Trade deal concessions threaten jobs at Kingston, Ont. baby formula plant

Trade deal concessions threaten jobs at Kingston, Ont. baby formula plant
Stephen Harper: Its Unequivocal The U.S. Got A Good Deal With USMCA
Former prime minister Stephen Harper says it is “unequivocal” that the United States scored a good deal with the revamped North American trade pact, while Canada tried to mitigate losses.

Harper made the remark during a discussion at the Canadian Club of Toronto Thursday promoting his new book, “Right Here, Right Now,” which tackles how conservatives should respond to a rise of global populism.

A livestream captured the former Conservative PMs roughly 40 minute chat with former party president John Walsh. Reporters were initially invited to the event, but the club rescinded the offer this week and stated the invites were sent in error.

Mr. Harper, who now chairs the right-of-centre International Democrat Union and runs his consulting firm Harper & Associates, said he travels the world advising businesses on geopolitical trends. Starting in 2016, the year after I left office, everything went to hell in a hand basket. Im sure its just a coincidence,” he said.

Harper was asked about his thoughts on the negotiations that led to the United States-Mexico-Canada Agreement (USMCA).

He said the case is unequivocal that the U.S. got a good deal, and is making headway on its trade agenda. On this one they got some pretty clear wins, he said. For Canada, obviously there are some losses, but the deal gives us comprehensive and largely beneficial access to the American market, so its essential.

“Yeah, I had a few thoughts,” he said, spurring laughs from the crowd. “That I mostly tried to keep between me and my clients.”

In a question-and-answer session moderated by former Conservative Party president John Walsh, Mr. Harper said he had a few thoughts about Canadas new trade agreement. I think everybody knows I did not think much of the way it was handled on our side, albeit a difficult situation, Mr. Harper said.

The former prime minister made headlines last October after a memo written for clients of his consulting firm, titled “Napping on NAFTA,” was obtained by The Canadian Press. Harper expressed concerns at the time about the North American Free Trade Agreement negotiations and warned U.S. President Donald Trump wasnt bluffing about terminating the deal.

The former prime minister was speaking at the Canadian Club of Toronto, where he was promoting his new book, Right Here Right Now, an examination of global populism and political disruption. Media members were not allowed to cover the event in person, but were able to watch it on a livestream.

“Canadas government needs to get its head around this reality: it does not matter whether current American proposals are worse than what we have now,” the letter stated. “What matters in evaluating them is whether it is worth having a trade agreement with the Americans or not.”

Prime Minister Justin Trudeau and Foreign Affairs Minister Chrystia Freeland have since charged Harper — and by extension the party he once led — wanted Canada to “capitulate” to U.S. demands. It remains a key talking point for Trudeaus cabinet when fielding USMCA-related questions.

In Toronto Thursday, Harper said he was tempted to change the acronym from USMCA to MUSCA, an apparent reference to how Mexico had earlier moved forward on a deal with the U.S. that did not include Canada. Harpers memo criticized the Liberal governments “unwavering devotion” to cooperating with Mexico during trade talks.

All three countries have large and growing imbalances with the Chinese market that are driven by the fact that we have grossly unequal market access … Frankly, I dont think acting alone we are capable of fixing that particular challenge.

“So look, I think everybody knows I did not think much of the way it was handled on our side, albeit a difficult situation,” Harper said. “I think… the case is unequivocal the U.S. got a good deal.”

The Trudeau government has argued that nothing in the agreement prevents Canada from deepening its trade ties with other countries, noting that any party may withdraw from the agreement for any reason, with six months notice.

The former prime minister said the U.S. had some “pretty clear wins,” but did not spell out examples.

In an interview with Fox News this week, Harper highlighted U.S. gains on the auto sector with new content requirements and wage provisions. He explained it should help tilt production from Mexico to America over time.

Former prime minister Stephen Harper says there are incentives in the new trilateral trade deal for Canada and Mexico to work with the United States in opening up the Chinese market.

