From: 7/12/99 5:25 PM Subject: [mil-corp] Canada's industrial policy under WTO's Network members: Canadian industrial policy is about to take a drumming from the World Trade Organization. A major program which provided subsidies to aerospace and defence corporations (and others) for R&D and other costs was ruled as an unfair subsidy by a WTO panel earlier this year. Technology Partnerships Canada is Canada's largest industrial program, and provided $300 million/yr in funding for military and commercial investments (for an analysis of the WTO's ruling effect on disarmament, see h As in other trade agreements, military spending and other subsidies are protected from the liberalizing demands of trade and investment agreements. This could leave legislators with few non-military policy options to promote economic priorities, such as conversion, diversification, regional development, etc. Steve ________________________________________ The Globe and Mail Monday, July 12, 1999 Trade ruling expected to kill auto pact Ottawa braces for bad news in drug, high-tech sectors Heather Scoffield and Greg Keenan Ottawa and Toronto – HEATHER SCOFFIELD in Ottawa GREG KEENAN in Toronto The [Canadian – ed] federal government is expecting three major losses at the World Trade Organization, including one that would destroy the historic Canada-U.S. auto pact. Senior government officials expect Japan and the European Union to carry the day in their case against Canada's auto pact, which has protected General Motors, Ford and Chrysler in Canada since 1965. Officials are also quietly admitting that Canada will probably lose its attempts to maintain its drug-patent regime and to keep intact the federal Technology Partnerships Canada program, a key research-and-development fund for aerospace and high-tech companies. Ottawa's hopes are also low for WTO cases aimed at protecting Canada's dairy-pricing system and at overturning a European ban on asbestos. "We maintain that the auto pact complies with Canada's international trade obligations," said André Lemay, spokesman for the Department of Foreign Affairs and International Trade. "We're still confident in all the cases. Otherwise we wouldn't have raised the cases." But behind the scenes, senior Canadian officials are far less sanguine and are, in fact, already devising ways to deal with the ramifications of losing. Binding decisions on all the trade challenges are expected within weeks, although some will be eligible for appeal. A loss on the auto-pact case would mean the death of the historic agreement, but federal sources played down the effect on jobs and Canada's economy. "It's jobs-neutral to potentially [creating] more jobs," said a source, who voiced hopes that one key result would be increased investment in Canada by Japanese auto giants. The Canada-U.S. auto pact allows the Canadian units of the Big Three U.S. auto makers to import vehicles from anywhere in the world, duty free. Other auto makers face a 6.7-per-cent tariff, which Japan and the EU argue is discriminatory. The federal government has expected to lose the case from day one but refused to quit, officials say, to give the domestic industry time adjust to a more-open market. The legal wrangling has given the Big Three an extra two years to prepare for head-to-head competition. "This is a case we knew we were going to lose, but we fought for good public policy reasons," one source said, adding that "you don't need the auto pact any more because you've got NAFTA." The North American free-trade agreement allows for cars to flow within Canada, the United States and Mexico tariff-free. If Canada loses the case, the resulting tariffs on vehicles imported from outside North America would level the playing field for Honda Canada Inc. and Toyota Canada Inc. It's a particularly important issue for their luxury lines (Acura and Lexus, respectively), several models of which are imported from Japan. The two Japan-based companies have argued that their manufacturing expansions in Canada in recent years have entitled them to the same treatment as DaimlerChrysler, Ford and GM. The three U.S. companies have responded that their investments far exceed those of the Japan-based auto makers and that they employ far more Canadians. The Big Three's Canadian work force totals about 50,000 people, including Cami Automotive Inc., GM's joint venture with Suzuki Motor Co. Ltd. of Japan. Honda and Toyota employ about 6,000 people at their manufacturing plants in Canada. If the Big Three have to face tariffs, GM will no longer be able to import, duty free, Saab luxury cars from Sweden, some Isuzu cars from Japan and Cadillac Catera luxury cars from Germany. Ford will lose the right to bring in Jaguar luxury cars and Volvo cars duty free. Industry sources say DaimlerChrysler Canada has been importing Europe-made Mercedes-Benz cars duty free since the beginning of the year, a development that has angered BMW Canada Inc., its main rival in the high-end luxury segment of the market. Sources