3 billion in interest rates, which we can invest in things such as education, healthcare, communities and innovation.

        We have continued to maintain our competitive corporate tax position, enhancing write-offs for investment in high-tech. We already have the very best tax credits for scientific R&D in the G7, and those have been enhanced even further in this budget. The fact that we have produced such a stable fiscal environment means we have very competitive interest rates, and we have maintained our monetary prudence, in terms of keeping inflation between the one-percent and three-percent band. And we will continue to do that, so investors know that they will have fiscal and monetary stability in Canada.

        Look what we were able to accomplish last year, in spite of SARS, BSE, droughts, forest fires, floods, blackouts, softwood lumber and a dollar that appreciated by 22 percent. We still had growth of 1.7 percent, and one of the highest employment creation records in the world. We have a very resilient economy, and we’re poised to benefit from an increase in world economic growth.