Harper said Thursday that while there are obviously “some losses” for Canada with the USMCA, the deal “gives us comprehensive and largely beneficial access to the American market, so its essential.”

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Theres been “a lot of commentary” on how the USMCA may affect Canadas relationship with China, he noted.

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Some observers say a clause in the deal, which requires countries tell each other if they want to enter trade talks with a “non-market economy,” essentially gives the U.S. a veto over a future Canada-China trade deal.

“I actually think… Ill use the word kindly, I actually think there are incentives in the deal for the governments of Canada and Mexico to work with the government of the United States to try to open up the Chinese market,” Harper said.

Though he largely avoided directly criticizing the Liberal government or his successor, Harper made some jokes about his election loss almost three years ago.

He noted that the events covered in his book, from the Trump win to Brexit to the rise of populist figures in Western democracies, have all happened since his defeat.

“Starting in 2016, the year I left office, everything went to hell in a handbasket,” he said. “Im sure its just coincidence.”

Harper said his book explores a period of disruptive political change and backlash that has come as ordinary working people — having lived through a financial crisis, bank bailouts, and mostly stagnant wages — question the pillars of the post-Cold War era, such as free trade and freer immigration.

While the book addresses how conservatives can respond to such grievances, Harper repeatedly said his publication is not about Canada. He said this country is a “kind of outlier” in many of the global trends discussed.

“Canada gets a bit of attention in the fact that you see all this political instability and change in Western democracies. I think most people notice that Canada doesnt have that,” he said, before hitting the punch line.

“Now, I qualify that, Canada has had changes of government. A couple of them, one in particular, I think was very bad. Just an unbiased view.”

But when asked to comment on the pace of investment capital coming into Canada, Harper suggested the conversation was veering too closely into partisan politics for his liking.

“Everybody knows I remain on the board of the Conservative Fund, assist our leader Andrew Scheer in his fundraising efforts and I try not to comment day-to-day on the current government,” he said.

“I leave that to our party. I think hes doing a good job and I look forward to him winning the election in 2019.”

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The revised North American trade agreement restricts shipments of a product Canada isn't even exporting at the moment: infant formula.

A $225 million investment by Chinese baby food manufacturer Feihe was poised to boost employment in Kingston, Ont., creating about 200 direct jobs and potentially 1,000 more indirectly.

The end of China's one-child policy increases the demand for safe and reliable supplies of baby food in China, where breastfeeding is less common than in North America.

The quality and price controls offered by Canada's supply management system were appealing to the Chinese, who planned to use Canadian skim milk products to make new brands. About 85 per cent of the Canadian-made formula was intended for export back to China.

Construction on a 28,000-square-metre plant began last year, and while the project has had some delays, it still planned to start manufacturing infant formula — first from cow's milk, later from goat's milk — starting in 2020.

By then, Canada's revised trade deal with the U.S. might be ratified and in effect. And concessions made in the U.S.–Mexico–Canada Agreement appear to thwart Feihe's business plan.

Canada agreed that, in the first year after the agreement takes hold, it can export a maximum 13,333 metric tonnes of formula without penalty. In USMCA's second year, that threshold rises to 40,000 metric tonnes, and increases only 1.2 per cent annually after that.

Each kilogram of product Canada exports beyond those limits gets hit with an export charge of $4.25, significantly increasing product costs.

Documents obtained in 2017 by CBC News under the Access to Information Act included a presentation from the Canadian Dairy Commission that suggested Feihe intended to manufacture 60,000 tonnes of infant food every year in Kingston.

While 10,000 tonnes of that was planned to be a goat's milk product that would not be subject to the USMCA limits, the rest would be made from cow's milk supplied by the Dairy Farmers of Ontario. USMCA provisions will apply to any formula "containing more than 10 per cent on a dry weight basis of cow milk solids."