familiar with the trade case say South Korea and India have intervened on the side of the EU and Japan. Cars from South Korea face the duty, and Seoul wants it removed for its auto makers operating here: Daewoo Auto Canada Inc., Hyundai Auto Canada and Kia Motors Canada Inc. An interim ruling on the case is expected Aug. 5. As for the other WTO challenges, Canada has already lost an initial WTO ruling on Technology Partnerships and now expects to lose the appeal. It is the largest federal program encouraging industrial development and provides about $300-million a year. The WTO sided with Brazil last March, saying that the program was an illegal export subsidy under international trade laws and that Canada must eliminate it, at least for the regional aircraft industry. Ottawa appealed the ruling. Senior government sources said they expect another defeat, but added that Industry Canada officials are already designing contingency plans. The department should be able to devise a new program that invests in research and development in the high-tech sector but is not linked to a particular problem. Technology Partnerships, as it stands now, invests money in specific new technologies. Recipient companies can repay the government on a royalty basis, with terms depending on the product's success. Most of the funded products are exported. If the government does not link funding to any specific product and merely funds research and development in general, officials say, the program may gain acceptance. The WTO battle over Canada's drug-patent regime, however, is more troublesome. "That is a mess," said one source. Canada's drug-patent regulations give brand-name multinational drug companies 20-year protection on their products, as required under international trade rules. But Canada also allows generic drug companies to research copycat drugs, produce them and stockpile them before the 20-year patent runs out. That way, generic drug companies can begin selling their copies the day the brand-name patent expires, usually at a much lower price. The regime was carefully stitched together by Industry Minister John Manley. It came after months of negotiations with the generic drug industry, health and labour coalitions and seniors groups on one side and Quebec-centred brand-name multinationals on the other. Both the United States and the European Union have major problems with the regime. A loss by Canada could easily cause the whole fragile balance between the multinationals and the generic companies to unravel. The federal government is also holding out little hope for a victory against Europe's ban on asbestos. Europe claims the substance, imported mainly from Quebec, is dangerous to people's health. As for Canada's attempts to protect its two-tiered dairy-pricing system, Ottawa lost an initial WTO ruling in its fight against the United States, and appealed. Again, officials are not optimistic. TRADE TRAUMA The federal government expects to lose three major international trade cases, and is pessimistic on two others. The stakes are high: Auto pact: A victory by Japan and the European Union would be the death knell for the pact, which has sheltered the Canadian units of the major U.S. auto makers since 1965. The Canada-U.S. auto pact is politically sensitive, especially in southern Ontario, where it is a strong symbol of Canadian job growth and export strength. Technology partnerships: A Canadian loss against Brazil would mean having to dismantle or radically restructure the program, at least its application in the aerospace industry. The program funds the research and development of leading-edge products and has been a key government tool for persuading foreign companies to keep investments and jobs in Canada. Drug patents: A victory by the United States and the European Union in arguing that Canada's drug-patent regime does not stand up to international requirements would force Ottawa to renegotiate a carefully struck balance between brand-name multinational drug companies and generic drug companies. It would tilt the balance in favour of the brand-name companies and possibly increase prices, upsetting health groups and seniors' organizations. Asbestos: The European Union has banned Canadian asbestos, which is used primarily in building materials and is produced mainly in Quebec. Ottawa is fighting the ban, but has little hope of winning. A defeat for Canada would mean the continued loss of a potentially major market for Quebec's struggling industry. Dairy: Canadian dairy farmers are paid high prices for milk that is consumed domestically, where quantities are controlled through a quota system. But they can export as much as they like at lower world prices. The United States argues that this policy constitutes an unfair export subsidy. A defeat for Canada would hurt the export market for Canadian milk and have negative ramifications for the domestic food-processing industry. Heather Scoffield ____________________________________________________________________