While the export limits set for the automotive industry elsewhere in the USMCA were comfortably above current and anticipated future production levels, the thresholds in this part of the deal appear below the planned capacity of the Kingston plant.

Canada wanted to attract investment for a baby formula facility because it uses skim milk as an ingredient.

Healthy consumer appetites for butter leave provincial milk marketing boards with a surplus of skim. Baby formula looked like a smart use for it, and Canada didn't have any significant infant formula production before Feihe arrived.

Expanding this plant, or building a second infant formula plant somewhere else in Canada, look like less attractive business propositions under this new trade deal.

The Americans also demanded, and got, an end to Canada's recent dairy ingredient pricing strategy in the USMCA. 

Farmers and dairy processors had struck an agreement to make their industry more competitive by making it more affordable for Canadian food manufacturers to use skim milk ingredients from Canada instead of the low-cost imported diafiltered or ultrafiltered milk protein products entering Canada tariff-free through a customs loophole.

A new pricing category in Ontario, followed by a national pricing change across Canada (referred to as "class 7"), set a lower price for dairy ingredients like skim milk that was comparable to the going rate internationally.

In return for not losing business to the U.S. products, farmers agreed to take a hit and receive a lower price than what Canada's supply management system would otherwise have set for their milk.

The Dairy Farmers of Ontario told CBC News in 2017 that the milk destined for the Kingston facility would be provided based on this lower ingredient price.

But in NAFTA 2.0, Canada agreed to end its ingredient strategy, pleasing both American farmers and the Trump administration, which had turned Canadian dairy pricing into a political cause célèbre.

Once ratified, the USMCA will dictate a price formula for "non-fat solids used to manufacture milk protein concentrates, skim milk powder and infant formula."

That formula is based on a nonfat dry milk price set by the U.S. Department of Agriculture, as opposed to some kind of global average calculated by a neutral third party.

Taken together, these two concessions on Canada's part would appear to undermine the business plan originally laid out by Feihe International, now incorporated for its Ontario operation as Feihe Canada Royal Milk.

"The United States is a major supplier of infant formula to the North American and export markets and sought these commitments to ensure effective disciplines on any potential Canadian exports of this product," said Katie Hawkins, a spokesperson for Agriculture and Agri-Food Minister Lawrence MacAulay, in an email.

CBC News reached out to Feihe for reaction to the new trade deal's provisions. Spokesperson Yang Zhiwen wrote back, saying only that "we are reviewing the new agreement and at this moment we don't have [any] comment."

When Feihe incorporated in Canada, it became eligible for the same government funding programs available to domestic dairy processors. Documents obtained by CBC News last year suggested Feihe was eligible for two federal programs, including a matching investment fund offering non-repayable contributions to companies that innovate. 

No dollar amounts were specified in the non-redacted portion of the documents, making it difficult to estimate how much the Canadian taxpayer already has contributed to building Feihe's facility.

The province of Ontario also invested $24 million in the Kingston plant through its Jobs and Prosperity Fund.

Canada signed a foreign investment protection agreement with China in 2012. It includes a form of dispute settlement for investors — to be used if a government acts in an arbitrary or otherwise unfair fashion that harms a corporation's investment.

It's unknown whether the facts of this situation warrant litigation under this investment treaty, so it remains to be seen whether taxpayers could face an additional cost from a successful lawsuit against the government of Canada.

CBC News asked the Canadian government whether Feihe was consulted during the renegotiation of the North American free trade agreement.

Ministerial spokesperson Hawkins said only that "officials regularly engaged broadly with stakeholders through meetings, roundtables, teleconference calls, and other means."

Xinhua, the Chinese news agency, reported Wednesday that Foreign Affairs Minister Chrystia Freeland spoke to Chinese Foreign Minister Wang Yi to brief him on the new USMCA.

According to the Chinese report, Freeland told her counterpart that "any free trade agreement should be open, inclusive but not exclusive, and that the USMCA should not harm the rights and interests of other countries."

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